BANKING OPERATIONS

Cheques & Endorsements

INTRODUCTION:
A cheque is a document that orders a payment of money from a bank account. The person
writing the cheque, the drawer, usually has an account where their money was previously
deposited. The drawer writes the various details including the monetary amount, date, and a
payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay that person or
company the amount of money stated

MEANING:
Cheque is an instrument in writing containing unconditional order, drawn on a banker, sign by
the drawer, and payable on demand. It is used to withdraw money deposited in the bank.

According to Section 6 Negotiable Instrument Act:

"Cheque is an instrument drawn on specific banker, ordering to pay specific amount, to a specific
person, after the specific date."

A cheque is also a bill of exchange, and it has two important features:

1. It is always drawn on specific banker by an account holder.

2. It is always payable on demand. This instrument has also three parties-drawer, drawee
and payee. It is also an unconditional order on the banker.
PARTIES TO A CHEQUE:

Here are three parties involved in a cheque. They are as follows:

1) Drawer:
Drawer is the party who draws the cheque upon a soecified banker. He is the maker of the
cheque. He is the account holder who draws the cheque for drawing money from his bank
account. He is the person who issues cheque directing the
bank to pay a certain sum of money to a certain person or to the bearer. Thus, the person who
signs the cheque is known as drawer.

2) Drawee:
Drawee is the party upon whom the cheque is drawn. Drawee is the bank. It is the party to whom
the drawer gives order to pay the amount to the person named on the cheque or his order to the
bearer. When the bank follows the order and pays
the amount of the cheque then the cheque is said to be honored. In case of refusal of the order,
the cheque is said to be dishonored.

3) Payee:
Payee is the party who presents the cheque for payment. He is the person who receives money
from bank. He is the party in favor of whom cheque is issued. The payee is the person whose
name is mentioned on the cheque. If the cheque is made
payable to self, the drawer himself becomes the payee.

ESSENTIALS OF CHEQUES:
If one takes a close look at the definition of a cheque, it becomes clear that a cheque has the
following 10 essential elements or characteristics.
1. It must be in writing:
A cheque must be in writing. An oral order to pay does not constitute a cheque.
2. 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.
3. It contains an unconditional order to pay:
A cheque cannot be drawn so as to be payable conditionally. The drawer‟s order to the drawee
bank must be unconditional and should not make the cheque payable dependent on a
contingency. A conditional cheque shall be invalid.
4. 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. For example, if a
cheque contains „Pay Rs 50000 and a TV worth Rs 50000 to A„ it is not a cheque.
5. 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.
6. It is payable on demand:
A cheque is always payable on demand.
7. 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.
8. 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.
9. Banker is liable only to the drawer:
The banker on whom the cheque is drawn shall be liable only to the drawer. A holder or bearer
has no remedy against the banker if a cheque is dishonored.
10. 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.

Types of Cheque:
Cheques are of following types:
1. Bearer Cheque:
2. Order Cheque:
3. Cross Cheque:
4. Open Cheque:
5. Account Payee Cheque:
6. Stale Cheque:
7. Post Dated Cheque:
8. Ante Dated Cheque:

1. Bearer Cheque:
A cheque which is payable to any person who presents it at the counter of the bank is known as
bearer cheque. It can be transferred to another person by mere delivery. However, it‟s a risky
cheque because if it is lost, the finder of it can receive cash from the bank.

2. Order Cheque:
A cheque which is payable to a person whose name is mentioned in it is called order cheque. In
order cheque the word “bearer” is cancelled. It can be transferred to a third person by the order
of the original payee.
3. Cross Cheque:
When a cheque is crossed by drawing two parallel lines on the face it becomes crossed cheque.
Such cheque cannot be cashed at the counter of the bank. It is only be credited to the payee‟s
account. It has the following kinds.

a. General crossing
b. Special crossing

General Crossing: When a cheque is crossed by drawing two parallel lines on the face of it with
additional words like “Payees A/c Only” or “Not Negotiable” or “& Co”.
Special Crossing: When a cheque is crossed by drawing two parallel lines on the face of it with a
particular bank name.

4. Open Cheque:
When a cheque is not crossed it is called an open cheque. Such a cheque can be cashed at the
counter of the bank. It may be a bearer or an order cheque.
5. Account Payee Cheque:
On the Account payee cheque, two lines are made with the word "account payee" on the top right
of the cheque. Amount mentioned on the cheque is only transferred to the bank account of the
payee whose name is mentioned on the cheque. No cash payment is made. This cheque can not
be endorsed to the third party.

6. Stale Cheque:
In India, if a cheque is not presented to the bank within 3 months from the date written on the
cheque is known as a stale cheque.
For example - On 10 January 2019, If the cheque is presented to the bank on 10 April 2019, the
chque will be returned by bank stating that cheque is stale.
7. Post Dated Cheque:
If any cheque issued by a holder to the payee for the upcoming withdrawn date, then that type of
cheques are called post-dated cheque.
For example - On 10 January 2019, Ram issued a cheque to Sham. Date written on the cheque is
10 February 2019.

8. Ante Dated Cheque:

If date entered on the cheque is prior to the current date, that type of cheque is known as Ante-
dated cheque.
For example - On 10 January 2019, Ram issued a cheque to Shyam. Date written on the
cheque is 10 December 2018.
REASONS FOR DISHONOR OF CHEQUE:
Bank can dishonor the cheque due to following reasons.
1. Irregular signature:
When the drawer signature does not match with the signature bank has in its record. The bank
will not accept the cheque for payment.
2. Insufficient Amount:
When the fund is not enough in drawer‟s account to meet the cheque for payment, the cheque
will be bounced. However, in case of overdraft facility, bank can accept the cheque.
3. Insanity:
The bank will not accept the cheque, if the account holder gets insane and bank receives notice
of insanity.
4. Bankruptcy:
When the account holder is unable to pay of his debts in full, and this bankruptcy is declared by
the court of law, the bank will not honor a cheque presented on behalf of such account holder.
5. Post-dated Cheque:
When a cheque is presented to the bank for payment before the date written on it is called
posted-dated cheque. This kind of cheque cannot be cashed till that date arrives.
6. Stale Cheque:
The cheque which is older than six months is known as stale cheque. The bank does not accept
such a cheque.
7. Death:
When the account holder draws a cheque, and before it is presented to the bank, he dies, and
bank receives such information, the bank will dishonor the cheque.
8. Frozen Account:
If the customer account is frozen by the court of law, the bank will not honor the cheque on
behalf of that customer.
9. Drawer’s Revocation:
If the account holder draws a cheque and issues it, after he directs bank not to make payment for
such a cheque, the bank will not accept it.
10. Alteration:
If any alteration in the cheque is made and is not confirmed by the drawer by his signature, the
bank will dishonor it.

CROSSING OF CHEQUE:
The process referred to as Crossing of Cheques specifies a general instruction to a cheque which
is about to be deposited to a bank account. According to Section 123 of the Negotiable
Instruments Act, 1881 about Crossing of Cheques, the instruction stated above defines that the
amount specified in the cheque will be deposited directly unto the account of the Cheque holder
and will not be immediately delivered as cash to the holder over the bank counter.

A crossing is an instruction to the paying banker to pay the amount of cheque to a particular
banker and not over the counter. The crossing of the cheque secures the payment to a banker.

Reasons to Cross Cheque

 Crossing a Cheque provides precise instructions to a financial organisation regarding the

handling of funds.
  Crossed cheques are usually identified by drawing either two parallel transverse lines
either vertically across the cheque or on the top left-hand corner of the cheque.
 Two or more words like „and company‟ or „not negotiable‟ may be placed between the
lines. While just drawing the lines with no words also would not alter the purpose of the
crossed cheque.
 With Crossed cheques, the cheque writers may protect the amount transferred from being
cashed by the unauthorized person or from being stolen.
 This format for Crossed cheques may differ between various countries in the nature of its
format or statements.
 Since the Crossed Cheques can only be paid through a bank account, the beneficiaries
transaction record may be traced later for further queries and clarifications.

Who can Cross it?

A Cheque may be crossed by any of the following
1. Drawer
2. Holder of the cheque
3. Banker

Methods / Types of Cross Cheque

1. General Crossing (Section 123)
As mentioned earlier, the general crossing of cheques means including some words in between
the two lines drawn which symbolizes a crossed cheque. This depicts that the bank on which it is
drawn shall not permit the amount of payment in any other banks. Hence, the payment can be
made only in the collecting bank.

2. Special or Restricted Crossing (Section 124)

In the case of special crossing, the cheque bears the name of the bank, either with or without the
words „not negotiable‟. This means that the payment can be made only to that specific bank.
3. Not negotiable crossing (Section 130)
This type of cheque crossing means that the cheque can be transferred but cannot be negotiated.
In such cases, the „cheque holder‟ will bear the title of a transferor only.

ENDORSEMENT:
In its literal sense, the term endorsement means writing on an instrument. In its technical sense in
the Act, it means the writing of a person's name on the face or back of a negotiable instrument or
on a slip of paper for the purpose of negotiation.

The act of signing a cheque for the purpose of transferring it to somebody else is known as
“Endorsement”.

In simple words endorsement means transferring the instrument by the holder by signing the
instrument.
In simple words, thus, Endorsement means transferring the instrument by the holder by signing
the instrument. Such signature must be in ink. The indorser must sign his name as exactly as he
has signed on the face of negotiable instrument. He must sign for the purpose of negotiation.

When holder signs the instrument with an intention to negotiate it, it is called an endorsement. A
simple signature of the holder on a negotiable instrument without any additional word constitutes
an endorsement. The endorsement confers the property in the instrument to the endorsee
(transferee) with the right of further negotiation.

Definitions :
Section 15 of the Negotiable Instrument Act :
"When the maker or holder of a negotiable instrument signs and the same, therwise than as such
maker, for and purpose of negotiation, on the back or face thereof or on a slip of paper annexed
thereto, or signs for the same purpose a stamped paper intended to be completed as negotiable
instrument, he is said to have indorsed the same, and is called the indorser."

PARTIES OF ENDORSEMENT:
Endorsement involves two parties :
 Endorser: The person making the endorsement.
 Endorsee: The person to whom the instrument is endorsed.
 ESSENTIALS OF A VALID ENDORSEMENT:
The following are the essentials of valid endorsement :
 Must be on Instrument:
It must be on the instrument. The endorsement may be on the back or face of the instrument and
if no space is left on the instrument, it may be made on a separate paper attached to it called
allonage. It should usually be in ink.
 Endorsement by Maker or Holder:
It must be made by the maker or holder of the instrument. A tranger cannot endorse it.
 Signature of Endorser:
It must be signed by the endorser. Full name is not essential. Initials may suffice. Thumb-
impression should be attested. Signature may be made on any part of the instrument.
 No Specific Form:
It may be made either by the endorser merely signing his name on the instrument (it is a black
endorsement) or by any word showing an intention to endorse or transfer the instrument to a
specified person (it is a blank endorsement) or by any words showing an intention to endorse or
transfer the instrument to a specified person (it is an endorsement in full). No specific form of
words is prescribed for an endorsement, but intention to transfer must be present.
 Delivery:
It must be completed by delivery of the instrument. The delivery must be made by the endorser
himself or by somebody on his behalf with the intention of passing property therein. Thus where
a person endorses an instrument to another and keeps it in his papers where it is found after his
death and then delivered to the endorsee, the latter gets no right on the instrument. If delivery is
conditional endorsement is not complete until the condition is fulfilled.
 Endorsement of Entire Bill:
It must be an endorsement of the entire bill. A partial endorsement i.e. which supports to transfer
to the endorsee a part only of the amount payable does not operate as a valid endorsement.

TYPES OF ENDORSEMENTS:
1. Blank or general endorsement:
If the endorser signs his name only and does not specify the name of the endorsee, the
endorsement is said to be in blank Sec. 16(1).
The effect of a blank ndorsement is to convert the order instrument into bearer instrument (Sec.
54), which may be transferred merely by delivery.
2. Endorsement in full or special endorsement:
If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in
the instrument to, or to the order of, a specified person the endorsement is said to be in full [Sec.
16(1)].
If, for example, A, the holder of a bill of exchange, wants to make an endorsement in full to B,
he would write thus: “Pay to B or order, SdA4.” After such an endorsement it is only the
endorsee, i.e., B, who is entitled to receive the payment of the instrument and to further negotiate
the instrument by his endorsement.
3. Partial Endorsement:
Section 56 provides that a negotiable instrument cannot be endorsed for a part of the amount
appearing to be due on the instrument. In other words, a partial endorsement which transfers the
rights to receive only a part payment of the amount due on the instrument is invalid.
 Such an endorsement has been declared invalid because it would subject the prior parties to
plurality of actions (one action by holder for part value and another action by endorsee for part
value) “and will thus cause inconvenience to them.

4. Restrictive endorsement:
When an endorsement prohibits further negotiation of a negotiable instrument, it is said to be
restrictive. Section 50 of the NI Act 1881states, “The endorsement may, by express words,
restrict of exclude the right to negotiable or pay constitute the endorsee an agent to endorse the
instrument or to receive its contents for the endorser or for some other specified person.”
5. Conditional endorsement:
If the endorser of a negotiable instrument, by express words in the endorsement, makes his
liability, dependent on the happening of a specified event, although such event may never
happen, such endorsement is called a „conditional‟ endorsement (Sec. 52).
The law permits a conditional endorsement and therefore it does not in any way affect the
negotiability of the instrument. Thus, endorsements can validly be made in the following terms:
(i) “Pay B or order on his marriage;”
(ii) “Pay B on the arrival of Pearless ship at Bombay.”
6. Sans recourse endorsement (Sec. 52):
When the endorser expressly excludes his own liability on the negotiable instrument to the
endorsee or any subsequent holder in case of dishonour of the instrument, the endorsement is
known as „sans recourse‟ endorsement.
Such an endorsement is generally made by adding the words „sans recourse‟ or „without
recourse.‟ Thus, “Pay X or order sans recourse” or “Pay X without recourse to me” or “Pay X or
order at his own risk” is examples of this type of endorsement.
7. Facultative endorsement:
When the endorser expressly gives up some of his rights under the negotiable instrument, the
endorsement is called a „facultative‟ endorsement. Thus, “Pay X or order, notice of dishonour
waived” is a facultative endorsement.
As a result of such an endorsement the endorsee is relieved of his duty to give notice of
dishonour to the endorser and the latter remains liable to the endorsee for the non-payment of the
instrument, even though no notice of dishonour has been given to him.

MARKING OF CHEQUES:
When a Banker certifies by writing on it words like approved or good or initialing the cheque,
bank also puts its seal on it. Such Cheques are known as Marked Cheques or Certified Cheques

When can Mark the Cheque?

• Marking at the request of drawer
• Marking at the request of Payee (or Holder)
• Marking at the request of Collecting Banker

MATERIAL ALTERATION:
Any Changes made in the cheque is known as Material Alteration. When the changes are made
in Cheques, it loses its original character and affects the rights and liabilities of parties to the
cheque and such altered Cheques becomes invalid.
For instance, A drew a cheque of Rs 500 in favour of B, who altered the figure 500 into 5,000
without taking the consent of the maker. The instrument appeared to be drawn for Rs 5,000 on
the face of it.

INSTANCES OF MATERIAL ALTERATION:

The following are considered as material alteration.
1. Alteration of the date of the instrument
2. Alteration of the amount payable
3. Alteration in time of payment
4. Alteration of the place of payment
5. Alteration of rate of interest or any change of party thereto, if any
6. Tearing of the material part of the instrument
7. Where a bill is accepted generally, the insertion of a place of payment
8. Addition of a new party to the instrument
9. Addition of words to a bill of exchange endorsed in blank so as to convert the same into
special endorsement.
10. Opening a Crossed Cheque.

MUTILATED CHEQUE
If a cheque is torn into two or more pieces, then such cheque is called Mutilated Cheque. If it is
presented for payment, the bank will not make payment against such a cheque without getting
confirmation of the drawer. In case, if a cheque is torn at the corners and no material fact is
erased or cancelled, the bank may make payment against such a cheque.