What is a Cheque?
As per Section 6 of the Negotiable Instruments Act, 1881 provides that “a Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated Cheque and a Cheque in the electronic form.”
Reasons for Dishonouring a Cheque by a Bank
The principal reasons for dishonoring the cheque are as follows: –
- A cheque is not in proper conditions specified in the Negotiable Instrument Act.
- A drawer signature’s on cheque differs from specimen signatures recorded with the bank.
- A cheque is stale (in circulation for more than 6 months) or postdated.
- Amount expressed in words and figures differ.
- Cheque mutilated (cut torn part of cheque missing)
- Material alternations (change in date, crossing, amount, name of payee etc. on cheque) need confirmation by the drawer.
- Over writing or order cheque not properly authorizes.
- Do not tally with directions contained in the crossing.
When a Banker is Justified in Refusing Payment
A banker is justified in refusing payment of a customer’s cheque on the happening of any one of the following events.
- Notice of the customer to refuse payment of the cheque.
- Notice of the customer’s death.
- Notice of the customer’s insanity
- Notice of the customer’s bankruptcy.
- In case of a company, notice of its winding up.
- Notice of a court order.
- In case of trust accounts receipt of information that the customer contemplates a breach of trust.
Dishonour of Cheque is a Serious Offence
Dishonor of cheques is a criminal offence under section 138 to 142 of the Negotiable Instrument Act, 1881 by an amendment.
- In order to make a person liable for Charges/ prosecution, the following criteria/ conditions must met –
- The cheque is presented within its validity from its date.
- A demand notice is sent by the Payee (person/ company/ entity on name the check is issued) to the drawer (person/ company/ entity issued the check) within 30 days from the Payee’s receiving the dishonor instruction/ report from Bank;
- The drawer (person/ company/ entity issued the check) of the cheque not been able to pay the amount mentioned on the check to the person check is issued within 15 days of receipt of the notice;
- Complaint is to be made only by the payee or holder in due course;
- Cheque which is dishonored must be issued for the discharge/payment of a debt or any other liability, which is legally enforceable. Thus, an action cannot be initiated for the dishonor of a cheque that is given as a gift.
- The offence is committed only when the cheque is dishonored and not when it is issued, Example: – At the time of its issuance of the cheque, there is no balance in his account, the drawer commits no offence if, when the payee present the cheque in the bank, he arranges the payment with the bank and the check is honored/ passed/ paid by the bank.
Procedure for Action
- Notice should be sent within period of 30 days from the date of the bounce of the check.
- For Limited Companies and Partnership concerns, notice should be sent to the Company, the Partners concern and to all the Directors / Partners also.
- For proprietary firms, notice should be addressed to the Proprietor only.
Notice should be sent preferably by
i. Speed Post with Acknowledgement Due (SPAD)
ii. Registered Post with Acknowledgement Due (RPAD)
iii. Postal receipt to be kept as the proof of dispatch.
iv. AD card to be kept along with the notice and Postal receipt.
v. If AD card does not come back or received without signature or date is not clearly mentioned then delivery confirmation receipt have to receive form the post office.
- During the 15 days’ time period to make payment from the party it is advisable to follow up with it to put pressure and if the party would not pay the dues then preparation must begin for filing of the complaint after expiry of 15 days period within 45 days from the date of the receipt of the notice by the Party.
- A cheque cannot be presented after a notice has already been sent to the party.
- After filing the complaint in the Court, a verification statement is sworn before the Magistrate and original documents are produced in the Court. Then the Court issues Summons against the accused persons named in the complaint. If in case the accused persons do not attend the Court after service of summons, the Court would issue first Bail able Warrant and then Non-bail able Warrant.
Where the accused has been declared absconder and Proclamation has been issued, the Magistrate on being satisfied can order the attachment of the property of the accused, the attached property will vest in the hands of the Government; Complainant can only participate in bidding for the purchase of the said property if Government decides to sell it.
Banks Dealing with Dishonour of Cheques of Value Less than “1 crore”
(i) Returning time for dishonoured cheques
The dishonored Cheques are required to be returned / dispatched to the customer promptly without delay, in any case within 24 hours of dishonor.
(ii) Procedure for return/dispatch of dishonoured cheques
a) The payee branch should return dishonoured cheques presented through clearing houses strictly as per the return discipline prescribed for respective clearing house in terms of Uniform Regulations and Rules for Bankers’ Clearing Houses.
- b) The collecting branch on receipt of such dishonoured cheques should dispatch it immediately to the payees / holders within 24 hours of receipt of the instruments.
- c) If cheques presented directly to the payee branch across the counter branch should return such dishonoured cheques to the payees/ holders same day/or next day, in case of dishonour due to insufficiency of fund.
d) Cheques dishonoured should be returned along with a memo ofreason for dishonor by bank.
(iii) Frequent dishonor for the same account
- a) If the dishonour of a cheque of value of less than rupees one crore drawn on a particular account of the drawer on 4 occasions during the financial year for insufficient funds in the account, no fresh cheque book would be issued and branch may close the account after issuing 30 days’.
- b) The branch may consider closing current account with the prior and proper notice to the customer. However, in respect of advances accounts such as cash credit account, overdraft account, the need for continuance or otherwise of these credit facilities and the cheque facility relating to these accounts should be reviewed by appropriate authority.
- c) If an account is having cheque book facility and ECS mandate is also registered, then the incidents of dishonour will be taken into account both for dishonour of cheque and failed ECS for computing the number of dishonour of cheques/failed ECSs.
Branch may consider for closing the account after serving 30 days’ notice to the customer in the event of subsequent dishonour of cheque/ ECS mandate in the account.