Commercial LawEnforcement and Bankruptcy LawWhat are the Legal Differences Between Cheque and Bill?

5 Key Legal Differences Between Cheque and Promissory Note: Secure Your Receivables

Cheques and bills (popularly known as promissory notes) are among the most frequently used payment and collateral instruments in commercial life. Both of them are “negotiable instruments” regulated under the Turkish Commercial Code (TCC) and are documents subject to certain formal requirements, the rights they contain are subject to a promissory note and are transferable. However, although these two documents are often confused with each other, there is a huge difference between them in terms of their legal qualifications, functions and especially the consequences of non-payment. Knowing these differences is the key to determining whether a receivable should be attached to a cheque or a bond. In this article, we will examine in detail the 5 main legal differences between cheques and bonds that a merchant or creditor should know.

1. Parties and Legal Relationship Structure: This is the most fundamental structural difference between the two documents.

• Cheque (Three-Party Relationship): The cheque embodies a three-cornered legal relationship.
  1. Drawer: The person who issued the cheque and issued the payment order (debtor).
  2. Payee: The institution that is obliged to pay the cheque. According to the TCC, the payee can only be a bank.
  3. Beneficiary: The person who has the right to collect the cheque amount (creditor). In a cheque, the drawer gives a payment order to the addressee bank stating “Pay this amount of money to the beneficiary”.
• Bond (Bilateral Relationship): A bond (or, in full, a promissory note) expresses a bilateral legal relationship.
  1. Issuer (drawer): A person (debtor) who unconditionally undertakes to pay a certain amount at a certain maturity.
  2. Beneficiary: The person who has the right to collect the amount of the bond (creditor). In a bond, the issuer makes a payment promise to the beneficiary as “I will pay you such and such amount of money on such and such date”.

2. Function: Payment Instrument vs. Credit Instrument: This structural difference between the parties also determines the economic function of the documents.

• Cheque (Payment Instrument): A cheque is legally a means of payment. Just like cash, it must be paid on sight. The use of a cheque as a credit or collateral instrument is contrary to the spirit of the law. Therefore, cheques cannot be post-dated. The future date written on the cheque only indicates the earliest date on which the cheque can be presented to the bank and does not legally constitute a “maturity”.
• Bills (Credit/Collateral Instrument): A bond is a credit instrument by its very nature. It undertakes that a certain debt will be paid at a future date (maturity). Therefore, one of the most fundamental elements of a bond is “maturity”. In commercial life, it is used for the payment of the price of goods or services at a future date and in this respect, it is a borrowing and guarantee instrument.

3. Consequences of Defalcation: Civil and Criminal Sanctions: This is the most critical difference for the creditor.

• Cheque (Criminal Liability): Failure to cover the cheque when it is presented to the bank within the due date is not only a legal problem, but also a criminal offence. According to the Cheque Law No. 5941, the drawer of a dishonoured cheque shall be sentenced to a judicial fine of up to 1500 days for each cheque upon the creditor’s complaint. If this judicial fine is not paid, it is directly converted into imprisonment. In addition, a ban on issuing cheques and opening cheque accounts shall be imposed by the court on the person who has made the dishonoured transaction. This criminal sanction makes the cheque a stronger guarantee for the creditor.
• Bond (Civil Liability Only): Failure to pay a bond on its due date does not constitute an offence. No criminal liability (imprisonment, judicial fine, etc.) of the debtor arises. The only thing the creditor can do is to initiate enforcement proceedings against the debtor and try to collect its receivable by legal means. This makes the bond a weaker collateral against cheques.

4. Limitation Periods: The statute of limitations in the enforcement proceedings of negotiable instruments is of a depriving nature and should be followed carefully.

• Czech:
  • The right of application of the bearer (beneficiary) against the endorsers (endorsers of the cheque) and the drawer is time-barred after three years from the expiry of the presentation period.
  • The right to file a complaint for the offence of bad cheque must be exercised within one year from the date the cheque is presented to the bank.
• Bono:
  • The actions of the bearer against the issuer of the bill shall be time-barred after three years from the date of maturity.
  • The actions to be brought by the bearer against the endorsers shall be time-barred after one year from the date of protest or, if there is a “return without cost” clause on the bill, from the date of maturity.

5. Addressee and Place of Payment:

• Cheque: The payee of a cheque is always a bank and payment is made by the bank. This creates an element of confidence in the likelihood that the cheque will be paid (up to the amount of the legal reserve that the bank is obliged to pay).
• Bills: There is no addressee in a bill. The debtor (the issuer) makes the payment directly. Therefore, the creditor’s assurance is only the debtor’s solvency and intention.

In summary, if we show the main differences between cheques and bonds with a table:

For a creditor, it is much more advantageous to receive a cheque than a bond, especially if it wants to minimise the risk of collection. The penal sanctions in case of bounce create a significant payment pressure on the debtor. For a debtor, a bond is a more flexible borrowing instrument. When using these two negotiable instruments in your commercial activities, it is critical to act by knowing their legal qualifications and consequences in order to prevent possible legal disputes and loss of rights in the future.