Difference between cheque and bill of exchange

Cheque Bill of Exchange

Meaning
The Cheque is a document which contains an A bill of exchange is a negotiable instrument
order to a bank to pay fixed amount of money which orders to drawee to pay a fixed amount of
from the account of the client money to payee on demand
Existence
A cheque exists in section 6 of the Negotiable A bill of exchange exists in section 5 of the
Instruments Act, 1881. negotiable instruments act, 1881.
Grace period
A cheque has no grace period once it is presented A bill of exchange has three days of grace
for the payment. period.
Approved
A Cheque does not need any approval from the A bill of exchange needs an approval from the
parties before presented for payment. drawee for the payment.
Validity
A bill of exchange has no validity for the
A cheque has a validity of 3 months.
payment.
Liability
In the bill of exchange, the parties who do not
Parties remain liable to pay also in case notice of
get notice of dishonour are free from the liability
dishonour is not given.
of paying.
Notice of Dishonour
In a bill of exchange, notice of dishonour is
In cheque, notice of dishonour is not compulsory.
mandatory.

As bill of exchange is not payable on demand, it is mandatory on the part of the drawee to
provide the money to the drawer as it is an unconditional order.

Another important factor is that bill of exchange has a grace period of 3 days, after which it
becomes mandatory for the drawer to get the amount as specifically stated in the bill of
exchange. As the cheque bounce is mulled to be decriminalised, bill of exchange can be a
suitable option as after the grace period, the drawer becomes fully entitled to the stated
amount.
EFFECTS OF CRIMINALISATION OF CHEQUE BOUNCE:

India ranks poorly on many counts in the Doing Business 2013 report. Of the 10 indicators
tracked by the report, India's rank is worst in Enforcing Contracts, where it is ranked 184th
out of 185 countries:

1. It takes 1,420 days to resolve a contract dispute.

2. 39.6 percent of the contract value is lost, of which 30% is paid out as fees to lawyers.
3. Even after getting a judgment in your favour, it takes 305 days to enforce the
judgment.
Given the absence of good contract enforcement, after 1988, cheques were often used by the
recipient of funds to create a deterrent against reneging. A common method of ensuring
regular payment of rent is to use post-dated cheques. The landlord takes the entire year's rent
in post-dated cheques. This allows the landlord to bypass the entire rent-controller and court
system for evictions when rent is not paid on time. With the voucher from the bank
(recording the dishonouring of the cheque), the landlord can file a criminal complaint against
the tenant.

This is a bad system of contract enforcement. It is biased towards the party which expects
payments and has no remedy to the party which is getting a service or good. As an example,
if the tenant sets off some rent because of mandatory repairs which the landlord failed to
carry out, the tenant is perfectly allowed to take a defence of `set-off' in a contractual
relationship. However, underlying the NI act is a presumption of debt, which will let the
criminal case continue till the tenant is able to establish that there had been a valid set-off.

On a similar note, while the existing Section 138 of the NI Act is a draconian idea and bad in
many ways, it has interesting positive effects when placed in an environment of bad contract
enforcement. Consider the penalties for bouncing a cheque:

1. Imprisonment for up to 2 years, or,

2. Fine up to twice the amount involved, or,
3. Both of the above.
This is draconian, but there is considerable legal certainty. In contrast, when a contract is
violated, there is no statutory method for calculating the amount of damages that the violator
has to pay. Given the delays in contract resolution, and the legal and administrative costs,
which are usually not awarded, the net receipt is generally much lower than the amount
owed. Indian courts are not bound by a strict statutory requirement of calculating litigation
costs and interest accrued is rarely granted from the date of dispute.

CONSEQUENCES FOR COURTS:

The proposed withdrawal of section 138 of the N.I. Act has not adequately been thought
through, in terms of the implications for the judiciary and the legal system. It is being argued
that for many cases, arbitration will be done. However:

1. What about the increased civil court burden? Post-dated cheques were used as a
substitute for contract enforcement services of civil courts. When this mechanism is no longer
available, there will be a surge in contract disputes. This flow of cases will atleast partially
counteract the de-bottlenecking of courts that will come from removing cases associated with
S.138.
2. Where will we get the increased number of arbitrators? There are very few arbitrators
in India, and there is no institutional system of providing arbitration services outside the
larger cities.
3. Who will bear the costs? The costs of arbitration are very high in India. While it may
be appropriate for large businesses to internalise their dispute resolution mechanisms, smaller
businesses should have access to a court system.
4. Will arbitration be faster? There is no standardised procedure in the arbitration
system in India for cheque bouncing cases. Evidentiary and procedural variety will lead to
more challenges in appeal and increase the burden of the judiciary where every appeal will
have to be checked for procedural propriety.
 5. Does the judiciary have the bandwidth to cope with the case load that will appear for
review? Orders of arbitrators will be appealed to the higher judiciary. In many cases the
courts will have to intervene to appoint arbitrators.
6. Will people write more bad cheques? The authority of the arbitration system is based
on the efficiency of the court system. The rational violator knows that the arbitral award will
go to the same over-burdened judiciary where penal costs are rarely imposed, so there will be
little incentive to honour arbitration awards.

CONSEQUENCES OF DEFAULT ON LOAN RE-PAYMENT

1. General Consequences
1. Late payment fees and penalties – If one is late in paying your EMI, a late fee will
naturally be charged which can be pretty high or his/her interest rate can get inflated with
penalty charges.
2. Loans Interest rate increase in case of credit card payments (unsecured loans)  – For
unsecured loans which are given to one without any collateral, like personal loan or credit
cards, the interest rate might shoot up when he/she misses an EMI payment or get late.
3. Collection agents – Usually, after 90 days of non-payment of EMI, one’s account will
be given a default status by the lender, and the collection department will be notified. After
120 days, the lender will delete that account from its books but he/she will still have to pay
back the loan amount to the collection department. And collection agents may pressurize
defaulters to repay the loan, through repeated calls, mails and personal visits.
 

 Drop in credit score – Defaulting a loan will negatively impact one’s credit score,
which will show other lenders that he/she is not sufficiently credit-worthy. Or in other words,
a poor credit score will show that one cannot repay loans properly.
 

 Reduced future loan eligibility – Since the non-payment of an EMI can reduce one’s
credit score, it will hamper his/her chances of getting any other loan in future. This is because
the credit score will show that he/she doesn’t have a good record of paying back loans.
 
 Legal proceedings – In case one doesn’t pay back the debt collection agency after
their repeated demands, that case can be taken to court, and an attorney might issue a letter
that acts as a final warning for that person to pay back your debt. In case the debt is
considered valid by the court, he/she will be ordered to pay it along with legal fees.
Moreover, his/her default will become public news. The court can also allow the lender to put
a lien on his/her collateral property, and if he/she decides to sell it, he/she might have to pay
off the debt partly or completely with the proceeds.
 Stressful times – A loan defaulter loses his or her peace of mind as collection agents
are constantly after them to pay up. Moreover, he or she is constantly afraid that some legal
action might be taken against them.
 

2. Consequences in case of secured loans

 

 Repossession of collateral – In secured loans, the borrower provides collateral in the

form of a house, factory, land or vehicle, against the loan amount. So, if he/she defaults on
the EMI payment, then the bank can repossess the collateral. In case one has taken a loan
against property, the bank will usually give you 60 days’ notice to settle that debt, before
repossessing the house. In case of a two-wheeler loan or car loan, he/she will get a notice of 7
to 15 days to settle the dues, before the bank repossesses his/her vehicle.
2. Auction/Resell your collateral – After repossessing a house, the bank can proceed to
sell it if the debtor doesn’t pay back the loan against property in 30 days. The bank will
inform the debtor about the venue, date and time of sale, and if the sale value exceeds the
loan amount, the balance will be refunded to the debtor. In case of a two-wheeler or car, the
bank will proceed to sell the repossessed vehicle, if the debtor doesn’t settle his dues in 7
days. In case the repayment is still not made, the vehicle will be sold at an auction within 90
days from the repossession date.
3. To avoid repossession, payment of entire amount as well as additional charges is
mandatory. And that too within the stipulated time period, depending on the type of loan.

3. In case of Bankruptcy
One might consider bankruptcy as a solution when he/she cannot repay a loan, but it can be
an unwise move too. One might think that by filing bankruptcy he/she can prevent creditors
from pursuing him/her, but in case he/she is filing it for a secured loan, the lender can
repossess his/her home, car, land or other collateral and sell it off to recover the loan. Also,
after filing bankruptcy, it will take him/her a lot of time to rebuild his/her credit history and
score. It will be quite some time before any lender will again consider him/her for a loan.