Cheque

• A cheque is a bill of exchange drawn upon a specified banker and

payable on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic form.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 1

Parts of a cheque
• Payee name
• Drawee (i.e. the bank where the cheque is presented for payment)
• Date of issue
• Amount of currency
• Signature of the drawer
• Machine readable routing and accounting information

Legal Aspects of Business - S. Nagarajan, AP/ MBA 2

Essential characteristics of a cheque
• It must be signed by the drawer.
• It contains an unconditional order.
• It is issued on a specific banker only.
• The amount specified is always certain and must be
clearly mentioned both on figures and words.
• The payee is always certain.
• The cheque must bear a date; otherwise it is invalid
and shall not be honored by the bank.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 3

Types of cheque
• Open cheque:
• A cheque is called “open” when it is possible to get cash over the counter at
the bank.
• Received its payment over the counter at the bank;

• Deposit the cheque in his own account; or

• Pass it to some one else by signing at the back of a cheque.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 4

Crossing…
• When such a cheque is in circulation, the great risk attends it.
• If the holder loses it, its finder may go to bank and get the payment
unless its payment has already been stopped.
• To avoid this limitation we are going to crossing.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 5

Crossing
• A cheque is crossed which two parallel transverse lines with or with
out the words “& co”.
Types of crossing :
• General crossing
• Special crossing

Legal Aspects of Business - S. Nagarajan, AP/ MBA 6

Continued…
• General crossing:
• A cheque is said to be crossed generally where it bears across its face an
addition of,
• “and company”
• “& co”
• “Not negotiable”
• “Not negotiable & co” etc.,
• Where the cheque is crossed generally, the drawer bank shall not pay it unless
it is presented by the banker.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 7

Continued…
• Special crossing:
• where a cheque bears across its face an addition of the
name of a banker either with or without the words “not
negotiable”.
• The payment can be obtained from the particular banker
whose name appears between the transverse lines.
e.g.
-----------------------------------------
Bank of India
-----------------------------------------

Legal Aspects of Business - S. Nagarajan, AP/ MBA 8

Continued…
• Restrictive crossing:
• It is otherwise called as A/c payee crossing.
• The words “A/c payee” on a cheque are a direction to the
collecting banker that the amount collected on the cheque
is to be credited to the account of the payee.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 9

Continued…
• Who may cross a cheque:
• The drawer

• The holder
• Uncrossed – may be done general cross

• General crossed – may be done special cross

• Both have done – he may add words “ Not Negotiable”

• The banker

Legal Aspects of Business - S. Nagarajan, AP/ MBA 10

Other types…
• Bearer cheque:
• A cheque which is payable to any person who presents it for payment at the
bank counter is called a “bear cheque”.
• Order cheque:
• An order cheque is one which is payable to a particular person.
• In that type of cheque “Bearer” may be cut out and the word “order” may be
written.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 11

Continued…
• Ante-dated cheque:
• A cheque bears a date earlier to the date on which the cheque is drawn.
e.g.
• A cheque drawn on January 15 bearing date January 10 is an ante-dated
cheque.
• Bank generally pay an ante-dated cheque.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 12

Continued…
• Stale cheque:
• if a cheque is presented for payment after six months from the date of
cheque is called stale cheque.
• After expiry of that period, no payment will be made by banks against that
cheque.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 13

Continued…
• Multi-lated cheque:
• Broken cheque.
• Post dated cheque

Legal Aspects of Business - S. Nagarajan, AP/ MBA 14

Continued…
• Clearing house:
• It is managed by Reserve Bank of India (RBI) or Clearing house recognized by
Reserve Bank of India(RBI).
• Cheques comprises of all information pertaining to Bill of Exchange with two
additional information’s,
• It is always drawn on a specified banker and
• It is always payable on demand.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 15

Continued…
• A some clarifications with cheque and bill of exchange:
• All cheque are bill of exchange but all bill of exchange are not a cheque.
• It must be signed by the maker.
• It does not required acceptance as it is intended for immediate payment.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 16

Holder and Holder in Due Course
• Holder (Sec. 8):
– The holder of the promissory note, bill of exchange or cheque,
a) The person who possess the NI.
b) To receive the amount from parties.
– The NI is lost or destroyed, its holder is the person to entitled the loss or
destruction.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 17

Continued…
• Holder in due course (Sec. 9):
– The person is called as holder in due course,
1. He become a holder of NI before its maturity.
2. For consideration,
a. The possessor of the NI, If payable to bearer.
b. The payee, if payable to order.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 18

Continued…
• Holder in due course (Sec. 9):
– The person is called as holder in due course,
1. He become a holder of NI before its maturity.
2. For consideration,
a. The possessor of the NI, If payable to bearer.
b. The payee, if payable to order.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 19

 Privileges of a holder in due course …

• Inchoate stamped negotiable instrument:

• A person, who has signed and delivered to another a stamped inchoate
instrument, is precluded from asserting, as against the holder in due course.
• The instrument has not been filled in accordance with the authority given by
him.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 20

Continued...
• Liability of prior parties:
• Every prior party to a negotiable instrument is liable thereon to a holder in
due course until the instrument is duly satisfied (Sec.36).
• Fictitious payee:
• Where a bill is drawn payable to the drawer’s order in a fictitious name, the
acceptor of a bill cannot say, as against the holder in due course, that other
parties to the bill were fictitious.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 21

Continued…
• Negotiable instrument without consideration:
• When the negotiable instrument is made, drawn, accepted or transferred
without consideration.
• It creates no obligation of payment between the parties.
• Conditional delivery:
• if a bill or note is negotiated to a holder in due course, the other parties
cannot avoid liability.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 22

Continued…
• Instrument cleansed of all defects:
• Once a Negotiable instrument passes through the hands of a holder in due
course, he gets cleansed of its defects, if he know already.
e.g.
• A, by fraud, induces “B” to make a promissory note on his behalf. He indorses
the note to “C”, who takes it as a holder in due course.
• “C” subsequently indorses the note to “D” for value. “D” cannot sue “B”.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 23

Liability of parties…
• Liability of drawer (Sec.30)
• The drawer of a bill of exchange or cheque is bound, incase
of dishonour by the drawee or acceptor.
• To compensate the holder has the liability to pay amount
to payee is called ‘ Primary Liability ‘.
• The bill of exchange or cheque is accepted by the acceptor
or drawee, the drawer’s liability is secondary.
i.e: he is only liable to pay only if the acceptor fails to pay.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 24

Continued…
• Liability of drawee of a cheque (Sec. 31)
• If any loss or damage cause to the drawer due to some mistake made by the
drawee.
• He has a liability on it.
• Liability of maker of note and acceptor of bill / note (Sec. 32)
• The maker of the promissory note may pay the amount before maturity.
• The acceptor of the bill of exchange may pay the amount after maturity.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 25

Continued…
• Liability of indorser (Sec. 35)
• The person, whoever delivers a negotiable instrument before maturity, in
case of dishonour by the drawee, acceptor etc.,
• Every indorser after dishonour is liable as upon an instrument payable on
demand.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 26

Continued…
• Liability of prior parties (Sec. 36)
• Every prior party to a negotiable instrument is liable to a holder in due course
until the instrument is duly satisfied.

Legal Aspects of Business - S. Nagarajan, AP/ MBA 27