Reasons for Cheque Bounce - Common Causes of Cheque Dishonour

Understanding Why Cheques Bounce

A cheque bounce occurs when a bank refuses to honour a cheque presented for payment. The bank provides a cheque return memo that specifies the reason for dishonour. Understanding the reason for dishonour is crucial because it determines the legal remedy available and the potential liability of the drawer. Cheques can bounce for a variety of reasons, ranging from financial insufficiency to technical errors, and the legal consequences vary depending on the reason for dishonour.

The reasons for cheque bounce are typically coded by banks using standard return codes that are printed on the cheque return memo. These codes help the payee understand why the cheque was not honoured and what steps can be taken next. Some reasons for cheque bounce attract criminal liability under Section 138 of the Negotiable Instruments Act, while others may only result in civil liability or no liability at all. Vidhi Legal Services helps clients understand the reason for cheque bounce and advises on the appropriate legal remedy.

Insufficient Funds in the Account

Insufficient funds in the drawer's account is the most common reason for cheque bounce. This occurs when the account balance at the time of presentation is lower than the cheque amount. The bank will dishonour the cheque with the return code Funds Insufficient. This is the primary reason covered under Section 138 of the Negotiable Instruments Act, and it attracts criminal liability. The drawer is presumed to have issued the cheque knowing that sufficient funds were not available, which amounts to an offence under Section 138.

The payee can take legal action against the drawer for dishonour due to insufficient funds. The payee must issue a legal notice within 30 days and file a complaint if the payment is not made within 15 days. The drawer can defend himself by proving that there was sufficient funds in the account but the cheque was dishonoured due to some other reason, or that the debt or liability was not legally enforceable. The courts have also held that if the account becomes funded after the dishonour, it does not absolve the drawer of liability. Vidhi Legal Services advises clients on the legal implications of dishonour due to insufficient funds.

Signature Mismatch and Other Technical Reasons

Signature mismatch is the second most common reason for cheque bounce. When the signature on the cheque does not match the specimen signature available with the bank, the bank will dishonour the cheque with the return code Signature Mismatch. This reason for dishonour is not covered under Section 138, as the dishonour is not due to insufficient funds. The drawer cannot be prosecuted under Section 138 for signature mismatch, but the payee can take civil action for recovery of the amount.

Other technical reasons for cheque bounce include: alteration or overwriting on the cheque without proper authentication, difference in amount written in words and figures, stale cheque (presented after three months from the date of issue), post-dated cheque presented before the date, closed account, frozen account, account dormant, account transferred, death or insolvency of the drawer, court order freezing the account, and stop payment instruction. The legal consequences vary depending on the reason for dishonour. For example, a stop payment instruction can attract liability under Section 138 if it is proved that the instruction was given with the intention to avoid payment. Vidhi Legal Services helps clients understand the legal implications of technical reasons for cheque bounce.

Stop Payment and Its Legal Implications

A stop payment instruction is a request by the drawer to the bank not to honour a particular cheque. The drawer may issue a stop payment instruction if the cheque is lost, stolen, or if there is a dispute regarding the underlying transaction. However, the Supreme Court has held that issuing a stop payment instruction does not absolve the drawer from liability under Section 138. If the cheque is dishonoured due to a stop payment instruction, the drawer can still be prosecuted under Section 138 if it is proved that the cheque was issued for a legally enforceable debt or liability.

The courts have held that the drawer must have a legitimate reason for issuing a stop payment instruction. If the stop payment instruction is issued to avoid payment of a genuine debt, the drawer is liable under Section 138. The burden of proof is on the payee to prove that the cheque was issued for a valid debt and that the stop payment instruction was given to avoid payment. The drawer can defend himself by proving that the stop payment was issued for a legitimate reason, such as the cheque being lost or stolen, or that there is a genuine dispute regarding the underlying transaction. Vidhi Legal Services advises clients on the legal implications of stop payment instructions.

How to Prevent Cheque Bounce

Preventing cheque bounce is essential to avoid legal complications and maintain financial credibility. For the drawer, the most important step is to ensure that sufficient funds are available in the account before issuing a cheque. The drawer should also maintain a record of all cheques issued and reconcile the account regularly. The drawer should ensure that the cheque is properly filled, with clear signatures, no alterations, and consistent amounts in words and figures. The drawer should use a cheque book with the current date or issue post-dated cheques with clear instructions.

For the payee, the best way to prevent cheque bounce is to verify the credibility of the drawer before accepting a cheque. The payee should present the cheque promptly within its validity period. The payee should also ensure that the cheque is properly filled and that all details are correct. The payee should deposit the cheque in the bank at the earliest opportunity and follow up with the bank to ensure that the cheque is cleared. If a cheque is dishonoured, the payee should obtain the cheque return memo and consult a lawyer immediately to understand the legal options. Vidhi Legal Services advises both drawers and payees on preventive measures to avoid cheque bounce.

Frequently Asked Questions