A cheque is an instrument in writing containing an unconditional order made by a depositor of a bank directing the banker to pay on demand a certain sum of money.
Thus, the cheque is an instrument which is used to withdraw money from the bank and settle transactions.
Different types Of Cheques :
There are two types of cheque :
- Open Cheques
- Crossed Cheques
1) Open Cheques :
An open cheque is one that is presented and paid by the banker over the bank’s counter in a direct way.
Types of Open Cheques :
- Bearer Cheques
- Order Cheques
I) Bearer Cheques :
A bearer cheque is one that is payable to any payee who presents it for payment over the counter of the bank.In other words, it is payable by the banker to the person named on the cheque or any other bearer.
Bearer cheques are freely transferable from one person to another by simple delivery. Bearer cheque does not need an endorsement for their negotiation.
In the case of the bearer, a cheque is lost or stolen, the banker shall not be responsible for the payment made to an unauthorized person.
Functions of Bearer Cheques:
A) Easy payment: It is quite easy to obtain the payment of the bearer cheque at the counter of the bank.
B) Easy Negotiations: It is easy to negotiate a bearer cheque as it does not need an endorsement for its negotiations.
C) Useful for the ordinary person: It is suitable for a person not conversant with banking operations. A person, who does not have any bank account can collect the payment of the cheque easily from the bank without any verification and attestation of signatures.
D) Lack of safety: It is not safe because payment of bearer cheque may be made by the bank to any person whoever he may be genuine payee or thief.
II) Order Cheques:
An order cheque is one that is payable to the person named in the cheque by the drawer or to the order of the payee.
In other words, it is payable only to the payee or to any person who receives it from him. For example, “pay to Raj Kapoor” or order is an order cheque.
This cheque is payable by the banker to either Raj Kapur or to any person whom he orders the payment of the cheque.
Thus, order cheque may be transferred from one person to another by making endorsements on the cheque.
Order cheque is paid by the banker only when he is satisfied with the identity of the payee.
Functions Of Order Cheques :
- Safety: An order cheque is safer as it can be encased only by the person named in the cheque or to his order.
- Suitable for big payment: Being safe, order cheque is particularly suitable for making big payments.
- Recorded movement: In case of order cheque there is a record of the cheque from one person to another. It is because an order cheque bears endorsement.
B) Crossed Cheque :
A crossed cheque is one which bears two parallel transverse lines across the face of the cheque with or without any words.
In other words, a cheque may be crossed by drawing two parallel lines on the face of the cheque. Crossing first originated in England when cheques were sent from one bank to another.
The crossing of a cheque may be defined as an instruction from the drawer of the cheque to the banker that he is only to pay the cheque provided certain conditions are fulfilled.
The crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the paying banker and also it’s negotiating character.
Different Types of Crossed Cheque :
- General Crossing
- Special crossing
- Account Payee Crossing
- Not negotiable crossing
1. General Crossing :
A general crossing is a crossing where a cheque simply bears two parallel lines with or without any words and without any specification for payment.
Sec 123 of the negotiable instruments act 1881 defines general crossing as follows, “where a cheque bears across it’s facing an addition of the words, and company” or any abbreviations thereof, between two parallel transverse lines or of two parallel transverse lines simply either words or without the words, Not Negotiable that addition shall be deemed crossing and the cheque shall be deemed to be crossed generally.
The essential requirements of general crossing are drawing of two lines :
- On the face of the cheque
- Parallel to each other and
- In cross direction
2. Special Crossing :
A special crossing is a crossing where a cheque bears across its face the name of a banker.
Sec 124 of the negotiable instruments act 1881, defines special crossing as follows, ” where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”, the addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to the banker.
In case of special crossing two parallel transverse lines are not necessary, but the name of a bank should be written on the face of the cheque.
The name of the banker on the cheque must appear otherwise than as a drawer, payee, drawer or endorser of the cheques to continue special crossing.
3. Account Payee Crossing :
Account payee crossing is a crossing where a cheque bears across it’s facing the words such as “Account payee” or “payee’s account only” along with general or special crossings.
It may be noted here that the words “Account payee” or payee’s account are not recognized by the negotiable instruments Act like, but are being used due to the practice prevalent in the business community.
4. Not-Negotiable Crossing:
A not negotiable crossing is a crossing where cheques bear across its face the words “Not Negotiable” along with general or special crossings.
According to section 123 and 124 of the Negotiable instruments act, 1881, cheques may be crossed either generally or especially with the words “not negotiable“.
Objects Of Not Negotiable Crossing :
- To provide safeguard against miscarriage and dishonesty to the holder of the cheques.
- To provide protection to the collecting banker.
- To provide protection to the paying banker.
What is the collection /opening Of Crossing?
The opening of crossing on a cheques means the cancellation of the crossing. The cheques thereafter become an open cheque.
The cancellation can be done only by the drawer of the cheques. The drawer after opening the crossing will put his full signature and write “Pay cash” on the cheques.
What is Double-crossing?
Where a cheque bears across its face two Separate special crossings I.e the name of two banks, it is termed as double-crossing.
Specially crossed cheques are required to be collected through the banker specified in the crossing. In the double-crossing two banks’ names will appear on the cheque.
What is Marking Of Cheques?
The marketing of cheques refers to the practice of declaring that cheques are good for payment.
It is a sort of certificate issued by the drawee banker certifying that there is a sufficient amount in the account of the drawer of the cheques and that the cheques will not be dishonoured due to lack of funds.
The marking Of cheques may be done at the request of —
- The drawer of the cheques
- The holder of the cheques
- The collective banker
What are the essential elements required for valid cheques?
Essential elements are :
1. Form of cheques: The cheques drawn by the customer must satisfy all the requisites of valid cheques. The negotiable instruments Act has not to provide the form of cheques
2. Date of Cheques: A cheques must be bear a date without which it is incomplete. The date of the cheques is important because the order of the customer to the banker given through the cheques becomes legally effective on the date mentioned on the cheques.
3. Amount of Cheques: The amount should be mentioned on the cheques both in words and in figures.
4. Fund of the customer: The banker should see whether there are sufficient funds in the account of the customer to pay the cheques.
5. Drawers Signature: A cheques must contain the signature of the drawer to be legally valid.
Who can Cross a cheque?
The following parties to a cheque can Cross it :
- The drawer: The drawer of the cheques may cross a cheque before issuing it. He may cross it generally or especially.
- The holder: The holder of a cheque can Cross the cheques.
- The banker: The banker to whom a cheque is crossed may cross the cheques.
The paying banker refuses payment of the cheques in the following circumstances :
1. Countermanding payment by the drawer.
2. Death of the drawer.
3. Insolvency of the drawer.
4. The insanity of the drawer.
5. Assignment of the credit balance
6. Breach of trust.