When Banks must refuse payment of cheque?

01. On customer countermanding payment
02. On receipt of a notice of customer death
03. On customer becoming insolvent
04. On receipt of a notice of the customer insanity
05. On receipt of Garnishee Order
06. On notice of Assignment
07. Trust account
08. Stolen cheques.

Important terms related to cheques

01. Apparent tenor - 04 elements (date of cheque, sum of cheque both word and figure, name of payee, drawer signatures).
02. Stale cheque
03. Ante-dated and post-dated cheques
04. Countermanding (stopping) payment of cheques
05. Conversion/wrong payment of cheques.


Apparent Tenor - 04 elements

01. Date of cheque,
02. Sum of cheque both word and figure,
03. Name of payee,
04. Drawer signatures.

Kinds of cheque

01. Bearer cheques
02. Order cheques
03. Crossed cheques
04. Not negotiable cheques

Features of a cheque

01. It must be an unconditional order.

02. Cheque must be a written order.

03. For certain sum of money.

04. Drawn on a specific bank.

05. Payee of a cheque to be certain.

06. Cheque must be payable on demand.

Crossing and Negotiability

Crossing does not affect the 'transferability' of a cheque. Cheque bearing a general crossing or a special crossing can be transferred from one person to another. A bearer cheque either crossed generally or specially can be transferred merely by delivering the cheque. On the other hand, an order cheque whether generally or specially crossed can be transferred by endorsement and delivery.

Bearer Instruments  : Transferred by its mere delivery.

Order Instruments   : Transferred by endorsement and delivery.

Liability of the paying banker on crossed cheques

The paying banker should make payment of a crossed cheque only through the collecting banker. In case of special crossing the payment of cheque should be done only to the banker show name has been mentioned between the two transverse parallel lines. In case the paying banker makes payment of a crossed cheque in contravention of the above rules, its liability will be as follows:

(i) The paying banker will have to reimburse the true owner for any loss that he might have suffered on account of payment being made to a wrong person.

(ii) The paying banker shall not be entitled to debit his customers account with the amount of payment in case payment has been made to a wrong person since it has not followed the mandate of the customer. Such payment will not be taken as a 'Payment made in due course'.

Obliterating a Crossing

Section -89 provides protection to a collecting banker of a cheque whose crossing is obliterated or erased by dishonest persons. Inc case of such cheques the paying bank shall be discharged from its liability if:

(i) the cheque does not appear to be a crossed one or obliteration of crossing is not apparent at the time of its presentation for payment and

(ii) the payment has been made in due course as required under section -10.

More than one Crossing:

When a bank accepts cheque from it's a/c holders, it gives them receipt for these cheques. If the cheques are lost or their amount is misappropriated bank will be responsible to it's a/c holders. To overcome this risk bank puts a special crossing of its own on all the cheques received for collection from its account holders, so that all cheques become payable only to itself.

One cheque may bear two crossing i.e. one general crossing and one special crossing. But when a cheque bears more than one special crossing i.e. when it is crossed specially to more than one bank, its payment should be refused unless one bank is collecting the payment for the other as its agent. To enable the paying bank to know that one bank is collecting the payment for the other, the sending bank should put on the back of the cheque its direction to pay cheque to the other bank. In this case the words "as agent for collection" must be included in the special crossing, subsequent endorsement or discharge.

What does constitute Crossing?

In case of general crossing, drawing of two parallel lines across the face of a cheque is sufficient and necessary. Writing of "And Co." or "& Co." are not necessary. It follows from it, therefore, that simply writing of "Not Negotiable" or "Account Payee" on the face of the cheque without two parallel lines do not constitute crossing.

Opening of Crossing?

Cancellation of crossing is called opening of crossing. After opening of crossing, the cheque becomes an open cheque. Only the drawer of the cheque is entitled to open the crossing by writing the words "Pay Cash" and cancelling the crossing along with his full signature.

Who can Cross?

Drawee of the cheque can cross a cheque generally or specially. A holder, however, can not convert special crossing into general crossing, because such alteration is a material alternation and needs confirmation by the drawer. The bank to whom the cheque is crossed specially may again cross it specially to another bank who acts as his agent for collection.

01. The drawer: The drawer can make general, special or restrictive crossing on a cheque before issuing it.

02. The holder: (i) Where a cheque is uncrossed, the holder may cross it generally or specially.

(ii) Where a cheque is crossed generally, the holder may cross it specially.

(iii) Where a cheques is crossed generally or specially the holder may add the word "not negotiable".

03. The banker: Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker to work as its agent for collection. It is to be noted that a cheque can be specially crossed only once except where the second crossing is to a banker as agent for collection.

Restrictive Crossing?

Besides the above two types of statutory crossing, in recent years the practice of crossing cheques with the words 'account payee' or 'account payee only' has sprung up. Such is termed as 'restrictive crossing'.

Restrictive crossing is only a direction to the collecting banker that the proceeds are to be credited only to the account of payee named in the cheque. In case the collecting banker allows the proceeds to be credited to some other account, it may be held liable for wrongful conversion of funds. It does not in any way affect the paying banker, who has simply to see that the cheque has been presented to it for payment by any bank in case of general crossing and by the particular bank (named in crossing) in case of special crossing. It is under no duty to ascertain that the cheque is in fact collected for the account of the person named as payee.

Specimen of Restrictive Crossing.

It is to be noted that the basic ingredient of crossing, 'the two transverse parallel lines' across the face of the cheque, must be present in order to constitute any cheque as a crossed cheque. The cheque will not be taken as a crossed cheque if this has not been done.