In simple terms, a cheque is defined as a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued. There are other legal definitions as well which are referred frequently to understand the meaning of the term ‘cheque’. As provided in Black’s Law Dictionary 9th Edition cheque is a ‘…draft document signed by the maker or drawer, drawn on a bank, payable on demand and unlimited in negotiability…’.
ORIGIN OF CHEQUE
The instances of using cheque date back to the Mauryan Empire where a commercial instrument called adesha was used as an order on banker desiring him to pay the money of the note to a third person. An early form of cheque known as praescriptiones were used by the Romans. And by the 17th century, England started to utilise the bills of exchange for domestic payments. This led to the evolution of modern form of the cheque. Initially these were called as draw notes because they enabled a customer to draw on the funds that he or she had in the account with a bank and required immediate payment.
In 1717, the Bank of England pioneered the first use of a pre-printed form. These forms were printed on a “cheque paper” to prevent fraud, and customers had to attend in person and obtain a numbered form from the cashier. Once written, the cheque was brought back to the bank for settlement. The suppression of banknotes in eighteenth-century England further promoted the use of cheques.
In 1881, Negotiable Instruments Act was enacted in India which provided a legal framework for non-cash paper payment instruments in the country.
UNDERSTANDING THE BASICS OF CHEQUE AS PER THE NEGOTIABLE INSTRUMENT ACT, 1881
The Act defines ‘cheque’ as under:
“6 “Cheque”. —A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Explanation I. —For the purposes of this section, the expressions—
(a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
Explanation II. —For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.”
The Amendment Act, 2002 has broadened the definition of cheque by including the electronic image of a truncated cheque and cheque in the electronic form, known as E-cheque. The reason to take such a step was to bring it in tune with Information Technology Act, 2002 which recognizes electronic form and digital signature.
As per Sec. 6 cheque is a species of bills of exchange and therefore, it must be drawn in accordance with the requirements of Sec. 5 of the Act which is as under:
“5. “Bill of exchange”.—A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain. The sum payable may be “certain’’, within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due. The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person”, within the meaning of this section and section 4, although he is mis-named or designated by description only.”
It can be said that there is no particular form of cheque which is required and an instrument is a cheque if it conforms to the requisites of Bill of Exchange. But obviously there are certain differences between these two types of negotiable instruments which are as follows:
1. Payable on demand /bearer: A cheque is always payable on demand and it may be payable to bearer also. A Bill of Exchange may or may not be payable on demand and cannot be made payable to bearer.
2. Drawee: The drawee in the case of cheque is always a bank, in a Bill of Exchange the drawee could be any person.
- Acceptance: There is no system of acceptance of a cheque as it is always payable on demand. This is not true in the case of a Bill of Exchange.
1. Days of grace: A cheque is not intended for circulation, it is given for immediate payment without any days of grace. A Bill of Exchange is normally entitled to 3 days of grace unless it is payable on demand.
2. Discharge: A bill must be duly presented for payment or else the drawer will normally be discharged. The drawer of a cheque is not discharged by delay of the holder in presenting it for payment, unless, through the delay, the drawer has been injured.
3. Notice of dishonour: In order to charge the drawer of a bill that has been dishonoured by non-payment, notice of dishonour should be sent to him, except in certain circumstances. When a cheque is dishonoured, notice of dishonour to the drawer may not be necessary in a large number of cases; want of his funds in the hands of the banker is sufficient notice.
- Crossing: Cheques may be crossed, but not the bills.
- Stopping payment: A cheque, unlike a bill, is a revocable mandate and its authority can be revoked by countermanding or stopping payment.
Statutory protection: It is given to the drawee-banker with regard to payment of cheques in certain circumstances. No such protection is available to the drawee or acceptor of an ordinary Bill of Exchange.
PARTIES TO THE CHEQUE
There are three parties to a cheque:
i. Drawer: The person who draws the cheque, i.e. signs and orders the bank to pay the sum.
ii. Drawee: The bank on which the cheque is drawn or who is directed to pay the specified sum written on the cheque.
iii. Payee: The beneficiary, i.e. to whom the amount is to be paid.
ADVANTAGES OF MAKING A PAYMENT BY CHEQUE
- More convenient than carrying the cash around
- Payments can be stopped if necessary
- A safer means to make payment if cheques are crossed
- It excludes the risk of making counting mistakes as in the case of cash notes
- Can be posted more cheaply
- Can be traced if lost and can be post-dated as well
DISADVANTAGES OF CHEQUE
- Cheques are not legal tender and other creditors may refuse to accept it
- Are valueless if the drawer has no funds in his/her account
- Are not suitable for small amounts
- People without bank accounts can face inconvenience if the cheque is crossed
- Bank charges are levied on cheque books and dishonoured cheques
References:
- https://m.rbi.org.in/Scripts/PublicationsView.aspx?id=155
- Federal Reserve Bank of Atlanta, The Evolution of the cheque as a Means of Payment: A Historical Survey, 2008
- Negotiable Instrument Act, 1881
- https://indiankanoon.org/
NOTE: The upcoming articles will focus on crossing of cheques, dishonour of cheques, parts of a cheque and other related information.
Author Bio
