Amendments to the Laws Governing Bearer Checks
A check is a financial instrument used for present purchases and for payment at a future date and is recognized as one of the most important commercial instruments.
The practical use of a check becomes apparent when a person intends to purchase goods or services and defers payment to a later date. In such circumstances, commercial instruments, including checks, facilitate completion of the transaction.
Regulations governing bearer checks have long been among the most significant legal rules in this field. The legislator defined the check in order to replace cash payments and allow individuals to rely on non-cash instruments.
Pursuant to Article 310 of the Iranian Commercial Code, a check is defined as a written instrument by which the issuer assigns all or part of the funds held with a bank to another person.
One of the essential requirements for the validity of a check is the presence of the issuer’s signature. A seal or fingerprint cannot replace a signature and is not legally valid. For this reason, banks verify a check’s signature against the account holder’s specimen signature.
Important Legal Notes and Practical Recommendations under the New Check Regime
Essential Elements of a Check
The issuance of a valid check requires the existence of three essential elements, as follows:
- Issuer of the check: The issuer is the account holder who completes and signs the check and whose account is drawn upon.
- Holder of the check: The person to whom the check is issued. A check may be issued in favor of the bearer or in favor of a specified person. Any person who acquires the check through inheritance or endorsement is also regarded as the holder. Under the law, only the holder of the check may initiate criminal proceedings.
- Drawee: The drawee is the bank on which the check is drawn. In commercial instruments, the term refers to the place where the funds are held. A check drawn on an account with insufficient funds is considered a dishonored or unfunded check.
Bearer Checks and Their Legal Implications
A bearer check is a check payable to the person who holds it; the word “bearer” appears in the pay-to clause, and the bank pays the amount to whoever presents the check. Under the amended Check Issuance Law, bearer checks are prohibited. Consequently, checks must now be issued in favor of a specified person.
One of the principal reasons for prohibiting bearer checks is the legal and practical risk arising from loss or theft, as such checks could previously be collected by any holder without verification of identity.
Key Features of the New Check Law
Under the amended legislation, every check must be registered in the Sayad system operated by the Central Bank of the Islamic Republic of Iran.
The primary purpose of this system is to standardize and integrate the issuance of checkbooks and to prevent the issuance of unfunded checks.
Additional objectives of the new law include reducing the number of dishonored checks and establishing the legal infrastructure for electronic checks.
Registration of a check in the Sayad system requires entry of the check details and the recipient’s identity. Such information includes the recipient’s national identification number, the due date, and the amount of the check.
The New Check Issuance Law
As noted above, the full identity of both the issuer and the recipient of the check is registered electronically. Only the person whose name is recorded in the Sayad system as the recipient is legally recognized as the holder of the check.
Under the new regime, traditional endorsement of checks has been replaced by electronic registration of transfer in the Sayad system. A check transfer is legally effective only when it is properly recorded in the system.
Furthermore, if a check leaf is registered in the system as an unfunded or dishonored check, the account holder will be prevented from registering and issuing new checks. One practical disadvantage of the new law is the reduction in the speed and ease of transactions relative to traditional practices.
Frequently Asked Questions Regarding Amendments to Bearer Check Regulations
A bearer check is a check payable to the person in possession. Due to the risks of loss and theft, bearer checks are prohibited under the amended Check Issuance Law.
The essential elements are the issuer, the holder, and the drawee bank that holds the funds.
The new law requires mandatory registration of checks in the Sayad system, aims to prevent unfunded checks and reduce dishonored checks, and facilitates the introduction of electronic checks.
The Sayad system records complete information about the issuer and the holder of the check, including national identification number, due date, and amount. Only the registered recipient is recognized as the lawful holder.
Traditional endorsement has been replaced by electronic registration of check transfers in the Sayad system. Transfers are valid only if registered online.
If a check is returned for nonpayment, the account holder is prohibited from issuing new checks until the matter is resolved.
Advantages include preventing unfunded checks, reducing dishonored checks, and preparing for electronic checks. A key disadvantage is reduced transactional speed compared to the previous system. What is a bearer check, and why has it been prohibited?
What are the essential elements of a valid check?
What are the main features of the new check law?
What role does the Sayad system play in check issuance?
How is endorsement handled under the new law?
What restriction applies when a dishonored check exists?
What are the advantages and disadvantages of the new check law?
