A Cheque is a bill of exchange (section 6) drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
A cheque is:
- Always drawn on a banker (drawee);
- Signed by the drawer (accountholder of the bank) authorizing the banker to pay;
- Always honoured on demand (i.e., on presentation);
- Drawn for a certain amount to be paid to a certain specified person (payee) or to his order (payee’s order) or to the bearer;
A cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque and is generated, returned and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric criptosystem;
A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payments, immediately on generation of an electronic image for transmission, substituting the further physical movements of the cheque in writing.
A cheque can be postdated but is valid for payment only on due date.
Parties to Cheque
- Drawer – The person who draws the cheque i.e., account holder
- Drawee – The person on whom the cheque is drawn i.e., bank
- Payee – The person to whom the money stated in the cheque is payable. It could be the original person on whose favour the cheque is drawn, his endorsee, subsequent endorsees, or the bearer of the cheque, if it is payable to bearer
- Holder – The original payee of the cheque, his endorsee, or the bearer, if it is a bearer cheque
- Endorser – The holder endorsing the cheque to someone else
- Endorsee – The person in whose favour the cheque is endorsed.
Presentation of Cheque
A cheque must be presented at the bank upon which it is drawn within its validity period. Generally, a cheque is valid for six months.
If 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 suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification. However, once the payment is made against such truncated cheque so demanded by the drawee bank, it shall retain the cheque with itself.
In all other cases, where cheque is an electronic image of a truncated cheque, the bank that has received the payment shall 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, shall be prima facie proof of such payment (Section 81, subsections (2) and (3)).
As per the new subsection 2 to section 89, where there is any difference in apparent tenor of electronic image and the truncated cheque, shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image. Further, any bank or a clearing house that receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image, that the image so transmitted to it and received by it, is exactly the same.
Negotiation of a Cheque
Negotiation of an instrument is a process by which the ownership of the instrument is transferred by one person to another. The two essential ingredients of negotiation (Section 14) are:
- Transfer of an instrument to another person
- Transfer done in such a fashion that it constitutes the transferee of the instrument as its holder.
Negotiation Mechanism
The negotiation mechanism could be:
- By mere delivery
- By endorsement and delivery.
The signature of the holder must be on the face/back of the instrument. The signature must be for the purpose of negotiation. The signature must be otherwise than as maker of the instrument.
Negotiable Instruments Payable to Bearer
Any negotiable instrument which is expressed to be payable to the bearer, or the only endorsement on it is in blank, or the last endorsement is in blank, is said to be payable to the bearer.
Example:
An instrument marked for payment to:
- Bearer,
- Ram or bearer, or
- Order to Ram, but Ram endorsed in blank for negotiation is payable to bearer.
Negotiable Instruments Payable to Order
A negotiable instrument – be it a promissory note, bill of exchange, or cheque – is payable to order if it is expressed to be so payable, or which is expressed to be payable to a particular person and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
Example:
An instrument that is payable to:
- Ram
- Ram or Order, or
- To the Order of Ram.
Endorsement
‘Endorsement’, literally means writing on an instrument. Under the Negotiable Instruments Act, it means writing of a person’s name on the face or back of the Negotiable Instrument or on a slip of paper annexed thereto for the purposes of negotiation (Section 15).
A negotiable instrument can be endorsed for negotiation either by:
- Delivery if it is a bearer instrument, or
- By signing and delivering the instrument if it is an order instrument.
Types of Endorsement
Suppose, there is a cheque payable to Ram or order. Now, Ram signs the cheque without writing the name of the person to whom it is intended. This act is known as Endorsement in Blank. In such cases the instrument becomes payable to the bearer even though it was originally an order instrument (Section 54).
Where a holder gives direction before signing it, it is said to be endorsement in full, i.e., it consists of:
- The name of the person to whom or to whose order payment shall be made; and
- The signature of the endorser.
It prohibits further negotiation of the instrument, e.g. Pay Krishna only.
By transferability, we mean that the instrument under reference is eligible for transfer and the transferee will acquire the right title and interest of the transferor. However, he inherits the said right with all its equities i.e. defects. In other words, the transferee cannot get a better title than what the transferor had.
By negotiability, we mean that the bonafide holder of an instrument for value would get a good title even though the person from whom the said instrument is acquired or received is having a defective title. In other words, under negotiation, the transferee will obtain the title free from all equities, i.e., defects, provided he acquires it for value or is the holder in due course.
Still any doubt? Pose it, we shall respond….
GRK Murty
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