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Crossings and Endorsements
14.1. Background;
The crossing of a cheque is a feature of law in Pakistan adopted from laws applicable in British India. In United Kingdom the use of the term ‘crossings’ originated in the eighteenth century. When the employees of different banks brought their cheques to the clearing centre, for the sake of identification and to facilitate remittance, they wrote the names of their banks on the face of cheques. In UK the crossed cheques were governed by the Crossed Cheques Act, 1856.

Please note a Common characteristic of ALL TYPES of crossings. If an instrument, cheque, draft, etc is crossed----whatever the type of crossing----the paying bank will not pay cash against a crossed instrument, it can only be credited into a bank account.

14.2. Types of crossing;
The first type of crossing is known as “general crossing” and consists of placing of two parallel transverse lines across the cheque. These lines may be with or without the words “and company” or an abbreviation thereof such as “& Co”. The second type is known as “special crossing” which carries name of the bank collecting the cheque on the face of the cheque. The effect of a crossing on the cheque is that it can only be collected by a bank for a customer and cannot be paid over the counter to the payee or holder in cash.

14.3. Definition;
Section 123 of the Negotiable Instruments Act, 1881 says:
“Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof between two parallel transverse lines simply, either with or without the words ‘not negotiable’ the addition shall be deemed to be a crossing and the cheque shall be deemed to be crossed generally”

14.4. Features of a ‘general crossing’;
(a) Two parallel transverse lines drawn across the face of the cheque;
(b) With or without the words ‘and company’;
Cash cannot be paid against a generally crossed cheque.
Amount can be paid only to a bank, to any bank where the payee has an account.

14.5. Special Crossing;
Section 124 of the Act defines it as under:
“Where a cheque bears across its face an addition of the name of a banker, that addition shall be deemed to be a special crossing and the cheque shall be deemed to be crossed ‘specially’. A ‘specially crossed’ cheque can be paid to (i.e. it can be collected by) only that bank whose name is written in the special crossing and by no other bank.”

14.6. Difference between ‘general’ and ‘special’ crossings
i. In general crossing two parallel transverse lines are necessary whereas in special crossing need not; Just the name of a bank written across a cheque constitutes special crossing.

ii. In special crossing the name of the collecting bank appearing on the face of the cheque is necessary whereas in general crossing it does not appear.

iii. A cheque crossed generally can be collected by any bank whereas a cheque crossed specially must be collected by only that bank whose name appears across the face of the Cheque;

All other crossings can be cancelled by the “drawer” of the cheque but a special crossing can be cancelled only by the bank in whose favour it is specially crossed.

iv. A cheque may bear more than one banks name where the other bank is acting as collecting agent for the bank where the payee of the cheque maintains his account.

14.7. “Not negotiable”;
According to Section 130 of the Act, if in a crossed cheque, the words ‘Not Negotiable’ appear, the holder taking the cheque 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 does not restrict further transferability of a cheque. It is freely transferable by delivery in case of bearer and by indorsement and delivery in case it is an order cheque. The effect of these words on a cheque is that it is a warning to the payee or holder that if the cheque had a defective title, the indorsee or holder thereof will not acquire a better title than that of the transferor. By the same token the holder will not be capable of passing a better title than that of his own to the subsequent holder.

To reiterate a negotiable instrument is one the property in which is transferred by mere delivery or by endorsement and delivery. Moreover a ‘holder in due course’ who receives the instrument ‘for value’ and ‘in good faith’, ‘without notice of any defect’ in its title can get a better title than the previous holder.
If an instrument is marked ‘not negotiable’ then the subsequent holders do not get a better title than the previous holders.

An example will explain the impact of ‘Not Negotiable’ crossing. Person “A” stole a cheque bearing ‘Not Negotiable’ crossing, then he indorsed it to “B” for valuable consideration. A, having stolen cheque has no title to it and he cannot pass on any title to any subsequent holder thereof. This is so only if the cheque is crossed Not Negotiable. Although “B” received it for value and without notice that the title of “A” was defective but it was clearly marked ‘not negotiable’ which is a declaration that this instrument is devoid of the important quality of negotiability and he ‘B’ cannot get a better title than ‘A’. Since the title of ‘A’ was defective-----the title of ‘B’ will also be defective.
A non negotiable crossing means that the cheque is devoid of its quality of negotiability and an endorsee will receive the cheque subject to any defects in the title of the endorser.

In the above example if the cheque was not marked “non-negotiable”, ‘B’ who had received the cheque for valuable consideration without knowledge of any defect in its title would get a better title than A and the person B could enforce the cheque against the drawer and the endorser ‘A’.

14.8. “Account Payee Only Crossing”;
In Pakistan it is a crime to credit “Account Payee Only” cheque to any account other than the payee named in the cheque.

Section 123A was added to the Negotiable Instrument Act, 1881 by an amendment Ordinance of 1962. It states that where a cheque crossed generally bears across its face an addition of the words “account payee” between the two parallel transverse lines constituting the general crossing, the cheque besides being crossed generally, is said to be crossed “account payee”. When a cheque is crossed “account payee”, it shall cease to be negotiable and it shall be the duty of the banker collecting payment of the cheque to credit the proceeds thereof only to the account of the payee named in the cheque.
{Transverse= placed across sth}

The practice of using this type of crossing has been in vogue since the 19th century. Such a cheque is not transferable but valid only between the parties. It is said that the safest crossing will be the combination of two crossings i.e. “Account Payee only” along with “Not Negotiable”.
{Vogue= a fashion for something}

“Account Payee Only” crossing means that in addition to the restriction that the payment cannot be made in cash and can only be collected by a bank the proceeds of an “Account Payee Only” cheque CAN only be credited TO THE ACCOUNT OF THE PAYEE NAMED IN THE CHEQUE. Such cheque cannot be endorsed or transferred to any other person or institution.

In Pakistan it is a crime to credit such cheque to any account other than the payee named in the cheque.

14.9. Purpose and benefits of Crossing;
A crossing though not affecting the negotiability of the cheque does restrict its presentation through a bank i.e. it has to be deposited in an account thereby minimizing the risk of fraud which could be easier if the cheque was paid on the counters of a bank. Moreover the crossing gives directions to the paying banker to pay the proceeds to the collecting bank.

When sending a cheque to a beneficiary by mail or courier or through a person whom you cannot rely upon fully, it is better to cross a cheque preferably “Account Payee Only” because if it is so crossed it can only go into the bank account of the named payee and the chance of somebody else obtaining the money in question is minimized appreciably.

14.10. Who can cross a cheque?
According to Section 125 of the Negotiable Instrument Act

a) Where a cheque is uncrossed, the holder may cross it generally or specially;
b) Where a cheque is crossed generally, the holder may cross it specially;
c) Where a cheque is crossed generally or specially, the holder may add the words ‘not negotiable’;
d) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection;
e) When an uncrossed cheque or a cheque crossed generally comes to the hands of a banker, he may cross it specially to himself’.

14.11. Duties of a Bank with regard to crossed cheques
As explained earlier Section 126 of the Act states that a cheque crossed generally must be paid only to a banker and a cheque crossed specially shall only be paid to the banker named therein. As per Section 127 of the Act a cheque may bear second special crossing in favor of a second bank which is acting as an agent for collection for the first banker.

14.12 A. Protection to the Paying Banker when paying a crossed cheque - Sec. 128 of the Negotiable Instruments Act deals with payment in due course of a crossed cheque and makes it obligatory to a banker that payment of a crossed cheque must be made only ‘in due course’ which implies payment in good faith and without negligence to a banker. However, if he makes payment in contravention of this section, he loses the legal protection and will have to compensate the customer for any loss suffered by him by such payment. The protection is available if the banker makes payment in good faith and without negligence of a cheque crossed generally to a banker and if crossed specially, the banker to whom it is crossed or his agent for collection, being a banker.

Protection regarding Payment of Instrument on which alteration is not visible.
Where a Cheque has been materially altered but does not appear to have been so altered.
Sec. 89 provides a relief to the banker in the case of payment of an instrument on which alteration is not apparent and states that if a cheque presented for payment has been altered but does not appear to be altered or it has been crossed but does not appear to be crossed or has had a crossing which has been expunged at the time of presentation. In such a situation, the banker may make the payment according to the apparent tenor of the instrument. If the payment made is in due course and made in good faith without negligence the bank shall be discharged from all liabilities.

14.12B. Protection to the Collecting Banker when collecting a crossed cheque — Sec. 131 of the Negotiable Instrument Act provides that where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself, and the customer has no title or defective title thereto, the bankers shall not incur any liability to the true owner of the cheque by reason only of having received such payment provided the payment has been collected in good faith and without negligence.
(Note the different types of protections available to the collecting banker and the paying banker provided they have acted in good faith and without negligence.)

14.13. Who can open a crossing on a cheque?
We have earlier mentioned as to who can add crossing on the cheque. However as to who can remove the crossing is a totally different matter. A crossing being a material part of the cheque, its cancellation can only be done by the drawer of the cheque i.e. only a person who issued the cheque can open the crossing. This is for general crossing. However for cancellation of ‘special crossings’ these can only be removed by the banker whose name appears in the crossing.

14. 14. Indorsements
“Indorsun” is Latin word and from it “Indorsement” is derived, the literal meaning of which is “on the back or reverse.” But its legal definition under Section 15 of Negotiable Instruments Act, makes things clearer: “When 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 annexed thereto or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same and is called the “indorser.”

The following points emerge from this definition:
• Indorsement means the writing of a person’s name either on the back or the face of a
negotiable instrument.

• In the event of insufficient space on the instrument, indorsement can even be made on a piece of paper annexed to the instrument, technically called “allonge.” The Indorsement should be so made that part of the name appears on the instrument and partly on the piece of paper attached as “allonge.”

• The Indorsement should be made only when the instrument is intended for negotiation as per definition of ‘negotiation’ given in Section 14 of Negotiable Instruments Act which reads: “when a promissory note, a bill of exchange or cheque is transferred to any person by the holder thereof, the instrument is said to have been negotiated.”

• Negotiation thus means the transfer of a ‘negotiable instrument’ to a third party in such a way that the third party is constituted as the holder of the instrument who is entitled to
the possession of the same in a manner that he can sue upon it in his own name.

• There is no exact form of indorsement prescribed in banking law, but the bankers have developed their own principles in consonance with the basic legal requirements in this
regard.

Bankers in Pakistan generally observe the following principles:

a) The indorser’s name must be exactly in the same spelling as written in the instrument as payee or indorsee, i.e. it should be verbatim.

b) Indorsement should be made in payee’s or indorsee’s hand writing only. Signature in the form of facsimile is not acceptable.

c) Vernacular indorsement is not acceptable unless it is confirmed and guaranteed by the collecting banker.

14.15. Types of Indorsements
Indorsements are of the following types:

i) “In blank” indorsement,
ii) “In full” indorsement,
iii) Conditional indorsement,
iv) Restrictive indorsement,
v) Partial indorsement.

14.15.1. “In blank” — If the indorser signs his name only, the indorsement is said to be “in blank- and if he adds a direction to pay the amount mentioned in the instrument, to or to the order of, a specified person the indorsement is said to be “in full” and the person so specified is called the indorsee of the instrument (Section 16(1)). “The provision of this Act relating to a payee shall apply with necessary modification to an indorsee.” (Section 16(2)).

In a blank indorsement, the indorser signs his name only. It is also called “general indorsement.” The instrument bearing a blank indorsement becomes payable to bearer. It is thus negotiated to subsequent holders by mere delivery as in case of an instrument payable to bearer.

14.15.2. “In full”
As mentioned earlier in Section 16 of the Negotiable Instruments Act, if an indorser specifies with his signature the name of the person to whom the instrument is made payable, this indorsement is called an indorsement “in full” or “special indorsement.”

14.15.3. Conditional
According to Section 52, conditional indorsement is one where an indorser makes such liability or the right of the indorsee to receive the amount due thereon dependent upon the happening of a certain event which may or may not take place or excludes his own liability thereon when signing his name, e.g. “Pay XY & Co. at his risk and responsibility” or “Pay XY & Co. or order without recourse to me.”

14.15.4. Restrictive
When an indorser attaches a condition with his signature which prevents further negotiation of the instrument, it is called “restrictive indorsement.” For example, if a bill of exchange is endorsed as “Pay XY only” or “Pay XY for the account of DE” etc. it restricts further negotiability. The indorsee has no power to transfer his rights to any one thereafter.

14.15.5. Partial
Under Section 56(1), negotiation by indorsement must be of the entire instrument. Under 56 (2) an indorsement which purports to transfer to the indorsee only a part of the amount payable or which purports to transfer the instrument to two or more indorsees severally, is not valid as a negotiation of the instrument; but where such amount has been paid in part, a note to that effect may be indorsed on the instrument, which may then be indorsed for the balance.

14.16. Who can indorse?
(Bona fide = [usually before noun] (from Latin) genuine, real or legal; not false: a bona fide reason Ç is it a bona fide, reputable organization)
A bona fide payee, indorsee or holder of an order instrument can endorse as an individual, if endorsed to him as such, or as partner if made payable to a partnership firm or as Chairman, Director, Secretary, or Manager if made payable to a joint stock company, as per following examples:

14.16.1. Indorsements by individual;
The name of the indorser should correspond exactly to the name of the payee written in the instrument. Titles of courtesy, rank, marital status are not to be prefixed with Indorsements.

a) Payee: Ahmed Hussain
Regular: Ahmed Hussain
Irregular: Ahmad Hossain

b) Payee: Mufti Samee-ullah Khan
Regular: Samee-ullah Khan
Irregular: Mufti Samiullah Khan

14.16.2. Indorsements by agents for individuals.
Indorsement must indicate that the agent is signing on behalf of the payee under proper authority.

a) Payee: Abdul Mannan
Regular: Abdul Mannan
By Shahzad Khan
(his) attorney

Irregular: Abdul Mannan
Shahzad Khan
Attorney

b) Payee: Rizwan Rasheed

Regular: For and on behalf of Rizwan Rasheed
Shahzad Khan

14.16.3. Indorsement by a firm as the agent to an individual.
Indorsement must indicate that firm is signing as an agent of the individual.

a) Payee: Imtiaz Shafi

Regular: for and on behalf of Imtiaz Shafi
Shafi &Co.

Irregular: Imtiaz Shafi
Shafi & Co.

14.16.4. Indorsement by Joint Payees.
In case of joint payees, all payees must endorse individually or one of them should sign under an authority from rest of them.

a) Payee : Muhammad Imran & Saleem Butt
Regular: Muhammad Imran (Both signing individually)
Saleem Butt
or
Muhammad Imran
For self & Saleem Butt


Irregular: Muhammad Imran (Both names written in the same handwriting)
Saleem Butt

14.16.5. Indorsement by firms as an agent of another firm. A firm can indorse as an agent on behalf of another firm.
a) Payee: Messrs Karman Shah & Co.

Regular: Per pro Karman Shah & Co.
Shahjee & Co.

Irregular: Shahjee & Co. for Karman Shah & Co.

14.16.6. Indrosement for and on behalf of a firm.
A person indorsing an instrument for and on behalf of a firm, the indorser must indicate his designation.

a) Payee: Messrs Karman Shah & Co.

Regular: for and on behalf of
Karman Shah & Co.
Syed Ali
(Manager.)

Irregular: for and on behalf of Karman Shah & Co.
Syed Ali

14.16.7. Indorsement for Joint Stock Company.
A person indorsing an instrument on behalf of a Joint Stock Company must be a duly authorized official or agent who must indicate his authority and designation thereon.

a) Payee: Messrs Salman Jamal & Co. Ltd.

Regular: Per pro Salman Jamal & Co. Ltd.
Mansoor Ali
(Secretary)

Irregular: Per pro Salman Jamal & Co. Ltd.
Mansoor Ali

b) Payee: Messrs A B Fashion & Co. Ltd.
Regular: A B Fashion & Co. Ltd.
Shahid Ahmed
(Director)

Irregular: Per pro A B Fashion & Co. Ltd.
Shahid Ahmed

14.16.8. Indorsements by Clubs, Societies, Administrators, Trustees etc
Indorsements by persons on behalf of the institutions like clubs, societies, trusts etc. must be made by an authorized office bearer who must indicate his designation.

a) Payee: Karachi Services Club
Regular: for and on behalf of
Karachi Services Club
Sheraz Khan
(Hony. Secretary)

Irregular: Karachi Services Club
Sheraz Khan


b) Payee: Lawyers Forum
Regular: for Lawyers Forum
Wali Khan
(President)

Irregular: for and on behalf of Lawyers Forum
Wali Khan

14.9. Liability of indorser
Sec 35 states that in the absence of a contract to the contrary, the indorser of a negotiable instrument, by indorsing it, engages that on due presentment it shall be accepted and paid according to its tenor and that if it be dishonored he will compensate the holder or subsequent indorser who is compelled to pay it for any loss or damage caused to him by such dishonor. Every indorser after dishonor is liable as upon an instrument payable on demand.

It may be noted that “dishonor by drawee is necessary”. Therefore a holder cannot come straight to an indorser and demand payment. The instrument has to be presented to the drawee and if he refuses to pay, only then the holder can claim from the indorser.

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“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain