How to Protect your cheques?

The addition of the words” not negotiable” in a crossed cheque has a special significance. The use of the words does not render the cheque non-negotiable but only affects one of the main features of negotiability. The general rule about the negotiability is that the holder in due course of a bill or promissory note or cheque takes the instrument free from any defect which might be existing in the title of the transferor. If the holder takes the instrument in good faith , before maturity and for valuable consideration, his claim is not defeated or affected by the defective title of the transferor. In case of any dispute, it is the transferor with the defective title who is liable. But the addition on the words “not negotiable” to the crossing of a cheque, makes the position different. When such a crossing is placed on a cheque, the holder in due course does not get any better title than what the transferor had: If the transferor had defective title, the title of the holder in due course also becomes defective. Therefore, he will have to refund the amount of the bill to the true owner. In other words, the principle of the ‘nemo dat quod non habet’ – (that is, nobody can pass on a title better than what he himself has ) will be applicable to a cheque with a “not negotiable” crossing.

Cheque marked “Account Payee”: It is a form of restrictive crossing, represented by the words “Account Payee” entered on the face of the cheque. Such a crossing acts as a warning to the collecting bankers that the proceeds are to be credited only to the account of the payee. If the collecting banker allows the proceeds of the cheque so crossed to be credited to pay any other account, he may be held guilty of a negligence in the event of an action for wrongful conversion of funds being brought against him. These words are not an addition to the crossing but are mere direction to the receiving or collecting bankers. These do not affect the paying banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the person named as the payee.

In the case of a cheque bearing “Account Payee” crossing which is not specially crossed to another banker, the paying banker needs only to see that the cheques bears no other endorsement but that of the payee, and that it is otherwise in order. But where the cheque is also crossed specially, the paying banker must make payment only to the bank named in the crossing. If has been held that crossing cheque with the words “Account Payee” and mentioning a bank is not a restrictive endorsement so as to invalidate further negotiations of the cheque by the endorsee.

(i) Protection in respect of uncrossed cheque: When a cheque payable to order purports to be endorsed by or on behalf of the payee and the banker on whom it is drawn pays the cheque in due course, he is authorized to debit the account of his customer with the amount so paid, even though the endorsement of the payee subsequently terns out to be a forgery, or though the endorsement may have been made by payee, agent without his authority . In other words, the banker is exonerated for the failure to direct either the genuineness of the validity of the endorsement on the cheque purporting to be that of the payee of his authorized agent.

For example, a cheque is drawn payable to B on order and it is stolen, Thereafter, the thief or someone else forges B’s endorse­ment and presents the cheque to the bank for encashment. On paying the cheque, the banker would be able to debit the drawer’s account with the amount of the cheque. Likewise, if the cheque in the above case, was not stolen but instead presented for payment by B’s agent on endorsing the same “Per Pro” for B and the cheque is cashed the banker could debit the account of the drawer. He would not be held guilty of the ground that he has cashed the cheque endorsed by the agent of B who has misappropriated the amount thereof.

Such a protection is also available in respect of drafts drawn by one branch of a bank of another payable to order (Section 85A).

(j) Protection in respect of crossed cheques: When a banker pays a cheque (drawn by his customer), if crossed generally then to any banker, and if crossed specially then to banker, to whom it is crossed or his agent for collection (also being a banker), he can debit the drawer’s account so paid, even though the amount of the cheque does not reach true owner.

The protection in either of the two cases aforementioned can be availed of, if the payment has been made in due course i.e., according to the apparent tenor of the instrument, in good faith and without negligence, to any person in possession thereof in the circumstances which do not excite any suspicion that he is not entitled to receive payment of the cheque.