Define 'Bill of Exchange'. How is it different from 'cheque'?

To understand a cheque, one must first understand a bill of exchange, because a cheque is not a separate animal — it is a species of bill of exchange, carrying all its essential DNA but with two defining attributes that mark it apart from the genus. The relationship between the two instruments is best captured in the elegant phrase: all cheques are bills of exchange, but not all bills of exchange are cheques.

The Bill of Exchange Defined

Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as "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."

At its heart, a bill of exchange is an order — a command by the drawer to the drawee. It involves three necessary parties: the drawer, who creates the instrument and signs the order; the drawee, the person upon whom the order is drawn; and the payee, the person entitled to receive payment. The drawee becomes the acceptor upon writing his assent on the bill. As the section further clarifies, the certainty of sum is not defeated merely because it includes future interest, is payable at an indicated rate of exchange, or provides that on default of an instalment the entire balance becomes due — all these are situations of calculable certainty, and the law does not treat them as uncertainty.

The essentials that emerge from a careful analysis of Section 5 are: (i) the instrument must be in writing; (ii) it must contain an order to pay — imperative in nature and not a mere request; (iii) the order must be unconditional; (iv) the drawer must sign it; (v) the drawee must be a certain person; (vi) the sum payable must be certain; (vii) the payment must be in money and money alone; and (viii) the payee must be certain. The Calcutta High Court in CC Sinha v Bidhu Bhusan De (AIR 1955 Cal 562) emphasised that an essential character of a bill is that it must contain a direction to accept or to pay, and the absence of such a direction is fatal. An instrument expressing, "I will be highly obliged if you make it convenient to pay," is not an order — it is a request, and the law of bills does not recognise requests.

The Cheque Defined

Section 6 of the Act, as amended by the Amendment Act of 2002, defines a cheque as "a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand," and expressly includes the electronic image of a truncated cheque and a cheque in the electronic form.

The definition thus builds upon Section 5, and two additional qualities are grafted onto the bill of exchange to transform it into a cheque: first, the drawee must be a specified banker — not just anyone, but a banker specifically; and second, the instrument must be payable on demand only. As the Delhi High Court held in Shree Tyres v State (2020 SCC OnLine Del 929), to qualify as a cheque, an instrument must first satisfy all five conditions of a bill of exchange under Section 5, and additionally, the direction to pay must be given to a specified banker. The cheque, therefore, is a bill of exchange with a narrowed constituency.

The Supreme Court addressed the peculiar nature of a post-dated cheque in Anil Kumar Sawhney v Gulshan Rai (1993 4 SCC 424), holding that a post-dated cheque is only a bill of exchange when written or drawn — it becomes a cheque only on or after the date it bears. This is because until that date, it is not payable on demand, and that quality — payability on demand — is what distinguishes a cheque from an ordinary bill.

The Points of Distinction

The differences between a bill of exchange and a cheque are not merely definitional — they carry significant legal consequences in the areas of acceptance, presentment, liability, and banking protection.

The reason why a cheque does not require acceptance was eloquently explained by Parke B in the Privy Council judgment in Ramchurn Mullick v Luchmeechand Radakissen (1854 9 Moo PC 46) — a passage of enduring authority. He observed that a cheque "is a peculiar sort of instrument, in many respects resembling a bill of exchange, but in some entirely different. In the ordinary course it is never accepted; it is not intended for circulation; it is given for immediate payment; it is not entitled to days of grace." In other words, a cheque is treated more like an appropriation of money already in the banker's hands, and the drawer is in substance the person primarily liable — much like the maker of a promissory note or the acceptor of a bill.

One must also bear in mind that the absence of the drawee's name on an instrument disqualifies it from being either a bill of exchange or a cheque. As the Gujarat High Court held in Nikhil P Gandhi v State of Gujarat (2016 SCC OnLine Guj 1856), where the drawee's name is not written in the instrument, that instrument cannot be termed a bill of exchange, and consequently a signed blank cheque leaf is not, strictly speaking, a cheque under Section 6 — it is merely a leaf bearing a signature.