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Cheques

Overview

Cheques are the oldest payment instruments developed by banks.  (Cash is older, but it was developed by rulers in most countries).  Cheques are widely used in the US, UK, France, Cyprus, Malta and Ireland.  Other EU countries have all but eliminated the cheque from common usage, and as a Euro country, Ireland will progressively come under pressure to follow suit.

The cheque is the only payment instrument which has it's own dedicated legislation.  The Cheques Act 1959 is mainly concerned with protection of bankers when paying cheques. The Bills of Exchange Acts of 1882 and 1909 also apply.

Cheques,  in the opinion of the EU Commission, arean unsatisfactory payment instrument for modern commerce - we agree with this view.  If you accept a cheque as a payment instrument, you do so on a basis of trust.  If you release goods on foot of a cheque, you do so on a basis of trust.  Cheques do not provide payment certainty.  So when you accept a cheque, you do not know for many days whether you have received actual payment or a worthless scrap of paper.

The main alternative for business transactions is credit transfer, which pays the funds from the payers account immediately.

About 60m cheques are issued in Ireland annually.  The usage of cheques by private individuals in Ireland has declined as the usage of cards and electronic payments has increased.  However, usage of cheques by businesses, especially for business to business payments is widespread, and seems set to continue for many years.

For business payments, the cheque provides a significant advantage over the alternatives - cheques are normally not presented for some days after the date of issue - thus providing a further extension of credit which may be important in many businesses.

There is a number of cheque-like instruments which have many of the features of cheques. These include bank drafts, government paying orders, postal drafts and money orders

The cheque described

The internationally accepted definition (BIS) of a cheque is:-

 "a written order from one party (the drawer) to another (the drawee, normally a bank) requiring the drawee to pay a specified sum on demand to the drawer or to a third party specified by the drawer. Cheques may be used for settling debts and withdrawing money from banks."

In practice, cheques are designed and issued by banks, or designed within standards agreed by banks.  The components of a cheque are:-

Item

Notes

Paper

The paper should conform to specified bank standards for weight, reflectivity and many other qualities

Background

The background of the cheque is usually printed in a feint ink to achieve:-

o      High level of security and show any attempted alteration

o      Low level of penetration when scanned electronically.  The cheque details will stand out clearly and uninterrupted by the design.  The design may include certain elements of the corporate logo of the bank

Bank Name and branch

The name and branch name of the bank and branch of the account-holder.  The logo of the bank will also be shown

Bank sort code

A six-digit branch code for the relevant bank branch.  For Irish banks, the code commences with the number 9

Date

A space is provided for the date of issuance of the cheque.  The date should not be used for any other purpose.  Post-dated cheques are not valid cheques, and all banks reserve the right to ignore the date. A cheque is regarded as out-of-date 6 months after the date shown on the cheque.  A bank will normally return a cheque unpaid if it is presented after that date, but it is not obliged to do so.  Normally, the drawer will be prepared to amend the date and initial the amendment, or alternatively, issue a new cheque.  If the drawer is not so prepared, then the payee can use the unpaid cheque to initiate court proceedings against the payee.

 

Pay -----------------------

A space is provided for the name of the payee.  If the payee is a limited company or other non-personal entity, then the cheque can only be paid into the account of the named payee. The payee of a cheque should be unambiguous.  If the payee is a legal entity, then the payee should be the full legal name of that entity (which might not be the trading name).  If the cheque is a response to an invoice, then the payee should match the header of the invoice.  A cheque can be used to withdraw cash from your own account, and so can be made payable to "cash".  For most people, there are better ways to withdraw cash, but some businesses wish to use a cheque to satisfy there own internal accounting systems.

Amount in writing and amount in words

Banking textbooks normally state that if the amount in writing differs from the amount in figures, then the amount in writing takes precedence.  However, the terms and conditions of all banks state that the bank may choose either amount in the event that amounts differ.

Medallion Stamp Duty

The cheque bears a design which shows that stamp duty has been paid.  The design consists of an Irish harp in a horseshoe shape, with the words IRELAND.  At the time of writing, the stamp duty is €0.50 per cheque.

Account name

The name of the accountholder

MICR line

A line of numbers in an unusual font (Known as Magnetic Ink Character Recognition MICR) consists of:-

o      Cheque Number – six digits of which the first digits may be zero

o      Bank sort code – two digits followed by a dash followed by 4 digits.

o      Account number – 8 digits

o      Transaction code – two digits.  This code will control the flow of the cheque through the banks book-keeping system and may define the bank charge to be applied.

o      Space – the rightmost part of the MICR line should be left blank.  This space may be used by the bank to print the amount of the cheque

Signature

The signature should conform with an agreement between the bank and the accountholder.  There is no way that the payee can be sure about the terms of such agreement

o      For a personal account, the signature is normally the signature of the accountholder. 

o      A cheque may be signed “per pro” the account-holder who has given such instructions to his bank

o      A cheque may be signed under power of attorney on behalf of an account-holder who is unable to sign due to illness.  Such power of attorney would be registered with the courts and notified to the bank

o      A cheque may be signed by means of a witnessed mark where the accountholder is illiterate or unable to sign

o      A cheque drawn on a joint account may require one, two, or more signatures

o      A company cheque may require one or more signatures as agreed with the bank.

o      A cheque drawn by a club normally requires the signature of the treasurer and one other officer

 

Crossing

Many non-personal cheques have a pre-printed crossing.  For the effects of crossings see the crossing section below

FAQ: If you write a cheque on an ordinary piece of paper, is it a valid cheque?

The question is probably irrelevant, since it is likely that neither a payee or a bank will accept it.  Legislation in this area pre-dates the era of computers, account numbers, cheque standards.  You might try seeking enforcement through the courts, but the courts are likely to regard such activity as vexatious, given that blank cheques are available from banks.  Furthermore, it would be difficult to comply with stamp duty requirements without the co-operation of the bank.  Our advice: don't try it except in extraordinary circumstances, e.g. bank strike.

Issuing a cheque

In some countries, it is an offence to issue a cheque if there are insufficient funds available in the account to pay it.  Not so in Ireland.  Nevertheless, issuing a cheque should not be done lightly.  It is a legal document in which you acknowledge that you owe funds to the payee; and even if you stop that cheque, it can be used against you subsequently in court.

Some years ago, the preprinted cheque carried the words on the payee line "Pay _______________________ or order" or even "Pay _______________________ or bearer".  These words implied that a cheque was a highly negotiable instrument.  You could issue a cheque to one individual, who might pass it on to another, and another, before it reached your account.  Nowadays, the negotiability of a cheque has been substantially limited in practice, and these extra words have been removed.

Crossing a cheque

Crossing a cheque reduces negotiability.  Legally, it's a bit complex.  If an uncrossed cheque issued by you is payable to Mr A, and he endorses it and gives it to Mr B, and the cheque later bounces, then Mr B can seek payment from either Mr A or from yourself.  If the cheque was crossed, Mr B's rights here would be reduced or eliminated, depending upon the precise nature of the crossing.  In simpler terms, the effect is that a bank, seeing a crossed cheque is immediately on guard, and will not cash it.  As mentioned above, the negotiability of a cheque has been progressively reduced in recent years, and banks, pubs, supermarkets, etc. are unlikely to cash a cheque nowadays in any case, and so the relevance of crossings is less than in the past.  Nevertheless, our advice is:-

 

  • Don't cash a crossed cheque; and definitely don't cash a cheque with a further limiting crossing e.g. a cheque crossed with the words "account payee only".

 

  • If you get a cheque from a credit union, it will likely not be crossed - keep it safe, treat it as cash

 

  • If you are issuing a cheque to a limited company, then crossing is irrelevant - the cheque must be lodged to the account of that company and cannot be negotiated.   

 

  • If you know that the payee does not have an account with a bank or credit union, then you may wish to make it possible for him to cash it; leave it uncrossed, but recognise the risk you are taking.  If the cheque falls into the hands of an unscrupulous person then he/she may be able to negotiate it in certain circumstances, and it may be difficult or impossible to recover the amount

 

  • If you are issuing a cheque to an individual who has a bank account, and there is a risk that the cheque might fall into wrong hands, then you should cross it.  You should cross it by putting two clear diagonal lines on the face of the cheque, with or without any of the following - usually also written diagonally:-

"& Co"  or "Not Negotiable - generally interpreted as requiring that the cheque should be lodged to an account

"Account Payee Only"   -requires that the cheque should be lodged to an account in the name of the payee

"Account payee only - XXX Bank, YYYY Branch  - requires that the cheque be lodged to an account in the name of the payee in the specified branch

Lodging a cheque

Cheques are accepted for lodgement at a bank for payment or for clearing.  Cheques drawn on accounts of the branch of lodgement are paid immediately. Other cheques may be passed through a clearing system and it may be a day or two before they are paid.  In the recent past, the distinction is more blurred as some banks clear all cheques within their own branch network immediately.  This means that if a cheque drawn on AIB Stillorgan is presented in AIB Donegal, it will normally be paid immediately.

Whether the cheque is cleared immediately or later, the proceeds are credited to your account immediately, and show in your bank balance.  But the bank retains the right to demand their money back (usually by debiting your account) if the cheque bounces.  So to cover themselves, banks may restrict your ability to withdraw until the cheque has been cleared.  Such restriction may last for up to 5 days.

Draft European legislation entitled "New legal framework for payments" appears to say that when funds are shown in the account, a bank cannot restrict payment.

Unpaid (Bounced) cheque

There is a range of circumstances in which a cheque is unpaid (bounced).  The unpaid cheque is returned to the payee with a message written on it.  The following table shows some of the most likely messages:-

Category

Message on cheque

Explanation

What the payee might do

Unsatisfactory mandate situations

 

"payment stopped"

The drawer (issuer) of the cheque has instructed his bank to stop the cheque. 

Stopping a cheque is normally a consequence of a very fundamental dispute between drawer (issuer) and payee.  The underlying cause of the dispute should be addressed. Contact the drawer (issuer).  The unpaid cheque should be retained by the payee, as it may be valuable if legal proceedings follow.

"amounts differ"

The amount in words differs from the amount in figures

Greater vigilance when accepting cheques in future.  Contact the drawer (issuer).  Ask the drawer (issuer) to issue a new cheque.

"post dated"

The date on the cheque is subsequent to the date of presentation.  This may be a deliberate delaying tactic by the drawer (issuer), or may be accidental.

Greater vigilance when accepting cheques in future.  Contact the drawer (issuer).  Ask the drawer (issuer) to issue a new cheque.  Or...hold the cheque until the relevant date and re-present it in a lodgement

"out of date"

The date on the cheque is more than 6 months previous to the date of presentation.  This may be accidental - drawers frequently put the old year in the early days of a new year.  Bankers normally assume that such wrong dating in January is accidental if everything else about the cheque is OK - but if there are multiple reasons to bounce the cheque, the least damaging message will normally be shown.  So a cheque bounced "out-of-date" in Jan 2007 with a date shown as Jan 2006, may suggest a greater underlying problem.

Contact the drawer (issuer). Ask the drawer (issuer) to issue a new cheque.

"no signature"

Self-explanatory

Contact the drawer (issuer). Ask the drawer (issuer) to issue a new cheque.

"not drawers usual signature"

Usually indicates a forgery -

Contact the drawer (issuer) first - then contact the police.

"requires second signature"

I am constantly amazed that the signature requirements are not printed on cheques requiring more than one signature

Contact the drawer (issuer). Ask the drawer (issuer) to issue a new cheque.

"drawer deceased"

The mandate of a cheque expires on the death of the drawer (issuer), even if the cheque was issued during the life of the drawer.

Contact the legal representatives of the deceased. The unpaid cheque should be retained by the payee, as it may be valuable if legal proceedings follow.

Destination account issues

"account closed"

"account transferred"

The drawer has closed or transferred his account

Contact the drawer (issuer). Ask the drawer (issuer) to issue a new cheque. 

Funds-related issues

"refer to drawer" or

"refer to drawer - present again"

Normally indicates that there are insufficient funds available in the account

Contact the drawer (issuer). Seek payment by other means. The unpaid cheque should be retained by the payee, as it may be valuable if legal proceedings follow.

Stopping a cheque

Stopping a cheque means countermanding the order which the cheque represents.  A cheque can only be stopped by the drawer (issuer) of the cheque.  To stop a cheque, you must notify your bank in writing, specifying the details (including cheque number, account number) of the cheque to be stopped.

Your notification of the stopping of the cheque must reach the account-holding branch before the cheque is presented.  Remember that this presentation may be electronic, and the physical cheque may be elsewhere.

Stopping a cheque should be considered only as a holding measure.  Remember that the bank returns the stopped cheque to the payee, and he may use it in legal proceedings against you.  You should therefore address the issue which gave rise to the stopping of the cheque.

Unpaid cheque - refer to drawer

"Bouncing" is the commonly used term which bankers refer to as "returning a cheque unpaid"

"Refer to drawer" is the term used by bankers when returning (bouncing) a cheque (or other payment instrument") when the cheque cannot be paid from the drawers account due to insufficient funds being available in the account.  Other forms of bouncing will be discussed in the next section below.

Unpaid cheque - the drawers (issuers) perspective

 

  • The "funds available" in the drawers account is the sum of (1) any credit balance in the account (2) any agreed overdraft facilities arranged in agreement with the bank and (3) any further overdraft which the bank may at its discretion allow.

 

  • If a cheque is presented, and there are insufficient funds to meet it, the bank must make a decision whether to extend further overdraft facilities or to unpay (bounce) the cheque.  Although there is no obligation to do so, the bank will normally attempt to contact the drawer before bouncing the cheque.  The decision may be made at any time, but not later than close of business on the day following the day on which the cheque was presented at the drawers bank (electronically of physically)

 

  • The drawer (issuer) of the cheque will be charged a penalty charge by his bank.  (The payee will also be subject to a charge).

 

  • He will undoubtedly be contacted shortly by an irate payee.

 

  • The payee may use the unpaid cheque to support a request for a court order against the drawer.

 

  • The payee may present the cheque again at a later date

Unpaid Cheque - the payees perspective

 

  • If a cheque is lodged on Monday, then, in normal circumstances, it should reach the drawers (issuers) bank by Wednesday.  That bank may hold it until Thursday before returning it unpaid "refer to drawer" to the payee's bank.  The payee's bank will send it to the payee, who will likely receive it on the following Monday.  The period may be longer if there are public holidays, postal delays, etc. If the cheque was lodged (by credit transfer) through a bank or branch other than the payee's branch then a further delay may arise.

 

  • The payee's account will be debited with the amount of the cheque (to cancel the amount of the lodgement)

 

  • The payee's account will also be debited with a handling charge.

 

  • If the payee can get assurances that the account has now been funded sufficiently, the payee may present the cheque again.  Usually, not more than one representation will be permitted.

 

  • The payee can initiate proceedings for enforcement of the payment.  This is done using the services of a notary public.  Many solicitors are notaries public.

Unpaid cheque - the bankers perspective

 

  • The bankers duty of care extends to the care of the reputation of his client, but also extends to his duty to ensure that the banks funds are protected.

 

  • When deciding to bounce a cheque (return it "refer to drawer"), the banker will have regard to the financial position of the customer, previous experience with this customer, and the impact of the decision.

 

  • If multiple cheques are presented simultaneously, then the banker may have to decide to pay some and bounce others.  Such decision should have regard to the interest of the customer.  For example, he may have to choose between bouncing one large cheque or five smaller ones.  All other things being equal, he will likely bounce the large one, since it only impacts the relationship with one payee.  On the other hand, some cheques may be more important than others - bouncing them may result in the cutting off of vital services to the payee.