The Bill of Exchange Act defines a cheque as: “A bill of exchange drawn on a banker payable on demand.” In other words, a cheque is an order written by the drawer to a bank to pay on demand a specified sum of money to the person named as payee on the cheque. To complete a cheque, the drawer inserts the name of the payee, the amount he is to be paid in words and figures, date and signature.
Differences between a cheque and a bank note
A cheque is an instrument in writing made upon a bank to pay a given sum of money to a named person or bearer, at a specific date, whereas bank notes are legal tenders that is, notes issued by the central bank to be legally used as means of payment for goods and services.
Features or characteristics of a cheque
- A cheque is an order to pay.
- It is an unconditional order.
- The amount must be specified.
- It must be in writing and not paid.
- The account number of the drawer is stated.
- The name and branch of the bank appear on the cheque.
- It is addressed by one person to another.
- The name of the payee must be shown on the cheque.
- A stamp duty is paid on a cheque.
- Amount must be clearly written in words and figures.
Advantages of payment by cheque
- Convenience: It is more convenient to carry cheque about than cash.
- Safe means of payment: Cheque is a safe means of payment, especially when it is crossed, the risk of loss is eliminated.
- A proof of payment: Cheque can serve as a receipt and a proof of payment.
- It saves time and energy: Using cheque to pay large sums of money saves time and energy of counting the cash.
- It helps to economise: Cheque can help to economise the use of currency notes and coins.
- Security: It is safer to carry cheque than cash for security reasons.
- For record purposes: The drawer can use the counterfoil for proper record keeping of payments and receipts.
- Easy to stop payment: It is very easy for the drawer to stop payment to prevent fraud.
Precautionary measures to be taken when drawing a cheque
- The signature must be consistent.
- The drawer must sign any alteration on the cheque.
- The cheque must not be folded.
- The amount must be written in figures and words.
- The name of the payee should be properly written on the cheque.
- The signature must be such that it cannot be easily forged.
Parties to a cheque
There are three major parties to a cheque. These are:
- Drawer: Drawer is the person responsible for drawing a cheque. He is the owner of the account on which the cheque is drawn. The drawer is the debtor who signs the cheque and orders the bank to pay his creditor.
- Drawee: Drawee is the bank on which the cheque is drawn, i.e. the bank where the cheque will be presented for payment.
- Payee: Payee is the person to whom the cheque is made payable, i.e. the person to whom payment is directed to be made. The payee is usually a creditor to the drawer and must present the cheque to the drawee for settlement. For example, if Mr. John writes a cheque to Mr. Steve to be drawn from Zenith Bank Plc ., in this transaction, Mr. John is the drawer and Mr. Steve is the payee while Zenith Bank Plc. is the drawee.
TYPES OF CHEQUES
- Order cheque: Order cheque is made payable to a person or firm named on it, or an order which requires the endorsement of the payee unless he pays it into his own bank account. A cheque that is drawn payable to payee or to order can only be cashed by the payee. The payee can endorse it to another person and this turns it into a bearer cheque.
- Bearer cheque: Bearer cheque is payable to the bearer, i.e. whoever presents it. The bearer cheque is payable without any endorsement. It can be cashed over the counter without having to be endorsed by the person presenting it.
- Open cheque: Open cheque can be presented and cashed over the counter of the bank which it is drawn. Open cheque is not crossed. It is used for drawing cash from the bank paying the creditors who have no current account. This is risky because it can be paid to a wrong person.
- Crossed cheque: This is a cheque having two parallel lines drawn across its face. Crossed cheque cannot be cashed at the counter; it must be paid into a current account. Some words may be written between the parallel lines, e.g. ” &Co” or “Non negotiable”. This helps to prevent fraudulent practices.
Forms of crossing a cheque
There are several types of crossing which can be used to place restriction on the negotiability of a cheque. They are:
- General crossing: General crossing is a form of crossing in which two parallel transverse lines are drawn across the face of the cheque with or without the addition of the words “& Co” or “Non-negotiable”. This type of crossing prevents payments over the counter. The cheque can only be paid into a current account. There is no bank named on it.
- Special crossing: In special crossing, the name of a bank is inserted between the transverse lines. This restricts payment to a specific named bank. The effect is to make the cheque payable only to the banker specified in the crossing. It is a precautionary measure to make a cheque safer.
Other forms of special crossing
- Non-negotiable: Non-negotiable is another form of special crossing in which the cheque cannot be paid to any person except the bearer of the name on the cheque. This phrase will deprive the cheque of its negotiability, i.e. prevents its further transfer. It is added to protect the owner against thieves.
- A/C payee only: A/C payee only is a directive to the bank that the proceeds of the cheque are to be paid only into the account of the person or firm named on the cheque, i.e. the payee. Any cheque with this form of crossing cannot be negotiated or transferred by endorsement to another person. It operates as notice to the collecting bank that only the account of the payee is to be credited.
Reasons for crossing a cheque
- It protects the owner against damage by loss or theft.
- It prevents the cheque from being paid over the counter.
- Crossing restricts a cheque to a particular bank.
- The holder of a crossed cheque must pay it to his account.
- It can help in tracing the culprit in case the cheque is stolen.
OTHER FORMS OF CHEQUE
- Stale cheque: Stale cheque is the type of cheque which has been in circulation for an unreasonably long period of time, hence the date of presentation for payment has expired. The bank will refuse to honour a cheque that is more than six months old because it is considered expired.
- Post dated cheque: Post-dated cheques are cheques that bear a date later than the current date on which they are drawn, i.e. it is dated for some future time. Such a cheque cannot be cashed before the proper date.
- Dishonoured cheque: A dishonoured cheque is one which a banker, for some reasons, has refused to pay on presentation. Such cheques generally have some explanatory phrase written on them stating the reason why such cheques cannot be paid or honoured.
Reasons for dishonouring a cheque
- Insufficient fund: A cheque can be dishonoured for lack of sufficient fund in the account.
- Irregular signature: A cheque will not be honoured if the signature is not regular.
- Difference in figures and words: If the figures and the words on the cheque do not agree, the cheque will be rejected.
- No date: A cheque can be dishonoured if there is no date on it.
- Bankruptcy: If the bank receives notice of default of drawer, it will reject the cheque.
- Alteration of cheque: If alteration on the cheque is not signed against by the drawer, the bank will no honour it.
- Mutilation of cheque: When the cheque is mutilated, it will be dishonoured.
- Stoppage of payment: If payment is stopped by the drawer, the cheque will not be honoured.
- Stale cheque: A cheque that has expired will be dishonoured.
4. Certified cheque: A certified cheque is a cheque which has been ratified by the bank in order to guarantee that the drawer has sufficient funds in the account to settle debt. A bank also ratifies a cheque in order to authenticate it.