Q. I have a few questions about cheques being dishonoured. If I receive a cheque from a person or a company, when can I determine that it has been dishonoured? What are the principal reasons that cheques get dishonoured? Is it possible to initiate legal action against someone whose cheque has been dishonoured? Is this done by sending a legal notice? If there is any other additional information you can provide in this matter, it’d be much appreciated.
Thank you for writing in to us. The queries you have raised also realistically faced in our day-to-day business activities and therefore it is wise to keep abreast of all the legal intricacies and formalities involved. Since we are all aware about what a cheque is, I’ll refrain from explaining much about that in detail and move directly to answer your queries.
A cheque can be dishonoured for several reasons. A few examples are: Insufficient funds, amount in word and figure differs, cheque out of date /post-dated, cheque issuer’s signature differs, payment stopped by the drawer, crossed cheque – to be presented through a bank, payee’s endorsement required, alteration in date/figures/words require drawer’s full signature, addition to bank discharge should be authenticated, etc. Usually the cheque holder has the opportunity of submitting the cheque thrice to the bank for it to be honoured. Once a cheque has been dishonoured thrice, it is basically rendered useless and possesses no value.
To dishonour a bill of exchange, or a cheque, is to refuse or neglect to pay it at maturity. S.138 of the Negotiable Instruments Act, 1881 deals with the dishonour of cheque for insufficiency of fund, etc. The cheque is to be presented to the bank within a period of 6 months from the date on which it is drawn or within the period of its validity (whichever is earlier). If the cheque is dishonoured, the payee or the holder of the cheque has to demand payment of said amount via a notice to the drawer of the cheque. This should be done within 30 days of the receipt of information from the bank regarding the return of the cheque as unpaid. If the cheque issuer fails to make the payment within 30 days of the receipt of the notice, the cheque holder will then be able to file a complaint under S. 141 of the N.I. Act, 1881 before a Metropolitan Magistrate or a 1st Class Magistrate. This should be done within one month of the date on which the cause of action arises under S.138(c) of the N.I. Act, 1881, and time is of the essence here.
In the case of a cheque being dishonoured, a notice shall be given under S. 138 of N.I. Act, 1881. The notice is basically an opportunity to the cheque issuer to fulfil the payment obligations within 30 days if the cheque is dishonoured due to insufficiency of funds, etc. Issuing a notice to the cheque issuer will assist the payee to proceed to undertake legal action. The notice must be a legal notice, duly drafted by a lawyer, who will specify the cheque issuer’s liabilities and legal obligations, and served on the cheque issuer in the correct manner.
It is worth noting that the dishonouring of a cheque actually has the potential to create serious criminal liabilities on the cheque. Something to ponder, the next time you issue a cheque yourself!
Jennifer Ashraf Kashmi is a barrister and solicitor of England and Wales. She is currently Senior Partner at Legacy Legal Corporate.