12 Reasons for Dishonour of Cheque

Key Takeaways:

1. Common Errors Cause Dishonour: Cheques can bounce due to mistakes like overwriting, signature mismatch, incorrect date, or mismatched amount in words and figures.
2. Financial Reasons Matter: Cheques are often dishonoured for insufficient funds, closed accounts, or if the drawer issues a stop payment.
3. Legal Implications: Repeated dishonour can lead to legal action under Section 138 of the Negotiable Instruments Act, including penalties or imprisonment.
4. Bank Issues Cheque Return Memo: When a cheque is bounced, the bank provides a “Cheque Return Memo” stating the reason for dishonour.
5. Precaution is Key: To avoid dishonour, ensure accurate cheque details, maintain sufficient balance, and consider using digital payment modes for reliability.

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Dishonour of Cheque- Have you come across a situation where your cheque has been dishonoured?

Dishonour of Cheque or cheque dishonoured entry mainly happens because most of us are not aware of creating and operating bank accounts & their services. Thus they end up making silly mistakes while writing a cheque. Therefore, it is important to understand the important banking terms to safeguard your money from fraud and save your different types of cheques from getting rejected.

Read to find out the top reasons for the dishonour of cheque.

What is Dishonour of Cheque?

When a bank returns a cheque unpaid, it is called dishonour of cheque. It is said to be honoured if the bank gives the amount to the payee. While, if the bank refuses to honour the cheque and pay the amount to the payee, the cheque is said to be dishonoured. In other words, dishonour of cheque journal entry is a condition in which the bank refuses to pay the amount of cheque to the payee.

Whenever the cheque is dishonoured, the drawee bank instantly issues a ‘Cheque Return Memo’ to the payee banker specifying the reasons for dishonour. An out cheque return means that the cheque, issued by one person or organization to another, is returned by the bank for various reasons such as insufficient funds, an irregular signature, a stale cheque, or a stop payment.

The payee banker provides the memo and the dishonoured cheque to the payee. The payee has an option to resubmit the cheque within three months of the date specified on the cheque after fulfilling the reason for the dishonour of the cheque.

Moreover, the payee has to give notice to the drawer within 30 days from the date of receiving the “Cheque Return Memo” from the bank. The notice should state that the cheque amount will be paid to the payee within 15 days from the date of receipt of the notice by the drawer.

However, if the drawer fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to conduct a legal proceeding against the defaulter as per Section 138 of the Negotiable Instruments Act.

Understanding how to write a cheque correctly is essential to prevent issues such as a dishonoured cheque, which can occur due to errors like insufficient funds or incorrect signatures.

Reasons for Dishonour of Cheque

1. If the cheque is overwritten. Know ‘How to write a Cheque?‘

2. If the signature is absent or the signature in the cheque does not match with the specimen signature kept by the bank.

3. If the name of the payee is absent or not clearly written.

4. If the amount written in words and figures does not match with each other.

5. If the account number is not mentioned clearly or is altogether absent.

6. If the drawer orders the bank to stop payment on the cheque.

7. If the court of law has given an order to the bank to stop payment on the cheque.

8. If the drawer has closed the account before presenting the cheque.

9. If the funds in the bank account are insufficient to meet the payment of the cheque.

10. If the bank receives the information regarding the death or lunacy or insolvency of the drawer.

11. If any alteration made on the cheque is not proved by the drawer by giving his/her signature.

12. If the date is not mentioned or written incorrectly or the date mentioned is of three months before.

What Are the Problems in the Dishonour of Cheque?

In the case of Dishonour of Cheque, a ‘cheque return memo’ is offered by the bank to the payee stating why the cheque has been bounced. The payee can resubmit the cheque if he believes that it will be honoured a second time. The payee can prosecute the drawer legally if the cheque is bounced again.

The Negotiable Instrument Act, 1881 is applicable for the cases related to the dishonour of cheques. In accordance with section 138 of this act, dishonour of cheque is a criminal offence and is punishable with a monetary penalty or imprisonment of up to 2 years or both. Below are the consequences of wrongful dishonour of cheque:

1. Penalty

If a cheque is bounced, then a penalty is levied on both drawer and payee by their respective banks. The person will additionally have to pay late payment charges if the dishonoured cheque is against repayment of a loan.

2. Damage To Credit History

Your credit history is negatively impacted if a cheque is dishonoured since your payment activities are reported to the credit bureaus by financial institutions. The lenders will trust you if you have a good credit score. In order to have a good credit score, it’s good practice to avoid your cheques from being bounced. Your good payment activities will help you build a good CIBIL score and benefit you at the time of lending money from financial institutions.

Keep the above points in mind while writing the cheque so that the cheque is not dishonoured.

Go Digital, Avoid Dishonour of Cheque Charges!

An efficient way of avoiding cheque dishonour charges is to bank digitally. Instead of issuing a cheque, one can choose to transfer funds online. You can use Net Banking or Mobile Banking for transferring funds to third-party accounts. You can also make transfers within your accounts using the digital payment system.

If you have to issue a cheque, here are a few things to keep in mind;

1. Make sure you issue an account payee cheque.
2. Use the signature that is registered with the bank.
3. Ensure that there is sufficient balance in your account.
4. Fill in the details on the cheque carefully

Bottom Line

In conclusion, it is best to avoid dishonoring checks at all costs because it not only reflects badly on the check writer but also jeopardizes the stability and confidence of the financial system as a whole. To preserve confidence and promote a sound financial environment, people and businesses must operate with honesty and financial responsibility in all of their dealings.

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