A cheque is marked with Not negotiable crossing by the drawer, A. The cheque is then endorsed by the payee, B to C. Explain the effect of such a crossing on the rights of C against A and B.

The Governing Provision: Section 130

Section 130 of the Negotiable Instruments Act, 1881 provides with crystalline precision:

"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."

This single sentence is the heart of the matter. To understand its full effect on C's rights, we must first be clear about what the crossing does — and equally important, what it does not do.

What the Crossing Does NOT Do: The Right to Transfer Remains

The first thing to understand is that a "not negotiable" crossing does not render the cheque non-transferable. It does not kill the right of B to endorse the cheque in favour of C. Section 125 expressly permits the holder to add the words "not negotiable" to a crossing, and the instrument continues to pass by endorsement and delivery in the ordinary way. As one authoritative explanation puts it, the crossing "does not render the instrument non-transferable — it only deprives the instrument of the incident of negotiability." The cheque can circulate; what changes is the quality of the title that any transferee receives.

What It DOES Do: Title Cannot Be Bettered

In the ordinary law of negotiable instruments, a holder in due course acquires a clean title, unaffected by any defects in the title of prior parties. A thief who steals a bearer cheque and transfers it to an innocent purchaser for value without notice would, but for special rules, give that purchaser a perfectly good title against even the true owner. That is the essential magic of negotiability — and it is precisely this magic that the "not negotiable" crossing removes.

Under Section 130, C cannot acquire a better title than B had. And B cannot give a better title than what B himself possessed. The transferee is in exactly the same shoes as the transferor — no more, no less. This is why it has been aptly remarked that the effect of a "not negotiable" crossing is to place the cheque on the same footing as an overdue bill or note, where the transferee takes only what the transferor had.

Applying This to the Facts: C's Position Against A (the Drawer)

In our problem, A draws a cheque marked "not negotiable," B endorses it to C. The question is what rights C has against A.

C's rights against A, the drawer, are entirely dependent on the quality of B's title. If B was the genuine payee who received the cheque for good consideration from A, then B had a perfectly valid title. In that case, C, having received the cheque from B by endorsement and for consideration, can enforce it against A, because C steps into B's shoes — and those shoes happen to be quite good ones. The Supreme Court in AV Murthy v BS Nagabasavanna (AIR 2002 SC 985) affirmed that the issuance of a cheque creates a legally enforceable liability, and where the title of the payee is good, a subsequent transferee can claim on that foundation.

However, suppose B had obtained the cheque from A by fraud or for no consideration, or suppose B was not even the rightful payee. Then B's title is tainted or altogether defective. Because of Section 130, C cannot claim that he took the cheque in good faith and for value and is therefore a holder in due course entitled to demand payment despite B's fraud. The "not negotiable" crossing destroys that shield. The true owner — in this case A, if B had no legitimate claim — can assert his title, and C is left without a remedy against A. The English case of Great Western Railway Co. v London and County Banking Co. (1901 AC 414) illustrates this beautifully: where the cheque had been obtained by fraud, the fraudster could give no title to the bank which cashed it, and the drawer was not liable. The principle applies with equal force in India through Section 130.

The crucial lesson is this: C must investigate B's title. He cannot shelter behind good faith or payment of value, as a holder in due course ordinarily could. If the title was defective at any point in the chain leading to B, that defect travels with the instrument and clings to C.

C's Position Against B (the Endorser)

The position against B is governed not by the "not negotiable" crossing but by the general law of endorsement. When B endorsed the cheque to C, B made an implied warranty under Section 35 of the Act — that the instrument is what it purports to be, that B had a good title to it, and that on due presentment it would be paid. If the cheque is dishonoured, C can sue B on the endorsement, because B's liability as an endorser is a contractual liability arising from the act of endorsement itself, independent of the crossing.

Section 130 does not strip C of his rights against B. The crossing affects C's claim against the drawer (and the true owner, if there be one) — it does not affect C's rights against the person who transferred the instrument to him. B, by endorsing and delivering the cheque to C, made himself secondarily liable. Unless B had expressly added words like "without recourse" under Section 52, B cannot escape that liability. Therefore, C has a good claim against B as endorser, regardless of the "not negotiable" crossing.

The Practical Consequence: A Warning to Transferees

The entire purpose of the "not negotiable" crossing, as the Halsbury LC observed in the classic English authorities, is to put transferees on notice that they take the risk of the transferor having no title. In the words drawn from those authorities, people who take a cheque which is upon its face "not negotiable" and treat it as a negotiable security "take the risk of the person for whom they negotiate it, having no title to it." This is the drawer's protective mechanism — it ensures that whoever ultimately holds the cheque cannot claim immunity that ordinary negotiable instruments would afford.

Summary of C's Rights

To bring the analysis together clearly:

• Against A (the Drawer): C's rights depend entirely on the quality of B's title. If B had good title, C can enforce payment against A. If B's title was defective — whether from fraud, lack of consideration, or any other defect — that defect binds C, and A can resist payment. C cannot claim to be a holder in due course to overcome this defect.

• Against B (the Endorser): C has a good claim arising from B's contract of endorsement under the general law. Section 130 does not affect this right. B is liable on the endorsement and cannot escape by pointing to the "not negotiable" crossing.

In the final analysis, the "not negotiable" crossing is a wise precaution for drawers who wish to ensure that their cheques do not end up in the hands of persons with no legitimate claim. It converts what would otherwise be a freely circulating negotiable instrument into something considerably more cautious — a cheque that can be transferred, but at the transferee's risk of the chain of title.