Chapter XIV, sections 123 to 131A of the Negotiable Instruments Act deal with crossed cheque and it's applicability to drafts.
In Mahendra Kumar Kedarnath Modi Versus State of Gujarat1) the Hon'ble Gujarat High Court held that:
“The cheques which are not payable to the bearer or to order, viz. cross cheques are governed by Chapter XIV. Reading Section 123 with Section 126, it is clear that the banker on whom the cheque is drawn “shall not pay it otherwise than to a banker”. The payment of such cheques either to a bearer or to the order of the payee is not permissible over the counter. Such cheques, if dishonoured, would fall under Section 142(2)(a).”
Section 123 of the Negotiable Instruments Act,1881.
Where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.
This section is a verbatim reproduction from the English Crossed Cheque Act of 1876, since repealed and incorporated into the Bills of Exchange Act. Ordinary cheques, that is, cheques which are not crossed, whether payable to bearer or to order, are, when presented to a bank, paid across the counter. They are liable to risks of loss or of being stolen in course of circulation and the finder may present it to a bank and may get payment over the counter, in case of a cheque payable to order, by forging the signature of the payee or indorsee, as the case may be, if meanwhile payment has not been stopped by the drawer by a countermand order. The bank making the payment, in the absence of any countermand order, will get absolute discharge while the true owner can only proceed for compensation against the finder or the thief. In order to safeguard the interest of all persons concerned against such loss and theft the system of crossing of cheques has been introduced. This practice originated at the clearing house when the clerks of different bankers who did business there used to write across the cheques, the names of their employers, so as to enable the clearing house clerks to make up the account.
The object of crossing a cheque is to give a direction to the banker not to make the payment over the counter, but to pay it to a banker only, who may be the drawee banker or a different one. The obvious advantage of this system of payment through a banker is that it may be easily found out to whose use the amount goes. It is thus a good protection against any mischief arising out of the loss or theft of the cheque.
Crossing may be either general or special. General crossing is dealt with in this section while special crossing is treated in the next. A cheque would be deemed to have been crossed generally if there are two parallel transverse lines drawn across its face with or without the words ‘and company’ or any abbreviation thereof (& Co ) between the lines. The words ‘not negotiable’ may or may not be added. It would thus appear that the two parallel transverse lines across the face of the cheque are of the essence of general crossing, the use of words ‘and Company’ or ‘not negotiable’ being left to the option of the drawer or indorser. A crossed cheque whether payable to bearer or to order is negotiable as uncrossed cheques by delivery or by indorsement and delivery. Crossing does not bar negotiability unless the right of transfer is expressly taken away by the addition of the words ‘not negotiable’ to the crossing.
Section 124 of the Negotiable Instruments Act,1881.
Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.
This section deals with special crossing of a cheque. When a cheque bears across its face the name of the banker with or without the addition of the words ‘not negotiable’ the crossing is special. When a cheque is specially crossed payment can be made only through the banker so specified and through none other so that the holder must have an account at that bank or negotiate the cheque to a person who has such an account. It would appear that in the case of special crossing the two parallel transverse lines which are essential to general crossing are not-necessary. The name of the banker is essential, the words ‘not negotiable’ may or may not be added. In India no other instrument except a cheque can be crossed.
Section 125 of the Negotiable Instruments Act,1881.
Where a cheque is uncrossed, the holder may cross it generally or specially. Where a cheque is crossed generally, the holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add the words “not negotiable”.
Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection.
This section deals with crossing a cheque by the holder after its issue by the drawer. The words 'where a cheque is uncrossed’ mean where it is not crossed by the drawer at the time of its issue. It, therefore, follows that the drawer of a cheque can cross it generally or specially at the time of its issue although there is no specific provision in the Act to this effect.
Any holder, not necessarily a holder for value, can cross a cheque. A cheque crossed generally may be converted by the holder into a specially crossed one by the addition of the name of the banker across its face. But the latter cannot be converted into the former by the obliteration of the name of the banker as it will be a material alteration of the document and will render it invalid altogether. A cheque that is specially crossed to a banker can again be specially crossed by that banker to another banker as his agent for collection. This is the only instance of a second special crossing and this can only be done by a banker for the purpose of collection.
A crossing is a material part of the cheque and any alteration of it except in the manner provided by this Act will be a material alteration to vitiate the instrument. When a drawer crosses a cheque he alone can cancel the crossing and make it open by inserting the words ‘Pay cash’ in the cheque but if that is not done under his full signature it will not be recognised.
When an uncrossed or a generally crossed cheque is sent to a banker for collection he can cross it specially to himself by having an indorsement in the cheque in his favour if such banker is the holder of the instrument.
Section 126 of the Negotiable Instruments Act,1881.
Payment of cheque crossed generally. Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker.
Payment of cheque crossed specially. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection.
The object of the provisions relating to the crossing of a cheque is that it would conduce to the ease of commerce, the security of property and the prevention of crimes if drawers or holders of drafts on bankers payable to bearer or order on demand, were enabled effectually to direct the payment of the same to be made only to, or through some banker. It follows, therefore, that crossing is only a direction to the drawee banker. To pay the amount mentioned in the cheque through a banker when the crossing is general or through the banker named in the cheque or to his agent banker for collection if the crossing is special. The drawee banker will not be justified in making payments in a manner contrary to the directions conveyed by the crossings. If he does so, and any loss results thereby, he cannot debit the amount against the drawer’s account , and if payment is made to a wrong person he will be liable to the true owner to make good such loss.
Section 127 of the Negotiable Instruments Act,1881.
Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.
It has been noticed before under section 125 that a cheque that is specially crossed to a banker can again be specially crossed by that banker to another banker as his agent for collection. This is the only instance of second special crossing which can be resorted to by a banker for the purpose of collection alone. Save and except this instance no other case of more than one special crossing is allowed by law. The present section prohibits payment by a banker, on whom a cheque is drawn, if it bears more than one special crossing except the one mentioned above. If any payment is made by the banker it must necessarily be made at his own risk.
Section 128 of the Negotiable Instruments Act,1881.
Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.
Payment of a crossed cheque by a banker in due course discharges him from all liability. Payment in due course would mean payment made in conformity with the provisions of sections 10 and 126. Such payment must be made in good faith, without negligence and if the cheque is crossed generally it should be made to a banker and if it is crossed specially it should be made to the banker specially named on the cheque or his banker agent for collection. On payment in due course the drawee banker will be discharged from all liability and can debit the amount with the drawer’s account even if the amount does not reach the true owner. The section has been enacted for the protection of the bankers. If, however, the payment is not made in due course the banker will be liable to the true owner of the cheque provided the amount has not reached him.
Section 129 of the Negotiable Instruments Act,1881.
Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
The section deals with the banker’s liability when payment of a crossed cheque is made in contravention of the direction conveyed by the crossing. If a banker pays a cheque in contravention of the direction in the crossing as laid down in section 126 and the amount does not reach the true owner i.e. the bona fide holder for value of the cheque, he cannot charge the drawer with the amount of the cheque. Not only that, he is further liable, under this section, to compensate the true owner of the cheque for any loss sustained by the latter by reason of the payment by the banker in contravention of the provisions of section 126. Payment of a crossed cheque otherwise than through a banker is a strong evidence of negligence making the banker responsible to his customer, which can be rebutted by the banker on proof of good faith when he will not be liable.
There is no privity of contract between the banker (drawee) and the holder of a cheque. His contract is with the drawer and, therefore, when a banker refuses payment to the holder of a cheque the latter has no remedy against the former. The holder can only proceed against the drawer and the endorser, if any. But if the banker makes a payment of a crossed cheque and such payment is made in contravention of the provisions of section 126, the true owner of the cheque will be entitled under this section to maintain an action against the banker for any loss sustained by him for such payment. A statutory obligation is cast on the banker to pay in a particular way and he will be liable for not making payment in that way.
This section IS to be read subject to the provisions of section 89. Therefore, when a cheque is presented for payment which does not, at the time of presentation, show on the face of it the crossing or where crossing is obliterated in such a manner as to avoid detection by the banker and the banker makes the payment in due course according to the apparent tenor of the cheque over the counter he will not only be not liable to the true owner for any compensation but will be able to charge the drawer with the amount. Here the essence of the whole thing is bona fide and good faith.
If a crossed cheque payable to order is stolen from the payee and his endorsement is forged on it the banker who makes payment of the cheque to a person who paid value in good faith in contravention of the direction conveyed by the crossing cannot debit the drawer’s account with the amount. The payee, in such a case, will be able to recover it from the person who has received payment from the banker. If, however, the drawer has allowed the banker to debit his account with the amount of the cheque he can recover the same from the person who has received payment from the banker. The case will, however, be different if the cheque be one payable not to order but to bearer and is not crossed with the words 'not negotiable'. In such a case the person who gets possession of the instrument bona fide for value becomes the holder and the payee ceases to be so and he cannot recover the amount from the person to whom payment is made by the banker. The payee has, however, a remedy against the banker who makes payment in contravention of crossing.2) When one person authorised his cashier to present a cheque crossed generally to a banker on whom it was drawn and the banker on presentation of the cheque made over another generally crossed cheque drawn by him upon another banker for the same amount to the cashier who, however, fraudulently misappropriated the amount it was held that the person having authorised the cashier to deal with the cheque was estopped from denying the authority of the cashier to receive payment in that manner and was not entitled to recover damages.3) A holder who loses a cheque cannot recover the amount from one who gets possession of the instrument bona fide for value and receives payment from the banker. The holder can proceed against the banker for having offended against the provisions of section 126.
A banker who makes payment of a bill or cheque through mistake, as for instance, to a wrong person or under a forged endorsement can recover the amount from the person who has received payment provided that he gives notice immediately and the party who has received payment has not changed his position in a way that repayment will prejudice him.
Section 130 of the Negotiable Instruments Act,1881.
A person taking a cheque crossed generally or specially, bearing in either case the words “not negotiable”, shall not have and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had.
Formerly, by striking out the word “bearer”, or “order” a cheque could be made non-negotiable but now the only way to do it is to cross the cheque with the words “not-negotiable”. The phrase “not negotiable” does not make the cheque non-transferable, it only takes away the negotiable character of the instrument, that is, a holder with a defective title cannot confer a good title on a holder in due course. In spite of this mode of crossing the cheque can be transferred but the transfer is not attended by the important consequences of a negotiable instrument. The most important advantage the holder in due course of a negotiable instrument gets by transfer is that he holds the instrument free from all the defects of title of his predecessors. But when the instrument is made 'not negotiable', although it does not cease to be transferable, there can be no holder in due course but only a holder and the transferee does not get that special advantage of holding the instrument free from all the defects of the transferor. He only acquires the right, title and interest of the transferor. In fact the transferee of a cheque crossed with the words 'not negotiable' has the same rights as those of an overdue bill or note. If the transferor has a good title the transferee will have a good title and if the transferor has a defective title so also will the transferee have. The holder i.e. the transferee steps into the shoes of the transferor. It can be transferred by indorsement or delivery Where H by false pretences obtained from G a cheque crossed '& Co ' and 'not negotiable' and took it to a bank and received payment from the bank it was held that on account of the fraud H had no title to the cheque and the bank was liable for the amount of the cheque.4)
Where a cheque is made payable to A only, it is non-transferable and payment can be made to A only and to no one else and, therefore, it cannot be transferred5).
The object of crossing a cheque with the words 'not negotiable’ is to afford protection to the drawer or holder against accident, miscarriage or dishonesty in the course of transit by making it difficult to get the cheque cashed until it reaches its destination.
Section 131 of the Negotiable Instruments Act,1881.
A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.
Explanation I. A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer’s account with the amount of the cheque before receiving payment thereof.
Explanation II. It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.
The explanation I to the section has been added by section 2 of the Negotiable Instruments (Amendment) Act VIII of 1922.
The explanation II to the section has been added by section 6 of the Negotiable Instruments (Amendment) Act 55 of 2002 with effect from 6-2-2003.
Formerly there was no statutory protection given to the bankers in general for payment or collection of cheques tainted by forgery or with defective title of the person presenting the same, so that when a collecting bank received from its customers crossed cheques, they would either collect them or leave them alone , if they would collect them and the customer who sent the cheque for collection had a bad title, the banker became liable. This was, at all events, rather hard. It was, therefore, only reasonable that the legislature should relieve the bankers from some of the consequences against which no amount of foresight could possibly guard.
While sections 82 and 128 of this Act afford protection to a banker who pays a crossed cheque in due course the present section gives protection to a banker who in good faith and without negligence receives payment for a customer of a crossed cheque. When, therefore, a banker receives from his customer a cheque crossed in his favour for collection and receives payment of the amount on his customer's behalf the fact that the customer's title to the cheque is defective will not render the banker liable to the true owner.
In order to avail of the protection afforded by this section the conditions laid down here must be strictly complied with, otherwise the banker will remain liable for receiving payment for a customer with a defective title in the cheque. The conditions are,
Banker is entitled to protection under this section if he acts in good faith and without negligence. Whether a bank is guilty of negligence is a question of fact and depends on the circumstances of each case.6) The test of negligence is whether the transaction of paying in any given cheque is so out of the ordinary course that it should arouse doubts in the mind of the banker and cause him to make an enquiry. Thus, where a cheque payable to a public officer in his official capacity was endorsed by him and was presented by his clerk, a man of slender means, and the cheque was allowed to be collected and credited to his personal account it was held that in the circumstances the bank should have held an enquiry and not having done that was guilty of negligence and not entitled to the protection under the section.7)
This obligation to take proper care has been imposed by the statute upon the banker in the interest of the true owner and, therefore, the question of good faith and want of negligence has to be considered from the point of view of the latter. The standard of care is what a reasonable business man would or would not do having regard to the surrounding circumstances and depends on the ordinary practice of bankers without inherent defects and not on the practice of individuals.8) It is no excuse that exercise of care would not probably lead to the detection of the defective title of the customer as the person who does not exercise reasonable care is not entitled to any protection under the section.
If the name of the customer given in the instrument is different from the name given in the endorsement and the banker without noticing the discrepancy makes the payment he is guilty of negligence. Cheques which on the face of them do not belong to the person who places them for collection into his private account but belong to his employer, or his principal or firm or company and a fiduciary relation subsists between the two, necessitate enquiry and absence of enquiry imports negligence and disentitles the bank to the protection of the section. If there are suspicious circumstances an enquiry is essential. When, from certain circumstances, some collections and payments were found unprotected but the true owner, with knowledge of them did not disapprove of the same, the subsequent transactions were not negligent. Thus, if banker in good faith collects a cheque signed 'per pro' he is not guilty of negligence merely because he does not enquire into the drawer's authority. But a bank will be guilty of negligence if it ignores a direction on a cheque like 'Account payee'.
A cheque crossed with 'Account payee’ must be received by a banker to the account of the person indicated thereon. If it is not so received without enquiry the banker is guilty of negligence and is not entitled to protection. A bank is entitled to protection even if the drawer’s signature in the cheque is forged.
In order to entitle the banker to the protection afforded by this section the payment must be received for a customer of the bank. The payment must not be received by the banker on his own account nor for a customer of another bank. A banker is protected only where he acts as a conduite pipe for conveying the cheque to the bank on which it is drawn and receiving the payment from that banker for its customer. A person who has habitual dealings in banking business with a bank having either a deposit or current account or some similar relation is a customer of the bank. A person who simply cashes cheques in a bank is not its customer. One bank can be a customer of another if the one claiming protection collects cheques for the other. A bank can credit the account of the customer on receipt of the cheques from him and in case of dishonour can reverse the credit to the constituent’s account in respect of those cheques. A customer does not cease to be so because his account is overdrawn. But where the customer had overdrawn and the bank received the payment to extinguish the debt of the customer the bank was holder of the cheque for value.
The crossing must be done before the cheque reaches the banker, otherwise the section will not apply. The banker cannot claim protection by crossing the cheque after it reaches the bank.
Section 131A of the Negotiable Instruments Act,1881.
The provisions of this Chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque.
This section was added by section 2 of the Negotiable Instruments (Amendment) Act (Act 33 of 1947) setting at rest the doubt whether the provisions of this chapter would apply to a draft drawn by one branch of a bank on another. But by the Repealing and Amending Act (Act 35 of 1950) the aforesaid Act of 1947 has been wholly repealed subject to certain saving regarding some rights and obligations etc under the repealed Acts (Vide section 4 of Act 35 of 1950).