Cheques, Meaning, Characteristics, Types, Parties and Uses

Cheque is a written instrument that orders a bank to pay a specific amount of money from an individual’s or entity’s account to the person or entity named on the cheque. The person writing the cheque, known as the drawer, must have sufficient funds in their account to cover the amount specified. Cheques are a widely used form of payment in many countries, offering a convenient and documented way of transferring money without the need for physical cash. They contain important details such as the date, payee’s name, amount in words and figures, and the drawer’s signature. Cheques can be categorized into various types, including bearer cheques, order cheques, crossed cheques, and account payee cheques, each serving different purposes and offering different levels of security. As a banking instrument, cheques facilitate personal, business, and government transactions, providing a traceable record of payment.

Characteristics of Cheques

• Written Order

A cheque is a written directive from an account holder (the drawer) to their bank (the drawee) to pay a specified sum of money to the person or entity named on the cheque (the payee) or to the bearer.

• Unconditional Payment

The instruction to pay given by the drawer to the bank is unconditional. The bank is obligated to pay the specified amount upon presentation of the cheque, provided there are sufficient funds in the drawer’s account.

• Fixed Amount

The amount to be paid through a cheque is fixed and clearly stated both in words and figures to avoid any ambiguity or alteration.

• Payable on Demand

A cheque is payable on demand, meaning the bank must pay the amount when the cheque is presented for payment, without any delay.

• Bearer or Order Instrument

Cheques can be made payable to a specific person (order cheque) or to the bearer of the cheque (bearer cheque). This determines how the cheque can be endorsed or transferred to another party.

• Banking Instrument

A cheque is strictly a banking instrument, as it involves three parties – the drawer, the drawee (bank), and the payee – and requires a bank account to be drawn against.

• Signature of the Drawer

For a cheque to be valid, it must bear the signature of the drawer. This signature is crucial for the bank to authenticate the cheque before processing the payment.

• Date of issue

A cheque must have a date of issue. This date is important for determining the cheque’s validity period and for record-keeping purposes.

• Crossing Feature

Cheques can be crossed, indicating that they must be deposited directly into a bank account and cannot be cashed out over the counter. This feature enhances the security of cheques by reducing the risk of theft or fraud.

• Validity Period

Cheques have a validity period, after which they become stale and cannot be processed for payment. This period varies by jurisdiction but typically ranges from three to six months from the date of issue.

Types of Cheques

1. Bearer Cheque

Bearer cheques are payable to the person holding (bearing) the cheque. They do not specify a particular payee, making them convenient but less secure, as anyone in possession of the cheque can cash it or deposit it into their account.

2. Order Cheque

An order cheque is made payable to a specific person or entity whose name appears on the cheque. Unlike bearer cheques, the payee can be asked to provide identification before the cheque is cashed or deposited, offering a higher level of security.

3. Crossed Cheque

Crossed cheques have two parallel lines drawn across the face of the cheque, often with additional notations such as “Account Payee Only” or “Not Negotiable.” This indicates that the cheque cannot be cashed over the counter; instead, it must be deposited directly into a bank account. Crossing a cheque enhances its security by reducing the risk of theft or fraud.

4. Account Payee Cheque

An account payee cheque is a type of crossed cheque with the words “Account Payee” or “Account Payee Only” written across it. This instruction means the cheque can only be deposited into the account of the person or entity named as the payee, further increasing security and reducing the risk of unauthorized endorsement.

5. Blank Cheque

A blank cheque is one where the drawer has signed it but left other fields (such as the date, payee name, and amount) blank. This practice is risky and not recommended, as it gives complete control to the holder to fill in the details and withdraw funds from the drawer’s account.

6. Certified Cheque

A certified cheque is one that the issuing bank has verified and marked as having sufficient funds available in the drawer’s account to cover the cheque amount. This certification assures the payee that the cheque will not bounce due to insufficient funds.

7. Traveller’s Cheque

Traveller’s cheques are preprinted, fixed-amount cheques designed to allow travelers to carry money securely. They can be cashed or used in payment transactions abroad without a personal bank account. The holder typically needs to sign each cheque twice, once upon receipt and again when cashing or using it.

8. Banker’s Cheque (Bank Draft)

A banker’s cheque or bank draft is a cheque drawn against the bank’s own funds after taking the amount from the purchaser. It is a secure way of making large payments, as it guarantees the availability of funds. Bank drafts are commonly used for transactions such as purchasing real estate or vehicles.

Parties of Cheques

1. Drawer

Drawer is the person who draws or issues the cheque and gives an order to the bank to pay a specified amount to another person. The drawer is usually the account holder of the bank on which the cheque is drawn. He must sign the cheque and ensure that sufficient funds are available in the account at the time of issuing the cheque. The drawer is primarily responsible for the correctness of the cheque and is legally liable if the cheque is dishonoured due to insufficient balance or other reasons. The drawer can stop payment by giving proper instructions to the bank before the cheque is presented.

2. Drawee

Drawee is the bank on which the cheque is drawn and which is directed to make the payment. The drawee bank holds the account of the drawer and pays the cheque amount when it is duly presented and all formalities are fulfilled. The drawee is responsible for verifying the signature of the drawer and checking the availability of sufficient funds in the account. If the cheque is in order, the drawee bank must honour it. If funds are insufficient or the cheque is irregular, the drawee may dishonour the cheque and return it unpaid.

3. Payee

Payee is the person to whom the payment of the cheque is to be made. The name of the payee is clearly mentioned on the cheque, or the cheque may be made payable to the bearer. The payee has the legal right to receive the amount stated in the cheque either in cash or by credit to a bank account. The payee may also transfer the cheque to another person by endorsing it. In case of a crossed cheque, the payee must deposit it into a bank account instead of receiving cash directly.

4. Endorser

Endorser is the person who transfers the cheque to another person by signing on the back of the cheque. Usually, the payee becomes the endorser when he endorses the cheque in favour of someone else. By endorsing the cheque, the endorser gives the endorsee the right to receive the payment. The endorser may be held liable if the cheque is dishonoured, unless the endorsement is made without recourse. Endorsement helps in the easy transferability of cheques and supports the negotiable nature of the instrument.

5. Endorsee

Endorsee is the person in whose favour the cheque is endorsed. He receives the rights to collect the amount mentioned in the cheque from the bank. The endorsee becomes the lawful holder of the cheque after endorsement and delivery. He can present the cheque for payment, deposit it in his bank account, or further endorse it to another person. The endorsee must ensure that the endorsement is valid and complete. Once the cheque is honoured, the endorsee receives the payment legally and conclusively.

Uses of Cheques

• Personal Payments

Cheques are often used for personal payments, such as paying rent, school fees, or settling debts between individuals. They provide a documented trail of payment that can be useful for record-keeping and dispute resolution.

• Business Transactions

Businesses frequently use cheques to pay suppliers, employees, and service providers. Cheques enable businesses to maintain accurate financial records, manage cash flows, and ensure payments are accounted for correctly.

• Large Transactions

For large transactions, such as purchasing a vehicle, real estate, or business equipment, cheques offer a secure and documented method of payment. The use of certified cheques or banker’s cheques is common in these scenarios to guarantee the availability of funds.

• Government Payments

Governments use cheques for a variety of purposes, including issuing tax refunds, paying contractors, and disbursing social security or welfare benefits. Cheques facilitate the management of public funds and ensure accountability and traceability in governmental financial transactions.

• Payroll

Many businesses still use cheques to distribute salaries to their employees. Payroll cheques allow for a physical record of payment and can be useful for employees who prefer or require a cheque over direct bank deposits.

• Financial Management

Cheques can be used as a financial management tool, helping individuals and businesses to control spending and manage cash flow. Writing a cheque requires recording the payment, which can aid in budgeting and financial planning.

• Mail Payments

Cheques are a convenient option for making payments by mail, such as charitable donations, bill payments, or sending money to family and friends in locations where electronic transfers are not feasible.

• International Transactions

While less common due to the rise of electronic payment methods, cheques can still be used for international transactions. Traveller’s cheques, in particular, are designed for travelers to carry and use as a secure form of currency abroad.

• Guaranteeing Payments

Cheques, especially certified cheques or banker’s cheques, can be used to guarantee payments, providing assurance to the recipient that the funds are available and will be paid.

• Flexibility and Convenience

Despite the increasing use of digital payment methods, cheques offer flexibility and convenience for those who prefer traditional banking methods or do not have access to electronic banking services.