Cheque

Of the three negotiable instruments the Negotiable Instruments Act, 1881, recognises, the cheque is the one most people use in everyday life. It is, in the eyes of the law, simply a special kind of bill of exchange, one with two extra conditions attached.

Those two conditions are: it must be drawn on a specified bank, and it must be payable on demand, meaning the bank pays it out whenever it is presented, not on some fixed future date.

Section 6 of the Negotiable Instruments Act, 1881, defines a cheque as a bill of exchange 'drawn on a specified banker' and payable only on demand — a definition that expressly extends to 'the electronic image of a truncated cheque and a cheque in the electronic form'.

Along with the bill of exchange and the promissory note, a cheque is a negotiable instrument under Section 13, and it can be payable to order, transferable by endorsement, or to bearer, transferable simply by handing it over. The Act also sets out the procedure for presentment, discharge from liability, and the penalties for dishonour of a cheque, covered in the chapter's discussion of related sections.

Priya writes a cheque for Rs 50,000 to a contractor, drawn on her savings account at ICICI Bank, and payable to 'Ramesh Contractors or order'. This satisfies Section 6's conditions: it is drawn on a specified bank, ICICI, and it is payable on demand, so the contractor can present it at any time rather than waiting for a fixed date.

Because it is payable 'to order' rather than 'to bearer', Ramesh Contractors can further endorse the cheque over to someone else, such as a supplier they owe money to, and that person can then present it for payment, exactly the transferability that makes a cheque a negotiable instrument, not just a private payment note between Priya and the contractor.

Chapter 18 (Key Regulations), section 18.8.4, gives the Section 6 definition of a cheque directly after the Section 5 definition of a bill of exchange, and notes that dishonour of a cheque carries specific penalties under the Act. Expect a question that asks you to identify the two conditions that make a bill of exchange a cheque, or one testing the electronic cheque's legal recognition.

• A cheque is legally a subset of the bill of exchange — every cheque satisfies the definition of a bill of exchange, but a bill of exchange payable at a future date, or not drawn on a bank, is not a cheque.
• The definition of 'cheque' explicitly includes electronic forms — a truncated cheque image and an electronic cheque are both covered, not just a paper instrument.
• Dishonour of a cheque carries specific penalties under the Negotiable Instruments Act — this is a distinct legal consequence from an ordinary contractual default.