Differences Between Cheque and Bill of Exchange

The Negotiable Instruments Act of 1881 deals with negotiable instruments such as bills of exchange, promissory notes, cheques, etc. Chapter XVII contains Sections 138 to 142, introduced to repose confidence in the efficacy of banking operations and thereby give credibility to negotiable instruments used in all business transactions. 

According to Section 13 of the Negotiable Instruments Act of 1881, A “negotiable instrument” means a promissory note, bill of exchange, or cheque payable to order or bearer. Thus, a negotiable instrument means any written document transferable on delivery. 

Meaning of a Cheque 

A cheque is a widely used payment instrument in various business transactions. It contains the payer’s date, written amount, and signature, instructing a bank or financial institution to pay a specified sum to the bearer. 

When the payee presents the cheque to the bank, the funds are deducted from the payer’s account as if an order was given to transfer the specified amount from the payer’s account to the payee’s account. 

The individual who makes the payment is referred to as the “payer,” while the one who receives the payment is known as the “payee.” Cheques are typically drawn against a specific account designated for payment, but they can also be used to withdraw funds from savings or other accounts.

Cheque under the Negotiable Instruments Act of 1881

Section 6 of the Negotiable Instruments Act of 1881 states that a “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand, and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Explanation –

• “a cheque in the electronic form” means a cheque that contains the exact mirror image of a paper cheque and is generated, written, and signed in a secure system ensuring the minimum safety standards with the use of a digital signature (with or without biometrics signature) and asymmetric cryptosystem; 
• “a truncated cheque” means a cheque that is truncated during a clearing cycle, either by the clearing house or by the bank, whether paying or receiving payment, immediately on a generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. 

Features of a Cheque

Cheques are drawn from a bank and are payable on demand without requiring a formal acceptance. They can be payable to a bearer on demand or to the drawer. In certain cases, a cheque may involve more than two parties. The person filling out the cheque provides their name and details on the top-left-hand side, while the bank’s name, holding the drawer’s account, is also present on the cheque.

The following details are to be filled out by the drawer:

• The date, which is located on the top-right corner of the cheque.
• The payee’s name, written on the first line at the centre of the cheque, indicates the recipient’s name or business.
• The amount in words is mentioned below the payee’s name.
• The amount in rupees is written in the small box next to the payee’s name.
• A signature on the bottom right-hand corner of the cheque.
• At the bottom edge of the cheque, beneath the drawer’s signature line, there are numbers representing the bank’s routing number, identification code, and transit number, indicating where the account is held.

Meaning of Bill of Exchange 

When transactions involve cash, payment is received immediately. However, when goods are sold or bought on credit, payment is deferred to a later date. In such cases, the selling firm usually relies on the buyer to make the payment on the agreed-upon due date. 

To mitigate the risk of delay or default, some firms utilize a credit instrument that assures the seller of timely payment according to the agreed terms. In India, credit instruments have been used historically in the form of “Hundies” written in various Indian languages. 

Today, these credit instruments are known as “Bills of Exchange,” which consist of an unconditional order, signed by the maker, to pay a specific sum of money on a designated date. The Bills of Exchange are regulated by the Negotiable Instruments Act of 1881.

Bill of Exchange under Negotiable Instruments Act

Section 5 of the Negotiable Instruments Act 1881 states that 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 the bearer of the instrument. 

According to Section 5 of the Negotiable Instruments Act 1881, a “bill of exchange” possesses the following characteristics:

• It must be a written instrument.
• It constitutes a demand or order for payment.
• The order for payment must be unconditional.
• It must be signed by the maker (the person issuing the bill).
• The specified payment amount must be complete and unambiguous.
• It is payable to a certain person or to that person’s order, or it can be made payable to the bearer of the instrument.
• The payment can be made either on-demand or on a specific future date.
• The bill must be duly stamped in accordance with the legal requirements.

Illustration 1: Amit draws a draft on Rohit for Rs. 10,000 payable after three months. Once accepted and signed, the draft becomes a bill of exchange. 

Illustration 2: Mr Shiv sells goods worth Rs. 75,000 to Mr Ram. However, Mr Ram is not able to pay the sum immediately. So, Mr Shiv, the seller, draws on Mr Ram and accepts the same. The bill of exchange is hence drawn for trade purposes. 

Illustration 3: Mr Hari issues a bill of exchange for Mr Jerry, who purchased goods worth Rs. 50,000 on 12.12.2021 on credit. Mr Hari is the creditor for Mr Jerry, who has also drawn a bill of exchange. Mr Jerry, however, accepted the bill on 25.12.2022 only. The bill becomes a bill of exchange from the date of acceptance. 

Features of a Bill of Exchange

The key characteristics of a bill of exchange are:

• It is an instrument in writing.
• It is drawn for a specific amount on a particular person (the drawee).
• The terms of the bill are certain and agreed upon by both parties involved.
• It contains an unconditional order to the drawee, directing them to pay the specified amount.
• The bill specifies the maturity date, indicating when the payment becomes due.
• The bill is signed by the maker (drawer) of the bill.
• It mentions the name of the bearer of the bill, who is entitled to receive the payment.
• It creates a sense of trust between the parties in the transaction.
• The bill is properly revenue stamped, meeting legal requirements.
• The payment must be made in the legal currency of the country.

Similarities Between Cheque and Bill of Exchange

• Negotiable Instruments: Both cheques and bills of exchange are considered negotiable instruments, meaning they can be transferred to another party by mere endorsement or delivery, making them a valuable means of payment and trade.
• Payee’s Payment Direction: Both instruments address the drawee (the party obligated to make the payment) to fulfil the payment to the specified payee or the instrument’s bearer.
• Written Instruments: Both cheques and bills of exchange are formal written documents that outline the terms of the payment, the parties involved, and the amount to be paid.
• Maker’s Signature: Both instruments require the signature of the maker (drawer) who issues the instrument, indicating their consent and liability for the payment.
• Payable on Demand: Both cheque and bill of exchange are payable on express demand or order, ensuring that the payment is made promptly as required.

What are the Differences Between a Cheque and a Bill of Exchange?

Cheques and bills of exchange are essential instruments in the world of finance and commerce, facilitating payments and trade transactions between parties. The differences between a cheque and a bill of exchange are as follows:

Meaning and Definition

A cheque is a written document used to make payments on demand and can be transferred through delivery. It is drawn on a specific banker and is payable to the bearer or a specified person. The Negotiable Instruments Act 1881 defines a cheque as an instrument drawn on a banker, expressed to be payable on demand, and includes electronic forms and truncated cheques.

On the other hand, a bill of exchange is also a written document that signifies the indebtedness of a debtor to a creditor. It contains an unconditional order, signed by the maker (drawer), directing a specific person or the bearer to pay a certain sum of money. The Negotiable Instruments Act 1881 provides the definition of a bill of exchange.

Governing Section

The definitions and legal aspects of both cheque and bill of exchange are covered under the Negotiable Instruments Act 1881. The Act lays down the rules and regulations regarding these financial instruments.

Drawn

A cheque is drawn solely on a specific banker and is not expressed to be payable otherwise than on demand. It is meant for immediate payment.

In contrast, a bill of exchange can be drawn on any person, including bankers. It may have a specific due date for payment, known as the maturity date.

Validity

A cheque is valid and payable on demand to the bearer. The drawee is obliged to honour it as soon as it is presented for payment.

A bill of exchange, if drawn as payable on demand, is considered void according to Section 31 of the Reserve Bank of India Act, 1934.

Payability

A cheque becomes payable on-demand only, and the payment is made immediately upon presentation.

A bill of exchange becomes payable on the expiry of a certain date or a specified period. It is not immediately payable upon presentation but requires the passage of time until the maturity date arrives.

Acceptance

A cheque does not require any formal acceptance from the payee or drawee. It is considered to be accepted when the drawee pays the amount upon presentation.

In contrast, a bill of exchange requires formal acceptance from the drawee before he becomes liable for payment. Acceptance is the drawee’s explicit agreement to pay the bill as per its terms.

Grace Period

No grace period is allowed for payments made by cheque because a cheque is always payable on demand.

However, in the case of a bill of exchange, a grace period of three days is allowed while calculating the maturity date for time bills.

Discounting

A cheque cannot be discounted with a bank or any other entity. It is primarily a means of immediate payment.

Conversely, a bill of exchange can be discounted with a bank, allowing the holder to receive immediate cash from the bank, deducting the discount charges.

Stamping

Cheques need not be stamped before payment since they are payable on demand and have immediate validity.

A bill of exchange, however, must be sufficiently stamped as per the applicable stamp duty regulations before it can be considered valid for payment.

Notice

Formal notice to the drawer is not necessary when a cheque is dishonoured due to insufficient funds or other reasons.

In contrast, when a bill of exchange is dishonoured, formal notice of dishonour must be given to the parties involved to ensure transparency and resolve any issues related to the dishonour.

Crossing

A cheque can be crossed to provide additional security and ensure payment to the rightful owner. Crossing involves drawing two parallel lines on the face of the cheque.

On the other hand, crossing a bill of exchange is not allowed. It is not a common practice in bills.

Dishonour

No formal protest or noting is required in the case of the dishonour of a cheque.

In contrast, the practice of noting and protesting is followed when a bill of exchange is dishonoured, providing a formal record of the dishonour.

Discharge from Liability

The drawer of a cheque is not discharged from liability if the holder delays in presenting it for payment. The drawer remains liable to pay the amount mentioned in the cheque even if the payment is delayed.

Conversely, the drawer of a bill of exchange is discharged from liability if it is not duly presented for payment on the due date or within the grace period, if applicable.

Here’s a table summarising the key differences between a cheque and a bill of exchange:

Conclusion

The above comparison highlights the key differences between a cheque and a bill of exchange. These two financial instruments serve distinct purposes in facilitating transactions and payments. While a cheque is a document used for immediate payments on demand, typically drawn by a specified banker, a bill of exchange represents a written instrument that signifies the debtor’s indebtedness towards the creditor and involves a certain period before it becomes payable.