Endorsement and Crossing of Cheques

Endorsement

Definition of Endorsement: Endorsement has been defined in sec.15 of

the Negotiable Instrument Act 1881 as follows:

“Where the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof, or on a slip of paper annex thereto… he is said to endorse the same, and is called the endorser.”

Endorsement can be made either on the back of the instrument or on the face thereof.

Allonge: If the space available on the back has been completely covered, a piece of paper may safely be attached to the instrument and subsequent endorsements may be made on that paper. The paper so attached is known as “Allonge.”

Significance of Endorsement

An endorsement consists of two contracts, viz:

1. Contract of transfer of the property in the instrument, and

2.Contract of a contingent assumption of liability on the part of the endorser.

The endorser of a negotiable instrument, by his act of endorsing signifies the following to his endorsee and to any subsequent holder that, when the instrument left his hands:

1. He had a good title.2. It was genuine in all respects at the time of

endorsement.3. All previous endorsement were genuine.4. To indemnify the loss due to dishonour.5. Right of further negotiation to the endorsee.

Kinds of Endorsement

Blank EndorsementSpecial EndorsementRestrictive EndorsementConditional EndorsementSans recourse EndorsementSans Frais EndorsementFacultative EndorsementPartial EndorsementPer pro Endorsement

Blank Endorsement

According to section 16(1) of the Act “ An endorsement in blank, as it is generally called as General endorsement, specifies no endorsee, and as such the instrument becomes payable to the bearer.”

Cheques endorsed in blank can be negotiated by mere delivery.

Example: A cheque is payable to D.David or Order. If it is simply signed by David on the back, it constitutes a blank endorsement.

Special Endorsement

It is also known as full endorsement.Section 16(1) of the Negotiable Instrument Act

lays down that if the endorser adds a direction to pay the amount mentioned, to or to the order of a specified person, the endorsement is said to be in “full” and the person so specified is called the endorsee of the instrument.

An instrument with a blank endorsement can be converted into full endorsement by any holder by specifying the name of an endorsee and putting his signature.

Once a bearer always a bearer instrument

According to Section 85 of the Negotiable Instrument Act “Where 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, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.”

Restrictive Endorsement

A restrictive endorsement is one which, limits the further negotiation of an instrument. The endorsee in such cases, cannot further endorse it. Generally, the word ‘only’ is added after the endorsee’s name.

Example: ‘Pay to Samuel only’ – D. DavidAn endorsement may be restrictive for the

purpose of constituting the endorsee as an agent for collection.

Example: ‘Pay Kumar for my use’- D. DavidIn all these cases, transferability of the

instrument is restricted.

Conditional Endorsement

Conditional endorsement can be either to limit the liability of the endorser or create some liability to the endorsee to receive the payment of the instrument.

Example: ‘Pay to Kamal on completion of the house building’ – D. David

This type of endorsement is also known as ‘Qualified Endorsement.’

Conditional Endorsement

Section 52 of the Negotiable Instrument Act permits the use of any stipulation in an endorsement, which limits the liabilities of the endorser. It can take the form of:

Sans recourse endorsementSans Frais endorsementFacultative endorsement

Sans recourse Endorsement

It is an endorsement which limits the liability of the endorser. The effect of this endorsement is, to render the endorser free from all liability to any subsequent holder.

Example: ‘Pay to Ravindranath or order without recourse to me.’ – D. David

However this type of endorsement will not relieve the endorser from his liability if the cheque contains any forgery.

Sans Frais Endorsement

Sans Frais means ‘without expense’

Endorser is liable only to the amount in the instrument and does not want to incur any other expenses on his account. For example noting and protesting charges.

Facultative Endorsement

It is an endorsement whereby , the endorser waives some of his rights on the instrument.

Example: ‘Pay to Rajeev or order. Notice of dishonour waiver.’ – D.David

Normally notice of dishonour should be served to all the previous parties. In the above case the holder can, without serving notice to drawer , make him liable, in case the bill is dishonoured.

Partial Endorsement

According to section 56 of the Negotiable Instrument Act – “No writing on a negotiable instrument is valid for the purpose of negotiability, if such a writing purports to transfer only a part of the amount appearing to be due on the instrument.”

Hence partial endorsement is not valid.

Per Pro Endorsement

It is an endorsement made by an authorized agent. Prior information about the delegation of authority to the agent must have been given to the banker. Otherwise, a banker is not legally bound to accept this type of endorsement.

Regularity of Endorsement

Complimentary and Courtesy Title: Complimentary prefixes and suffixes and other courtesy title should not form a part of the endorsement.

Examples like Mr. Mrs. Miss, Captain, etcCorrect and Incorrect Spelling: If the name of

the payee or endorsee is spelt incorrectly on a cheque, then, the endorsement must correspond with that of the mis-spelt name.

Regularity of Endorsement

Endorsement by Illiterate persons: Left hand thumb impression, witnessed by an individual well-known to both the parties.

Endorsement by deceased persons: It must be endorsed by his legal representative.

Endorsement by Firms: Endorsement can be either in the name of the firm itself, or, it may be by an authorized agent, or by a legally authorized person on behalf of the firm. The name of the firm must be mentioned in full.

Regularity of Endorsement

Endorsement by Companies: Section 47 of the Companies Act provides “A

bill of exchange, or promissory note shall be deemed to have been made, drawn, accepted or endorsed on behalf of a company, if made, “drawn, accepted or endorsed in the name of or by or on behalf or on account of the company, by any person under its authority expressed or implied.”

Regularity of Endorsement

Endorsement by Clubs and other Non-trading Associations:

The endorsement in such cases consists of the signature of the authorized person, followed by his designation and the seal of the association.

If a cheque is received in the personal name of the secretary, but the amount is for the institution, then a mere signature will constitute a regular endorsement.

Regularity of Endorsement

Endorsement by Executors and Trustees: A cheque payable to executors and administrators may be endorsed by all of them or anyone acting for all.

In the case of trustees, the endorsement must be made by all of them.

Endorsement by Joint payees: All of them or any one acting for all.

Endorser’s Liability

Liable to every subsequent holder, in case of dishonour of the instrument. (sec.35)

Liability of the endorser will be fixed in the order in which, their signatures appear on the instrument.

Liability of the endorser continues even after death till the instrument is paid.

Liable only if he is served with a notice of dishonourLiability of the endorser can be excluded by a

separate contract to the contrary.Sans recourse endorsementInstrument paid in due course , the endorser is

relieved from his liability.

Other Aspects of Endorsement

Endorsement of cheques payable to fictitious, impersonal or imaginary persons

Effect of an intentional cancellation of endorsement

Negotiation Back: Instrument comes back to the same person who had endorsed it previously.

In such case no intermediate endorsers are liable to him. But when an endorser excludes his liability and afterwards becomes the holder of the instrument, all intermediate endorsers are liable to him.

Cont’d

Negotiation of lost instruments and instruments obtained by unlawful means:

Lost Instruments: 1. Holder of the lost instrument should give

notice of the loss to all parties liable on the instrument and also a public notice by an advertisement.

2. The finder of the lost instrument cannot sue in his own name.

3. True owner can recover the instrument from the finder or the finder must compensate the owner.

Cont’d

4. An acceptor or maker or drawee who makes payment in due course of a lost instrument, payable to bearer, to a finder, gets valid discharge of it.

5. If the finder negotiates the instrument, ‘payable to bearer’, to a bonafide transferee for value, the transferee gets a better title and will be entitled to retain the instrument as against the owner and to compel payment from the party liable thereon. But if the instrument is payable to order, transferee does not get a better title.

Instrument obtained by fraud

Instrument obtained by fraud: A person guilty of fraud does not get a valid title and cannot recover the payment.

But if it is transferred to a holder in due course, the instrument is purged of all its defects and the holder in due course can recover the payment.

Crossing

A cheque is said to be crossed when two transverse parallel lines with or without any words are drawn across its face. A crossing is a direction to the paying banker to pay the money generally to a banker or a particular banker as the case may be, and not to the holder at the counter.

A cheque may be classified as:a) Open chequeb) Crossed cheque

Object of crossing

Crossing affords security and protection to the true owner.

Avoids losses arising from open cheques falling into the hands of wrong persons.

Crossing of a cheque does not affect negotiability.

Crossed cheques payable to bearer are negotiable by delivery and where they are payable to order by endorsement and delivery.

Modes of crossing

General Crossing

Special Crossing

General Crossing

Section 123 of the Negotiable Instrument Act 1881 defines general crossing as:

“ 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 to be a ‘crossing, and the cheque shall be deemed to be crossed generally.”

Significance of General Crossing

Direction to the paying banker not to pay the cheque at the bank counter.

Section 126 clearly lays down that, “where a cheque is crossed generally, the banker on whom it is drawn, shall not pay it otherwise than to a banker.”

Payment of crossed cheque across the counter does not amount to payment in due course as it breaches his customer’s mandate.

He will be liable to the drawer and the true owner of the cheque.

Special Crossing

Section 124 of the Negotiable Instruments Act defines a special crossing as follows:“ where a cheque bears across its face, an addition of the name of a banker, 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.”

Significance of Special Crossing

It is a direction to the paying banker to pay the cheque only to the banker whose name appears in the crossing or to his agent.

Section 126 lays down that “ where a cheque is crossed specially the banker on whom it is drawn; shall not pay it otherwise than to the banker whom it is crossed or his agent for collection.”

Not Negotiable Crossing

Section 123 and 124 of the Act permit the use of the words ‘Not Negotiable’ in the crossing.

Not Negotiable crossing affects negotiability and not transferability.

No one can be a holder in due course in the case of a ‘Not Negotiable’ instrument.

Section 130 states that “ A person taking a cheque crossed generally or specially, in either case bearing 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 from whom he took it had.”

Not Negotiable Crossing

‘Not Negotiable’ crossing gives protection to the true owner of the cheque by preserving his right against any subsequent holder.

In a nutshell, if a cheque is crossed ‘not negotiable’ it is taken out of the category of negotiable instruments. But it can be transferred subject to the title of the transferor.

A/c Payee Crossing

This type of crossing gives a further protection to a cheque. The crossing gives a direction to the collecting banker not to collect it for any other person other than the payee.

In India, the A/c payee directions were abused during the multi-crore securities scam period.

The A/c payee cheques issued to banks on RBI, instead of being credited to the payee banks, were directly credited to the brokers’ accounts.

A/c Payee Crossing

Thus RBI has issued the following strict order with regard to A/c payee crossing:“ Crediting the proceeds of A/c payee cheques to parties other than that clearly delineated in the instructions of the issues of the cheques in unauthorized and should not be done under any circumstances.”