Have you come across a situation where your cheque has been dishonoured?
Today I am going to discuss the reasons for dishonour of cheque.
Dishonour of cheque meaning:
A cheque is said to be honoured, if the banks give the amount to the payee. While, if the bank refuses to pay the amount to the payee, the cheque is said to be dishonoured. In other words, dishonour of cheque is a condition in which bank refuses to pay the amount of cheque to the payee.
Whenever the cheque is dishonoured, the drawee bank instantly issues a ‘Cheque Return Memo’ to the payee banker specifying the reasons for dishonour. The payee banker provides the memo and the dishonoured cheque to the payee. The payee has an option to resubmit the cheque within three months of the date specified on the cheque after fulfilling the reason for the dishonour of cheque.
Moreover, the payee has to give a notice to the drawer within 30 days from the date of receiving “Cheque Return Memo” from the bank. The notice should state that the cheque amount will be paid to the payee within 15 days from the date of receipt of the notice by the drawer.
However, if the drawer fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to conduct a legal proceeding against the defaulter as per Section 138 of the Negotiable Instruments Act.
Reasons for Dishonour of Cheque
- If the cheque is overwritten. Know ‘How to write a Cheque?’
- If the signature is absent or the signature in the cheque does not match with the specimen signature kept by the bank.
- If the name of the payee is absent or not clearly written.
- If the amount written in words and figures does not match with each other.
- If the account number is not mentioned clearly or is altogether absent.
- If the drawer orders the bank to stop payment on the cheque.
- If the court of law has given an order to the bank to stop payment on the cheque.
- If the drawer has closed the account before presenting the cheque.
- If the fund in the bank account is insufficient to meet the payment of the cheque.
- If the bank receives the information regarding the death or lunacy or insolvency of the drawer.
- If any alteration made on the cheque is not proved by the drawer by giving his/her signature.
- If the date is not mentioned or written incorrectly or the date mentioned is of three months before.
To get a more clear understanding of the major reasons for dishonour of a cheque, you can watch the video below:
What Happens When A Cheque Is Dishonoured?
When the cheque is dishonoured, a ‘cheque return memo’ is offered by the bank to the payee stating why the cheque has been bounced. The payee can resubmit the cheque if he believes that it will be honoured second time. The payee can prosecute the drawer legally if the cheque is bounced again.
The Negotiable Instrument Act, 1881 is applicable for the cases related to dishonour of cheques. In accordance with section 138 of this act, dishonour of cheque is a criminal offence and is punishable with monetary penalty or imprisonment up to 2 years or both.
If a cheque is bounced, then a penalty is levied on both drawer and payee by their respective banks. The person will additionally have to pay late payment charges if the dishounoured cheque is against repayment of a loan.
2. Damage To Credit History
Your credit history is negatively impacted if a cheque is dishonoured since your payment activities are reported to the credit bureaus by the financial institutions. The lenders will trust you if you have a good credit score. In order to have a good credit score, it’s a good practice to avoid your cheques from being bounced. Your good payment activities will help you build good CIBIL score and benefit you at the time of lending money from financial institutions.
Keep the above points in mind while writing the cheque so that the cheque is not dishonoured.