Dishonor of a cheque

Introduction:
"Dishonor of a cheque" refers to the situation where a cheque issued by a person
or entity is not honored by the bank upon presentation due to certain reasons,
usually related to insufficient funds in the issuer's account or other issues with the
cheque. The word bank is derived from the Italian word Banco or from a French
word Banque, which means a bench or money exchange table. A bank is a
financial institution that accepts deposits from the public and creates a demand
deposit while simultaneously making loans. A banker is a person or organization
that provides financial services, such as accepting deposits, making loans, and
issuing cheques.
Definition of banker according to section 3 (b) of the negotiable instrument act,
1881:
"banker" means a person transacting the business of accepting, for the purpose of
lending or investment, of or deposits of money from the public, repayable on
demand otherwise withdrawable by cheque, draft, order, or otherwise, and
includes any Post Office Savings Bank.
Definition of cheque:
According to section 6:
A "cheque" is a bill of exchange drawn on a specified banker and not expressed
payable otherwise than on demand.
Cases in which a banker is justified in dishonoring of a cheque:
A dishonoured cheque is a cheque that is not paid by the bank on which it is
drawn.
1. Insufficient funds:
If the cheque is drawn on an account with insufficient funds to cover the
amount, the banker is legally required to dishonour it. This is the most
common reason for dishonouring a cheque.
2. Stop payment order:
 If the drawer of the cheque has placed a stop payment order on it, the
banker is also required to dishonour it. This is done to protect the drawer
from fraud or other unauthorized use of their account.
3. Fraudulent cheque:
If the banker has reason to believe that the cheque is fraudulent, it is
justified in dishonouring it. This could include a cheque that is forged,
altered, or drawn for an illegal purpose.
4. Material alteration:
If the cheque has been materially altered, the banker is justified in
dishonouring it. This means that the cheque has been changed in a way
that changes its meaning.
5. Uncrossed cheque presented to a non-banker:
If an uncrossed cheque is presented to a non-banker, the banker is justified
in dishonouring it. This is because an uncrossed cheque can only be paid
into a bank account.
6. Cheque presented after the expiry date:
If the cheque is presented after the expiry date, the banker is justified in
dishonouring it. This is because the cheque is no longer valid after the
expiry date.
7. Mutilated cheque:
a banker may also dishonour a cheque if it is presented in a mutilated or illegible
condition, or if the payee's endorsement is not in order.
It is important to note that the banker must exercise reasonable care and
diligence before dishonouring a cheque. If he fails to do so, he may be liable to
the drawer of the cheque for damages.
Case law
Nazir Ahmed vs. State Bank of Pakistan
Nazir Ahmad had a current account with the State Bank of Pakistan. He drew a
cheque on this account in favor of Muhammad Hussain. When Muhammad
Hussain presented the cheque to the bank for payment, the bank refused to pay
it. The bank informed Muhammad Hussain that Nazir Ahmad's account had been
closed.
Muhammad Hussain challenged the bank's decision in court. He argued that the
bank was bound to pay the cheque because it had been drawn in his favor. The
bank argued that it was not bound to pay the cheque because Nazir Ahmad's
account had been closed.
The Supreme Court held in favor of the bank. The court held that the banker is
entitled to rely on the information that is available to it. In this case, the bank had
information that Nazir Ahmad's account had been closed. The court held that the
bank was therefore entitled to refuse payment of the cheque.

Cases in which a banker is bound to dishonor a cheque:

1. PAYMENT COUNTERMANDED BY THE DRAWER
When the cheque drawer of the cheque countermands the payment, that is it
issues the instruction to the bank not to make the payment. On receipt of a valid
stop payment order, the cheque must be returned unpaid with the remark
“payment countermanded by drawer“
A stop payment order is a written instruction from a cheque drawer to their bank
to refuse payment of a cheque that has been issued. The stop payment order is
typically valid for a certain period of time, after which it expires.

2. NOTICE OF DRAWER’S DEATH

On receipt of the confirmed news of death of account holder, cheques signed by
him should be returned unpaid with the remark “Drawer deceased”.
When a person dies, their bank account is typically frozen until the estate is
probated. This is to prevent unauthorized access to the account.
If a cheque is presented to the bank after the account holder has died, the bank
must return it unpaid. This is because the cheque is no longer valid.
 3. NOTICE OF CUSTOMER’S INSANITY
Where the account holder is certified as insane by a recognised medical practitioner then the
cheques signed by him should be signed by him should be returned unpaid.
When a person is declared insane, they are not legally capable of entering into contracts. This
means that any cheques that they sign are not legally valid.
If a bank honours a cheque that has been signed by an insane person, they may be liable to the
payee for damages.

4. NOTICE OF CUSTOMER’S INSOLVENCY

Where a customer is adjudged insolvent, the banker must refuse to pay cheques drawn by the
customer.
When a person is declared insolvent, they are unable to pay their debts. This means that they
are not legally capable of making payments on their cheque account.

5. LIQUIDATION OF COMPANY
When a bank receives notice from the liquidator in accordance with the provisions of
Companies Act, requiring to pay the balance to liquidator’s account , all the cheques by the
companies should be returned unpaid.
When a company is liquidated, its assets are sold and the proceeds are used to pay off its debts.
Any cheques that are outstanding at the time of liquidation are typically returned unpaid.
This is because the cheques are no longer valid once the company is liquidated.

6. Non-Compliance with Legal Requirements: Banks are required to

comply with various legal requirements and regulations related to
cheques. If a cheque does not meet these requirements or if it appears
to be fraudulent or forged, the bank may dishonor it.
7. Inoperative Account: If the account has been classified as inoperative
(no transactions for a certain period), the bank may dishonor cheques
drawn on that account.