The definition and use of cheques are covered by The Bills of Exchange Act 1882, and the Cheques Acts of 1957 and 1992. The Bills of Exchange Act 1882 defines a cheque as a written order from an account holder instructing their bank to pay a specified sum of money to one or more named beneficiaries on demand. Ever since their inception it has been the case that cheques are not a promise to pay by the bank, but a request to the bank that it pays, out of the funds deposited by the customer, an amount to a third party.
This means that the bank will only honour the cheque if the account holder has sufficient funds to meet it or it can be covered by an agreed overdraft or other line of credit. Cheques are not legal tender and never have been. Even today, if you owe someone money they are not obliged to accept a cheque. A creditor is entitled to be paid in legal tender and can refuse payment in any other form.
The most recent amendment to the Bills of Exchange Act occurred via the Small Business, Enterprise and Employment Act (section 13), which gained Royal Assent in 2015 and became law in July 2016, eliminating the need for cheques to be physically transported around the country. The law now makes it clear that once paid into a bank account, the image that has been created may be exchanged with the payer’s bank for payment rather than the physical cheque. This is how the Image Clearing System is operating.
Secondary legislation passed by the Electronic Presentment of Instruments (Evidence of Payment and Compensation for Loss) Regulations 2018 ensures customers can offer proof of payment with a cheque image and have legally binding compensation rights in the case of fraud or error when using the Image Clearing System.
The rules concerning crossed cheques are set out in Section 1 of the Cheques Act of 1992 and prevent cheques being cashed by or paid into the accounts of third parties. On a crossed cheque the words “account payee only” (or similar) are printed between two parallel vertical lines in the centre of the cheque. This makes the cheque non-transferable and is to prevent cheques being endorsed and paid into an account other than that of the named recipient. Crossing cheques basically ensures that the money is paid into an account of the intended recipient of the cheque.