Cheques are some of the most important and common forms of negotiable instruments. The Negotiable Instruments Act, 1881 defines and regulates cheques. Almost all large business transactions these days make use of cheques instead of cash. Apart from drawers and drawees, parties to a cheque include payees, holders, endorsers, and endorsees.
Meaning of a Cheque
Section 6 of the Negotiable Instruments Act defines what a ‘cheque’ means. According to this provision, a cheque is basically a bill of exchange drawn on a specific banker. Furthermore, it is not payable otherwise than on demand.
The Negotiable Instruments (Amendment) Act had amended this definition to make it broader in 2015. Accordingly, cheques now include the electronic image of a truncated cheque and also an electronic cheque. Despite this amendment, the basic definition still remains the same.
A truncated cheque is one which undergoes truncation during a clearing cycle. Truncation basically means the conversion of a physical cheque into digital format. Either a clearing-house or a bank may do this upon generating an electronic image of a cheque.
An electronic cheque is a cheque which exists in digital format. A computer resource generates such cheques using digital signatures (either with or without biometrics).
Looking at the definition of a cheque, we can conclude that it is similar to a bill of exchange. Furthermore, it is always drawn on a banker and is payable on demand.
Browse more Topics under Negotiable Instruments Act
- Definition of Negotiable Instrument
- Classification of Negotiable Instruments
- Promissory Notes
- Bills of Exchange
- Crossing and Types of Cheque Crossing
- Liability of Parties – Cheque
- Endorsement of Instruments
- Presentment for Acceptance
- Notice of Dishonor
- NEFT and RTGS
Parties to a Cheque
Generally, there are two parties to a cheque. These include the drawer and the drawee. While the drawer is the person who draws the cheque, the drawee is the banker on whom it is drawn.
Apart from these, there can also be a payee who is liable to pay the amount on the cheque. Furthermore, there can also be a holder who is generally the original payee. When the holder endorses the cheque to somebody, he becomes the endorsee. On the contrary, an endorsee is a person to whom the cheque is endorsed.
Essentials of a Cheque
The main elements of cheques are that they are drawn on a banker and are payable on demand. Furthermore, they never require any formal acceptance.
Cheques can be payable either to the drawer himself or to a bearer on demand. Hence, there might be two or more parties to a cheque depending on the situation.
Another feature of cheques is that they are usually valid only for six months. They do not require any stamping as other negotiable instruments do.
Cheques v/s Bills of Exchange
Cheques and bills of exchange might appear to be similar but there are important differences between them. The following are some such points of distinction:
- A cheque is always drawn only on a banker, while a bill may be drawn on any person.
- Cheques are payable only on demand, while bills may be payable on demand or upon a specific date.
- It is important to cross a cheque but a bill needs no such crossing.
- Bills generally carry a grace period of three days for repayment of money. Cheques, however, do not provide for any grace period.
- Dishonour of a bill requires the production of a notice. No such notice is important for cheques.
- All cheques are bills of exchange but the vice versa is not true.
Solved Examples on Parties to a Cheque
Question: Name the missing words in these following statements.
(1) Parties to a cheque generally include the __________ and the __________.
(2) Section __________ of the Negotiable Instruments Act defines cheques.
(3) __________ means conversion of a physical cheque into digital format.
(4) Cheques are payable on demand but __________ are payable either on demand or on a specific date.
Answers: (1) drawer, drawee (2) 6 (3) truncation (4) bills of exchange