Negotiable Instruments Act, Section 126

Negotiable Instruments Act, Section 126: Payment of Cheque Crossed Generally and Specially

Section 126 of the Negotiable Instruments Act, 1881 lays down the rules for payment of generally and specially crossed cheques by the drawee banker, ensuring secure banking transactions and protection against fraud, unauthorized encashment, and misuse.

1. Meaning of Crossed Cheque

A crossed cheque is a cheque bearing markings across its face that direct the banker regarding the mode of payment, requiring payment to be made through banking channels rather than directly over the counter, thereby providing an important safeguard in cheque transactions.

2. Purpose of Section 126

The object of Section 126 is to regulate the duty of the drawee banker to make payment of crossed cheques through proper banking channels, thereby preventing unauthorized encashment, protecting the true owner, reducing fraud and banking risks, and imposing statutory obligations on the banker.

3. Payment of Generally Crossed Cheque

The first part of Section 126 provides that where a cheque is crossed generally, the banker on whom it is drawn must not pay it otherwise than to a banker.

4. Meaning of General Crossing

A cheque is crossed generally when it bears two parallel transverse lines across its face, with or without words such as “& Co.” or “Not Negotiable,” indicating that it must be paid through a banking channel.

5. Effect of General Crossing

The effect of a general crossing is that the drawee banker cannot make direct cash payment over the counter and must pay only to another banker, thereby creating a record of the transaction and enhancing security.

6. Purpose of Restricting Payment to Banker

The restriction reduces the risk of theft or fraudulent encashment, enables tracing through banking records, and protects both the drawer and the true owner of the cheque, thereby making the banking system safer and more reliable.

7. Payment of Specially Crossed Cheque

The second part of Section 126 provides that where a cheque is crossed specially, the drawee banker must pay it only to the banker named in the crossing or that banker’s agent for collection.

8. Meaning of Special Crossing

A cheque is specially crossed when it bears the name of a specific banker across its face, directing that payment be routed only through that banker and thereby providing greater security than a general crossing.

9. Effect of Special Crossing

The effect of a special crossing is that the drawee banker must pay only to the banker named in the crossing, who acts as the authorized collecting banker, and not to any other person or bank.

10. Payment to Agent for Collection

The section permits payment to the named banker’s agent for collection, thereby accommodating practical banking arrangements where collection is carried out through another bank or through banking networks in different locations.

11. Duty of the Drawee Banker

Section 126 imposes a strict duty on the drawee banker to comply with the crossing instructions by verifying whether the cheque is crossed generally or specially and ensuring that payment is made through the proper banking channel, failing which the banker may incur liability.

12. Consequences of Wrongful Payment

If a banker pays a crossed cheque contrary to Section 126, the banker may lose statutory protection, incur liability for wrongful payment, and become liable to compensate the true owner, making strict compliance essential.