What is the difference between “Open Cheques” and “Closed Cheques”
A cheque marked in this fashion can be paid only to another banker. Naturally it will not be paid at the counter. The system of crossing cheque arose by mercantile usage and was later on sanctioned by law.
The advantage of crossing is that it reduces the danger of unauthorised persons getting possession of a cheque and cashing it. A crossed cheque can only be cashed through a bank of which the payee of the cheque is a customer.
There are different modes of crossing a cheque. The simplest mode of crossing is to put two parallel lines across the face of the cheque. This is called General Crossing. A cheque crossed generally will be paid to any bank through which it is presented.
When the name of bank is written between the parallel lines, it is called Special Crossing. A cheque crossed specially will be paid only when it is presented for collection by the bank named between the parallel lines. Such crossing affords a greater measure of protection against loss.
In addition to general or special crossing, a cheque may contain various remarks written on it, the effect of which is to restrict payment in certain ways. The usual remarks are “Account Payee” and “Not Negotiable.”
“Account Payee Only:”
The words ‘account payee’ on a cheque are interpreted as a direction on the banker to credit the proceeds of the cheque to the account of the payee. The negotiation of the cheque is not prohibited; therefore such a cheque remains transferable. Regarding negotiable instruments, there is a general principle that if the cheque is negotiable in its origin, (that is payable to order or bearer), the words “Account Payee Only” prohibiting transfer or indicating an intention not to transfer will not.defeat the transferability or negotiability of the cheque.
But although the payee is entitled to transfer the cheque to anyone, the transferee will face difficulty in getting the cheque collected for him. The words “account payee only” suggests that the collecting banker shall receive proceeds of the cheque only for the payee and shall credit only to his account. If the banker goes against this order, he will be guilty of negligence. Hence “account payee only” crossing is not negotiable practically, as banks will collect it on behalf of no person other than the payee.
A cheque marked with the words “not negotiable” can be transferred or assigned by the payee. The transferee will get the same rights, as regards payment, as the transferor had. But the transferee will not get the rights of a holder in due course.
“A person taking a cheque crossed generally or specially, bearing in either case 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.”
Certification of Cheque by Banks:
In some countries there is a custom of marking a cheque with the words “good for payment” by the drawee bank (e.g., in U.S.A.). The effect of this practice is that, it cannot be countermanded by the drawer, and the payee is certain of getting the money.
It has been held in Bank of Baroda v. Punjab National Bank that the practice of marking or certifying cheques has not been established in India, either by judicial decisions or by statutes. Therefore, even if a particular cheque is market as good, the drawee bank in India may refuse to honour it if there are insufficient funds. By inter-bank agreement, the marking of cheque have been stopped.