Remedies for dishonour of cheque

Dishonour of cheque is a condition in which bank refuses to pay the amount of cheque to the
payee. Usually, cheques get dishonoured when drawer’s account is frozen or there are
insufficient funds in drawer’s account when cheque was redeemed. Whenever the cheque is
dishonoured, the drawee bank instantly issues a ‘Cheque Return Memo’ to the payee banker
specifying the reasons for dishonour. 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 cheque.

The Negotiable Instrument Act, 1881 is applicable for the cases related to dishonour of
cheques. In accordance with section 138 of this act, dishonour of cheque is a criminal
offence and is punishable with monetary penalty or imprisonment up to 2 years or both.
If payee decides to proceed legally, then the drawer should be given a chance of repaying
the cheque amount immediately. Such a chance has to be given only in the form of notice
in writing.
The payee has to send the notice to the drawer within 30 days from the date of receiving
“Cheque Return Memo” from the bank. The notice should mention that the cheque
amount has to be paid to the payee within 15 days from the date of receipt of the notice
by the drawer. If the cheque issuer fails to make a fresh payment within 15 days of
receiving the notice, the payee has the right to file a criminal complaint under Section 138
of the Negotiable Instruments Act.
The payee may legally sue the defaulter / drawer for dishonour of cheque only if the amount
mentioned in the cheque is towards discharge of a debt or any other liability of the defaulter
towards payee. If the cheque was issued as a gift, towards lending a loan or for unlawful
purposes, then the drawer cannot be prosecuted in such cases.

It must be noted that the act provides the legal remedy, shall be available to the payee only
if:

1. The cheque is presented within the period of its validity;

2. The payee or the holder of the cheque, has mandatorily made a demand for the
payment by giving a written notice to the drawer of the cheque within 30 days of the
receipt of information of the return of check as unpaid by the bank, and
3. The drawer has failed to make the payment of the said amount to the payee or the
holder in due course, within a period of 15 days of the receipt of the above-
mentioned notice.

The court, after receiving the complaint along with relevant documents, will start the case. If
the drawer is found guilty, he/she will have to, as per Section 138 of the Negotiable
Instruments Act, 1881, spend time in jail for up to two years and/or pay penalty of amount
twice the cheque amount. In addition, the banks also have the right to close the guilty
person’s account (on repeated bounce cheque offense) or stop their cheque book facility.
The bank may also charge penalty to both the drawer and the payee for the inconvenience,
extra paperwork and wasting the bank’s time.
Amendment:
The Negotiable Instruments (Amendment) Act, 2018 which came into effect from September
1, 2018 allows the Court trying an offence related to cheque bouncing, to direct the drawer to
pay interim compensation not exceeding 20% of the cheque amount to the complainant
within 60 days of the trial court's order to pay such compensation. This interim compensation
may be paid either in a summary trial or a summons case where the drawer pleads not guilty
to the accusation made in the complaint; or upon framing of charge in any other case.
Furthermore, the Amendment also empowers the Appellate Court, hearing appeals against
conviction under s. 138, to direct the appellant to deposit a minimum 20 % of the
fine/compensation awarded, in addition to interim compensation.

Reasons for dishonour of cheque:

1. Insufficient Funds
One of the most prevalent reasons for dishonouring of the cheque is lack of funds in the
account. If you have issued a cheque linked to the account with fewer amounts than the
amount you have written in the cheque, then the bank would not find enough money to
complete the transaction. This non-availability of requisite balance would stop the payment,
and the bank would dishonour the cheque.
2. Irregular Signature
Bank will never accept the cheque if the signature of the issuer does not tally with the
exemplar signature available with the bank. It is a prevalent mistake because of which the
cheque gets dishonoured. If it does not match as per the bank records, then your cheque
would not be approved by the bank. One should never sign on the MICR band on the
cheque as it also leads to dishonouring of the cheque.
3. Date of Cheque
The date holds a lot of significance in the cheque, and any difference or problem with it can
lead to disapproval or dishonouring of your cheque. It is a vital piece of information.  The
issue that comes with the date is that it can be disfigured or has some error or is scribbled; if
there is any of this on your cheque, then it can lead your cheque to dishonour. If the date is
not definite, then the bank would reject it.
Another reason for dishonour of cheque is when the date has expired. There is an order by
the Supreme Court that Cheque cannot be cashed after a period of 3 months. For example,
if the issuer mentions the date on Cheque 15/5/2021 then this would be valid only till
14/8/2021.
4. Difference in the amount in words and numbers
In case if you write incorrect amount as expressed by the difference in words and numbers
your cheque would be dishonoured. Also, if there are numbers in words sections or words in
the numbers section, then also the bank would not approve your cheque.
For example, in words section, you write fifteen thousand only but in the amount in figures
you write 1, 50,000. This is a huge difference, and the bank would dishonour your cheque.
5. Frozen Account
This happens when the government or court orders the bank that a person’s account has to
be frozen. In cases like this, the bank will reject all the issued cheques in the name of that
person.
Some other reasons for which a bank can refuse to make payment are:
 Account Closed by the drawer before submitting the cheque to the payee
  Payment stopped by account holder
 In case of a joint account where both signatures are required but only one is there
 Death of the drawer
 Insanity of the drawer
 Crossing limit of the overdraft

Pointers for PPT

Remedies for Dishonour of Cheque

 The Negotiable Instrument Act, 1881 section 138

 Conditions to be fulfilled
 Penalties
Reasons for dishonour of Cheque

 Insufficient Funds
 Irregular Signature
 Date of Cheque
 Difference in the amount in words and numbers
 Frozen Account