Cheque Dishonour: Causes, Consequences, and Legal Remedies

What is Cheque Dishonour?

Cheque dishonour occurs when a bank refuses to pay the amount specified on a cheque. Also known as a "bounced cheque," this situation creates legal and financial implications for both the drawer (issuer) and the payee (recipient).

Common Reasons for Cheque Dishonour

Financial Reasons

1. Insufficient Funds The most common reason for dishonour. The drawer's account doesn't have enough balance to cover the cheque amount.

2. Account Closed If the drawer has closed their bank account before the cheque is presented.

3. Payment Stopped The drawer has issued a stop payment order on the cheque.

Technical Reasons

1. Signature Mismatch - Signature doesn't match bank's specimen - Multiple signatories required but not all present - Signature is unclear or incomplete

2. Date Issues - Cheque is post-dated (presented before the date written) - Cheque is stale-dated (more than 6 months old) - Date is missing or illegible

3. Amount Discrepancy - Amount in words doesn't match figures - Amount has been altered - Amount exceeds the drawer's limit

4. Other Technical Issues - Payee name is missing or incomplete - Cheque is mutilated or damaged - MICR line is unreadable - Cheque has been materially altered

Return Memo and Reason Codes

When a cheque is dishonoured, the bank issues a return memo with a specific reason code:

Common Return Reason Codes

Legal Consequences

For the Drawer

For the Payee

While the payee is the aggrieved party, they must: - Issue demand notice within statutory timeframe - Wait for prescribed period before legal action - Document all communication - Choose between criminal and civil remedies

Legal Remedies for Payees

Step 1 Demand Notice

Upon receiving a returned cheque, the payee must: 1. Send written demand notice to drawer 2. Notice must be sent within 30 days of return 3. Demand payment within 15 days 4. Send via registered post with acknowledgment

Step 2 If Payment Not Made

Step 3 Court Proceedings

Prevention Strategies

For Cheque Issuers

1. 1Maintain Adequate Balance
2. 2 - Track all issued cheques
3. 3 - Set up balance alerts
4. 4 - Maintain buffer funds

2. Verify Before Issuing - Confirm fund availability - Double-check all details - Use proper ink and writing

3. Record Keeping - Maintain cheque register - Note to whom and why issued - Track presentation dates

For Cheque Recipients

1. 1Due Diligence
2. 2 - Verify drawer's credibility
3. 3 - Request crossed cheques
4. 4 - Deposit promptly

2. Follow-Up - Monitor clearing status - Act quickly on returns - Document everything

Impact on Credit and Banking

Credit Bureau Reporting - Bounced cheques may be reported - Affects credit score - Impacts future loan applications - May affect business relationships

Banking Consequences - Bank may close account after multiple bounces - May be blacklisted from chequing facilities - Higher fees for future accounts - Enhanced scrutiny on transactions

Conclusion

Cheque dishonour is a serious matter with significant legal and financial consequences. Drawers should ensure funds are available before issuing cheques, while payees should act promptly and follow proper legal procedures when cheques bounce. Understanding these implications helps both parties manage their cheque transactions responsibly.

Key Takeaways

1. 1Always verify funds before issuing cheques
2. 2Know the reason codes and their implications
3. 3Act within statutory timeframes for legal remedies
4. 4Maintain proper documentation
5. 5Consider electronic payments for time-sensitive transactions