Legal aspects of a cheque
Definition of a Cheque
A cheque is defined in Sec 6 of NI Act as under :-
(i) A cheque is a bill of exchange drawn on a specified banker
(ii) Payable on demand
(iii) Drawn on a specified banker
(iv) Electronic image of a truncated cheque is recognized under law. The Information Technology Act, 2002
recognizes (a) digital signatures and (b) electronic transfer as well
A cheque is nothing but a bill of exchange with special features
(i) It is always payable on demand ( A bill of exchange can be payable on demand/at sight and/or after a specific term called as usance bill)
(ii) always drawn on a specified banker i.e., the drawee of a cheque is the banker on whom the cheque is drawn. The banker with whom the customer holds his/her account. This drawee bank is called the paying bank. The parties to a cheque are:
Apart from the above three parties, others involved in payment and collection of cheques are :
Endorser: The person who transfers his right to another person
Endorsee: The person to whom the right is transferred
Different types of cheques
(1) Open Cheque:
A cheque is classified as ‘Open’ when cash payment is allowed across the counter of the bank.
(2) Bearer Cheque:
A cheque which is payable to any person who holds and presents it for payment at the bank counter is called a
‘Bearer cheque’. A bearer cheque can be transferred by mere delivery without any endorsement.
(3) Order Cheque:
An order cheque is a cheque which is payable to a particular person. In case of order cheque, the word ‘bearer’
might have been cancelled and the word ‘order’ is written. The payee can transfer an order cheque by endorsement
to another person by signing his name on the back of the cheque
Crossing of a cheque
Crossing is an ‘instruction’ given to the paying banker to pay the amount of the cheque through a banker only
and not directly to the person presenting it at the counter. A cheque bearing such an instruction is called a
‘crossed cheque’; others without such crossing are ‘open cheques’ which may be encashed at the counter of
the paying banker as well. The crossing on a cheque is intended to ensure that its payment is made to the right
Section 123 to 131 of the Negotiable Instruments Act contain provisions relating to crossing. According to Section
131-A, these Sections are also applicable in case of drafts. Thus not only cheques but bank drafts also may be
Cheque crossed generally
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. [section 123]
Cheque crossed specially
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. [section 124].
Payment of cheque crossed generally or specially
Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker.
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. [section 126].
Cheque bearing “not negotiable”
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 form whom he
took it had. [section 130]. Thus, mere writing words ‘Not negotiable’ does not mean that the cheque is not
transferable. It is still transferable, but the transferee cannot get title better than what transferor had.
“Account Payee” crossing : N.I. Act does not recognize “Account Payee” crossing, but this is prevalent as per
practice of banks in India. In view of this, RBI has directed banks that:
(1) Crediting the proceeds of account payee cheques to parties other than that clearly delineated
in the instructions of the issuers of the cheques is unauthorized and should not be done in any
(2) If any bank credits the account of a constituent who is not the payee named in the cheque without proper
mandate of the drawer, it would do so at its own risk and would be responsible for the unauthorized
payment. Reserve Bank has also warned that banks which indulge in any deviation from the above
instructions would invite severe penal action.
(3) In case of an ‘account payee’ cheque where a bank is a payee, the payee bank should always ensure that
there are clear instructions for disposal of proceeds of the cheques from the drawer of the cheque. If
there are no such instructions, the cheque should be returned to the drawer.
(4) However, with a view to mitigating the difficulties faced by the members of co-operative credit societies incollection of account payee cheques, relaxation has been extended in respect of co-operative credit
societies. Banks may consider collecting account payee cheques drawn for an amount not exceeding
`50,000/- to the account of their customers who are co-operative credit societies, if the payees of such
cheques are the constituents of such co-operative credit societies.
A cheque bearing a special crossing is to be collected through the banker specified therein. It cannot , therefore,
be crossed specially again to another banker, i.e., cheque cannot have two special crossings, as the very purpose
of the first special crossing is frustrated by the second one.
However, there is one exception to this rule for a specific purpose. If a banker, to whom the cheque is originally
specially crossed submits it to another banker for collection as its agent, in such a case the latter crossing must
specify that it is acting as agent for the first banker to whom the cheque is specially crossed.