Cheques and its kinds

Cheque

• Cheque is an important negotiable instrument which can be transferred by mere hand delivery. Cheque is used to make safe and convenient payment. It is less risky and the danger of loss is minimized.

• "Cheque is an instrument in writing containing an unconditional order, addressed to a banker, signed by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."

• A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

• Three parties to a cheque:– Drawer:one who writes the cheque– Drawee:bank to whom request for payment is

made.– Payee: to whom payment of the amount on the

cheque is to be made by the bank.

Sample cheque

Forms/types of cheques

Bearer cheque

• When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called a bearer cheque.

• The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank for payment.

• However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank.

Bearer cheque

• This is a cheque which is payable to whoever presents it to the bank for payment.

Order cheque• In an order cheque, the person whose name is written on it is paid the

stated sum.

• When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque, the cheque is called an order cheque.

• The person named can cash the cheque or negotiate it with other party.

• Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred).

• However the practice is that the named person must endorse the cheque i-e, sign on the back, before he can cash it over the counter.

Post dated cheque

• If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque.

• A post dated cheque cannot be honoured earlier than the date on the cheque.

Anti- dated cheque

• If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid upto six months from the date of the cheque.

Stale cheque

• If a cheque is presented for payment after six months from the date of the cheque it is called stale cheque.

• A stale cheque is not honored by the bank.

Uncrossed / open cheque

• When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque".

• The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one.

Crossed cheque

• A banker can make payment of only open cheques at the counter.

• Section 126,127 and 129 of the negotiable instruments act 1881, prohibits the payment of crossed cheques in cash.

• These cheques can be paid only to a collecting banker.

Crossed cheque

• Crossing: after drawing the cheque the drawer puts two parallel transverse lines across the cheque and the cheque is then said to have been crossed.

• Crossing is a special feature of cheques and there are two kinds of it.– GENERAL CROSSING – SPECIAL CROSSING

General crossing

• According to section-123 of NI Act, where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof between two parallel transverse lines or two parallel transverse lines simply, either with or without the words “not negotiable” that addition shall be deemed a crossing & the cheque shall be deemed to be crossed generally.

Cheque crossed “account payee”

• Where a cheque crossed generally bears across its face an addition of the words “account payee” between the two parallel transverse lines constituting the general crossing, the cheque, besides being crossed generally, it is said to be crossed “account payee”.

• When a cheque is crossed ‘account payee’– It shall cease to be negotiable– It shall be the duty of the banker collecting payment of the

cheque to credit the proceeds thereof only to the account of the payee named in the cheque.

• This crossing gives a very clear indication to the collecting banker that the proceeds of the cheque should go only to the account specified in the cheque, and that they should not be collected for any other person. It is also implied that – It renders the instrument not negotiable– If the collecting banker contravenes the provision of this

clause and credits the amount to some other account, he will do so at his own risk

– If he does not keep the payee’s account he should refuse to handle the cheque.

Special crossing

• Special crossing has been defined under section 124 of the negotiable instruments act 1881.

• When a cheque bears across its face an addition of the name of the banker, either with or without the words ‘not negotiable’ that addition shall be deemed a special crossing and the cheque shall be crossed specially; and to be crossed to that banker.

Special crossing

• It is evident from the definition that – In case of a special crossing the two parallel

transverse lines are not essential.– The name of the banker written across the face of the

cheque is sufficient to constitute a special crossing.– After the cheque has been crossed specially the

holder cannot receive payment except through the banker named on the cheque.

– If a crossed cheque is lost or stolen, there is no risk of wrong payment.

Who can cross the cheque?

• The drawer.• Holder, where the cheque is uncrossed.• Holder may cross a cheque especially where

the cheque is crossed generally.• A cheque crossed specially to one banker may

be crossed specially to another banker.• Where an uncrossed cheque or cheque crossed

generally is sent to a banker for collection he may cross it especially to himself.

Opening of crossed cheques

• Since crossing is a material part of the cheque, its cancellation amounts to material alteration

• Hence, only the drawer of the cheque is authorized to cancel the general crossing, even though the instrument was crossed after being delivered to the payee.

• A crossed Cheque can be converted into an open cheque by writing, “Please pay Cash” near the crossing with full signature of the drawer.

• The drawer can cancel the crossing. However, the banker can cancel the special crossing

• Since a special crossing specifically mentions the name of the banker through whom the instrument is to be collected, only the banker named in such a crossing is authorized to cancel.

• In both the cases the opening of the cheque should not be recognized unless the full signatures of the authorized person has been appended to the alterations.

Advantages of crossing

• Crossing has following advantages– It is an effective means of minimizing the risk of

loss or forgery.– Crossing is a direction to the paying banker to pay

the money generally to a bank or to a particular bank, as the case may be.

– Since only a banker secures the payment of a crossed cheque, it can easily be traced for whose use the money was received.