Cheque: Definition, Types, Parties, Salient Features, Material Alterations, Payment

&Cancellation,Stop Payment of Cheque& Cheque Return Memo, Cheque Book Issue,

Delivery, Duplicate Issuance, Passing, Cancellation, Payment & Transfer of Cheque,
Important Checking Point, etc.
Md. Wahidur Rahman
SVP &Deputy Manager
Shahjalal islami Bank Ltd.
Dhaka Main Branch,Dhaka

As per Negotiable Instruments Act, 1881, the following instruments were accepted as “negotiable
instruments”.
i) Promissory Note,
ii) Bill of Exchange,
iii) Cheque,
iv) Demand Draft.

Definition of cheque :
“ A Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand.”(Section 6 of the NI Act ).
The cheque is utilized to make safe, secure and convenient payments. It serves as a secure option since
hard cash is not involvement during the transfer process; hence the fear of loss or theft is minimized.
There are different modes of financial payments which are successfully used by individuals, firms and
corporate organizations. Out of these various options, a cheque does act as an important negotiable
instrument, which can also be transferred by simple delivery option.

Introduction of cheques :
Cheques are divided into 2(two) parts :
a) General Parts/Printed Parts,
b) Essential Parts/Material Parts

a) General Parts/Printed Parts :

i) Date (Blank Column), Name of the Bank, Barcode, Monogram,

ii) Branch Name, Online Banking,
iii) Printed serial number, account number, name of the customer,
iv) Pay to Bearer, Taka (Words), Taka (Figure),
v) MICR Encoding,
vi) Routing Number.
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A bundle of cheque leaves maintaining proper serial number attached together issued by the Bank is
called a Cheque Book. Cheque leaf is not cheque.

b) Essential Parts/Material Parts:

i) To fill in the column of date,
ii) To write down the name of the natural person or legal entity,
iii) Exact amount of money both in word & figure,
iv) Signature of the drawer,

There are also 2 (two) vital essential parts which make a basic changes of a cheque :

v) Cancellation of the word “Bearer” automatically makes the cheque an “Order Cheque”.
vi) Crossing the cheque by drawing two parallel lines across the top left-hand corner of the
cheque,

Types of cheques :
a) Bearer Cheque : Bearer cheque is payable over the counter to the bearer or the presenter of the
cheque by the drawee Bank. This cheque is transferable only by delivery.
b) Order Cheque :When the word “Or Bearer” printed on the chequeis cancelledor the word
“Order”is written on the cheque, then the cheque is called an “Order Cheque”. The payee can
transfer the ownership of an order cheque to someone through endorsement & delivery.
c) Open Cheque :An open cheque is a cheque that is not crossed and payable over the counter by
the Bank.
d) Crossed Cheque :The cheque is crossed at the top left corner by drawing two parallel lines with
or without using some words. Crossed cheques are of mainly two types :

General Crossing : In a General crossing, simply two parallel lines , with or without the words “Not
Negotiable”, “& Co.”, “A/C Payee”, A/C Payee Only”, etc.

Special Crossing : In a special crossing, the name of the Banker is written between the two parallel lines.

e) Stale Cheque : A cheques turns stale after 6 (six) months of the date written on the cheque.
f) Ante-Dated Cheque :A cheque containing a prior date is called an Ante-Dated Cheque.
g) Post Dated Cheque :A cheque containing a future date is called aPost-Dated Cheque.
h) Mutilated Cheque : A cheque which is torn, damaged, crushed or washed is called Mutilated
Cheque.
i) Traveller’s Cheque :This sort of cheque is used by traveler issued by a particular bank arranging
for payment at different Cities/Countries. The payee of the cheque signs in it at the time of
issuance. The Cheque can be encashed by putting same signature.

Parties of cheques :
a) Drawer :The person who draws/signs the cheque and orders the Bank to pay the sum.
b) Drawee :The Bank on which the cheque is drawn to pay the specified sum written on the cheque.
c) Payee : The beneficiary who is entitled to get the sum.
Apart from these three, there are two more parties to a cheque ;
a) Endorser : When a party transfer his right to another party through endorsement is called the
endorser.
b) Endorsee : The party in whose favour the right is transferred is called the Endorsee.

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The salient features of a cheque
i. Instrument in writing: A cheque must be in writing.
ii. Unconditional order: A cheque is an order to pay and not a request. The order must be
unconditional.
iii. On a specified banker: A cheque is always be drawn on a specified banker.
iv. Payee to be certain: A cheque must be payable to the order of a certain specified person or to
his agent or bearer thereof. The payee is the person to whom the amount of the cheque is
payable. So, the payee must be certain person. He may be a human being or an artificial person
i.e. company.
v. A certain sum of money: A cheque is usually drawn for a definite sum of money, which is to be
written both in words and figure.
vi. Payable on demand: A cheque is payable only on demand.
vii. To be signed by the drawer: A cheque must be signed by the drawer, i.e. the account holder
or his authorized agent.

Material Alteration :

The term material alteration indicates alteration or change in the material parts of the cheque. All
changes in the instrument which alter the operation of the instrument or the rights and liabilities of the
parties shall be material alteration.

Instances of material alteration:

 Alteration of the date of the instrument.
 Alteration of the sum payable.
 Alteration in time of payment.
 Alteration in the place of payment. Even when a place of payment is added without the
acceptor’s consent, it will also be taken as a material alteration.
 Alteration by the addition of a new party.
 Alteration of an order instrument into bearer instrument.

In case a cheque is materially altered and the banker makes the payment, he shall be discharged
from liability when he proves that the alteration could not be detected with reasonable care,
prudence and scrutiny and the payment has been made in due course.

Some important Issues :

Holder : A person who legally obtains the cheque with his name to receive the payment is called the
“Holder” of the cheque.
Holder in due course :
Holder in course is defined as a holder who acquires the cheque in good faith for consideration without
any idea of a defective title of the party who transfers the title to him.

A (Holder),
B(Holder & Endorser),
C(Illegally received the cheque from B),
D(Legally received the cheque through negotiation),
“D” becomes the “Holder in due course” if ;
 D does not know C is illegal holder;
 Consideration,
 In good faith without negligence,
 Instrument valid in all respect.
“D” can sue against all the parties if the cheque is not honoured.
(As per Transfer of Property Act-1882, “A man cannot give better title unless he has.” This law
contradicts with NI Act-1881).
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Payment in due course :
a) Thorough verification of the instrument presented for payment,
b) Payment to be made only to a legally entitled person,
c)In good faith without negligence,
d) There is no reasonable ground for believing that he is not entitled to receive payment.

Issuance& Delivery of Cheque Book

The Customer would normally request for a Cheque Book when he opens his new account. The existing
customers are also applying for cheque books on requirement basis.

 The Bank will issue a cheque book to Customer for the first time upon receipt of acknowledgment
of Thanks Letter. Customer will receive it in the mail or by courier in a few days time.
 The new cheque book will be issued only upon written request/cheque requisition slip.
 Cheque book shall be hand delivered by the Branch to the customer/authorized representative.
 Bank may also dispatch the cheque book at the customer address registered in his/her account
with the Branch. It would be responsibility of the customer to notify the branch any change in
his/her communication address and contact details to avoid wrong delivery of cheque book.
Communication address and contact details such as tel. no./mobile no./email ID are required to
enable timely delivery and to facilitate identification for the customer to submit the details to
branch with relevant documentary proof.
 If the cheque book is to be issued through the bearer, his/her signature must be attested by the
account holder on the cheque requisition slip or the authority letter. Signature of the bearer shall
be obtained in acknowledgement on the requisition slip/ authority letter. The party’s
acknowledgement of the receipt of cheque book shall also be obtained by sending him/her a
letter.
 Delivery of cheque book by messenger shall be avoided.

Stop Payment of Cheques:

 Instruction for stopping payment of any cheque shall be obtained from the Account Holders in
writing.
 If such instructions are received over telephone, fax or by telegram a provisional note in respect
thereof shall be made on the relative ledger folio, pending receipt of written instructions from the
Account holder. In the meantime if such Cheque presented should be returned with the objection
“drawer’s confirmation required.”
 The date and time on Instructions received shall be marked on the letter. The signature of
Account holder shall be verified on the application and a “STOP PAYMENT” seal is affixed on the
right hand side of the ledger folio.
 The relevant Officer shall check the relative account and ensure that the particular cheque has not
been paid. The ledger keeper shall enter the particulars of the Cheque in the stamp cage and
initial it and the deposit – in – charge shall authenticate the entries.
 Particulars of cheque shall also be noted in the stop payment register.
 An acknowledgement Memo shall be prepared in triplicate. The original shall be sent to the
customer, the duplicate shall be pasted on the ledger folio of the account and triplicate shall be
retained in the Memo Pad as office record.
 The stop payment application received from the parties shall be filed in the “Stop Payment File”.
 When a stop payment cheque is presented, return the cheque with objection “Payment Stopped
by Drawer.”
 When an account shall be carried forward to a new folio, the “Stop Payment” instructions shall
also be carried over to that folio.

Return of a Cheque
The cheque,if dishonoured, cheque return memo to be issued stating the following causes as applicable in
case to case basis ( In case of BACH) :

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1)Insufficient fund, 2)Amount in figure and word differs, 3) Stale Cheque, 4) Post dated/undated cheque,
5)Drawer’s signature differs/missing, 6) Payment stopped by drawer, 7) Item represented too
often/more than three times, 8) Incomplete or missing endorsement, 9) Forged Endorsement, 10)
Material Alteration-Payee/amount/date/account no., 11) Forged or unauthorized signature, 12) Missing
corporate stamp, 13) Incorrect amount, 14) Item sent to wrong Bank/Branch, 15) Account
closed/dormant/blocked, 16) Advice not received, 17) Duplicate item-previously paid, 18) Incorrect
payee, 19) High value item presented to an ineligible Branch, 20) Cheque not activated, 21) Cheque &
Advice data mismatched, 22) 7 days notice required, 23) Test keys required /differ, 24) Not arranged for,
25) Revenue stamp required, 26) Signature & seal required, 27) Budget required/refer to the issuer, 28)
Item required revalidation, 29) MICR data & image mismatched.
In terms of circular letter No. BRPD(P) 717/2002/1020 dated 12/12/2002 of Bangladesh Bank, Head
Office; the cheque return memo to be issued stating the following causes as applicable in case to case
basis ( In case of counter payment):
 Insufficient fund.
 Amount in figure and word differs.
 Cheque out of date/post dated.
 Drawer’s signature differs.
 Payment stopped by drawer.
 Not arranged for
Cancellation and Payment of Cheques :
A banker on whom a cheque is drawn should pay the cheque when it presented for payment. This
cheque-paying function is a distinguished one of a banker. This obligation has been imposed on banker
by section 31 of the N.I. Act. A banker is bound to honour his customer’s cheque, to the extent of the funds
available and the existence of no legal bar to payment. Further, the cheque must be in order and it must
be duly presented for payment at branch where the account is kept. The paying banker should use
reasonable care and diligence in paying a cheque, so as to, abstain from any action likely to damage his
customer’s credit. If the paying banker wrongfully dishonors a cheque, he will be asked to compensate
the loss.

So, a banker must be very cautious both at the time of honoring as well as dishonoring his customer
cheques. To get protection of the paying banker and to protect the interest of the customer, the paying
banker while making payments of his customer’s Cheque should take the following precautionary
measures:
Precaution
1. Form of cheques: Although there is no specific specimen of cheque forms in Negotiable Instrument
Act., different banks provide in their rules of operating accounts that the Cheque must be drawn in
the printed forms i.e., the Cheque books supplied by them and the bank can dishonour the Cheque if it
is not on the printed cheque.
2. Date of Cheque: While receiving cheques for payment the banker should examine the date very
carefully as the banker can neither pay a post-dated cheques nor a stale Cheque.

Post dated cheque: In case a cheque is post dated i. e. it bears a date which is yet to come, the banker
should pay it only on due date or after the date mentioned in the cheque but not later than 6 months. If a
bank pays such cheques, it will run the following risk:

The drawer may countermand the payments before the date mentioned on the cheque and then the bank
will not be entitled to debit the customer’s account with the amount of the cheque.

The drawer may make the banker liable for dishonoring of other cheques on account of insufficiency of
funds resulting because of payment of the post-dated cheques.

In case of insolvency or death of the drawer before the date mentioned on the cheque, the banker shal
not be entitled to debit the customer account if it has already made payment of the cheque.

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The payment of post-dated cheque shall not be considered tobe payment in due course and, therefore,
banker shall not get any statutory protection if the payment is made to wrong person.

Stale Cheque: It is the custom of the banker not to pay cheques which are presented after a certain
period has elapsed since the apparent date of the issue. Generally the period of a cheque is considered
valid for 6 months.

3. Amount of cheques: The banker should examine that the amount mentioned in the cheque both in
words and figure are the same. If it differs, the banks usually return the cheque for the reference to
the customer.
4. Funds of customer: There should be sufficient fund in the account of the customer for payment of
the Cheque. Cheque has to be paid in full and not in part and, therefore, inadequacy of fund will result
in dishonor of the cheque.

5. Material alteration: All changes in the instrument which alter the operation of the instrument or the
rights and liabilities of the parties shall be material alteration.All material alteration must have
drawer’s approval with his full signature where the alterations are made.

In case a cheque is materially altered and the banker makes the payment, he shall be discharged from
liability when he proves that the alteration could not be detected with reasonable care, prudence and
scrutiny and the payment has been made in due course.

6. Drawer’s signature: Bankers make payment of cheques on verifying the recorded specimen
signature of the drawers of the cheque. If the drawer’s signature is forged, and the banker makes
payment of the cheque, the loss will be borne by the banker. When there is a joint account, both or all
the signatures on the cheque should be genuine. In case any of the signatures is forged, the bank shall
not make payment of such cheque.

7. Mutilated cheque: A cheque is said to be mutilated when it is torn or torn into two pieces or more.
Such a cheque should not be paid by the banker.

8. Banking Hour: The banker should make payment of only such cheques, which have been presented,
to it for payment during its banking hour. Any payment of cheque which was presented after banking
hour will not be taken as a payment in due course and the banker will not be entitled to debit the
customer’s account if in the, meanwhile, the customer has stopped the payment, or some similar
events had happened.

9. Crossing: The paying banker should make payment of a crossed cheque only through the collecting
banker. In case of special crossing, the payment of a cheque should be done only to the banker whose
name has been mentioned between the two parallel lines. In case the paying banker makes payment
of a crossed cheque in contravention of the above rules, its liability will be as follows:
a. The paying banker will have to reimburse the true owner for any loss that he might have
suffered on account of payment being made to a wrong person.
b. The paying banker shall not be entitled to debit his customer’s account with the amount
of payment in case of payment has been made to a wrong person since it has not followed
the mandate of the customer. Such payment will not be taken as a payment made in due
course.

_____________________END_____________________

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