Check explained – value incorporated in a document

Securities in general

Long before e-transfers and debit cards, trade  had already found a way to transfer  value without transferring money – the cheque. The lender could now collect the value written on the piece of paper he received from a debtor in another city or country without having to meet in person every time they entered transactions with each other. 

After centuries of commercial practice, continuously using the cheque as a legitimate way to transfer value, states finally introduced the relevant legislation. Specifically, in 1933 the Greek State published law 5325/1932 for bill of exchange and law 5960/1933 for cheques, both of which are still in effect today, almost intact.  

Bill of exchange – means of credit

A bill of exchange is a means of credit, i.e.  a promise for future payment. The issuer ought to pay the recipient the value written on the bill on the expiration date.

The norm is, however, that the issuer orders a third person to pay and that person is called “the payer”. The payer ought to pay the recipient of the bill the written value on behalf of the issuer.

The holder can also transfer the bill of exchange (mainly by endorsement) to anyone and for any consideration (e.g. for money). As a result, the new holder now has the right to seek payment of the written value from the issuer (and/or payer). Consequently, any person can be a holder of a bill of exchange even without knowing the issuer or the payer.

Cheque – means of debit (immediate payment)

On the contrary, cheque is a means of debit, i.e. a way of payment and not a means of credit. That means that the cheque issuer orders his bank to pay the written value to the recipient by directly charging the issuer’s bank account, instead of paying the recipient in cash. This order must be written on a specific bank sheet (cheque block).  If the issuer’s available funds in his bank accounts do not suffice to cover the amount of the cheque, the bank marks the cheque as bounced (bad).

A bank client, however, can request from his bank to issue a ‘bank cheque”, meaning that the bank will issue the check by withholding money from the client’s available funds and will also be the payer of that cheque. The recipient will be the client who requested the cheque. This enables the bank client (recipient) to transfer the cheque (mainly by endorsement) to whomever he does not wish to pay in cash. This way the cheque payee is reassured that the cheque will not bounce since he will be paid by the bank’s own funds.  

It becomes clear that the cheque was invented and promoted mainly to restrict cash use and increase transaction safety.

Post-dated cheque

Cheques can have no expiration date, since they constitute monetary value that is payable immediately. However, an 8-day deadline applies; the cheque may only be presented to the bank for payment within 8 days from the date of issue.

In order to protect the payee in the case that cheque bounces (is bad), legislation provides for criminal liability (penalty of 3-month to 5-year’s jail time) of the issuer of a bad cheque. Under that penalty threat, the issuer makes certain that there are sufficient available funds in his account to cover all issued cheques.

Nowadays, however, traders mostly issue cheques with a future date, i.e., the date they want the cheque to be paid. This way they use the cheque as means of credit (future payment) and not as means of debit (immediate payment). Both the issuer and the payee know that  if there are no sufficient deposits when the cheque is presented to the bank, the issuer is subject to jail penalty (3 months to 5 years). Is there a greater security than one’s own freedom?

Legislators foresaw this practice. Εven in the case that a cheque is presented to the bank for payment before the date of issue, the bank is still obliged to pay the recipient by charging the issuer’s bank account, and the issuer will still be subject to jail penalty if his funds do not suffice. Issuing a postdated cheque is evidently a matter of trust; the issuer trusts that the recipient will not present the check to the bank for payment before the date written on the cheque.