A cheque is one of the most commonly used negotiable instruments in financial and commercial transactions. It ensures secure, traceable payments and plays a crucial role in India’s banking and legal system. Governed by the Negotiable Instruments Act, 1881, the legal aspects of cheques include issuance, endorsement, transfer, and consequences of dishonour.
What is a Cheque?
A cheque is a negotiable instrument that instructs a bank to pay a specific amount from a person’s account to another individual or entity.
Definition under Section 6 of the Negotiable Instruments Act, 1881:
“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.”
In simple terms, it is an order by the drawer (account holder) to the drawee (bank) to pay the payee a specific sum of money.
Parties to a Cheque
- Drawer: The person who writes and signs the cheque.
- Drawee: The bank on which the cheque is drawn.
- Payee: The person in whose favour the cheque is issued.
Types of Cheques in India
1. Bearer Cheque
- Payable to the person holding the cheque.
- Easily transferable without endorsement.
- Risky if lost or stolen.
2. Order Cheque
- Payable only to the person named in the cheque.
- Requires proper identification and endorsement.
3. Crossed Cheque
- Cannot be encashed over the counter; must be deposited into a bank account.
- Offers safety in large transactions.
4. Post-Dated Cheque (PDC)
- A cheque with a future date.
- Cannot be encashed until the mentioned date.
5. Stale Cheque
- A cheque that is presented after 3 months from its date.
- Becomes invalid and is usually rejected by banks.
Legal Provisions Governing Cheques
Negotiable Instruments Act, 1881
- Section 138: Deals with dishonour of cheque due to insufficient funds.
- Section 139: Presumption in favour of the holder.
- Section 142: Cognizance of offence only on a written complaint by the payee.
- Section 143: Summary trial for speedy disposal of cases.
Dishonour of Cheques: Legal Consequences
What is Cheque Bounce?
- When the bank refuses to honour the cheque due to reasons like insufficient funds, closed account, or mismatched signature, it is called cheque bounce.
Key Legal Points (Section 138 N.I. Act):
- The cheque must be drawn for discharge of legally enforceable debt.
- The cheque must be presented within 3 months.
- Upon dishonour, the payee must send a written notice within 30 days.
- The drawer must make payment within 15 days of receiving notice.
- If payment is not made, a criminal complaint can be filed within 30 days after the lapse of the 15-day period.
Punishment for Cheque Bounce:
- Imprisonment up to 2 years, or
- Fine up to twice the amount of the cheque, or both.
Recent Legal Developments
- Digital Cheques and Truncated Cheques: As per RBI guidelines and amendments to the N.I. Act, image-based cheque clearing is permitted.
- Compounding of Offences: Section 147 allows for compounding even after the complaint is filed.
- Speedy Trials: Section 143 mandates summary trials for cheque bounce cases to ensure time-bound justice.
Precautions While Issuing Cheques
- Always maintain sufficient balance in the account.
- Never sign blank cheques.
- Mention the amount, payee name, and date clearly.
- Avoid overwriting or tampering with details.
- Keep a record of issued cheques for legal reference.
Role of Cheques in Business and Banking
Cheques continue to be used for:
- Salary disbursement
- Business transactions
- Bill payments
- Loan repayments
- Official reimbursements
They provide traceability, security, and legal recourse in case of default or fraud.