Dishonor of Cheques, Grounds for Dishonor of Cheques

Dishonor of a cheque occurs when a bank refuses to process the payment due to insufficient funds, signature mismatch, post-dated issuance, account closure, or any other reason. As per the Negotiable Instruments Act, 1881, dishonoring a cheque can lead to legal consequences, especially under Section 138, which penalizes cheque bounce due to insufficient funds. When a cheque is dishonored, the bank issues a Cheque Return Memo, specifying the reason. The payee can demand repayment within 30 days, and if unpaid, legal action can be initiated. Dishonored cheques affect creditworthiness and can lead to financial and legal troubles.

Grounds for Dishonor of Cheque:

1️⃣ Insufficient Funds

One of the most common reasons for cheque dishonor is insufficient funds in the drawer’s bank account. When the account does not have enough balance to cover the cheque amount, the bank refuses payment and issues a Cheque Return Memo stating “Funds Insufficient.” Under Section 138 of the Negotiable Instruments Act, issuing a cheque without sufficient funds is a criminal offense. The payee can demand repayment within 30 days, and if unpaid, legal action can be taken. This can damage the drawer’s reputation and creditworthiness.

2️⃣ Signature Mismatch

Cheque may be dishonored if the drawer’s signature does not match the one registered with the bank. Banks verify the signature to prevent fraud and unauthorized transactions. If the signature differs in style, spelling, or size, the bank may reject the cheque. This often happens when individuals rush while signing, use different signatures, or authorize someone else to sign without proper documentation. To avoid dishonor, it is important to maintain consistency in signatures and update records with the bank in case of any changes.

3️⃣ Post-Dated or Stale Cheque

A post-dated cheque is one that has a future date, and if presented before that date, the bank will dishonor it. On the other hand, a stale cheque is one presented beyond its validity period. In India, cheques are valid for three months from the date of issuance. If a cheque is older than three months, the bank refuses payment and returns it marked “Cheque Expired.” It is advisable to reissue such cheques with a new date to avoid rejection and ensure timely payment.

4️⃣ Account Closed

If a cheque is issued from a closed bank account, it will be dishonored. When an account is closed, the bank is no longer responsible for processing transactions related to it. If a cheque is drawn on a closed account, it indicates an attempt to deceive the payee. This can lead to legal action under Section 138 as issuing a cheque from a closed account is considered a criminal offense. To avoid this, businesses and individuals should update their payment methods when closing old accounts.

5️⃣ Payment Stopped by Drawer

Cheque can also be dishonored if the drawer issues a stop payment order to the bank. This means the drawer has instructed the bank not to honor the cheque for specific reasons, such as fraud suspicion, disputes, or accidental issuance. While a stop-payment order is a legal right, if it is used fraudulently to avoid paying dues, the payee may take legal action. Stopping a cheque without a valid reason can lead to disputes and harm business relationships.

6️⃣ Alterations or Overwriting on the Cheque

If a cheque contains unauthorized alterations or overwriting, the bank may dishonor it. Changes in the amount, date, or payee’s name must be properly authenticated with the drawer’s full signature; otherwise, the cheque is considered invalid. Unauthorized alterations raise suspicions of forgery, leading banks to reject such cheques. To avoid dishonor, cheques should be filled carefully, without errors. If a mistake occurs, it is best to cancel the cheque and issue a new one instead of making corrections.

7️⃣ Mismatch in Payee Name or Amount

Cheque may be dishonored if there is an inconsistency in the payee’s name or the amount in words and figures. Banks verify that the name on the cheque matches the account holder’s details and that the amount written in words corresponds to the numerical value. If there is any discrepancy, the bank rejects the cheque. This is to prevent fraud and ensure that payments are made correctly. Payees must double-check these details before depositing a cheque to avoid unnecessary delays.

8️⃣ Bank Account Frozen or Under Attachment

Cheque will be dishonored if the drawer’s account is frozen due to legal action, regulatory orders, or government directives. This happens in cases of court disputes, tax liabilities, or financial investigations. A frozen account restricts all banking transactions, making cheque payments impossible. Additionally, if an account is under attachment by government authorities for pending debts or legal matters, the bank cannot process any cheques issued from that account. To avoid this, businesses and individuals must comply with financial regulations and resolve any legal disputes promptly.

9️⃣ Discrepancy in MICR Code or Cheque Format

Banks use Magnetic Ink Character Recognition (MICR) technology to process cheques efficiently. If the MICR code is damaged or unreadable, the cheque may be dishonored. Similarly, cheques that do not follow the prescribed banking format, such as incorrect dimensions or missing security features, may be rejected. This usually occurs with manually altered or photocopied cheques. To ensure smooth processing, cheques should be issued from valid cheque books and should not be tampered with.