Amending Negotiable Instrument Act — III

Sections 123 to 130 are the most important parts of the Negotiable Instrument (NI) Act 1881 because these sections have discussed about crossed cheque which is the most popular form of negotiable instrument. In banking, bearer cheque and crossed cheque are most commonly used in settling transactions. Even the use of crossed cheque is much more popular than the bearer cheque. Payment against these cheques is made in accordance with the relevant sections of the NI Act.
Therefore, a banker has to have very good understanding and clear perception about these sections in order to deal with crossed cheque. As stated in this Act, a cheque is made 'crossed' when two parallel transversal lines are drawn across the face of the cheque. The law does not specify the space where parallel lines will be drawn. However, in practice, at the top of the left side of the cheque, these two parallel lines are drawn across. The important feature of crossing is that crossed cheque can never be paid over the counter and the payment thereof must be credited to the payee's or the endorsee's account.  
However, there are various types of crossed cheque with different properties. As per these sections of the NI Act, the crossed cheques are open crossed cheque, crossed with 'A/C Payee', crossed with '& Co', and crossed with 'Not Negotiable'.
Cheque drawn with two parallel transversal lines thereon without inscribing any word/s between the parallel lines is known as open crossed cheque which implies that negotiation of the instrument is open, meaning the cheque can be freely negotiated. Cheque drawn with two parallel transversal lines thereon inscribing words 'A/C Payee' between the parallel lines is known as crossed cheque with 'A/C Pay', which implies that negotiation of the instrument is restricted, meaning the cheque loses its negotiable feature and therefore, cannot be negotiated any more.
Cheque drawn with two parallel transversal lines thereon inscribing words '& Co' between the parallel lines is known as crossed cheque with '& Co', which means that negotiation of the instrument is open and as such, the cheque can be freely negotiated. To speak the truth, this writer himself has some confusion about the feature of this kind of crossing as some experienced senior bankers have said that this kind of cheque is drawn for making payment in favour of a company and therefore, will be paid under the endorsement with the company's seal and signature. However, this explanation cannot be substantiated with any valid document. We have tried to find reliable source, preferably court judgment for obtaining more clarity on the implication of this kind of cheque but our efforts have gone in vain due to lack of relevant documents.
However, as far as we have been able to go through some papers on this issue, our understanding is that words '& Co' is used between the parallel lines so as to keep the drawer's intent unaffected and restrict the subsequent payee's ability to change the drawer's intent. If the drawer of a cheque wants to keep his instrument freely negotiable during the entire validity period and draws open crossed cheque which is freely negotiable at the time of issue but its negotiability can be restricted if the subsequent payee writes 'A/C Pay' between the lines and as a result, the drawer's intent is affected. This kind of situation can easily be averted if the drawer issues crossed cheque with '& Co' as the subsequent payee will not be able to write a single word in the crossing.  
Cheque drawn with two parallel transversal lines thereon inscribing words 'Not Negotiable' between the parallel lines is known as crossed cheque with 'Not Negotiable'. This is a very peculiar type of crossed cheque which is hardly used in settling any transaction. 'Not Negotiable' does not mean that the cheque cannot be negotiated. Rather it can be freely negotiated but there is no guarantee of the authenticity of the instrument.    
It may, however, be mentioned here that regardless of the type of crossing, payment has to be made through the account of the final payee/endorsee which is the unique feature of the crossed cheque. In the banking transaction, only bearer cheque and crossed cheque with 'A/C Payee' are the most common forms of cheque.
Crossed cheque with '& Co' is seldom used while crossed cheque with 'Not Negotiable' is never used. We have spoken with many veteran bankers who have never seen this kind of crossing and even in his 20 years of banking career, this writer has not come across any crossed cheque with 'Not Negotiable'. There should not be the provision of cheques which are hardly used or not used at all and therefore, these sections should be amended removing crossed cheque with '& Co' and 'Not Negotiable' and retaining only open crossed cheque and crossed cheque with 'A/C Payee'.   
RESPONSIBILITY OF PAYING BANK AND COLLECTING BANK (SECTION 31 & 131):  These sections are related to the role and responsibility of paying bank and collecting bank. In effect, a bank has to play the dual role of paying bank as well as collecting bank. Paying bank is the bank which pays or honours negotiable instrument as per drawer's instruction while collecting bank plays the role of an agent for the customer. In reality, collecting bank has to play the simultaneous role of collecting banker as well as paying banker because first it has to collect the proceeds of the instrument on behalf of the customer and then pay to its customer.
In respect of crossed cheque, the paying bank has less responsibility than the collecting bank because paying bank pays money to the bank which pays to the customer. If any wrongful transaction happens, the paying bank can easily call back money from the collecting bank which will be in a difficult situation to recover money from the customer. Besides, the collecting bank pays money to the ultimate payee. So it is their responsibility to ensure proper identity of the payee. Section 31 refers to the role of paying bank while Section 131 refers to the role of collecting banker. So the banker must have well understanding and clear conception about these sections of the NI Act.
However, these sections of obsolete Act cannot provide full protection to the bank while playing the role of paying bank and collecting bank as well. Because of the globalisation and following recent developments in the international trade, some crucial issues have emerged calling for stringent compliance in carrying out banking transaction.
KYC, KYCC, DD and EDD are the most common forms of compliance the banker has to perform prior to undertaking any transaction even under documentary credit. So these compliance factors will have to be included with the role and responsibility of paying bank and collecting bank and therefore, these sections will have to be updated inserting these compliance issues.   
ALONGE:  Alonge is another typical term added and briefly discussed under this Act. This term allows annexing extra paper on the back of the cheque for accommodating more endorsement required for continuing the negotiation of the instrument. A cheque once drawn remains valid for six months when it can be freely negotiated to the number of people but back of the cheque does not have enough space for endorsement. So the provision of annexing extra paper has been retained. Although this explanation is theoretically correct, in reality, endorsement is never provided on the additional paper.
In this scribe's whole banking career, he never saw using additional paper with cheque for endorsement nor did he hear about any banker experiencing this kind of endorsement. We believe, the banker will be reluctant to honour the cheque if endorsement is provided on additional paper annexed with the cheque. This impractical and non-existent provision should not continue in this Act and therefore, need to be taken out.  
The NI Act is considered as the most important legal knowledge required for discharging day-to-day banking operation. Either Teller Service Department or Foreign Exchange or Credit Department, everywhere the knowledge of the NI Act is required. Therefore, every banker has to have good understanding and clear conception about the NI Act and apply the knowledge thereof while carrying out any banking transactions. This Act was created in 1881. Thenceforth no addition, deletion or amendment has been made.
Language and wording of this Act is so difficult and full of ambiguity that general people can hardly understand this Act properly. Whereas this is the only Act which is applied by the ordinary people, specially the bankers who come with general education without the knowledge of legal language. So this important Act should be rewritten in simple language removing all kinds of ambiguity and putting more clarity where needed. The sections which have become obsolete and lost its enforceability in the changing scenario need to be deleted while new addition will have to be made to make the Act up-to-date.
It may, however, be mentioned here that many countries have repealed this obsolete Act long ago and enacted new laws that suit appropriately to the needs of the modern banking. So, the Negotiable Instrument Act - 1881 needs amendment and now is the right time to do so.
The author, a banker,
works in Toronto, Canada.
 [email protected]