Dishonor of Cheques, Grounds for Dishonor of Cheques

A cheque is an important negotiable instrument used for making payments. When a cheque is presented to the bank for payment and the bank refuses to honour it, the cheque is said to be dishonoured. Dishonour of cheques has serious legal consequences under Indian law.

Meaning of Dishonour of Cheque

Dishonour of cheque occurs when a cheque presented for payment is returned unpaid by the bank. This may happen due to insufficient funds in the drawer’s account or other technical or legal reasons. Dishonour affects the credibility of the drawer and may result in civil as well as criminal liability.

Legal Provision (Section 138)

Dishonour of cheques is governed by Section 138 of the Negotiable Instruments Act, 1881. This section provides that dishonour of a cheque for insufficiency of funds or if it exceeds the arrangement made with the bank is a criminal offence, punishable with imprisonment or fine or both.

Reasons for Dishonour of Cheque

A cheque is dishonoured when the bank refuses to make payment on presentation. Dishonour may occur due to financial, technical, or legal reasons. The following are the major reasons for dishonour of a cheque

• Insufficient Funds

Insufficient funds is the most common reason for dishonour of a cheque. It occurs when the balance in the drawer’s bank account is less than the amount mentioned in the cheque. In such cases, the bank returns the cheque unpaid. Dishonour due to insufficient funds attracts criminal liability under Section 138 of the Negotiable Instruments Act, 1881, provided other legal requirements are fulfilled.

• Exceeds Arrangement with Bank

A cheque is dishonoured when it exceeds the overdraft or credit limit sanctioned by the bank. Even if some balance is available, payment will be refused if it goes beyond the agreed arrangement. This reason is treated at par with insufficient funds under Section 138, as the drawer fails to honour his commitment within the agreed banking limits.

• Signature Mismatch

A cheque may be dishonoured if the signature of the drawer does not match the specimen signature available with the bank. Banks strictly verify signatures to prevent fraud. Even minor differences in signature can lead to dishonour. In such cases, dishonour usually arises due to technical reasons rather than financial incapacity of the drawer.

• Post-Dated Cheque Presented Early

When a post-dated cheque is presented to the bank before the date mentioned on it, the bank will dishonour it. A post-dated cheque becomes valid only on or after the specified date. Premature presentation makes the cheque invalid, resulting in dishonour. Such dishonour does not generally attract penal provisions under Section 138.

• Account Closed

If the drawer has closed his bank account before the cheque is presented for payment, the cheque will be dishonoured. Courts have held that dishonour due to “account closed” is equivalent to insufficiency of funds. Therefore, it attracts liability under Section 138, as closing the account indicates intention to avoid payment.

• Stop Payment Instructions

A cheque may be dishonoured if the drawer issues stop payment instructions to the bank. Even though sufficient funds may be available, the bank refuses payment as per the drawer’s instructions. Dishonour due to stop payment may still attract Section 138 liability if the cheque was issued for a legally enforceable debt.

• Stale or Outdated Cheque

A cheque becomes stale if it is presented after the expiry of its validity period, which is usually three months from the date of issue. Banks do not honour stale cheques, leading to dishonour. Such dishonour is technical in nature and does not generally result in criminal liability under Section 138.

• Material Alteration in Cheque

A cheque is dishonoured if it contains material alterations such as changes in date, amount, or payee’s name without proper authentication by the drawer. Material alteration makes the cheque invalid. Banks dishonour such cheques to prevent fraud and misuse, as altered cheques lack legal validity.

Punishment for Dishonour of Cheque

Under Section 138, punishment may include:

• Imprisonment up to 2 years, or

• Fine up to twice the amount of the cheque, or

• Both imprisonment and fine

The court may also order compensation to the complainant.

Procedure to File a Complaint

• Complaint must be filed within 30 days after the expiry of the 15-day notice period

• Complaint should be filed in the court having jurisdiction

• Complaint must be made by the payee or holder in due course

Defences Available to Drawer

The drawer may defend himself by proving that:

• Cheque was not issued for a legally enforceable debt

• Notice was not properly served

• Cheque was lost or misused

• Payment was already made

Importance of Dishonour Provisions

The provisions relating to dishonour of cheques:

• Promote financial discipline

• Enhance credibility of cheque transactions

• Protect the interests of payees and holders

• Strengthen confidence in banking operations

Grounds for Dishonor of Cheque

Dishonour of a negotiable instrument occurs when it is not accepted or not paid as required by law. Under the Negotiable Instruments Act, 1881, dishonour may take place on two main grounds: Non-Acceptance and Non-Payment.

I. Dishonour by Non-Acceptance

Dishonour by non-acceptance applies mainly to bills of exchange. A bill is said to be dishonoured by non-acceptance when the drawee refuses or fails to accept the bill when it is duly presented for acceptance.

• Refusal to Accept the Bill

A bill is dishonoured by non-acceptance when the drawee expressly refuses to accept it. Such refusal may be oral or written. Once refusal is made, the holder need not wait until maturity and can immediately treat the bill as dishonoured and take legal action.

• Failure to Accept within Prescribed Time

If the drawee does not accept the bill within 48 hours after it is presented for acceptance, it is deemed to be dishonoured by non-acceptance. Silence or inaction on the part of the drawee amounts to refusal and gives the holder the right to proceed against prior parties.

• Qualified or Conditional Acceptance

When the drawee gives a qualified or conditional acceptance that varies the terms of the bill, and the holder does not consent to it, the bill is treated as dishonoured by non-acceptance. Such acceptance alters the original obligation and is not binding unless agreed upon by the holder.

• Drawee Incompetent to Contract

If the drawee is legally incompetent to contract, such as being a minor or of unsound mind, the bill is dishonoured by non-acceptance. Acceptance by an incompetent person has no legal effect, and the holder may treat the bill as dishonoured.

• Drawee Cannot Be Found

If the drawee cannot be located even after reasonable search when the bill is duly presented for acceptance, the bill is considered dishonoured by non-acceptance. The holder is not required to make repeated attempts and can proceed against other parties.

II. Dishonour by Non-Payment

Dishonour by non-payment applies to promissory notes, bills of exchange, and cheques. It occurs when the instrument is duly presented for payment and payment is refused or cannot be obtained.

• Refusal to Pay on Maturity

An instrument is dishonoured by non-payment when the maker, acceptor, or drawee refuses to make payment on the due date. Refusal may be express or implied. Once refusal occurs, the holder has the right to sue and take legal action against liable parties.

• Insufficient Funds

If payment is refused due to insufficient funds in the account of the drawer or acceptor, the instrument is dishonoured by non-payment. In the case of cheques, this ground may attract criminal liability under Section 138 of the Negotiable Instruments Act, 1881.

• Death or Insolvency of the Party Liable

If the party primarily liable to pay has died or become insolvent, and payment cannot be obtained from his legal representative or official receiver, the instrument is dishonoured by non-payment. This gives the holder the right to proceed against endorsers and other prior parties.

• Stop Payment Instructions

When the drawer issues stop payment instructions to the bank, the cheque is dishonoured by non-payment. Even if sufficient funds exist, refusal by the bank results in dishonour. Such dishonour may still attract legal liability if the cheque was issued for a lawful debt.

• Expiry of Validity or Presentment Defects

If an instrument is presented after its validity period or not presented in the manner prescribed by law, payment may be refused. This leads to dishonour by non-payment, though it is technical in nature and may not always result in legal liability.