A cheque is a widely used negotiable instrument for making payments through banks. However, not every cheque presented for payment is honored.
When a bank refuses to make payment on a cheque, it is known as dishonour of cheque. Understanding the reasons for dishonour is important for both account holders and businesses to avoid financial and legal issues.
What is Dishonour of Cheque
Dishonour of cheque occurs when the bank refuses to pay the amount mentioned on a cheque when it is presented for payment.
This refusal can happen due to various reasons such as insufficient funds, legal restrictions, or technical errors in the cheque.
Dishonour can have serious consequences, including financial penalties, damage to reputation, and even legal action in certain cases.
Reasons for Dishonour of Cheque
There are several situations in which a bank may legally refuse to honor a cheque.
1. Stop Payment Instructions (Countermand by Drawer)
If the drawer instructs the bank to stop payment before the cheque is processed, the bank must dishonor the cheque.
2. Insufficient Funds
If the account does not have enough balance to cover the cheque amount, the bank will dishonor it.
3. No Funds in Account
If there is no balance in the account, the cheque will be dishonored.
Note: (Important correction: The bank will not honor such a cheque.)
4. Signature Mismatch
If the signature on the cheque does not match the specimen signature available with the bank, payment will be refused.
5. Death of the Customer
If the bank receives notice of the drawer’s death before payment, it must stop payment and dishonor the cheque.
6. Insolvency of the Customer
If the drawer is declared insolvent and the bank is informed, it must not honor the cheque.
7. Insanity of the Customer
If the bank is notified that the customer is legally declared of unsound mind, it will refuse payment.
8. Court Order (Garnishee Order)
If a court issues an order restricting payment from the account, the bank must comply and dishonor the cheque.
9. Account Closed
If the account has been closed, any cheque presented afterward will be dishonored.
10. Defective or Incomplete Cheque
A cheque may be dishonored if:
- It is not properly filled
- Required details are missing
- It is incomplete
11. Difference Between Words and Figures
If the amount written in words and figures does not match, the bank may refuse payment.
12. Post-Dated or Stale Cheque
- A post-dated cheque presented before its date will be dishonored
- A stale cheque (older than validity period, usually 3 months) will also be rejected
13. Material Alteration
If there are changes in:
- Date
- Amount
- Name
Without proper authentication, the cheque will be dishonored.
14. Irregular Endorsement
If endorsement is required but is missing or incorrect, the bank may refuse payment.
15. Effects Not Yet Cleared
If the drawer deposits another cheque and issues a cheque before that deposit clears, the bank may dishonor it due to insufficient available balance.
16. Crossing of Cheque
If a cheque is crossed, it cannot be paid in cash.
If presented incorrectly (e.g., for cash payment), it will be dishonored.
17. Joint Account Issues
In joint accounts, if all required signatures are not present, the cheque will be dishonored.
18. Presentation at Wrong Branch
If the cheque is presented at a branch where payment is not authorized, it may be dishonored.
19. Suspicion of Fraud or Defective Title
If the bank suspects fraud or knows that the holder’s title is defective, it may refuse payment.
Conclusion
Dishonour of cheque occurs when a bank refuses to make payment due to insufficient funds, legal restrictions, or errors in the cheque. Understanding these reasons helps individuals and businesses avoid financial complications and maintain credibility in transactions.
Proper handling of cheques, maintaining sufficient balance, and ensuring accuracy can significantly reduce the chances of dishonour.
See Also: What is Crossing of Cheque | Types of Crossing of Cheques
