Dishonoured Cheque: Know the Legal Implications and Penalties

Dishonoured cheques are also known as bounced cheques or returned cheques. Dishonoured cheque meaning refers to those cheques that the bank rejects. The reasons are numerous but admissible. Suppose the holder has deposited a cheque at the bank for encashment and the bank rejects to honour it. This is referred to as a dishonoured cheque. This can happen for one cause or another such as lack of enough funds or a mismatch in the cheque details.

• Know the dishonoured cheque meaning . Your cheque may be dishonoured due to insufficient funds, signature mismatch, post-dated or stale cheques, etc.
• Learn what is dishonour of checque . Dishonoured cheques are actionable under Section 138 of the Negotiable Instruments Act, implying penalty &/or imprisonment.
• Banks impose different charges for bounced cheque based on the policy, bank, and cheque amount.
• Ensure you have sufficient funds, recheck details on the cheque, and regularly update your bank record to prevent such instances.

A dishonoured cheque, commonly referred to as a bounced cheque, is one that a bank refuses to process due to various reasons. This can occur due to insufficient funds in the issuer’s account, signature
mismatches, overwriting, stale or post-dated cheques, and account closure.
Dishonouring a cheque can lead to financial penalties and legal consequences under Section 138 of the Negotiable Instruments Act. To avoid cheque dishonour, both issuers and payees must ensure accuracy in
cheque details and maintain sufficient funds in the linked bank account.

As of 2022, India reported that cases of dishonoured cheques account for nearly 9% or over 33 lakhs of total criminal cases pending before Courts. It is important to understand the possible reasons for cheque dishonouring. Here are the most common reasons:

Insufficient Funds

The most common scenario under which a cheque bounces is when there is insufficient balance in the drawer’s account. If the balance left in the account will not support the amount on the cheque, then the bank will not be able to cash the cheque, and therefore, bounce it.Another rule is to always ensure sufficient funds in the account before writing a cheque.

Signature Mismatch

This is a situation where the signature used while signing the cheque is different from the one in the records of the Bank. These differences could be due to the variation in the incidence account holder’s signature or by standard human errors.When it comes to cheques, banks are very particular with matches, if they do not match, cheques can be dishonoured for fraud.

Post-dated Cheques

This usually refers to a cheque that is drawn and passed on after a specified date in the future. The presentation of such cheques before that particular date is dishonoured because the banks are not allowed to cash these cheques until that date.Ensure that the cheques are presented on the date stipulated or after so as not to be dishonoured.

Stale Cheques

Cheques on which payment has not been made, and which have been returned to the drawer for encashment after six months are called stale cheques.Unfortunately, such cheques are not honoured by Banks due to the elapsed time. For cheques to be effective they should be cashed or deposited within their period of validity to avoid them being referred to as stale cheques.

Account Closure

If the named account on which the cheque is drawn has been closed, the cheque will bounce automatically. This is usually the case when an account holder fails to recall the cheques that had not been used in circulation and did not destroy them once they closed the account.To avoid such a problem, it is advisable to ensure that all the cheques not wanted in an account are thoroughly shredded any time an account is being closed.

Alteration on Cheque

There might be cases where the cheque was fraudulently altered or differed from the original one in some ways. If so, it will be dishonoured.This involves an alteration of any characteristics relating to the amount, the date and the name of the payee without necessary authorisation. Every alteration, even the least of them, must be countersigned to be effective.Banks are very strict towards varied cheques to eliminate scams.

Technical Errors

Such factors like overwriting, different figures and words, and failure to enter vital aspects like the date or name of the payee also tend towards dishonour of a cheque.You can reduce these mistakes by ensuring that all required fields are completed properly and in a neat, clear manner.

The bouncing of a cheque is not just a reminder of the fact that everyone carries a certain amount of cash for security but is also legally actionable under section 138 of the Negotiable Instruments Act, 1881 for Indian clients.If a cheque is returned to the payee unpaid because the amount of money standing in the account of the drawer is insufficient or the cheque has been drawn for an amount not agreed upon or arranged to be paid, the payee may sue the drawer.

Notice to the Drawer

The payee is required to send an acknowledgement of the cheque return memo and inform the drawer in writing within 30 days of receiving the said memo from the bank.

Payment Window

The drawer is given 15 days of notice, starting from the day the notice was served on him, to make the payment to the drawer.

Filing a Complaint

If the drawer is unable to make the payment as per the demand made by the payee, the latter can present a complaint in the court of a Judicial Magistrate or a Metropolitan Magistrate within one month from the date counting from the expiry of the aforesaid period of fifteen days.

Banks charge fees for bouncing cheques and such fees differ with the policy of the specific bank in operation and the amount on the cheque.This may be avoided by establishing lines of credit with the holding bank by the drawer.

Cheque Return Charges

These are charges levied on a customer by the bank for engaging in business with the customer especially when cheques issued by this customer have been dishonoured.The range can start from ₹ 100 and sometimes can reach ₹ 750 or even more, depending on the bank.

Interest on Overdrawn Amount

In the scenario that this cheque causes an overdraft, the overdraft incurs interest concerning the overdraft sum with the bank.

Penal Charges

In addition to returned cheque charges, some banks may impose penal charges for cheque dishonour occurring frequently.

Here are some tips to ensure that the cheques drawn by you do not get dishonoured:

Maintain Adequate Balance

Ensure that your account has adequate balance to pay the cheques drawn on it.

Verify Cheque Details

While writing the cheque and getting it completed it should be ensured that basic aspects such as the date of writing the cheque, the amount to be paid, and the signature used while preparing the cheque are correct.

Update Bank Records

In case you update your signature, you must also change it in the bank record to avoid cases of mismatch.

Avoid Post-dated Cheques

Draw cheques only if you are sure that the money to clear that cheque will be available on the due date.

Use Electronic Transfers

Choose electronic methods of payment since they are efficient and effective.

Verify the Issuer’s Account

Before accepting a cheque, confirm the credibility of the issuer and ensure they have sufficient funds.

Deposit the Cheque on Time

Avoid delays in depositing cheques to prevent them from becoming stale (valid for only three months).

Request Alternate Payment Modes

For large transactions, ask for digital transfers like NEFT, RTGS, or IMPS to reduce the risk of cheque dishonour.

Cross-Check Cheque Details

Ensure the date, amount (both in words and figures), and signature are correct before submission.

Monitor Bank Notifications

Stay alert for cheque clearance updates and take prompt action if a cheque is dishonoured.

The financial sector has evolved greatly through the help of technology which brings new measures that can be used to avoid cheque dishonour. Here’s how technology can help:

Automated Clearing Systems

Mechanised systems for example the Cheque Truncation System (CTS) reduce the time taken to clear cheques. These systems help minimise errors and also enhance the timely execution of financial transactions.

Mobile Banking Apps

These apps automatically show the account balance and notify you of situations where the available funds might not be sufficient to cover a cheque.It is also common for many apps to permit cheque deposits using the capture of an image to minimise contact with physical cheques.

Electronic Fund Transfers (EFTs)

Nowadays many methods such as NEFT, RTGS, and IMPS are increasingly used, thereby significantly reducing the usage of cheques.These methods are faster and more reliable than the traditional methods while overcoming problems such as misrepresentation of signatures, or dates that may have already elapsed.

SMS and E-mail Alerts

With the help of mobile alerts of banking transactions, which include low-balance alerts, people can know the remaining amount in their accounts.These alerts ensure that you always have enough balance in your account that would enable you to avoid situations such as a cheque being returned because of insufficient balance.

Online Cheque Books

Certain banks have developed online chequebook orders and tracking tools to assist with the management of cheques.

Fraud Detection Systems

Modern electronic recognition equipment can help recognise different kinds of violations, including forgery or other changes that might lead to cheque dishonour due to fraud.

Awareness of prevention measures and opportunities to protect yourself, helps you control the balance on your account and effectively respond to cases of dishonoured cheques .It is recommended that you check your business transactions frequently to identify areas that require legal attention. This can be done with the help of a lawyer to safeguard your money.