Cheque Dishonour

Cheque Dishonour: A Detailed Explanation

Cheque dishonour, commonly referred to as “bounced cheque,” occurs when a cheque cannot be processed due to insufficient funds or other technical reasons. In such cases, the bank refuses to clear the payment, and the cheque is returned unpaid. Cheque dishonour is a significant issue in financial transactions, leading to legal consequences for the drawer (the person who issues the cheque) if not resolved promptly.

1. What is Cheque Dishonour?

A cheque is an instrument that instructs a bank to pay a specific amount of money from the drawer’s account to the person or entity (the payee) whose name appears on the cheque. When a cheque is presented to the bank for payment, it undergoes certain checks, and if it fails to meet the required criteria, the cheque is dishonoured.

Cheque dishonour can occur for several reasons, which can be either financial (related to the drawer’s account) or technical (related to the cheque’s formalities or errors).

2. Reasons for Cheque Dishonour

A cheque may be dishonoured for various reasons, broadly categorized into financial and technical reasons:

Financial Reasons:

• Insufficient Funds: The most common reason for cheque dishonour is that the drawer’s bank account does not have enough funds to cover the cheque amount.
• Account Closed: If the account from which the cheque is issued has been closed, the bank will not honour the cheque.
• Overdraft Limit Exceeded: If the cheque amount exceeds the overdraft facility (if any) that the account holder has with the bank, the cheque will be returned unpaid.
• Frozen or Blocked Account: Accounts can be frozen or blocked for various reasons, such as legal disputes or government directives. In such cases, cheques issued from the account will not be processed.

Technical Reasons:

• Signature Mismatch: If the signature on the cheque does not match the drawer’s signature on file with the bank, the cheque will be dishonoured.
• Post-Dated or Stale Cheque: A cheque dated for a future date (post-dated cheque) will not be processed before that date. Similarly, cheques older than six months are considered stale and will not be honoured.
• Alteration or Overwriting: Any alteration or overwriting on a cheque without proper authentication can lead to its rejection.
• Incomplete Details: If essential details like the date, payee’s name, or amount are missing or incorrectly filled out, the cheque will not be processed.
• Mutilation or Damage: If the cheque is physically damaged or mutilated, making it unreadable or illegible, it will be rejected by the bank.

3. Legal Consequences of Cheque Dishonour

The dishonour of a cheque can have serious legal consequences, especially in cases where the cheque was issued for the repayment of a debt or obligation. In many countries, including India, cheque dishonour is considered an offence under the law. In India, it is governed by the Negotiable Instruments Act, 1881, specifically Section 138, which deals with dishonoured cheques.

Steps Following Cheque Dishonour Under Section 138:

1. Notice to Drawer: Once the cheque is dishonoured, the payee must issue a written notice to the drawer, demanding payment of the cheque amount. This notice must be sent within 30 days of the cheque being dishonoured.

2. Drawer’s Response: The drawer is given 15 days from receiving the notice to settle the payment. If the drawer fails to make the payment within this period, legal proceedings can be initiated.

3. Filing a Complaint: If the payment is not made within the 15-day period, the payee can file a criminal complaint in a court of law. The complaint must be filed within one month from the date of expiry of the notice period.

4. Punishment: If the court finds the drawer guilty, the punishment can include imprisonment of up to two years, a fine that can be up to twice the cheque amount, or both.

Civil Suit for Recovery:

Apart from the criminal case under Section 138, the payee can also file a civil suit to recover the amount of the dishonoured cheque, along with interest and legal costs. This is done through regular civil proceedings.

4. Preventive Measures to Avoid Cheque Dishonour

To avoid the inconvenience and legal complications of cheque dishonour, certain precautions can be taken:

• Ensure Sufficient Funds: Always ensure that your bank account has sufficient funds to cover the cheque amount.

• Avoid Post-Dated Cheques: If possible, avoid issuing post-dated cheques to prevent issues related to delayed presentation.

• Check Signature and Details: Ensure that the signature on the cheque matches the signature registered with the bank and that all details (date, amount, payee’s name) are correctly filled out.

• Track Cheques Issued: Maintain a record of all cheques issued to keep track of their status and ensure that none are forgotten or misplaced.

• Communicate with the Payee: If you suspect that your cheque might bounce due to insufficient funds or any other reason, inform the payee and try to arrange alternate payment methods.

5. Impact of Cheque Dishonour on Creditworthiness

Cheque dishonour can have a negative impact on the drawer’s financial reputation and creditworthiness:

• Legal Consequences: Repeated cheque dishonours can lead to legal issues, including criminal charges, especially if it is part of a debt repayment.

• Damage to Reputation: A dishonoured cheque reflects poorly on the drawer’s financial reliability, which can damage relationships with vendors, clients, or lenders.

• Credit Score Impact: In some cases, a history of dishonoured cheques can negatively affect the drawer’s credit score, making it harder to secure loans or credit facilities in the future.

6. Conclusion

Cheque dishonour is a significant issue in both personal and business transactions, and it can lead to serious financial and legal consequences. Ensuring proper funds, avoiding errors in cheque writing, and understanding the legal implications are essential to prevent the dishonour of cheques. If a cheque is dishonoured, it is crucial for both parties to follow the legal process to resolve the matter, ensuring that the issue is handled fairly and within the bounds of the law. Understanding these aspects will help individuals and businesses navigate the complexities of cheque dishonour and maintain financial integrity.