Paying by cheque
A cheque is a written document whereby a person (the drawer) with available funds in a bank (the drawee bank) orders the latter to pay a specific sum to a designated person (the payee). The payee can be the drawer himself or a third party.
A cheque is a means of payment used by the business, just like a cash payment or transfer.
Objective: cheques are used to settle all types of purchases and to pay invoices or contracts regardless of the underlying commercial consideration (purchase of movable or immovable assets, delivery of goods, tools, machinery, services, etc.).
Who is concerned
Available to the self-employed and any type of business, payment by cheque applies in the following cases:
- creation of a business (capital contribution by cheque);
- day-to-day management of the business (payment of employees’ salaries, purchase of merchandise or equipment, etc.);
- growth of the business (advance payment for the purchase of new machinery);
- liquidation of the business (settlement of accounts payable).
In practice, the use of cheques is becoming increasingly rare in the Grand Duchy of Luxembourg.
- the drawer of a cheque must have a bank account;
- the drawer must ensure that the payee (beneficiary) accepts payment by cheque (the payee is not obliged to do so);
- 7 pieces of mandatory information (see below) must appear on the cheque for it to be valid;
- the drawer’s bank account must have sufficient funds or have a sufficient credit line when the cheque is presented at the bank for collection to ensure that the payment is executed by the bank.
How to proceed
- the word 'cheque', inserted in the text of the cheque;
- the name of the paying entity (the bank drawn on);
- the place where the payment has to be made. If there is no specific indication thereof, the place indicated alongside the drawee bank’s name is deemed to be the place of payment;
- the date and place of writing the cheque;
- the signature of the person writing the cheque (drawer);
- the simple authorisation to pay a specific sum;
- the amount to be paid: it must be stated in figures and written out in full.
The cheque can be transferred by:
- handing it over, if:
- it is a bearer cheque;
- it is made out to a named person and also contains the words 'or bearer' (ou au porteur in French) or an equivalent term ;
- it does not specify a payee.
- ordinary transfer, if the cheque is stipulated as payable to a named person with the words 'not to order' (non à ordre in French) or an equivalent term;
- endorsement (endossement in French), if the cheque is issued to a named person, with or without the words 'to order' (à ordre in French). Endorsement means the transfer of all rights associated with the cheque and must be a simple endorsement, i.e. without conditions or reservations.
It is carried out by writing on the back of the cheque or on an attached slip (called an allonge in French) signed by the endorser.
Through aval, a third party undertakes to guarantee the obligations of the signatory of the cheque. The aval will be recorded in writing, either on the cheque or in a separate document. If the aval is given on the back of the cheque, the words 'good per aval' or 'per aval' ('Bon pour aval' in French) should appear before the signature, whereas, on the front, only the signature is required.
Deadline for presentation and payment
According to the law, the cheque is payable at sight, i.e. the day it is presented. Any notation to the contrary is disregarded. A post-dated cheque, i.e. presented for payment before the date indicated as the issue date, is payable on the day it is presented.
The deadlines for presentation of normal cheques are:
- 8 days for cheques issued in Luxembourg;
- 20 days for cheques issued in a country other than the one in which it is payable, but in a country in Europe or the Mediterranean basin;
- 70 days for cheques issued or payable outside of Europe and the Mediterranean basin.
Protection of the bearer
Vis-à-vis the drawer’s creditors, the bearer of the cheque has a preferential claim on the funds for which the drawee bank becomes the debtor when the cheque is presented.
The bearer of an unpaid cheque presented within the legal deadline has a right of recourse against the endorsers and the drawer, provided that the refusal to pay is recorded:
- by lodging a protest;
- by a declaration made by the drawee bank, dated and written on the cheque with the date of presentation indicated;
- by a declaration made by a clearing house.
Credit on collection or direct credit subject to collection
The payee of the cheque can be paid:
- on collection, i.e. the account will be credited on the date on which the payee's bank receives payment from the bank drawn on and the payment is effective;
- via direct credit subject to collection, i.e. the payee's account will be credited immediately, but may be debited by the same amount plus charges if the cheque comes back unpaid from the bank drawn on.
Types of cheques
The words 'for deposit only' (à porter en compte in French) are written on the cheque. This type of cheque cannot be paid in cash. It must be settled by crediting an account. Non-cash payments (bank account entries) equate to payment.
Payment time frames
The payment time frame varies depending on 2 criteria:
- national or international cheque (country concerned);
- credit on collection or direct credit subject to collection.
Advantages, disadvantages and risks
Provided that there are sufficient funds on the drawer’s account:
- material document equivalent to cash;
- collection at the convenience of the payee;
- endorsable by a third party;
- recourse on bill of exchange (up to the last party involved).
- administrative burden involving additional operating expenses for the drawer and the payee;
- long time frame between handing the cheque to the bank and the account being credited;
- difficult for the payee to plan cash flow because the actual credit date is not foreseeable;
- different national regulations depending on the countries of issue;
- in process of disappearing: cheques are no longer used at all in some countries.
- risk of non-collection of the cheque in the case of insufficient funds in the drawer's account;
- loss or theft of the cheque book, the owner or drawer of which remains responsible as in the case of cash;
- risk of fraud.