V Semester BBA

BANKING LAW & PRACTICES

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MODULE-3
SECTION A
a) Define a Paying Banker.
 A paying banker is the person who pays the cheque either to his customer or on the
instructions of his customer. A cheque is a Negotiable instrument that orders a banker
to pay when certain conditions are met.
 The paying banker is the bank responsible for honoring (paying) cheques drawn on
accounts held by their customers.
 “Paying banker refers to the banker who holds the account of the drawer of the cheque
and is obliged to make payment, if the funds of the customer are sufficient to cover the
amount of his cheque drawn”

b) Define a Negotiable Instrument.

 A negotiable instrument is a signed document that promises a payment to a specified
person or assignee.
 In other words, it is a formalized type of IOU (I Owe You): A transferable, signed
document that promises to pay the bearer a sum of money at a future date or on-
demand. Common examples of negotiable instruments include personal checks,
cashier's checks, money orders, certificates of deposit (CDs), promissory notes, and
traveler's checks.

c) What is an Endorsement?
 Endorsement refers to the signature or other form of authentication on the back of a
negotiable instrument, such as a check or a promissory note. It indicates the legal
transfer of the instrument from one party to another.

d) What is opening of crossing?

 It means cancellation of crossing made on a cheque. Such cancellation can only be done
by the drawer. Crossing is cancelled by striking off the crossing with the words crossing
cancelled pay cash and putting the drawer’s full signature near the crossing.

e) What is General Crossing?

 When a cheque only possesses two parallel transverse lines without having anything
written between them is called General Crossing.
f) Give the meaning of wrongful dishonour of cheque.
 Wrongful dishonor occurs when a bank or credit union fails to honor a valid check or
draft sent to it. A bank is liable for its mistake if it is proved that wrongful dishonor has
occurred on its watch. Dishonor refers to a check or draft presented to a bank by a party
with insufficient funds

g) What are a Forged Cheque and Travelers Cheque?

 Forged Check: A forged check is the check where the drawer's signature has been forged
to draw money from the bank.
 Travelers Cheque: A cheque issued by a bank for a fee, containing a fixed amount. These
cheques are enchased or used to make payment in a foreign country, after endorsement
by the signature of the holder.

h) What is a Promissory Note?

 A promissory note is a written and signed promise to repay a sum of money in exchange
for a loan or other financing. A promissory note typically contains all the terms involved,
such as the principal debt amount, interest rate, maturity date, payment schedule, the
date and place of issuance, and the issuer's signature.

SECTION B & SECTION C

1) Discuss the Precautions and Statutory Protection to the Paying Banker.
 A paying banker is the person who pays the cheque either to his customer or on the
instructions of his customer. A cheque is a Negotiable instrument that orders a banker
to pay when certain conditions are met.
 The paying banker is the bank responsible for honoring (paying) cheques drawn on
accounts held by their customers.
 “Paying banker refers to the banker who holds the account of the drawer of the cheque
and is obliged to make payment, if the funds of the customer are sufficient to cover the
amount of his cheque drawn”
PRECAUTIONS TO BE TAKEN BY PAYING BANKER WHILE MAKING PAYMENT OF CHEQUES
 Crossed Cheque: The most important precaution that a banker should take is about
crossed cheques. A banker has to verify whether the cheque is open or crossed. He
should not pay cash across the counter in respect of crossed cheques. If the cheque is a
crossed one, he should see whether it is general crossed or special crossed. If it is general
crossing, the holder must be asked to present the cheque through some banker and
should be paid to a banker. If the cheque bears a special crossing, the banker should pay
only the bank whose name is mentioned in the crossing.
 Open Cheque: If it is an open cheque, a banker can pay cash to the payee or the holder
across the counter. If the banker pays against the instructions as indicated above, he is
 liable to pay the amount to the true owner for any loss sustained. Further, a banker loses
statutory protection in case of forged endorsement.
 Proper Form: A banker should see whether the cheque is in the proper form. That means
the cheque should be in the manner prescribed under the provisions of the Negotiable
Instruments Act. It should not contain any condition.
 Presentment of Cheque: Presentation of the cheque should be in right format and right
place. A banker can honour the cheques provided it is presented with that branch of the
bank where the drawer has an account or another branch if it is multi-citycheque.
 Date of the Cheque: The paying banker has to see the date of the cheque. It must be
properly dated. It should not be either a post-dated cheque or a stale-cheque. If a
cheque carries a future date, it becomes a post-dated cheque. If the cheque is presented
on the date mentioned in the cheque, the banker need not have any objection to honour
it. If the banker honors a cheque before the date mentioned in the cheque, he loses
statutory protection. If the drawer dies or becomes insolvent or countermands payment
before the date of the cheque, he will lose the amount. The undated cheques are usually
not honored.
 Words and Figures: The amount of the cheque should be expressed in words, or in
words and figures, which should agree with each other. When the amount in words and
figures differ, the banker should refuse payment. However, Section 18 of the Negotiable
Instruments Act provides that, where there is difference between the amount in words
and figures, the amount in words is the amount payable. If the banker returns the
cheque, he should make a remark ‘amount in words and figures differ’.
 Alterations and Overwriting: The banker should see whether there is any alteration or
over- writing on the cheque. If there is any alteration, it should be confirmed by the
drawer by putting his full signature. The banker should not pay a cheque containing
material alteration without confirmation by the drawer. The banker is expected to
exercise reasonable care for the detection of such alterations. Otherwise, he has to take
risk. Material alterations make a cheque void.
 Proper Endorsements: Cheques must be properly endorsed. In the case of bearer
cheque, endorsement is not necessary legally. In the case of an order cheque,
endorsement is necessary. A bearer cheque always remains a bearer cheque. The paying
banker should examine all the endorsements on the cheque before making payment.
STATUTORY PROTECTION FOR PAYING BANKER
Protection regarding the order cheque: In case of an order cheque, Section 85(1) of the
NI Act provides statutory protection to the paying banker as follows, where a cheque
payable to order purports to be endorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
Protection in case of bearer cheques: Section 85 (2) of the Negotiable Instruments Act,
1881 states, “Whereas a cheque is originally expressed to be payable to bearer, the
drawee is discharged by payment in due course to the bearer thereof, notwithstanding
 any endorsement whether in full or in blank appearing thereon, notwithstanding that
any such endorsement purports to restrict or exclude further negotiation.”
Protection in case of crossed cheques: Regarding payment of crossed cheque, the
paying banker gets the protection under Section 128 of the Negotiable Instruments Act,
1881: “Whereas the banker on whom a crossed cheque is drawn has paid the same in
due course, the banker paying the cheque and the drawer thereof (in case such cheque
has come to the hands of the payee) shall be entitled respectively to the same rights and
placed in the same position if the amount of the cheque had been paid to and received
by the true owner thereof.”
Protection in case of draft: Section 85A of the NI Act states that, Drafts drawn by one
branch of a bank on another payable to order where any draft, that is an order to pay
money, drawn by one office of a bank upon another office of the same bank for a sum of
money payable to order on demand, purports to be endorsed by or on behalf of the
payee, the bank is discharged by payment in due course.
Protection in respect of Materially altered cheque: Section 89 grants protection to the
paying banker when banker pays cheque which is materially altered provided the
following conditions are satisfied:
 The alteration was not apparent or appears.
 Banker has made payment in good faith and without negligence.
 Banker is liable to pay the cheque.
 Where the customer did not exercise proper care in drawing the cheque.
Protection in respect of Order cheque with forged endorsement of the payee: Section
85(1) of NI Act 1881 gives protection to the paying banker in respect of payment made
on order cheque on which payee’s signature is forged. “Where a cheque payable to
order purports to be endorsed by or on behalf of the payee, the drawee is discharged by
payment in due course”.

2) Explain the roles, duties and responsibities of Paying Banker.

 A paying banker is the person who pays the cheque either to his customer or on the
instructions of his customer. A cheque is a Negotiable instrument that orders a banker
to pay when certain conditions are met.
 The paying banker is the bank responsible for honoring (paying) cheques drawn on
accounts held by their customers.
 “Paying banker refers to the banker who holds the account of the drawer of the cheque
and is obliged to make payment, if the funds of the customer are sufficient to cover the
amount of his cheque drawn”
DUTIES AND RESPONSIBILITIES OF A PAYING BANKER:
a) Honoring Cheques: Mandatory Payment: The banker has an obligation to pay a
customer's cheque, provided there are sufficient funds in the account and the cheque
meets all legal requirements. Following Proper Procedures: Adhere to bank regulations
 and the Negotiable Instruments Act to ensure secure and legal transactions. Verifying
Cheque Authenticity: Before paying, the banker must carefully examine the cheque for:
o Validity: Ensure it's a genuine cheque issued by the bank.
o Correctness: Verify the date, amount, payee, drawer's signature, and
endorsements.
o Completeness: Check for any alterations, erasures, or cancellations.
b) Maintaining Customer Confidentiality: Protect customer information and only disclose
financial details as per regulations or upon court orders.
c) Preventing Fraud: Implement measures to detect and prevent fraudulent cheques, such
as verifying signatures and using Positive Pay systems.
d) Handling Stop Payments: Honor stop payment instructions received from customers
promptly and accurately.
e) Record Keeping: Maintain proper records of all cheque transactions for audit purposes.
f) Dishonoring Cheques: In cases where the cheque is not valid or there are insufficient
funds, the banker must dishonor it with a valid reason and notify the customer.
g) Check Clearing: Processing and clearing checks drawn on accounts held at the bank. This
involves verifying the authenticity of the check, ensuring sufficient funds are available,
and facilitating the transfer of funds.
h) Electronic Funds Transfer (EFT): Facilitating electronic fund transfers, including direct
deposits, wire transfers, and other electronic payment methods according to customer
instructions.
i) Issuing Banker's Drafts/Cheques: Issuing banker's drafts or cashier's cheques to
customers for specified amounts often used for large transactions where a more secure
form of payment is required.

3) What is Negotiable Instrument? Explain its features.

 A negotiable instrument is a signed document that promises a payment to a specified
person or assignee.
 In other words, it is a formalized type of IOU (I Owe You): A transferable, signed
document that promises to pay the bearer a sum of money at a future date or on-
demand. Common examples of negotiable instruments include personal checks,
cashier's checks, money orders, certificates of deposit (CDs), promissory notes, and
traveler's checks.
FEATURES OF NEGOTIABLE INSTRUMENTS
 Writing: Negotiable instruments must be in writing, signed by the issuer (also known as
the maker or drawer), and contain an unconditional promise or order to pay a specific
sum of money.
 Certainty of Sum: The amount of money to be paid must be certain and fixed.
 Order or Promise to Pay: The instrument must contain an unconditional order or
promise to pay a specific sum of money.
  Signature of the Issuer: The instrument must be signed by the issuer (also known as the
maker or drawer).
 Negotiability: The instrument must be transferable by endorsement (signing the back of
the instrument) and delivery, and it must contain a statement that it is payable to the
bearer (i.e., the person who holds it) or to the order of a designated person.
 Fixed Maturity: The instrument must have a fixed maturity date, meaning that the
payment is due on a specific date.
 Interest: Negotiable instruments often carry interest until they are paid. These features
are designed to make the different types of negotiable instruments easy to transfer and
to establish the legal rights and obligations of the parties involved.
 Consideration: It is drawn, accepted, or endorsed for consideration. The presumption is
that there is a presence of consideration in every negotiable instrument.
 Date: It contains a date on which the instrument is drawn or made.
 Time of acceptance: Unless otherwise is proved, the instruments are presumed to be
accepted within a reasonable time, i.e. after it has been issued and prior to its maturity.
 Time of transfer: Unless otherwise is proved, it is presumed that all the transfers are
made before the instrument is matured.
 Order of Endorsement: Unless otherwise is proved, it is presumed that endorsements
showing upon the instrument, were in the sequence in which they appear.
 Stamp: Unless otherwise is proved, it is presumed that the lost promissory note bear the
stamp
 Holder in Due Course: Unless otherwise is proved, it is presumed that the holder of the
instrument, is the holder in due course. Here, it is inferred that each holder of the
instrument has paid adequate consideration for it and possessed it in good faith..
TYPES OF NEGOTIABLE INSTRUMENT

i. Promissory Note: A written instrument signed by the maker and carrying an

unconditional promise to pay the given amount only to the person whose name is
specified in the instrument, or to any other person on his order or to the bearer of the
instrument.
 Characteristics of Promissory Note
 It is a written document.
 There must be a clear and unconditional promise to pay a certain sum to a specified
person or on-demand.
 It must be drawn and duly signed by the maker.
 It must be properly stamped.
 It specifies the name of the maker and payee
 The amount to be paid must be certain, given in both figures and words.
 Payment is to be made in the country’s legal currency.

ii. Bill of Exchange: A written financial instrument carrying the signature of the maker, with
an unconditional order, directing a person to pay the specified amount mentioned in the
instrument only to the person whose name is specified in the instrument, or to any
other person on his order or to the bearer of the instrument.
Features of Bill of Exchange
 An instrument which a creditor draws upon his debtor.
 It carries an absolute order to pay a specified sum.
 The sum is payable to the person whose name is mentioned in the bill or to any
other person, or the order of the drawer, or to the bearer of the instrument.
 It requires be stamping, duly signing by the maker and accepting by the drawee.
 It contains the date by which the sum should be paid to the creditor.
iii. Cheque: A cheque is a type of bill of exchange that directs the specified banker, to pay
the specified amount to the person whom the document has been issued or to the
person whose name is specified in the instrument or to the bearer, by deducting the
same amount from the drawer’s account. One thing is to be noted that a cheque is
always payable on demand.

iv. Certificates of Deposit: Certificates of deposit (CDs) are negotiable instruments issued
by banks or financial institutions to depositors in exchange for a fixed sum of money for
a specified period. CDs typically offer higher interest rates than regular savings accounts
and are considered low-risk investments. The depositor agrees not to withdraw the
funds before the maturity date, in return for the higher interest rate. For instance, an
individual may purchase a CD with a maturity period of one year, earning a fixed interest
rate, and receive the principal amount plus interest upon maturity.
v. Money Orders: money orders are a secure form of payment issued by banks, post
offices, or other financial institutions. They are similar to checks but are prepaid,
meaning the purchaser pays the issuing institution the face value of the money order
plus a fee. Money orders are often used when a payee does not accept personal checks
or when a secure method of payment is required. For example, individuals may use
money orders to pay bills, send money to family or friends, or make purchases from
individuals or businesses that do not accept credit cards.

4) What is endorsement? Explain the various types of endorsements along with

essentials.
 Endorsement refers to the signature or other form of authentication on the back of a
negotiable instrument, such as a check or a promissory note. It indicates the legal
transfer of the instrument from one party to another.
 An endorsement may be a signature authorizing the legal transfer of a negotiable
instrument between parties, or it can be an amendment to a contract or document, such
as a life insurance policy or a driver's license.
 TYPES OF ENDORSEMENTS

 Blank or General Endorsement: It is a type of endorsement when the endorser just

signs on the instrument without mentioning the name of the person in whose favour
the endorsement is made. Endorsement in blank specifies no endorsee. It simply
consists of the signature of the endorser on the endorsement. Example: A bill is payable
to X. X endorses the bill by simply affixing his signature. This is an endorsement in blank
by X. In this case the bill becomes payable to bearer. There is no difference between a
bill or note endorsed in blank and one payable to bearer. They can both be negotiated
by delivery.
 Special or Full Endorsement [Sec. 16]: In this type of endorsement contains not only the
signature of the endorser but also the name of the person in whose favor the
endorsement is made, then it is an endorsement in full. In Special or Full Endorsement
an endorsement, it is only the endorsee that can transfer the instrument. Example: A is
the holder of a bill endorsed by B in the blank. A writes over B’s signature the words
“Pay to C or order.” A is not liable as an endorser but the writing operates as an
endorsement in full from B to C.
 Partial Endorsement [Sec. 56]: A partial endorsement is a type of endorsement in which
purports to transfer to the endorsee a part only of the amount payable on the
instrument. Such an endorsement does not operate as a negotiation of the instrument.
Example: A is the holder of a bill for Rs.1000. He endorses it “pay to B or order Rs.500.”
This is a partial endorsement and invalid for the purpose of negotiation.
 Restrictive Endorsement[Sec. 50]: A restrictive endorsement is one which either by
express words restricts or prohibits the further negotiation of a bill or which expresses
that it is not a complete and unconditional transfer of the instrument but is a mere
authority to the endorsee to deal with bill as directed by such endorsement.
Example: “Pay C,“ “Pay C for my use,“ “Pay C for the account of B“ are instances of
restrictive endorsement. The endorsee under a restrictive endorsement acquires all the
rights of the endorser except the right of negotiation.
 Conditional or Qualified Endorsement: A type of endorsement where the endorsee
limits or negatives his liability by putting some condition in the instrument is called
a conditional endorsement. A conditional endorsement, unlike the restrictive
endorsement, does not affect the negotiability of the instrument. It is also sometimes
called a qualified endorsement.
 Sans recourse Endorser relieves himself from the liability to all subsequent
endorsees.
 Facultative: The endorser waives any of his rights
 Contingent: The endorser makes his liability dependent upon happening of some
event.
Example: The holder of bill endorse it- ‘pay A or order on his marrying B’. In such case,
the endorser will not be liable until A marry to B.
ESSENTIALS OF ENDORSEMENT
Signature: An endorsement must include the signature of the person or entity
transferring the instrument. The signature indicates the intent to transfer ownership.
Placement: The endorsement should be placed on the back of the instrument, typically
within the designated area provided for endorsements. Placing it elsewhere may lead to
complications in the negotiation process.
Date: While not always a legal requirement, including the date of the endorsement can
be beneficial for record-keeping and may help determine the order of endorsements in
case of disputes.
Clear Language: The language used in the endorsement should be clear and
unambiguous. It should convey the intent to transfer the instrument, whether through a
blank endorsement, special endorsement, or other types.
Consistency with Payee Name: The name on the endorsement should match the name
of the payee on the front of the instrument. This consistency helps ensure the legitimacy
of the transfer.
Endorsement Type: The type of endorsement should be specified, whether it's a blank
endorsement, special endorsement, restrictive endorsement, or another type. The type
chosen will determine the negotiability and conditions of the instrument.
Endorsement Restriction (if any): If the endorser wants to impose restrictions on the
use or negotiation of the instrument, these restrictions should be clearly stated. For
example, a "For Deposit Only" endorsement limits the instrument to be deposited into a
specified account.
Endorser's Capacity: If the endorser is acting in a representative capacity (e.g., as an
agent or on behalf of a company), it may be advisable to indicate this on the
endorsement to clarify the authority.
Endorsee Information (for Special Endorsement): In the case of a special endorsement,
the name of the new payee should be clearly stated. This restricts the negotiation to the
specified person or entity.
Without Recourse (if desired): If the endorser wants to disclaim any liability in case the
instrument is dishonored, the phrase "Without Recourse" or similar language may be
added.
5) What is a Cheque and Mention the features and types of Cheques?
 A cheque can be defined as a document that instructs the bank to pay a specific amount
to the person whose name is written on the cheque.
 A cheque is a negotiable instrument governed by the Negotiable Instrument Act, of 1881
i.e. it promises its bearer a payment of the specified amount on furnishing the document
to the banker.
 As Per Section 6 of the Negotiable Instruments Act, of 1881, “A cheque is a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise than
on demand and it includes the electronic image of a truncated cheque and a cheque in
the electronic form”.
FEATURES OF A CHEQUE
Instrument in writing: A cheque must be in writing. An oral order to pay does not
constitute a cheque.
It should be drawn on banker: It is always drawn on a specified banker. A cheque can be
drawn on a bank where the drawer has an account, saving bank, or current.
Unconditional: A cheque is an order to pay and it is not a request .The order must be
unconditional.
The check must have an order to pay a certain sum: The cheque should contain an
order to pay a certain sum of money only. If a cheque is drawn to do something in
addition to, or other than to pay money, it cannot be a cheque.
It should be signed by the drawer and should be dated: A cheque does not carry any
validity unless signed by the original drawer. It should be dated as well.
It is payable on demand: A cheque must be an order to pay a certain sum of money on
demand but it is not necessary to the word ‘ on demand ‘ or equivalent words.
Validity: A cheque is normally valid for six months from the date it bears. Thereafter it is
termed as stale cheque. A post-dated or antedated cheque will not be invalid. In both
cases, the validity of the cheque is presumed to commence from the date mentioned on
it.
It may be payable to the drawer himself: Cheques may be payable to the drawer
himself/herself. It may be drawn payable to bearer on demand unlike a bill or a pro-
note.
Specific banker only: A cheque is always drawn only on a particular banker. Usually , the
name & address of the banker is clearly printed on the cheque leaf itself .
It does not require acceptance and stamp: Unlike a bill of exchange, a cheque does not
require acceptance on part of the drawee. There is, however, a custom among banks to
mark cheques as ‘good’ for the purpose of clearance. But this marking is not an
acceptance. Similarly, no revenue stamp is required to be affixed on cheques.
How Many parties are there in a Cheque transaction?
1. Drawer: The person who makes and signs the cheque and promises to pay the debtor a
specific amount.
2. Drawee: In the case of a cheque Drawee is always the bank on whom the cheque is
drawn and it’s the responsibility of Drawee to make the payment.
3. Payee: The person in whose favour the cheque is drawn, his name is written on the
cheque he is the person in whose name the cheque is endorsed.
Who may cross a Cheque?
 The Banker: Only an uncrossed cheque can be crossed by a bank, or a general crossed
cheque can be converted into a special crossing for collection to direct another banker
or any banking agent.
 The Drawer: The drawer can cross the cheque by either General crossing or special
Crossing.
 The Holder: The holder can cross the cheque by general or special also he can add the
word “Not Negotiable” and also make an uncrossed cheque crossed.
TYPES OF CHEQUES
Open Cheque: Otherwise called as uncrossed cheque, it is one on which cash is payable
at the counter of the bank, or it is transferred to the bank account of the person whose
name is written on the cheque. It is negotiable, i.e. it is transferable in nature.
Bearer Cheque: Bearer cheque refers to the cheque which can be encashed by the
person whose name is written on the cheque or anyone who presents the cheque
before the bank for payment. It is negotiable in nature, which can be transferred by
simply delivering it and so endorsement is not needed. No identification of the presenter
or holder is required in case of a bearer cheque.
Order Cheque: As the name suggests, it is the cheque which becomes payable to the
person or organization whose name is specified on the cheque or to his order. To
convert a bearer cheque into an order cheque, the word ‘or bearer’ is stricken off from
the cheque. Endorsement of the cheque to the third party is done by simply signing on
the cheque.
Crossed Cheque: You might have observed, two transverse parallel lines at the top left
corner of some cheques, which may or may not have the words – & Co., A/c payee or
Non-Negotiable. Such cheques are regarded as crossed cheques. The amount on such
cheques is credited to the account of the payee.
Self Cheque: When a person wants to withdraw money from his own account, by writing
‘self’ at the name of the payee, is called self-cheque. Do not cross the cheque or cancel
the words ‘or bearer’ from the cheque. These cheques should not be crossed, as well as
the words ‘or bearer’ should not be stricken off from the cheque, so that any person as
your representative can receive the amount on your behalf.
Blank Cheque: A cheque which is only signed, but the name of the payee and date is not
indicated, is called a blank cheque. Such cheques can be made account payee, and the
maximum limit of withdrawal can be mentioned.
Stale Cheque: A cheque bears a date and is valid up to three months of the stated date.
If a cheque is presented before the bank, after the expiry of the reasonable period, i.e.
three months after the date, then it is called stale cheque.
 Post-Dated Cheque: When a cheque is drawn containing a future date, it is called post-
dated cheque. In such cases, money will not be payable by the bank before that date.
Ante-dated Cheque: A cheque containing a prior date, is called an ante-dated cheque.
Bank honours cheques until three months to the date mentioned.
Banker’s Cheque: Otherwise called a pay order, it is a non-negotiable instrument, which
is issued by the bank on behalf of the customer, which is payable in the same city.
Cancelled Cheque: Due to any kind of mistakes while writing the cheque, it is cancelled,
and so it is called cancelled cheque.
Travelers Cheque: A cheque issued by a bank for a fee, containing a fixed amount. These
cheques are enchased or used to make payment in a foreign country, after endorsement
by the signature of the holder.
Gift Cheque: Cheques that are used for the purpose of gifts and prizes, usually very large
in size, are called Gift Cheques. Banks charge a fee for issuing such cheques.
Forged Check: A forged check is the check where the drawer's signature has been forged
to draw money from the bank. Cheque fraud, or check fraud, refers to a category of
criminal acts that involve making the unlawful use of cheques in order to illegally acquire
or borrow funds that do not exist within the account balance or account-holder's legal
ownership. Most methods involve taking advantage of the float to draw out these funds.

6) What is crossing of a cheque? Explain the different types of crossing.

What is the Crossing of Cheques?
The crossing is like an instruction to the paying bank not to make payment on the bank
counter rather payment shall be made through a bank account only so that no wrong
person can take the payment to the said cheque.
A crossed cheque is primarily any cheque that is crossed with two parallel lines. The lines
could be drawn either across the whole cheque or with the top left-handed corner.
TYPES OF CROSSING OF CHEQUES
GENERAL CROSSING
SPECIAL CROSSING
ACCOUNT PAYEE CROSSING
NOT NEGOTIABLE CROSSING
DOUBLE CROSSING
 General Crossing: When a cheque only possesses two parallel transverse lines without
having anything written between them is called General Crossing, When a cheque
possesses General Crossing the payee bank can only pay the said cheque to a banker. A
general crossing cheque is a form of a cheque that contains two parallel transverse lines
across the cheque or on the top left corner of the cheque with/without the words ‘and
Co.’ or ‘not negotiable’ between them, according to Section 123 of the Negotiable
Instruments Act, 1881.
 Special Crossing: A cheque in which the name of the banker is written, across the face of
the cheque in between the two transverse parallel lines, with or without using the word
‘not negotiable’. This type of crossing is called a special crossing. In a special crossing,
the paying banker will pay the sum only to the banker whose name is stated in the
cheque or to his agent. Hence, the cheque will be honored only when the bank
mentioned in the crossing orders the same.

 Account Payee Crossing: When the cheque has “A/c Payee” written between the
crossed lines and “A/c Payee” is added to a case of general or special crossing then it is
Restrictive crossing. In this case, the collecting bank has to credit the amount of the
cheque in the payee’s bank account only. It is also considered the safest form of crossing
and is widely used in the market.

 Not Negotiable Crossing: When “Not Negotiable” is written between the crossing lines,
the cheque is said to be a non-negotiable cheque. The effect of this cheque is that the
person accepting a “Not Negotiable” cheque shall not be allowed to pass the title of
“Holder” to any other person i.e. a better title can’t be passed on to any other
Party/Person. However, this crossing doesn’t affect the transferability of the cheque. A
bank, therefore, should be extra careful in paying such cheques. The payment should be
made only after he is satisfied that the person demanding payment is the person
entitled to receive it.

 Double Crossing: Double crossing is when a bank to whom the cheque crossed specially,
further submits the same to another bank, for the purpose of collection as its agent, in
 this situation the second crossing should indicate that it is serving as an agent of the
prior banker, to whom the cheque was specially crossed.

7) What is Dishonour of Cheque and explain the Grounds for Dishonour of cheque.
 A dishonored cheque is a cheque that a bank on which it is drawn refuses to pay (also
termed as honor). In other words, if you submit a cheque to your bank and it refuses to
pay you the amount mentioned in the cheque, it becomes a dishonored cheque.
Circumstances or reasons for dishonour of Cheques:
 Insufficiency of funds: When adequate funds are not available in the account of a
customer, then the cheque can be dishonoured. If the banker pays a countermanded
cheque, he will not only be required to reverse the entry but also be held liable to pay
damages for dishonouring the cheques presented subsequently which would have been
honoured otherwise.
 Notice of the Customer’s Death: The banker should not make payments on cheques
presented after the death of the customer. He should return the cheque with the
remark ‘Drawer Deceased’.
 Notice of the Customer’s Insolvency: A banker should refuse payment on the cheques
soon after the customer is adjudicated as insolvent.
 Receipt of the Garnishee Order: Where Garnishee order is received attaching the whole
amount; the banker should stop payment on cheques received after the receipt of such
an order. But if the order is for a specific amount, leaving the specified amount, cheques
should be honored
 Presentation of a postdated cheque: The banker may refuse the cheque when the
cheque is presented before the valid date.
 Stale Cheques: When the cheque is presented after a period of three months from the
date it bears, the banker may refuse to make payment.
 Material Alterations: When there is material alteration in the cheque, the banker may
refuse payment.
 Drawer’s Signature: If the signature of the drawer on the cheque does not tally with the
specimen signature, the banker may refuse to make payment.
GROUNDS OF DISHONOR DISHONOUR OF CHEQUE
o If the cheque is overwritten.
o If the signature is absent or the signature in the cheque does not match with the
specimen signature kept by the bank.
o If the name of the payee is absent or not clearly written.
o If the amount written in words and figures does not match with each other.
o If the account number is not mentioned clearly or is altogether absent.
o If the drawer orders the bank to stop payment on the cheque.
o If the court of law has given an order to the bank to stop payment on the cheque.
o If the drawer has closed the account before presenting the cheque.
o If the fund in the bank account is insufficient to meet the payment of the cheque
o If the bank receives the information regarding the death or lunacy or insolvency of the
drawer.
o If any alteration made on the cheque is not proved by the drawer by giving his/her
signature.
o If the date is not mentioned or written incorrectly or the date mentioned is of three
months before.
CONSEQUENCES FOR DISHONOUR OF CHEQUES:
1. Legal Consequences for the Bank: Liability: The bank may be held liable for damages
caused by wrongfully dishonoring a cheque. This could include compensating the parties
for any financial losses incurred as a result of the wrongful dishonor. Legal Action: The
affected parties may choose to take legal action against the bank for damages. This
could involve filing a lawsuit to seek compensation for financial losses, damages, and
potentially even punitive damages.
2. Consequences for the Issuer of the Cheque: Breach of Contract: Wrongful dishonor
could be considered a breach of the contract between the account holder and the bank.
The account holder may have legal grounds to pursue a claim against the bank for
damages resulting from the breach. Potential Liability to Pay Again: The issuer of the
cheque may still be obligated to pay the intended recipient. The wrongful dishonor does
not necessarily relieve the issuer of their financial responsibility.
3. Impact on the Payee/Recipient: Financial Loss: The payee may suffer financial losses
due to the wrongful dishonor, especially if they were relying on the funds from the
cheque for essential purposes. Potential Legal Recourse: The payee may have the right
to take legal action against the issuer of the cheque to recover the amount owed.
4. Credit Rating Impact: Negative Reporting: If the wrongful dishonor leads to financial
issues for the issuer, such as an overdraft or other consequences, it could potentially
affect their credit rating.
5. Reputational Damage: Reputation of the Bank: The bank's reputation may be
negatively impacted by wrongful dishonors, affecting customer trust and confidence in
its services.
6. According to Section 138 of the Act, “the dishonour of cheque is a criminal offence and
is punishable by imprisonment up to two years or with monetary penalty or with both”.
If payee decides to proceed legally, then the drawer should be given a chance of
repaying the cheque amount immediately. Such a chance has to be given only in the
form of notice in writing.