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

It includes electronic image of truncated cheque, and cheque in electronic form [Section 6].

Salient features of a Cheque

(i) It is a bill of exchange, and thus, has three parties:  Drawer  Drawee  Payee (ii) It is drawn on a specified branch of a specific bank. (iii)It is always made payable on demand, and never so many days or months after date. (iv)It is payable to the bearer or to the original payee or to his order.

Requisites of a Cheque
Cheque, being bill of exchange, contains the following features: (a)An instrument (i.e. a document, in writing, to transfer rights, from one person, to another). (b)In writing, with pen or dot pen, or type-written, computer printed, or printed in printing press. But if written in pencil, it can be easily materially altered (in regard to the amount, payees name, and the date). Therefore, all banks insist that the cheques must be drawn on the leaves of the cheque book issued, which is printed on a special security paper, quite sensitive to chemicals. (c) It must contain an order to pay (and not a promise or request to pay).

Requisites of a Cheque
(d)Unconditional order

(Continued)

(e)Three parties, viz. (i) Drawer (ii) Drawee (specified branch of a specified bank) (iii)Payee (f) Signed by the maker (drawer) (g)Directing certain branch of specific bank, where drawers account is maintained (h)To pay (and nothing else) (i) Certain or ascertainable sum of money only

Requisites of a Cheque

(Continued)

(j) To, or to the order of a certain person (including company, firm, club, association, institutions, society, local bodies or authorities, etc.); or to the bearer. (k) Payable on demand only. (l) Amount written both in words and figures. (Though Section 18 provides, the amount in words should be paid, banks still continue to return such cheques as Amount in words and figures differs.) (m)Bankers suggest that no blank space be left between words Rupees and Rs, printed, as also at the end of the amount, to avoid any undetectable forgery. (n) Cheque must be dated; otherwise it is incomplete and returned unpaid. (But the payee or endorser or endorsee, etc., can put any date on the blank space, as it is not considered as a material alteration.

Anti-dated cheque = of earlier date, Post-dated cheque = of later date, Stale (out-dated) Cheque = presented after six months (after three months, in the cases of dividend and interest warrant), from its date. Stale cheque may be presented again, but only after its revalidation by the drawer only. Cheques marked Bearer or Order Bearer cheque needs no endorsement, i.e. transferred by
mere delivery.

Order Cheque, needs both endorsement and delivery

[Section 47].

Bearer cheque gets converted into order cheque, by cancelling the word bearer, with or without writing the word order. Any person can do so, because it is not considered as a material alteration. But an order cheque can be converted into a bearer cheque, only by the drawer, under his full signature.

When is an Instrument Payable to Bearer?

(i) When it is made payable to bearer (ii) Where originally made payable to order, but endorsed in blank (iii)Once a bearer, always a bearer, means a bearer cheque remains bearer only, even if endorsed in full (iv)If the payee is a fictitious (not real) person Its transferor has no liability to any party, other than the immediate transferee, as it is negotiated merely by delivery

Crossed Cheque and Open (Uncrossed) Cheque

Crossed cheque gives the direction to the paying banker to pay it, not in cash, but only by credit to the account of payee or endorsee. More than ordinary care is required, while crediting crossed cheques or warrants into a recently opened account, operated for less than six months. Now, some companies credit dividend and interest amount electronically to respective accounts direct. Uncrossed cheque is called open cheque.

General Crossing and Special Crossing

(a) General Crossing: Where a cheque bears, across its face, two parallel transverse lines, either with or without the words & Company and/or not negotiable, or A/c Payee. (b) Special Crossing: Where cheque bears across its face, name of a specific banker. whereby it can be paid only through that specified bank [Section 124].

Material and Immaterial Additions/Alterations on cheque

A material alteration/addition renders it as void. A material alteration materially (substantially) alters the operation of the instrument, and thereby, the rights and obligations of the parties involved; e.g. where the change pertains to instruments date, amount, name of payee, time or place of its payment, number of parties involved in instrument and relationship between them, and its legal character of the instrument. Converting an order cheque into a bearer cheque, and opening a crossed cheque amount to material alteration. Paying bankers enjoy protection under Section 89, where such alteration is not noticeable apparently, and cheque is paid in due course, as per Section 10. Paying banker enjoys protections for paying cheques bearing forged endorsements. But, no protection is available to him, in paying a cheque with forged signature of the drawer, howsoever cleverly and unnoticeably forged. But if cheques, with forged signatures of the drawer are caused directly through his (drawers) own conduct, carelessness or negligence, he himself has to bear the loss.

What is a Forgery?
(i) To write (copy and forge) signature of a real (existing) person on instrument so cleverly (or even not-socleverly) with fraudulent intention. (ii) To write (copy and forge) signature even of a fictitious (non-existing) person on the instrument, with fraudulent intention. (iii) If a person signs his own name on cheque, it will amount to forgery, if he has so signed with a fraudulent intention, that it may pass as the genuine signature of another person, having the same name. (iv) To fraudulently change (chemically or otherwise) date, amount, or name of payee, etc., which all amount to material alterations, also tantamount to forgery.

Legal Position pertaining to Forgery?

(i) Paying banker is liable, even if forgery of drawers signature was so cleverly done that it could not be detected from the naked eye. (ii) Holder of forged instrument cannot enforce its payment, nor can he give a valid discharge. (iii) True owner of the instrument can compel the debtor to pay the amount over again by another cheque. (iv) Even a holder in due course cannot enforce payment on a forged instrument, because defective title and forged instrument are entirely different. (v) But, the person, whose signatures are forged, by his conduct, can be estopped from denying its genuineness to an innocent person.

Immaterial Alteration
Where it does not, materially (substantially) alter the nature and operation of the instrument, and thereby rights and obligation of the parties involved. Such additions/alterations are permitted. For example:
(a) (b) (c) (d) (e) (f) (g) Filling blanks in the Instrument [Section 20], Converting a blank endorsement into a full endorsement [Section 49], Converting bearer cheque into order cheque, Crossing an open cheque [Section 125], Converting general crossing into a special crossing, Converting special crossing into further restrictive special crossing, and Alteration(s) made with the consent of the parties concerned.

Types of Crossing of a Cheque

Crossings on a cheque, adding restrictions, one after the other, will look like: _________ and Company or & Co., or Not Negotiable, or A/c Payee or State Bank of India or State Bank of India, Lucknow Main Branch, or State Bank of India, Lucknow Main Branch, a/c Johnson, Current Account No. 51. One or more, or all crossings, may appear on the face of the same cheque:  A Bearer Cheque Crossed A/C Payee Only, is contradictory in nature. It is to be credited to the payees account only, as specified in cheque.  Payment of cheque can be stopped only by drawer, in writing with signature, quoting number, date, payees name, amount of cheque.  But if he stops payment of cheque, by telephone, Telegram/Fax/E-mail, bank should return such cheque, under objection Drawers confirmation required.

Bank Draft is also a bill of exchange, invariably drawn as demand bill, and both the drawer and drawee are two branches of the same bank or different banks. Bank is discharged even by paying demand draft in due course (like cheque) [Section 85 A]. Bank draft must invariably be made payable to order, and never to a bearer. While holder receives negotiable instrument, without consideration, holder in due course receives it with some consideration, and acquires a better title than transferor. [Sections 8 and 9]. For example, in case of lost instrument, or with forged endorsement, a holder in due course gets a better title than the transferor, provided he did not have any prior knowledge or notice of such defect.

Additional privileges of Holder in Due Course

(i) If a person signs and delivers a stamped but otherwise incomplete (inchoate) instrument, he cannot plead that it was not fully filled by him, provided the amount filled in, is covered by the stamp duty paid thereon [Section 20] (ii) All prior parties to a negotiable instrument remain liable to the holder in due course, till the instrument is duly satisfied (paid) [Section 34] (iii)If a bill is drawn by fictitious person, and is payable to his order, acceptor cannot be relieved of his liability to the holder in due course, provided the holder in due course could prove that the instrument was endorsed by the same hand, as the drawers signature [Section 42] (iv)If an instrument is negotiated to the holder in due course, parties cannot plead that the delivery of the instrument was conditional, or only for a special purpose. [Sections 46 and 47]

 

A minor may draw, endorse, deliver and negotiate negotiable instruments to bind all parties, except himself [Section 26] The drawer, payee, or collecting banker of a cheque, may request the drawee bank to mark the cheque as good for payment, under full signature of the banker. This certifies that there are sufficient funds in the account. But, the effect of such markings in the following three cases is different -

(i) When the paying banker, marks or certifies a cheque, at the request of its drawer, he can retain a lien on the drawers account, for the amount of the cheque. Thus, the banker can return any cheque(s), if presented after such marking, if sufficient fund is not available in the account, after noting the lien against the marked cheque. But, such marking only certifies genuineness of the signature of the drawer, and that sufficient balance is available in his account, and not endorsements, etc. In such cases, the drawer cannot stop payment of the marked cheque. Besides, even the death or bankruptcy of the drawer, before actual payment of the marked cheque, does not bar (stop) the payment of the marked cheque.

(ii)

Such marking, if made at the request of its payee or holder, the bank just informs them that, at the material time, bank had sufficient funds in the drawers account. Here, the banker does not note a lien on the drawers account. And, the drawer can stop payment of the cheque, even thereafter.

(iii) Paying and collecting bankers also mark cheques as good for payment, by which they become bound to one another, certifying that the cheque will be cleared if presented in clearing on the next business day (Godwin vs. Roberts). Such marking of postdated cheques is not permitted. It can be so marked only later, i.e. on and after the date of the cheque, but within six months of its date.