Dishonoured Cheques: Meaning & Reasons

reasons for dishonouring a cheque

While the reasons for dishonoring a cheque will be communicated by your bank eventually–as the drawer (the person making the payment), wouldn’t you want to avoid the inconvenience a dishonored cheque will cause your customers and clients? 

That’s right, in today’s post, not only will I be revealing the top reasons why a cheque may be rejected aka dishonored, but I’ll also be providing details on the cheque as a means of payment.

First thing first…

What is a Cheque?

A “cheque” is a means of payment where the payer gives an unconditional order through writing to a banker to pay a particular amount to a particular person on a particular date. 

What are the Essentials of a Cheque? 

The following are the characteristics of a cheque as a payment method.

  • Payment order via cheque is unconditional.
  • Payment is on demand.
  • Payment of a cheque is made in cash.
  • There’s specificity as to who to pay, when, the amount payable, and supporting banks.

Who Are the Parties to a Cheque?

When a cheque is drawn, it is usually in the name of a third party. “Party” here means the different persons that need to get involved at the different stages of exchanging a cheque for the money. Typically there are three “parties” to a cheque.

Party 1: Drawer – This is the account holder and the person who created and authorized the cheque.

Party 2: Drawee –  This is the bank where the cheque can be exchanged for money if approved.

Party 3: Payee –  This is the person whose name appears on the cheque and who is entitled to get the amount on the cheque.

Just so you know, the drawer and the payee can be the same person if the cheque was issued for the purpose of depositing.

Depositing Vs Cashing a Cheque

Cashing a cheque means getting your cash upon acceptance by the bank.

Depositing a cheque, on the other hand, means adding or crediting the amount stated on the cheque to your bank account. In doing this, you might have to wait for 24-48 hours for the amount to get credited into your account. The process is quite simple: you deposit the cheque in any branch or cheque box, the bank collects the cheque, approves it, and credits the money into your account.

What is a Dishonored Cheque?

A dishonored cheque also known as a bounced cheque is a cheque that the bank refuses to accept or honor. Whenever a cheque is dishonored, the bank (drawee) issues a ‘Cheque Return Memo’ to the payee banker, stating the reason for dishonor. Then, the payee banker in turn offers notice of the dishonored cheque to the payee. 

The payee has an option to resubmit the cheque within three months from the date specified on the cheque after fulfilling the reason for the dishonor of the cheque. When using this option, the payee must give notice to the drawer within 30 days from the date of receiving the ‘Cheque Return Memo’ from the bank. It should be stated in the notice that the cheque amount will be paid to the payee within 15 days from the date of receipt of the notice by the drawer.

In the event that the drawer fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to conduct a legal proceeding against the defaulter.

What are the Possible Reasons for Dishonoring a Cheque?

From errors on the part of the drawer to bank account issues. Below are eleven common reasons that could cause a cheque to bounce:

  1. Insufficient Fund: A cheque may get dishonored when the amount written on it is more than what the drawer has in his account. To remedy this, the drawer can provide a new cheque ensuring that they have sufficient balance in the account.
  2. Irregular signature: Signature plays a vital role in cheques. A bank will never accept a cheque if the signature of the drawer does not tally with the specimen signature available with the bank.
  3. Stale Cheque: Date is another primary element of a cheque that holds a lot of significance. A cheque may get dishonored on the ground of the expiration of the date. A cheque delayed for more than 3 months of the date written on it, if presented for payment, would be dishonored by the bank. When this happens, the drawer would have to issue a new check.
  4. Post-Dated Cheque: A Post-dated cheque is one in which the date mentioned is yet to come. A Post-dated cheque, if presented for payment, will be dishonored by the bank.
  5. The Death of the Drawer: Where the bank receives information of the death of its customer, it will not honor any cheque presented on the account of the dead customer.
  6. Bankruptcy: A bank will not honor any cheque issued by its bankrupt customer (one whom the court has declared is unable to pay his debts in full).
  7. Frozen Account: Where a court order or a military government decrees that a person’s account be frozen, the bank must dishonor all cheques bearing the account’s numbers.
  8. Scribbling and Overwriting on Cheque: If there is any scribbling, overwriting, or correction on a cheque, except the drawer appends his signature above or under the altered word, the bank will dishonor such a cheque.
  9. Difference between the amount in words and numbers: if for instance, the drawer writes twenty dollars only in words and $40 in numbers on a cheque, the cheque will not be honored by the bank.
  10. ‘Stop payment instruction’: This is when the drawer asks the bank to stop the cheque from clearing. When this happens, the cheque would bounce, and the payee would not receive the amount mentioned in the cheque.
  11. Damaged Cheque: The bank would not accept any cheque that is damaged, torn, has too many stains, or whose condition is not good generally.

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