Endorsing a cheque to the third-party implies the passing of a cheque to a party other than to whom the check originally belongs. There is a liability of risk and its control along with the policies of the bank, and due to this, not all the banks accept an endorsed or third party cheque.
Some banks do accept the endorsement, but they might require your signature below the endorsed cheque as evidence of the cheque’s ownership in order to bounce back all the financial consequences.
Endorsing a Check to a Third-Party the Right Way
Regular third-party cheque endorsement
The easiest and clear way to endorse a cheque to a third party is to make the cheque payable to a single person. You can do this by placing the endorsement at the reverse side of the cheque and at an appropriate end. The Federal Deposit Insurance Corporation (FDIC), according to its Regulation- CC of the expedited Funds Availability Act, requires that the endorsement made at the back of the cheque should not use a purple-colored pen because banks use purple ink for the purpose of cheque processing.
How does a third-party endorsement look like?
Pay to the order of ‘first name and last name.’
Date (it is important to put a date but optional)
Your name: Signature:
Here, the phrase ‘pay to the order of’ is not specified according to the Uniform Commercial Code (UCC) requirement regarding endorsement related codes. The Uniform Commercial Code describes a third-party bank endorsement as being the holder’s signature, who makes the cheque payable to a new bearer. This new bearer can be a third-party or even a bank. The same is true for a person (a third person) who has an endorsed cheque.
Also Read: The Charges & Penalty under Cheque Bounce
Ways to endorse a cheque:
1. Blank endorsement: Here, you will have to sign your name at the back of the cheque exactly how you did in the front. The correct signature is very important. Also, do not sign a blank endorsement; otherwise, someone else might get a hand over it and try to cash it out as anyone can encash a blank endorsed cheque.
2. Restrictive endorsement: This method of endorsement is much safer, especially if you want to send it via any person or mail. You have to write “for deposit only,” or you can write the account number along with it and then after sign put your name under it. This way, the cheque will deposit to your bank account.
3. Special endorsement: With this method, you can sign your cheque over to someone else that is third-party. This third party can later encash it. For this, you have to write “pay to the order of” and the name of the third-party or person at the back of the cheque before placing your signature. Now, only that individual would be able to encash or deposit the cheque, which is having his name written on the backside of the cheque.
The Indorsement Law
We often refer endorsement with an ‘e,’ but the legal terminology describes it with an ‘I.’ The acceptable practices, state, and interstate commerce laws are all stated under the Uniform Commercial Code.
These laws are subordinate to the laws of Federal law, such as the Check 21 Act, which holds the statutory requirements for endorsement of cheques.