Writing a cheque is a very common payment method used by individuals, businesses, and organizations. When you write a cheque, you are entrusting the recipient with your money and expecting them to be able to cash it.
However, there are times when the cheque may not be honored by the bank and this is referred to as “dishonor of cheque”.
In this post, we will discuss what is dishonor of cheque and reasons for dishonor of cheque.
What Dishonor of Cheque
Dishonor of a cheque occurs when a bank refuses to honor a cheque presented to it for payment.
When a cheque is dishonored, the payee can no longer be certain of receiving payment from the issuer of the cheque.
See Also: What is Crossing of Cheque | Types of Crossing of Cheques
Reasons for Dishonor of Cheque
There are several common reasons why a bank may refuse to honor a cheque.
- Insufficient funds
- Closure of bank account
- Signatures do not match
- Post-dated cheques
- Stale cheques
- Cheque is damaged
- Mismatch in numbers and words in the amount field
- Cheque is overwritten
- When a stop payment has been applied
Insufficient Funds
One of the primary reasons for the dishonor of a cheque is the lack of sufficient funds in the account from which the cheque is being presented.
When the issuer of the cheque does not have enough money to meet the payment, the bank will decline to honor the cheque and return it to the payee or beneficiary.
This is done with a note that the account does not have sufficient funds for honoring the cheque. The payee can then take appropriate legal action against the issuer of the cheque.
Closure of Bank Account
A cheque can be dishonored if the bank account associated with it has been closed. This is because when the issuing bank sends a cheque for collection, the receiving bank contacts the issuing bank to check for the validity of the cheque, and in this case since the bank account has been closed, the cheque will be dishonored.
It is important to ensure that your bank account remains active and you have sufficient funds in it to avoid any cheques issued by you from being dishonored.
Signatures do not Match
When a cheque is dishonored due to a signature mismatch, it means that the signature on the cheque does not match the signature held on record by the bank.
This could mean that either the signatory on the cheque is not authorized to do so or that someone else has forged the signature of the authorized signatory.
When a bank detects a signature mismatch, they will usually return the cheque and mark it as ‘Signature differs’ in the remarks section.
See Also: Advantages and Disadvantages of Cheques
If the payee suspects that the cheque was forged, they can file a complaint with the police and also inform their bank of the incident.
It is important to note that if the bank finds that the discrepancy in signatures was indeed due to forgery.
They will close the bank account from which the cheque was issued and freeze all funds until the dispute is settled.
Post-dated Cheques
A post-dated check is one that has a future date printed on it. This type of cheque cannot be cashed until the date specified on it.
If a post-dated cheque is presented to a bank for payment before the stated date, the bank must reject the cheque and return it unpaid. In such cases, the drawer of the cheque will incur dishonor of cheque charges.
For example, let’s say you issued a post-dated cheque for February 10, 2021, to pay for an upcoming expense.
However, the recipient tries to cash the cheque on February 5, 2021, which is before the date specified on the cheque. The bank will reject the cheque and notify you that they are returning it unpaid.
It is important to note that there may be legal repercussions if you issue a post-dated cheque with the intent to defraud or deceive.
It is also important to mention that banks may not accept post-dated cheques at all, so check with your bank beforehand to make sure that they accept them.
Stale Cheques
A stale cheque has been outstanding for a long period (generally over 6 months) and is no longer considered valid by the issuing bank.
This can occur if the issuer or recipient of the cheque forgets about the cheque or has not taken any action to cash or deposit it.
When the bank receives a stale cheque, they will typically refuse to honor it and return it to the issuer.
If you have issued a cheque that is more than six months old, it is important to contact the recipient and inform them that the cheque has gone stale. They will likely need to provide you with a new, up-to-date cheque to receive payment.
If you have received a stale cheque, you will need to contact the issuer and request a new, updated cheque.
It is important to be mindful of the time limit when cashing cheques to ensure they are not rendered stale. Taking action quickly will help avoid unnecessary inconvenience and confusion.
Cheque is Damaged
Cheques can also be dishonored if they are damaged. When a cheque is damaged, it means that the security features on the paper have been tampered with and can no longer be verified by the bank.
Damage to a cheque could include tearing: writing on the document, altering of dates or signature, or anything else that would prevent the cheque from being processed.
See Also: Difference between Cheque and Bill of Exchange
A cheque can become damaged even after it has been issued, so it is important to check them before handing them over to anyone.
If you find that a cheque is damaged, you should contact the issuer and arrange to have a new one issued.
Mismatch in Numbers and Words in the Amount Field
When the numbers and words in the amount field of a cheque do not match, the cheque can be dishonored.
The amount written as words should correspond to the numerical amount on the cheque. If the two are not equal, the bank may not honor the cheque.
This means that if there is an inconsistency between the two amounts, the cheque will be dishonored.
For example, if a cheque has an amount write in numbers as ₹3000 and an amount written in words as ‘three thousand rupees’, then the cheque will be honored by the bank.
However, the check will be dishonored if the amount written in words and the amount written in figures are different.
This is why it is important to make sure that the amount written in words and figures matches a cheque before signing it.
Any mismatch can lead to the cheque being dishonored, which could create problems for the payer and payee involved.
Cheque is Overwritten
If a cheque has been overwritten, then the bank will reject it. This means that if any alterations have been made to the cheque, such as changing the date or amount, the bank will not accept it.
An alteration is usually considered to be a forgery. In such cases, even if all other criteria are met, the bank will not honor the cheque.
It is important to ensure that no changes are made to the cheque once it has been issued, to avoid potential dishonor of the cheque.
When a Stop Payment has been Applied
A stop payment is a request from the account holder to their bank not to honor a specific cheque.
This can be done when they believe that the cheque has been lost, or stolen, or if they simply want to cancel the cheque.
When a stop payment is requested, it is the responsibility of the bank to inform the beneficiary that the cheque will not be honored.
If a stop payment is issued on a cheque, it will be dishonored. The bank is not obligated to investigate the circumstances and will return the cheque to the beneficiary without any further processing.
A stop payment may also be issued if the account holder has insufficient funds to cover the cheque amount.
Customers need to remember that a stop payment is not an immediate process and may take several days to become effective.
In some cases, this can lead to an unfortunate situation where a cheque is issued and honored before the stop payment is processed, leading to a double payment for the beneficiary.
Customers need to plan and make sure that the necessary stop payments are in place before issuing cheques.
Conclusion
A dishonored cheque can have serious financial implications for both the issuer and the recipient.
If a cheque is dishonored, then the issuer may incur charges from their bank for insufficient funds or for not complying with the terms of the cheque.
The recipient may also suffer losses if the cheque is not honored on time. For this reason, it is important to make sure that all checks issued are valid and up to date before they are issued.
It is also important to understand the rules and regulations governing cheque payments to prevent a check from being dishonored.
