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 contains the electronic image of a truncated cheque and a cheque in the electronic form. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favour of others, thus directing the bank to pay the specified amount to the person named in the cheque.

Definition

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”.

Features of a cheque

Below given are some of the important features of a cheque.

·         A cheque should be in writing and properly signed by the drawer.

·         A cheque contains an unconditional order.

·          A cheque issued on a specified banker only.

·         The amount specified is always certain and should be clearly mentioned both in figures and words.

·         The payee of a cheque is always certain.

·         A cheque is always payable on demand.

·         The cheque should bear a date otherwise it is invalid and shall not be honored by the bank.

 

Types of Cheque

Generally speaking, cheques are of four types, they are;

·         Open cheque

·         Crossed cheque

·         Bearer cheque

·         Order cheque

 

Open cheque:

A cheque is called ‘Open Cheque’ when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following:

·         Receive the payment over the counter at the bank

·         Deposit the cheque in his own account

·         Pass it to someone else by signing on the back of a cheque

 

Crossed cheque:

Open cheque is subject to risk of theft so it is dangerous to issue such cheques. But this risk can be avoided by issuing other types of cheque called ‘Crossed cheque’. The payments of such cheques are 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 writing ‘Account payee’ or ‘Not Negotiable’ on it.

 

Bearer cheque:

A Bearer cheque is one which is payable to any person who presents it for payment at the bank counter. A bearer cheque can be transferred by mere delivery of it and it doesn’t require endorsement.

Order cheque:

An Order Cheque is one which is payable to a particular person. In such a cheque instead of the word ‘bearer’ 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.

Below given is the format of a cheque leaf:

ABC BANK                                                                                                     Date…………..

PAY___________________________________________________OR BEARER

RUPEES _______________________________________________Rs..................

____________________________________________________

A\c No. ___________________________ ABC  BANK LTD. Carmichael Road,                                                                      (Signature of the person) Bangalore 400026, Bangalore

334678        400700456       10

Marked cheques

In some cases a cheque will be marked or certified by the banker on whom it is drawn as “good for payment.” This marking does not lead to the acceptance but is very similar and protects the person to whom the cheque is issued against the cheque being refused for payment later. An open cheque is one that can be paid by a paying banker across its counter.

 

Crossing of Cheques

Crossing is an instruction or order given to the paying banker that the cheque should not be paid across the counter but through a banker. Payment of a crossed cheque can only be collected through a banker.
Crossing is done by drawing two parallel lines across the face of the cheque with or without the addition of certain words such as ‘Account payee’ or ‘Not Negotiable’.

Who can cross a cheque

Three parties can cross a cheque, they are;

·         Drawer – the drawer can cross the cheque generally or specially.

·         Holder – If the drawer has not crossed the cheque, the holder can cross it generally or specially.

·         Banker – Where a cheque is crossed specially, the collecting banker may cross it again to another banker as it is an agent for collection, this is called double special crossing.

 

Types of crossing
there are two ways of crossing cheque. They are;

·         General

·         Special

General Crossing

Putting two traverse lines across the face of the cheque with or without the words “& co” or the words “non negotiable” is called General Crossing. Where a cheque is crossed generally, the banker on which it is drawn must pay it through a banker. Cheques that are crossed generally and payable to “order” must be collected only on proper endorsement by the payee.

Special crossing

If the drawer writes specific instructions within the two traverse lines such as to which bank it should be paid is called special crossing. The purpose of a special crossing is to pay it if it is presented though a specific banker such as at XYZ Bank.
Some cheques are crossed “account payee”. This is a restrictive crossing that the cheque must be paid to the account of a particular person. It is also a warning to the collecting banker to make sure that the cheque is to be deposited in the account of a specific depositor. The paying banker needs to ensure that it bears no other endorsement than that of the payee.

 

Not – Negotiable Cheques

In this type of cheque the principle of “nemo dat quod non habet” (nobody can pass on a title better than what he himself has) will be applicable. The title of the transferee would be vitiated by the defect in the title of the transferor. The transferee cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith.

 

Account payee Cheques
‘Account payee’ is an instruction to the collecting banker that he must collect the amount of the cheque for the benefit of the payee’s account only and nobody else. This crossing does not limit the transferability but in practice these are not transferred as the collecting banker had to credit the payee’s account. The Reserve Bank (RBI) has also stated that these should not be credited to anyone else’s account. It has also stated that “account payee” cheques of third parties should not be collected.

 

Double crossed Cheques.
These kinds of cheques are to be collected by the banker specified. It cannot be crossed again as the purpose of the first is frustrated by the second crossing. This is only allowed if the bank to which it is crossed does not have a branch at the paying banker’s place.

Crossing of Cheque

·         Holder of a cheque can cross it or add to the existing crossing

 

·         Banker to whom it is crossed can cross it again

 

·         Cheque crossings can be opened by the drawer by cancelling the crossing with his signature

 

·         Negotiable Instruments Act particularly states what amounts to a crossing. A cheque with the words “not negotiable” without the two traverse lines is not a crossed cheque. The traverse lines are essential for a crossing.

 

·         If a cheque bears a single line it is not a crossed cheque.

 

·         It is assumed that the banker on whom it is drawn has made payment to a banker who acts for the true owner of the cheque, though in fact the amount of the cheque might not reach the true owner. In short the banker is protected.

 

Wrong payment of a crossed cheque

If a crossed cheque is wrongly paid, the banker is liable to the true owner for any loss occurred to him.

Protection on uncrossed cheques
If the banker pays an uncrossed cheque in due course, he is authorized to debit the account of his customer with the amount so paid irrespective of the genuineness of the endorsement on the cheque. 

Protection in respect of crossed cheques
When a banker pays a cheque drawn by his customer, he can debit the drawer’s account even though the amount of the cheque does not reach the owner.

 

Prerequisites for claiming protection

The payment must be made in due course:

·         According to the apparent tenor of the instrument

·         In good faith

·         To any person in possession thereof

·         In circumstances, which do not excite any doubt that he is not entitled to receive payment of the     cheque

It is the duty of the banker who receives the payment on an electronic image of a truncated bill held with him to verify the genuineness of the cheque to be truncated and any fraud, forgery or tampering on the face of the instrument that can be verified with due diligence and ordinary care.

Liability of drawee of cheque
Drawee has the liability to pay the cheque provided he has in his hands sufficient funds of the drawer. If the banker rejects the payment without sufficient cause he must compensate the drawer (not the holder) for any loss.

·         The banker should pay the cheque only when he is required to.

·         The compensation payable will be based on the damage caused to the drawer.

A bank on which a cheque is drawn is liable to make payment on the cheque only during banking hours.
If a payment is made after the banking hours the amount cannot be debited to the client’s account till the bank opens.

When a bank can refuse the payments on a Cheque:

·         When the cheque is undated

·         When the cheque is stale. A cheque is stale if it has not been presented for payment for six months from the date mentioned

·         When the instrument is unclear or not free from reasonable doubt

·         When the cheque is postdated and presented it for payment before the date

·         When the customer’s funds are not  “properly applicable” to the payment of the cheque by the customer

·         When the customer’s account is overdrawn

·         When a garnishee order or other legal order from the court attaching the customer’s account has been served on the bank. If the attachment is on a single person then a joint account cannot be attached by the garnishee order. Credits to the account subsequent to a garnishee order are not attachable. Trust accounts cannot be attached by a garnishee order whereas a partnership account can be. A banker with a prior right of set-off is not bound by a garnishee order. If the garnishee order is received after presentation and debiting the cheque to the account but before payment, the bank can technically pay the cheque, but it would be better to refuse payment. If the cheque is received through clearing and the garnishee order is received before the time specific for return of cheques, the cheque should be returned. If the cheque has been credited to another person’s account and then the garnishee order is received, the credit can be cancelled and the cheque returned unpaid provided that the account holder has not been advised of the credit.

·         When the customer has died or been declared as insolvent or a lunatic

·         When the cheque contains material alterations or irregular signature

·         When the notice of closure of account has been served on the bank

·         When the customer has countermanded payment

·         When there is an ambiguity in the material part of the cheque

·         When there is a difference between the amount of the cheque in words and in figures

·         In case of Irregular endorsements

·         When the cheque is mutilated

·         When the signature of the drawer has been fake.

Cheques written in Hindi with a valid Hindi date are valid.

·         The paying banker should ensure that the signature on the cheque compares with the specimen signature of the account holder

·         If it differs or the signature is fake, payment should be refused

·         The banker is liable on the payment of fake/forged cheques even if the client was negligent

·         The Mumbai High Court in a decision in 2005 held that banks should pay the value of cheques they have sent if they were lost in transit/ sent for collection

Dishonor of cheque

If a Cheque is not paid on presentation, the cheque is said to be dishonored. In other words when a banker rejects to pay a cheque, the cheque is dishonored. The cheques negotiability will lose on dishonor, Dishonor can be rightful or wrongful. If the dishonor is wrongful, the drawee can bring an action against the bank. Dishonor of a cheque due to the shortage of funds is an offence and action can be taken against the drawer. Holders of cheques should present these at the bank upon which it is drawn. If payment is refused by the bank, the holder can sue the drawer. If the holder sues the drawer without first presenting the cheque at the bank, the suit will be dismissed.

If the holder does not present the cheque in time, the position of the bank may become precarious and the bank may dishonor the cheque. In this case the drawer is not responsible if the bank refuses payment on presentment. In short the cheque should be presented before the relation between the drawer and the banker has been altered to the prejudice of the drawer.

When an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable doubt about the genuineness of the tenor of the instrument. If the doubt is that of fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification, provided the truncated cheque so demanded shall be retained by it if payment is made accordingly.

It must be remembered that if a bill is not presented in time the drawer is discharged but the drawer of a cheque (if there is a delay) is discharged only if he has suffered some loss or injury and that too to the extent of such loss or injury and that too, to the extent of the loss only. If the bank is solvent, the drawer will be liable unless it becomes time barred by the statute of limitations. Presentment can be made to an authorized agent or if dead, legal representatives or if insolvent to assignees. If the instrument is lost or cannot be produced, the banker can ask to be indemnified against any further claim thereon against him.

Related to cheques in an electronic form or a truncated cheque even after the payment, the banker who has received the payment may be entitled to retain the truncated cheque. A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument may be prima facie proof of such payment. Where the cheque is an electronic image of a truncated cheque, any difference in tenor of such electronic image and the truncated cheque can be a material alteration. The bank or clearing house should ensure the exactness of the apparent tenor of the electronic image of the truncated cheque while truncating and transmitting the message. A bank or clearing house receiving a transmitted electronic image of a truncated cheque should verify from the transmitting party that the image is exactly the same. If a cheque is not presented for payment within a reasonable time after its issue, the drawer may not liable for the delay. If the drawer bears some loss due to the failure of the bank, the drawer is discharged as against the holder to the extent of losses suffered by him. If a cheque is dishonored for lack of funds, the drawer may be punished with imprisonment up to one year and/ or with a fine up to double of the amount of the cheque, only under the following conditions:

·         The cheque must be presented to the bank within six months from the date on which it was drawn or within its validity.

 

·         The payee or holder makes a demand for payment by giving notice in writing to the drawer within 30 days of the acceptance of the information.

 

·         The drawer of the cheque fails to make payment within fifteen days of acceptance of the notice.
Source:-http://www.indianmoney.com/article-display.php?cat_id=1&sub_id=16&aid=236&acat=&ahead=Cheque