This article is written by Akshaya V, pursuing LLB from CMR University, School of Legal Studies. This article explains in detail the concept and working of cheques and bill of exchange and the key differences and similarities between them.

This article has been published by Sneha Mahawar.

Introduction 

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 the 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 either to order or to bearer. Thus, a negotiable instrument simply means any written document transferable on delivery. 

Meaning of a cheque 

A cheque is a commonly used instrument for paying in all business transactions. A cheque that is dated, written, and signed directs a bank or a financial institution to pay a sum of money to the bearer. When a payee presents a cheque to a bank or a financial institution, the funds are drawn from the payer’s bank account as if an instruction is given to transfer a sum from the payer’s account to the payee’s account. The person who is paying the amount is called the “payer” and to whom it is paid is known as the “payee”. Cheques are usually written against an account to which it is to be paid but it is also used to negotiate funds from savings or any other type of account. 

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 –

1. “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; 
2. “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 always drawn from a banker and are payable on demand even without a formal acceptance. It is payable either to a bearer on demand or to the drawer himself. In some cases, there may be more than two parties to a cheque. The name and the details of the person filling the cheque are found on the top-left-hand side. The bank’s name that has the drawer’s account also appears on the cheque. The drawer has to fill the following lines:

1. The date is on the top–right corner of the cheque.
2. The payee’s name is on the first line at the centre of the cheque by the phrase by giving the name of a person or business.
3. The amount (in words) below the line of the name of the payee. 
4. The amount in rupees is in the small box next to the payee’s name. 
5. Signature on the bottom right-hand corner of the cheque. 

At the bottom edge of the cheque underneath the signature line of the drawer, the numbers represent the bank’s routing number, identification code, and the transit number where the account is held. 

Parties to a cheque

The parties to a cheque include a drawer, drawee, and payee. A drawer is a person who draws the cheque, the drawee is the banker on whom it is drawn and a payee is a person who is liable to pay the amount on the cheque. Apart from these parties, there can also be a holder who generally is the original payee. 

Types of cheques

1. Certified cheque – This cheque verifies and certifies that the drawer’s account has sufficient funds to honour the cheque amount and is guaranteed not to bounce. It also verifies if the drawer’s signature is genuine or not. Certified cheques are used when the recipient is unsure of the creditworthiness of the drawer or does not want the cheque to bounce. 
2. Cashier’s cheque – This cheque is given by the bank or a financial institution and signed by the cashier of the bank, shifting the burden on the bank to handle the funds. When the amount involved in a transaction is large, such as buying a property or an asset, a cashier’s cheque is required. 
3. Payroll cheque –  A payroll cheque is also called a paycheque issued by an employer to compensate the employee for their work. It includes hours worked, employees’ pay, and distributing payments. However, in recent years, paycheques paved way for direct deposit systems and other forms of electronic transfer
4. Bounced cheque – The cheque cannot be negotiated when it is written for an amount larger than what is in the bank account of the drawer. This is referred to as ‘cheque bounce’ because it cannot be processed further owing to insufficient funds in the account. A bounced cheque is bound to incur a penalty fee to the drawer and sometimes even to the payee.

Advantages of using cheques

1. Simple: It is easier for some companies, particularly small ones or startups, to receive cheques as payment since they can leave the processing end to the bank instead of having to handle it themselves.
2. Leeway of funds: Cheques require some time to clear. For small businesses, this is a positive aspect. In case of financial emergencies, the companies will have some lines of credit to fall back on during this period. You can then arrange for funds to make sure that the cheque clears. 
3. Rectification of wrong transactions: Usually, it takes time for a cheque to be processed after it is written and deposited in a bank. If it is discovered that the cheque is not approved or that any of the data given is incorrect, it can be rectified before it gets cleared. However, because electronic transaction techniques are instantaneous, the procedure for resolving a problem can be more time-consuming.
4. Widens customer base: It is important to remember that many people still prefer cheque payments. They could potentially be having technical difficulties with their online payment alternatives. The customer base becomes limited when the business refuses to consider opportunities such as cheque transactions. Due to limitations in the payment methods allowed, there may be a postponement of the conclusion of a contract. Because you include those who are more comfortable with cheque transactions, your consumer base expands as well.

Disadvantages of using cheques

1. Potential fraud: Despite the security risks of internet banking, check fraud still accounts for a significant portion of all financial fraud. Someone can write and sign a check with ease, but it can be tough to track down. It’s incredibly difficult to recoup cash once they’ve been gained in this way, whether it’s by someone writing false cheques from the company or receiving bogus cheques for payments.
2. Time for clearance: Many checks can take up to five days to clear, which means we have to wait for the money to arrive in our bank account. If we need money to keep our firm running, this is not an ideal option.
3. Cheques may be returned or stopped: If we are into the business of selling, this is a critical consideration. The consumer or client might pay with a check and then pick up the products. They may then refuse to pay or may not have sufficient funds in their account for the cheque to clear. In that scenario, you will be responsible for paying for the goods. In most situations, recovering funds from such clients is likewise a lengthy process.
4. Book-keeping: Whenever a cheque is written, we have to make a note of the cheque number as well as the account holder’s information. Otherwise, we will have to wait until the cheque clears before we can see the transaction information on our account statement. However, when we employ electronic banking techniques, we get records very quickly as we will receive a transaction ID as well as full payment details via SMS or email. It can be extremely useful if a transaction becomes disputed in the future.
5. Reapply for cheque books: If we run out of cheque leaves in a chequebook, we will need to apply for a new one, especially when there are huge transactions. We  must also collect these cheques in person or create an authorisation letter allowing someone else to do so on our behalf.

Crossing of cheques

A cheque can be either open or crossed. An open cheque is the bearer cheque payable on the counter when presented by the payee to the paying bank. On the other hand, a crossed cheque is not payable on the counter but collected through a banker, which is then transferred to the payee’s bank account. By crossing a cheque, an instruction is given to the paying banker for payment to a particular banker and not over the counter. This not only provides security for the amount but also traces the person receiving the cheque. The inclusion of words like “Not negotiable” or “Account payee only” is necessary, and restricts the negotiability of the cheque. However, a crossed bearer cheque can be negotiated by delivery and a crossed order cheque by endorsement and delivery. 

There are four types of crossing cheques dealt with under Sections 123-131A of the Negotiable Instruments Act:

1. General crossing – An addition of two parallel transverse lines across the face of the cheque. The words ‘and Co.’ or ‘not negotiable’ between them. The money is payable to any banker and for this purpose, two parallel transverses are necessary. The holder of the cheque will also receive the cheque through an authorised bank. The words ‘not negotiable’ is significant as they restrict the negotiability and the transferee will not be given any title better than that of a transferor. 
2. Special crossing – In special crossing, the words ‘not negotiable’ is not required but the addition of the banker’s name must be on the face of the cheque. The paying bank will pay the banker whose name appears in the crossing or to his authorised agent. Therefore, the paying banker is entitled to honour only the name of the bank mentioned in the crossing and not otherwise. 
3. Account payee crossing – This type of crossing restrains the negotiability of the cheque. It instructs the collecting banker that the amount should be credited only to the payee’s account or his agent. When a collector transfers the credit of the cheque bearing crossing to any other bank account, he shall be guilty of negligence. 
4. Non-negotiable crossing – Non-negotiable crossing cheque is transferable and the person who takes the cheque with general or special crossing with the words ‘not negotiable’ is not entitled to give a better title than the person from whom the cheque has been taken at the time of transfer. However, a non-negotiable crossing cheque takes away the essential character of that of a person who receives it in good faith for a value without knowing the defects in the title and before maturity, gets a good title to the instrument. It ensures that both titles of the transferor and transferee are good and prevents any taint that may be in the title. 

Sample cheque

UTI Bank     (125678) KARAMANA                              KAIRALI PLAZA, NH-47, KARAMANA                          __ __ __ __ __ __ __ __            THIRUVANANTHAPURAM – 695002                              D  D   M  M   Y  Y  Y   Y            IFS CODE: SBIN0011234 PAY _____________________________________________________________ OR ORDER RUPEES  ______________________________________________________________Rs. 50,000 /- A/c No.00012222345656767MULTI-CITY CHEQUE Payable at Par at All Branches of UTI                                Please sign 560049 798062 256587 0654498 31

*Disclaimer: This is just a sample of how a cheque is written.

Section 138 of the Negotiable Instruments Act, 1881    

Sections 138 – 142 of the Act deal with penal provisions of negotiable instruments to ensure that obligations undertaken by issuing cheques are honoured. Section 132 provides the ingredients for filing cheque dishonour cases. They are:

1. a person must have drawn a cheque for discharging his liability or debt;
2. the said cheque must have been presented to the bank within three months;
3. it has been returned by the restricts to insufficient funds or that it exceeds the amount to be paid from that account of the bank;
4. the payee has demanded the money within fifteen days of the receipt of information by him from the bank about the return of the cheque as unpaid, and
5. the drawer fails to pay on the payee’s demand within fifteen from the date of the said notice.

Procedure followed in complying with Section 138 of the Act is as follows:

1. A legal notice is issued to the drawer of the cheque within fifteen days of dishonour of the cheque through a registered post with all relevant details and facts. The drawer is given a further period of fifteen days to make the payment and if the payment is made, the matter gets settled. On the other hand, if payment is not made, criminal proceedings under Section 138 of the Act will be initiated against the drawer in a magistrate’s court within the jurisdiction. 
2. The complainant is then required to appear in the witness box and provide details for filing the case. The court will then issue summons to the accused for appearing before the court. 
3. If the accused failed to appear after issuing summons, the court may issue a bailable warrant, and subsequently, a non-bailable warrant may be issued if the accused does not appear. 
4. Once the drawer appears, he may file a bail bond to ensure he appears during the trial. After which, the plea of the accused is recorded. If he pleads guilty, the court will decide his punishment. In denial of his charge, he will be served with a copy of his complaint. 
5. The complainant will then place evidence and so will the accused with all the supporting documents. Cross-examination takes place after this process. 
6. After final arguments, the accused may be acquitted or convicted. If convicted, adequate punishment is given. If the accused is not satisfied with the judgement, he may go for an appeal in the Sessions Court. 

Bill of exchange 

When goods are sold or bought for cash, payment is received immediately. However, when goods are sold/bought on credit, payment is deferred until a later date. In such a situation, generally, the firm relies on the part of the buyer. In general, the company relies on the party to pay on the due date. To avoid the possibility of any delay or default, some firms use an instrument of credit through which the buyer assures the seller that payment will be made following the agreed terms. In India, instruments of credit have been used in the form of Hundies written in Indian languages since time immemorial. Now, the credit instruments are called Bill of Exchange, containing an unconditional order, signed by the maker to pay a sum of money on a certain date. Bill of Exchange is governed by the Negotiable Instruments Act, 1881

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. 

From this definition, the following characteristics of a bill of exchange can be inferred:

1. It must be in writing;
2. It is a demand or order to make payment;
3. It is unconditional;
4. It must be signed by the maker;
5. The payment that is to be made must be complete;
6. It must be payable to a certain person;
7. It may be paid either on-demand or on the expiry of a fixed time and;
8. It must be duly stamped as per the law.

In most cases, a bill of exchange is served and drawn by the creditor upon his debtor. The exchange amount is payable either on-demand or on the expiration of a set period. 

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 he 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 has 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

1. It is an instrument in writing;
2. It is drawn for a specific amount on a specific person;
3. It should be certain and agreed upon by both the parties;
4. It contains an unconditional order to a person, ie., drawee;
5. It specified the date on which the bill matures;
6. It is signed by the maker(drawer) of the bill;
7. It mentions the name of the bearer of the bill; 
8. It creates trust between the parties to the transaction; 
9. It is properly revenue stamped;
10. It must be paid in the legal currency of the country. 

Parties to a bill of exchange 

There are three parties to a bill of exchange:

1. Drawer – A bill of exchange is created by a drawer. A seller/creditor who is entitled to money from the debtor might issue the buyer/debtor with a bill of exchange. After drafting the bill of exchange, the drawer must sign it as the bill of exchange’s maker.
2. Drawee – The person on whom the bill of exchange is drawn is known as the drawee. The buyer or debtor of the commodities on which the bill of exchange is drawn is known as the drawee.
3. Payee – The payee is the individual who will receive the money. If the drawer of the bill retains it with him until the day of payment, he will be the payee. In the following circumstances, the payee may change: 

(i) if the drawer has received the bill discounted, the person who discounted the bill becomes the payee;

(ii) if the bill is endorsed in the drawer’s creditor’s name, the drawer’s creditor becomes the payee.

Types of bill of exchange

1. Documentary bill of exchange: A documentary bill is a bill of exchange that is always accompanied by supporting documentation that establishes the validity of the trade or transaction that has taken place between the seller and the buyer. Invoices, receipts, bills of lading, railway bills, and other papers may be included. Documentary bills of exchange can be further divided into – 

1. Documents against acceptance bills(D/A): A D/A bill refers to papers that are only given in exchange for the acceptance of a bill to the drawing. Following the transmission of documents, the bill is nullified or becomes obvious.
2. Documents against payment bills(D/P): A D/P bill is one in which documents are supplied in exchange for payment of a bill. The banker keeps the documents once they’ve been delivered until the bill’s maturity date.

2. Demand bill: A demand bill is a bill that is payable on demand or when it is presented for payment, because the demand bill does not include a payment due date or time, the payment can be made at the time the bill is presented.

3. Inland bill: An inland bill is a bill drawn in India and payable exclusively in India or a bill written by an Indian resident in India or any other country. The domestic bill is the polar opposite of the foreign bill.

4. Usance bill: This is also known as a time bill because it is a bill that specifies the time for payment as the exact time and term indicated on the usage bill, it is considered a time-bound charge.

5. Clean bill: Clean Bill refers to a bill that has no supporting documentation. Because there are no documents involved, clean bills have a higher interest rate than regular documentary bills.

6. Foreign bill: A foreign bill of exchange is drawn and paid outside India. That which is not an inland bill is termed a foreign bill. It can be further divided into

1. Export bill: A bill of exchange drawn by an exporter for a party outside India is termed as an export bill.
2. Import bill: A bill of exchange drawn by an exporter outside India is called an import bill.

7. Accommodation bill: The term accommodation bill refers to a bill of exchange that is drawn and accepted for mutual assistance. Without a business transaction, this bill is for mutual benefit. There is no sale or purchase of goods or services involved. This bill contains an agreement between two parties to provide financial assistance to others.

8. Trade bill: A trade bill is a bill of exchange that is drawn and accepted to settle a trading transaction. The seller of the goods creates this bill of exchange, which the buyer accepts.

9. Supply bill: A supply bill is a bill that is drawn on a government agency by a supplier or contractor to deliver certain goods. The purpose of supply is to collect cash from financial institutions in exchange for pending payments to meet financial obligations. Government departments normally do not accept this type of business, but due to its non-negotiable characteristics, it is suitable for cash loans from commercial banks.

10. Fictitious bill: A bill in which the name of either of the party that is drawer or drawee or both are fictitious, is termed as a fictitious bill.

Working of a bill of exchange

The drawer hands the bill to the drawee, who signs it and seals it with an official stamp. As a result, the bill becomes a tradable instrument. The creditor can now collect this instrument and exchange it for cash by extending a bank or a corporation by paying a commission. This process is known as discount. Before the due date for payment, the bill may pass through multiple hands before the debtor or drawee pays the sum agreed upon between them.

Sample bill of exchange

Bangalore 17th April 2022 Rs. 1,00,000 Two months after the date, pay to me or my order, the sum of Rupees One Lakh Only, for valued received STAMP Accepted                                                                                                                                (Signed)(Signed)                                                                                                                                   KarthikKiran                                                                                                                                     MG RoadBanaswadi, Bengaluru – 560043                                                                           Bangalore- 560001

*Disclaimer: This is just a sample of how a bill of exchange is written.

Advantages of a bill of exchange

Bills of exchange are commonly used as credit instruments in business because of the following benefits:

1. Relationship structure: A bill of exchange is a device that provides a framework for enabling a credit transaction on an equitable basis between the seller/creditor and the buyer/debtor.
2. Clarity of terms and conditions: Just as the creditor knows when he will receive the money, the debtor is fully aware of the date by which he must pay the money. This is because the bill of sale clearly states the terms and conditions of the debtor-creditor relationship, such as the amount due, the due date, the interest to be paid if any, and the payment location.
3. Convenient means of credit: A bill of exchange is a convenient form of credit that allows a buyer to purchase things on credit and pay off the balance at the end of the credit period. Even after the credit has been extended, the seller of goods can obtain payment promptly by discounting the bill with the bank or endorsing it in favour of a third party.
4. Conclusive proof: The bill of exchange is legal documentation of a credit transaction, implying that the buyer purchased by the credit of the seller of the goods in the course of the trade and is consequently obligated to pay the seller. When the debtor refuses to pay, the law requires the creditor to seek a certificate from a Notary for it to be conclusive proof. 
5. Easy Transferability: A bill of exchange can be used to satisfy a debt by transferring it through endorsement and delivery. 

Disadvantages of a bill of exchange

1. Bill of exchange can be availed only in large companies dealing in huge transactions. 
2. They are used only for availing short term services and are not considered a good option for banking services.
3. The discount allowed for this instrument becomes an additional cost for the drawee.
4. It is burdensome for the drawee to make the payment as the time of payment is fixed. 
5. When there are chains involved, the regulating laws that apply to all relevant parties (drawer, payee, and drawee) are often highly difficult. The legality of a contract is determined by many variables, including the nature of the parties, their location, and so on, and it must be applied in each local jurisdiction.

Maturity of a bill of exchange

The day on which a bill of exchange becomes due for payment is referred to as maturity. The grace period of three days must be added to the date on which the period of credit expires before the instrument is payable to arrive at the maturity date. For example, if a bill dated March 5th is payable 30 days after the date, it is due on 7th April, which includes the grace period. If the maturity date falls on a weekend or holiday, the instrument will be due the next business day. If 7th April falls on a public holiday, the maturity date will be 6th April in this situation. However, if the Government of India declares an emergency holiday under the Negotiable Instruments Act 1881 on a day that happens to be the day of maturity of a bill of exchange, the date of maturity will be the next working day after the holiday. Because 7th April was declared a holiday under the Negotiable Instruments Act, 8th April will be the day of maturity for a bill of exchange. 

Discounting and endorsement of a bill of exchange

If a holder of the bill needs money, he can go to the bank and have the bill encashed before the due date. The bank will pay the debt after deducting a certain amount of interest (called a discount in this case). Discounting a bill refers to the procedure of encashing it with a bank. On the due date, the bank receives the funds from the drawee. A bill may be transferred by any bearer unless it is restricted, i.e., the bill has been drafted to include words restricting its transfer. The drawer can initially endorse the bill by signing it and adding the name of the person to whom it is being transferred at the back of the bill. The act of signing and transferring the bill of exchange. 

Noting charges

On the due date, a bill of exchange should be properly provided for payment. If the bill is not properly presented, the drawee is discharged from his obligation. The bill should be properly presented to the acceptor on the maturity date during business hours. It may be preferable to have the bill noted by a Notary Public to establish beyond a reasonable doubt that the bill was dishonoured despite its proper presentation. The act of noting confirms the truth of dishonour. The Notary Public charges a fee known as Noting Charges for providing this service. The Notary usually takes note of the following aspects:

1. The date, fact, and cause for the dishonour;
2. If the bill is not expressly dishonoured, the reasons for the same, and;

      (c) The amount of noting charges.

Renewal of a bill of exchange

When the acceptor of a bill anticipates that meeting the payment obligation on maturity will be difficult, he or she may contact the drawer with a request for an extension of time to pay. If this is the case, the old bill is cancelled, and a new bill with updated payment terms is drafted, accepted, and delivered. This is referred to as bill renewal. The bill does not need to be noted because the cancellation is mutually agreed upon. For a long duration of credit, the drawee may be required to pay interest to the drawer. The interest is paid in cash or may be added to the new bill’s total. Occasionally, a portion of the sum due may be paid and a new bill may be drawn only for the balance sum. For example, a Rs. 10,000 bill may be cancelled in exchange for Rs. 3,000 cash payment and the receipt of a new bill for the balance of Rs. 7,000 plus interest, as negotiated between the parties. 

Retiring of a bill of exchange

A bill of exchange can be negotiated to be retired before the due date by mutual agreement between the drawer and the drawee in some cases. This occurs when the bill’s drawee has funds available and requests that the drawer or holder accept payment of the bill before its maturity date. The bill is said to be retired if the holder agrees to do so. The retirement of a bill puts an end to the bill’s transactions before its usual term expires. To encourage this, the holder offers a Rebate on bills for the period between the date of retirement and maturity. The rebate is based on a percentage of the purchase price. 

Liabilities of the parties to negotiable instruments

The provisions concerning the liabilities of the parties to the cheque are mentioned under Sections 30 to 32 and 35 to 41 of the Negotiable Instruments Act, 1881. 

1. Liability of the drawer (Section 30) – A drawer is a person who signs the cheque instructing the bank to pay the cheque amount to the payee. The drawer is responsible to compensate the amount to the holder in case of dishonour of cheque or bill of exchange on duly receiving the notice of dishonour. 
2. Liability of the drawee of cheque (Section 31) – The banker to whom the cheque is presented, will always be the drawee. When the cheque is drawn on a specified banker by the drawer, the banker is bound to pay the amount of the cheque and for which the following conditions have to be satisfied:
   (i) the drawee should have a sufficient amount of funds to the credit of the drawer’s account;

(ii) Such funds    are to be used only against the payment of the cheque amount and be free from liens;

(iii) The cheque must be duly paid during the banking hours on the date on which it is made payable; and

(iv) The drawee is responsible to honour the cheque, failing which it shall be liable for damages. 

3. Liability of the acceptor of a bill (Section 32) – Section 32 of the Negotiable Instrument Act states that in the absence of a contract to the contrary, the acceptor of the bill is liable to pay the amount thereof at maturity. The amount shall be paid as per the apparent tenor of the note to the holder on demand. The liability of the acceptor is unconditional and absolute subject to a contract on the contrary and may be modified by a collateral agreement. 
4. Liability of the endorser (Section 35) – The one who endorses and delivers a negotiable instrument before maturity is called the endorser. He has a liability to the parties that are after him for payment and also in case of dishonour of the instrument by the drawee to compensate such holder of loss or damage caused due to such dishonour after satisfying the following conditions:

(i) there shall be no contract to the contrary;

(ii) the endorser has not expressly excluded or limited his the liability; and

(iii) such endorser shall duly receive the notice of dishonour.

5. Liability of prior parties (Section 36) – The prior party includes the drawer, the acceptor, and all the intervening endorsers. Every prior party to a negotiable instrument has a liability with the holder in due course until the instrument is duly satisfied. The holder in due course may declare any or all prior parties liable for the amount in case of dishonour. 
6. Liability of the acceptor in forged endorsement (Section 41) – The acceptor is not relieved of any liability if the bill of exchange endorsed is forged, accepted with or without the knowledge of forgery at the time of acceptance of the bill.

Similarities between cheque and bill of exchange

1. Both cheque and bill of exchange are negotiable instruments.
2. Addresses the drawee to make the payment.
3. Both are instruments in writing.
4. Signed by the maker of the instrument
5. Payable on express demand or order

Differences between cheque and bill of exchange

S.No.	Basis of difference	Cheque	Bill of exchange
1	Meaning	A cheque is a document, used to make payments on demand and can be transferred through delivery.	A bill of exchange is a written document that shows the indebtedness of the debtor towards the creditor.
2	Definition	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.	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.
3	Governing Section	Cheque is defined under Section 6 of the Negotiable Instruments Act, 1881.	Bill of Exchange is defined under Section 5 of the Negotiable Instruments Act, 1881.
4	Drawn	A cheque is drawn only on a particular banker.	A bill of exchange can be drawn on any person including a banker.
5	Validity	A cheque is payable on demand to the bearer and hence, it is valid	A bill made payable on demand is void as per Section 31 of the Reserve Bank of India Act, 1934.
6	Payability	A cheque becomes payable on-demand only.	A bill of exchange becomes payable on the expiry of a certain date or period.
7	Acceptance	A cheque does not need any acceptance per se from the payee.	Acceptance must be given by the drawee before he can be made liable on it.
8	Grace period	No grace period is allowed in case of payment being made by cheque for the simple reason that it is always payable on demand.	A grace period of three days is allowed while calculating the maturity date in the case of a time bill.
9	Discounting	A cheque cannot be discounted.	A bill of exchange can be discounted with a bank.
10	Stamping	Cheques need not be stamped before payment.	A bill of exchange must be sufficiently stamped before payment.
11	Notice	When a cheque is dishonoured, notice is not necessary.	Notice of dishonour is necessary in case of a bill of exchange.
12	Crossing	A cheque can be crossed to ensure payment to the rightful owner.	Crossing a bill of exchange is not allowed.
13	Dishonour	There is no protest or noting for the dishonour of a cheque.	The practice of noting and protesting is followed in case of dishonour of a bill.
14	Discharge from liability	The drawer of a cheque is not discharged by the delay of the holder in presenting it for payment.	The drawer of bills is discharged from liability if it is not duly presented for payment.

Conclusion

Both cheque and bill of exchange contain an unconditional order to pay a certain sum of money in favour of the person mentioned in the document. A cheque is not only used in business but government agencies, individuals and other institutions also undertake cheque transactions. However, a bill of exchange is the most commonly used instrument for business transactions.

References

• https://ncert.nic.in/textbook/pdf/keac108.pdf
• https://www.mondaq.com/india/financial-services/812822/section-138-of-negotiable-instruments-act-overview
• https://www.lexology.com/library/detail.aspx?g=c1f86808-e817-4ed7-ab7a-b6361d5c3c64
• https://keydifferences.com/difference-between-cheque-and-bill-of-exchange.html

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