Material Alteration and Crossing of Cheque

What is material alteration?

Meaning of Material alteration: – Material alteration means to make any change or alter some material parts of the instrument and try to make it a valid created with the purpose of the nature of that instrument. Any alteration in the original state of a cheque such as date, amount, payee’s name, changing the word ‘order’ to bearer appearing after payee’s name or in endorsement is called material alteration.

All material alteration must have drawer’s approval with his full signature (not initials) where the alterations are made. Due to the effects of Material Alteration, the said instrument become a void.

Material Alteration

Material alteration is one aspect of a negotiable instrument. Material alteration may change the character of the instrument or the rights and obligations of the parties. An original instrument can be said to be an altered instrument after it has been altered.

Material alteration occurs when changes have occurred to the instrument without the drawer’s knowledge, and changes made after the cheque has been issued. Where the nature of the instrument has changed by alterations made in the instrument, it is equivalent to a physical change. All physical changes must have the approval of the drawer with his full signature where the changes are made. Without the permission and consent of the drawer, a blank cheque cannot be enforced.

Instances of material change

  • Alteration in instrument date
  • Alteration in Amount Payable
  • Alteration in Time of Payment
  • Alteration of Place of Payment
  • Alteration in interest rate or any change in its favor, if any
  • Tearing of the material part of the instrument
  • Insertion of the place of payment where the bill is generally accepted
  • Addition of a New Party to the instrument.
  • Adding words to a blank endorsed bill of exchange so as to convert it into a special endorsement.

For Example: – ‘A’ drew a cheque of Rs. 500 in favor of ‘B’, who changed the figure of 500 to 5,000 without the consent of the manufacturer. The cheque appears to have been pulled from above for Rs. 5,000. On presenting the check for payment, the paying banker paid Rs. 5,000 to ‘B’. The banker did so in accordance with the express term of the instrument and in good faith. In this case, since the banker acted honestly and without negligence, he is entitled to debit ‘A’ with Rs 5,000.

What are the alterations that do not constitute a material alteration?

The alterations that do not constitute a material alteration are: –

  1. Alterations that are made with the consent of the parties and changes that correct errors in data or clerical errors. The change is not obvious and goes into the hands of the instrument holder.
  2. After a change is made to the instrument, the parties to the old instrument cannot be held liable for the new instrument or the modified instrument for which they never consented. The party that consents to the change or who changes the instrument is not entitled to complain against such alteration.
  3. A material alteration is one that changes the rights, liabilities or legal status of the parties as ensured by the original instrument. Whether a change is biased or beneficial to the parties, the liability of the parties to the material alteration is avoided.

What are the effects of material alteration?

Following are the effects of material alteration: –

  1. The main effect of a material instrument is that it makes the instrument void, and that it frees the instrument itself against any person who was a party to such an instrument at the time of the material alteration and has had not given his approval.
  2. All former parties to a negotiable instrument, which was subsequently changed without their consent, shall also not be liable to the holder-in-course of having no notice or knowledge of the material alteration.
  3. It does not discriminate whether the change was for profit or to cause harm to any party. Further, it also does not matter whether the holder himself changed the instrument or a stranger changed it while the instrument was in the holder’s custody because a party in whose condition the instrument is bound to protect the instrument in its original condition.
  4. However, it is worth noting that a material alteration does not make the instrument completely void i.e., it cannot be applied against all parties.
  5. It is void only against those who have not given their approval for the change, and can be enforced against those who consented to the change or effected the change. Such an instrument also works against those who become parties to the instrument after the conversion. However, there is an exception to this rule.
  6. On the other hand, section 89 of the Negotiable Instruments Act provides protection to a party who pays a material altered bill of exchange or promissory note or cheque provided that he does not know about the alteration and makes such payment in good faith and without negligence on his part.

What is crossing the cheque?

Meaning of crossing the cheque: – To cross a cheque means to draw two parallel lines on the face of the cheque. Crossing a cheque is an instruction given by the customer as to how the payment is to be made and who can give it. Crossed cheque cannot be paid over the counter, it can be endorsed to anyone, and the payment will be through the bank.

A crossed cheque is a cheque that has been marked specifying an instruction on the way it is to be redeemed. A common instruction is for the cheque to be deposited directly to an account with a bank and not to be immediately cashed by the holder over the bank counter.

Purpose: – The crossing is to warn the bank to not to make payment of crossed cheque over the counter. The crossing serves as a caution to the paying banker.

What are the types of crossing cheque?

There are 3 types of crossing cheque: –

  1. Normal crossing: – When there are two transverse lines on the face of a check and there is a pair of words between those lines.
    • Amount cannot be paid in cash
    • The amount can only be credited to the bank account of the designated recipient or endorser.
  2. Special crossing: – When the banker’s name is written on the top of the cheque. When the words “non-negotiable” are added to the check, the check loses its negotiability.
    • Amount cannot be paid in cash
    • The amount can be deposited only in the bank account of the mentioned bank.
  3. Account payee crossing: – Where the drawer adds words like account payee, or account payee only in general or special crossing, it gives instructions to the banker to collect the cheque and credit the amount only to the payee’s account. This crossing is not legally recognized.

Protection from liability to the paying banker in the following cases

  • Where the cheque is drawn by the payee with the order of the drawee, if such payee is a fraud, or the banker is not held responsible for the forged signature of the drawer, the banker is not held liable.
  • Banker is not liable in cheques payable to bearer. In this case, it does not matter whether the direct holder is the owner of the cheque.
  • The banker must have acted in good faith and without any negligence.
  • The banker had received the payment of the cross cheque.
  • The collection was done by the bank on behalf of the customer.

Meaning of Double-crossing: – When there are two special crossings on a cheque, it is called double-crossing. In this, the second bank acts as the agent of the first collecting banker. This is done when the banker in whose favor the check is crossed does not have a branch where the cheque is paid.

Meaning of Opening the crossing: – The checker can cancel the check by writing the words “pay cash” on the check with his full signature. The law does not allow this but it has been taken out of custom.

Case Laws under Material Alteration of cheque

  1. In the case of Veera Exports vs. T. Kalavathy [2002(1) SCC 97] the supreme court held that invalid cheque can be re-validated voluntarily by altering the dates, so as to give fresh life to cheques for another 6 months. A cheque which has become invalid because of the expiry of the stipulated period could be made valid by alteration of dates. There is no provision in the Negotiable Instruments Act or in any other law which stipulates that a drawer of a negotiable instrument cannot re-validate it. It is always open to a drawer to voluntarily re-validate a negotiable instrument, including a cheque.

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