Bill and cheque

Different Different Between Bill of Between Bill of exchange and exchange and

chequechequePresentation by

The Negotiable Instruments Act, 1881 Act - Act No.26 of 1881

Enacted by - Parliament of india

Date enacted - 9 December 1881

Date commenced - 1 March 1882

The Act extends to the whole of India.

The Act is to regulate commercial transactions

Background to development of negotiable instruments

Merchants had to pay for purchases with precious metals – this was burdensome, there was always a risk of theft or destruction (eg. Shipwreck).

Merchants began writing orders to each other. Legal rules impeded them, e.g. the nemo dat rule—’lit you cannot give what you do not have’, you cannot transfer better title to goods than you have.

To overcome nemo dat, an exception developed for negotiable instruments—these can be transferred from one person to another and the transferee receives good title (in fact the transferee can receive better title than the transferor.)

Negotiable InstrumentsDefinition:

The word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a written document by which a right is created in favour of some person.’

So negotiable instrument is a piece of paper which entitles a person to a certain sum of money and which is transferable from one to another person by a delivery or by endorsement and delivery.

Types of Negotiable Instruments

Negotiable instruments are of two types which are as follows:

• Negotiable Instruments recognized by status: e.g. Bills of exchange, cheque and promissory notes.

• Negotiable instruments recognized by usage or customs of trade: e.g. Bank notes, exchequer bills, share warrants, bearer debentures, dividend warrants, share certificate

Bill of Exchange Definition: Section 5 of the Negotiable Instruments

Act defines a Bill of Exchange as follows:

“A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”

Specimen of Bill of Exchange

Parties to a Bill of ExchangeThere are three parties involved in a bill of

exchange(i) The Drawer – The person who makes the

order for making payment. In the above specimen, Rajiv is the drawer.

(ii) The Drawee – The person to whom the order to pay is made. He is generally a debtor of the drawer. It is Sameer in this case.

(iii) The Payee – The person to whom the payment is to be made. In this case it is Tarun.

The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words in the bill would be Pay to us or order.

In a bill where a time period is mentioned, just like the above specimen, is called a Time Bill.

But a bill may be made payable on demand also. This is called a Demand Bill.

Essentials of a Bill of Exchange1. It must be in writing2. It must contain an order to pay. A mere

request to pay on account, will not amount to an order

3. The order to pay must be unconditional 4. It must be signed by the drawer5. The drawer, drawee and payee must be

certain. A bill cannot be drawn on two or more drawees but may be made payable in the alternative to one of two or more payees

6. The sum payable must be certain7. The bill must contain an order to pay money

only8. It must comply with the formalities as regards

date, consideration, stamps, etc

ChequeA cheque is the means by which a person

who has fund in the hand of a bank withdraws the same or some part of it.

A cheque is a kind of bill of exchange but it has additional qualification namely-

1- it is always drawn on a specified banker and

2-it is always payble on demand without any days of grace.

Definition

A “cheque” is a bill of exchange drawn on

a specified banker and not expressed to be

payable otherwise than on demand.

‘Cheque’ includes electronic image of a

truncated cheque and a cheque in

electronic form. [section 6].

The definition is amended by Amendment

Act, 2002, making provision for electronic

submission and clearance of cheque. The

cheque is one form of Bill of Exchange. It is

addressed to Banker. It cannot be made

payable after some days. It must be made

payable ‘on demand’.

Essential characteristics of a Cheque

In writing Express order to pay Definite and unconditional order Signed by drawer Order to pay certain amount Order to pay money only Drawn upon a specified banker Otherwise Payable on demand

Specimen of cheque

Parties involved

Drawer—Person who Signe the cheque

Drawee—Bank on which cheque is being drawn

Payee—Person to whom cheque is being paid

Types of chequeOrder cheques One person or more is specified on the cheque as

payee or endorsee Negotiated by endorsement and deliveryBearer cheque (converted to order cheque by deleting 'or bearer') No person is specified in the cheque as payee or

endorsee, or the words 'to bearer' appear on the cheque

Negotiated by deliveryCrossed cheques Specific direction to the drawee financial institution

not to pay the cheque over the counter

Differences between a bill of exchange and cheque

Bill of exchange Cheque

• Payable on demand, or at a fixed or determinable future date

• Payable on demand

• Drawn on anyone • Drawn on a financial institution

• Can’t be crossed (always negotiable)

• Can be crossed

• Continuing security • Presented for payment within a reasonable time

•Obligation from acceptance of bill

• Ongoing relationship

•Substantial trading transactions

• Day-to-day transactions

• It should be stamped •Not required

• Accepted before the drawee can be made liable upon it.

•Not require any acceptance

•. Electronic image cannot be use

•Electronic image can use

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