Cheque

Kinds of Cheques

1. Open cheque or bearer cheque

• This is a cheque that can be cashed at the bank counters directly. Anyone who has possession of this cheque can go to the bank and withdraw cash.
• It is risky because if the cheque is lost or stolen, anyone can cash it.
• Example: If Rahul wrote it as an open/bearer cheque, Shanti could directly go to the bank and withdraw Rs. 1000 in cash. But if she lost the cheque on the way, anyone finding it could also withdraw the cash.

2. Crossed cheque

• This cheque has two parallel lines drawn across the face of the cheque.
• This means the money cannot be withdrawn as cash from the bank counter. The crossed cheque must be deposited into another bank account. When this cheque is deposited, the bank will transfer the money from the account of the person who wrote the cheque to the account of the person depositing it.
• This is safer than an open cheque. Even if the crossed cheque is lost or stolen, no one can withdraw cash from it. They can only deposit it into another bank account. The bank will trace where the money went and reverse the transaction if reported stolen.

Example:

Instead, Rahul decides to write the cheque as a crossed cheque by drawing two parallel lines on it. Now Shanti cannot withdraw cash, she has to deposit the cheque into her bank account.

When she deposits the crossed cheque in her account, her bank will transfer Rs. 1000 from Rahul’s account to Shanti’s account through the banking system.

Even if Shanti lost the cheque, no one else can withdraw cash as it is crossed. They would have to deposit it into their own account for the amount to be transferred.

Types of crossed cheque

1. Cheque crossed generally

• Definition:
  • According to Section 123, a cheque with two parallel lines drawn across it, with or without the words “and company” or its abbreviation between the lines, is considered a generally crossed cheque.
  • Even without any words, the presence of two parallel lines is sufficient for it to be treated as a generally crossed cheque.
• Variations:
  • The lines can be drawn with or without additional words like “not negotiable”.
  • If the words “not negotiable” are written on a generally or specially crossed cheque, it means the cheque cannot be transferred or negotiated further.
• Legal Implications:
  • The person who receives a “not negotiable” cheque only obtains the same legal rights to the cheque as the person from whom they received it.
  • The purpose of marking a cheque “not negotiable” is to provide more protection to the person who wrote the cheque or the current holder from any dishonest acts that may occur while the cheque is being passed around.
  • Even if someone else gains possession of such a crossed “not negotiable” cheque, they cannot legally have a better claim over the cheque than the person they received it from.
• Protection Against Fraud:
  • This prevents the cheque from changing multiple hands with different legal claims.

⬆️ Reference: [Section 130]

Example:

Suppose Rahul writes “not negotiable” on the crossed cheque. Now if Shanti loses it, whoever finds it will not be able to deposit it in their own account or transfer the rights over the cheque to someone else. They can only get the same rights that Shanti had.

2. Cheque crossed ‘account payee’

• Definition:
  • Section 123A states that when two parallel lines are drawn on a cheque, making it a generally crossed cheque, additional words can be written between these lines.
  • If the words “account payee” are written between the two parallel lines, such a cheque is specifically called a “crossed account payee” cheque.
• Implications of “Account Payee”:
  • When a cheque is crossed with “account payee”, two things happen:
    1. It stops being negotiable, meaning the cheque cannot be transferred or assigned to someone else.
    2. The bank collecting the payment has a duty to directly credit the proceeds only to the account of the person named as the payee on the cheque.
• Bank’s Responsibility:
  • No other account can be credited; the amount must be deposited in the specific account of the person or company whose name is written as the payee on the cheque.
• Security Benefits:
  • This provides maximum security as the money cannot be credited to any other account besides the rightful payee’s account specified on the cheque.
  • Writing “account payee” makes a cheque non-negotiable and ensures only the payee’s account gets credited for the amount.
• Summary:
  • “Account payee” protects both the payer and the payee by ensuring that the cheque’s amount is credited only to the specified payee’s account.

3. Cheque crossed specially

• Definition:
  • Section 124 states that if the name of a specific banker or bank is written across a cheque between two parallel lines, it is called a ‘specially crossed’ cheque.
  • The name of the banker or bank can be written either alone or along with the words “not negotiable”.
• Characteristics:
  • When the name of a particular bank is written between the two parallel lines on a cheque, it becomes a ‘specially crossed’ cheque as per the law.
• Bank’s Role:
  • A specially crossed cheque will only be paid by the issuing bank if it is presented for collection through the specific bank whose name is written on the cheque crossings.
  • No other bank can collect payment for such a cheque. Only the bank named on the crossings is authorized to present the cheque for collection from the issuing bank.
• Security Benefits:
  • This ensures the cheque amount is collected securely through the designated bank written on it, rather than being deposited in any other bank.
• Summary:
  • Specially crossed cheques enhance security by ensuring that only the named bank can present the cheque for collection, providing a secure process for the cheque amount to be collected.

Crossing after issue of cheque

• According to section 125, if an uncrossed cheque is issued, the holder receiving it can add crossings to it – either generally or specially.
• If crossed generally, the holder can convert it into a specially crossed cheque.
• To a generally or specially crossed cheque, the holder can add “not negotiable”.
• In case of a specially crossed cheque, the bank it is crossed to can again cross it to another banker for collection.
• An uncrossed or mostly crossed cheque sent for collection can be crossed specially to the collecting banker.
• According to section 125A, any crossing done as allowed above is an authorized and material part of the cheque.
• Material means important legally. Changing, removing or altering any authorized crossing without permission is illegal.
• Only changes permitted as per the law can be done to a cheque crossing after issue. No unauthorized addition, removal, or change of crossings is allowed.