Cheques are of two types:
(i) Open cheques, and (ii) Crossed cheques.
(i) Open cheques. When a cheque is payable at the counter of the bank on whom it is drawn, it is called an open cheque.
An open cheque may be of two types:
(a) Payable to bearer, Payment of a cheque payable to bearer can be made to the bearer, e.g., “Pay A or bearer”. Any person who presents such a cheque to the bank can get the payment. Therefore, if a bearer cheque is lost, it is as good (or bad) as the loss of cash or currency notes. Hence there is a great risk.
Effect of scoring out the word “bearer” in a cheque. Whether endorsee becomes a holder in due course.
Two cheques were issued with the understanding that the cheques will not be endorsed to anyone or discounted. In both the cheques, the word “Bearer” was scored out by the maker when he wrote the cheques. One of the defendants endorsed the cheques in favour of the fourth defendant who discounted the cheques with the plaintiff. The plaintiff presented the cheques for collection.
The bank dishonoured the cheques on the ground that the payment was stopped by the drawer. Hence, the plaintiff filed a suit against all the defendants. The defendants argued that since the word “Bearer” was scored out in both the cheques, they became non-transferable and hence, the plaintiff was not a holder in due course and as such, could not maintain an action on the basic of the cheques. The Court held that since it was not made explicit on the instruments that those were not negotiable or were payable only to the payee, it will have to the construed as cheques payable to order and negotiable as such.
The appellant defendant further argued that as there were no words “to the order of on the cheques, the cheques could not be treated as payable to order.
The Court rejected the contention in view of the explanation (i) of Sec. 13 (1) of the Negotiable Instruments Act. A promissory note, Bill of exchange or cheque is payable to order which is expressed to be so payable to a particular person and does not contain words prohibiting transfer of indicating an intention that it shall not be transferable.
It confirmed the decree passed by the lower Court against the defendants. [M. George and Brothers v. Cherian.]
(b) Payable to order:
A cheque payable to order is payable only to the person named in the cheque or to his order, e.g., “Pay A or order”. In case an order cheque is lost, there is not much risk. The finder cannot get the payment unless he becomes successful in forging the drawer’s signature or the signature of the holder. There are greater chances of the fraud being detected.
2. Crossed cheques:
There is a risk involved in an open cheque. Hence, to reduce the risk, a cheque may be crossed. The payment of a crossed cheque cannot be received at the counter of the bank. The amount of a crossed cheque can be received through a collecting banker, i.e., by depositing the cheque in the account of the payee or holder.
In a crossed cheque the risk is negligible. Even if the cheque is encashed by a wrong person it is possible to trace the person and take action to recover the amount.