Cheque is a very common form of negotiable instrument. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favor of others, thereby directing the bank to pay the specified amount to the person named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque. The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
From the above dentition it appears that a cheque is an instrument in writing, containing an unconditional order, signed by the maker, directing a specified banker to pay, on demand, a certain sum of money only to, to the order of, a certain person or to the bearer of the instrument. The person who draws a cheque is called the ‘drawer’. The banker on whom it is drawn is the ‘drawee’ and the person in whose favor it is drawn is the ‘payee’. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.
Features of a Cheque
Cheque is one of the important negotiable instruments. It is frequently used by the people and business community in the course of their personal and business transactions. The definition of cheque has been given in Section 6 of Negotiable Instrument Act in these words,” A cheque is a bill of exchange drawn on a specified banker and is expressed to the payable, otherwise than on demand.” The essential requisites of cheque are as:
- Must be in Writing — The cheque may be written in hand by using ink or ballpoint pen, typed or even it may be printed. But the customer should not use pencil to fill up the cheque form. Even though other columns may be permitted to be written in hand or printed or typed, the signatures should be made by ink pen or ballpoint pen by the maker.
- Must be Unconditional — The order to pay the amount must be unconditional. If there is any condition imposed to pay the amount to the holder of the cheque then it will not be considered as a cheque. A cheque made payable on the happening of a contingent event is void ab-initio.
- Must be Drawn on a Specified Banker — For the validity of a Cheque it must be drawn on a specified banker. If there is not mentioned in the cheque about the banker it would not be a valid cheque. In addition to it, it must contain all the three parties i.e. Drawer, Drawee and Payee.
- Certain Sum of Money — It is one of the essential requirement of the Cheque that it must be payable in money and money only. If is not in term of money then it will be a valid one. The sum mentioned in it must be certain.
- Certain Payee — The parties of the Cheque must be certain. There are three parties of the cheque i.e. Drawer, Drawer and Payee. In a valid Cheque the name of the must contain in other words they must be certain. It must contain an order, which must be unconditional. If any condition were imposed then it would not be a valid cheque.
- Date — In a valid cheque it must be signed by the drawer with date otherwise it would not be a valid cheque. It must be written in hand by using ink or ball point pen, typed or even it may be printed as it becomes conclusive proof i.e. presumption under Section 118(b) unless contrary is proved.
Parties to the Cheque
The maker of a cheque is called the ‘Drawer’, the person thereby directed to pay is called ‘Drawee’ and the person named in the instruments, to whom or to whose order the money is by the instrument direct to be paid, is called the “Payee.”
The person entitled in his own name to the possession of the cheque and to receive or recover the amount due is called the “Holder of the cheque.”
The person who for consideration becomes the possessor of the cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title is called the “Holder in due course.”
The maker or the holder of the cheque signs his name (endorse) on the back of the cheque for the purpose of negotiable and he is said to be the ‘Endorser.’ The endorser who signs his name and directs to pay the amount mentioned in the cheque to, or the order of, a specified person, and the person so specified is called the “Endorsee” of the cheque.
Types of Cheque
Cheques are of four types.
a) Open cheque:
A cheque is called ‘Open’ when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following:
I. Receive its payment over the counter at the bank,
ii. Deposit the cheque in his own account
iii. Pass it to some one else by signing on the back of a cheque.
b) Crossed cheque:
Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing other types of cheque called ‘Crossed cheque’. The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without the writing ‘Account payee’ or ‘Not Negotiable’.
c) Bearer cheque:
A cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’. A bearer cheque can be transferred by mere delivery and requires no endorsement.
d) Order cheque:
An order cheque is one which is payable to a particular person. In such a cheque the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.
There is another categorization of cheques which is discussed below:
- Ante-dated cheques: Cheque in which the drawer mentions the date earlier to the date of presenting if for payment. For example, a cheque issued on 24th March 2011 may bear a date 4th March 2011.
- Stale Cheque: A cheque which is issued today must be presented before at bank for payment within a stipulated period. After expiry of that period, no payment will be made and it is then called ‘stale cheque’
- Mutilated Cheque: In case a cheque is torn into two or more pieces and presented for payment, such a cheque is called a mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer. But if a cheque is torn at the corners and no material fact is erased or canceled, the bank may make payment against such a cheque.
- Post-dated Cheque: Cheque on which drawer mentions a date which is subsequent to the date on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th May 2003 bears a date of 27th March 2011, it is a post-dated cheque. The bank will make payment only on or after 27th March 2011.
To open a checking account, a person deposits a sum of money in a bank. The bank gives him a check-book with blank check forms, and provides him with a means of keeping a record of the checks he writes and the amount of money he still has on deposit. The bank gives him a receipt for each new deposit and sends him a statement (usually monthly) showing a complete record of all transactions. All concealed checks (checks that have been cashed by the bank) are returned with the statement, providing the depositor with proof that payment was received. The bank usually makes a small service charge on every account, and perhaps also a charge for each check written. Ordinarily, no interest is paid on checking accounts.
To make out a check, the depositor writes the date, the name of the payee (the person or firm who is to receive the money), and the amount. He then signs his name. Before cashing the check the payee must endorse it by signing his name on the back. He then either deposits it in a bank or exchanges it for cash by giving the check to a bank, currency exchange, business firm, or individual. The new owner can endorse the check to someone else or can deposit it in a bank. When a check reaches a bank, it is forwarded through a clearing-house back to the bank on which it was drawn. After making sure the depositor’s signature is genuine, this bank in turn pays the cashing bank through the clearing- house. The biggest danger in accepting a check is that the person writing it may not have enough money (or any money) in the bank to cover it. Forgery is another danger. The best defence against “bad checks” is to refuse to accept checks from strangers.
Difference Between Cheque and Bill of Exchange
A cheque is no doubt essentially a bill of exchange, but it has certain peculiarities, which distinguish it from a bill of exchange. There are many differences between cheque and a bill of exchange. Some of them are as under:
- The acceptance of drawee is not required for payment of cheques, whereas the bill of exchange requires the acceptance of drawee before it is made liable for payment;
- A banker is only a drawee in case of payment by cheque, while any person including a Banker can be the drawee of a bill of exchange;
- A cheque is payable immediately when the demand is made and without any days of grace but in a bill of exchange, the grace of three days is given for its payment;
- In case of bill of exchange, if it is not duly presented for payment or otherwise, the drawer is discharged, while in case of cheque, the drawer is discharged if the holder of cheque causes delay in taking payment or present it to Banker for payment after the expiry of period by Banker from the date of its issue;
- When a bill of exchange is dishonoured, due to non-payments, a notice to that effect should necessarily be given to all concerning parties, whereas it is not necessary in case of dishonour of a cheque;
- A cheque has always to be made payable on demand whereas and ordinary bill of exchange can be made after a fixed period. A future dated cheque being not payable on demand may not be regarded as a cheque in the real sense of the word unless the date arrives and it becomes payable on demand.
Difference Between Cheque and Draft
A draft is as much a bill of exchange as a cheque and there is hardly any difference between a dishonoured draft and a dishonoured cheque, which is issued by a bank on itself. The basic difference between the two consists in two aspects:
- A draft can be drawn only by a bank on another bank and not by a private person as in the case of a cheque and;
- A draft cannot be so easily counter-manded as a cheque either by the person purchasing it or by the bank to which it is presented.
If a person requires money to be remitted from one place to another through a bank by way of a draft, it will be the relationship of not merely creditor and debtor as between the customer and the bank but also a relationship of cestui que trust and trustee. If the purchaser of the draft cancels it before it is delivered to the drawee and retain it in his own hands be can treat the bank which issued the draft as his debtor and a creditor demand the amount from the bank and the bank would, thereby, be liable to satisfy the demand.