Dishonoured Cheque: Meaning, Reasons, Charges, Consequences

With the rise of digital payments, the convenience and speed of banking transactions have greatly improved. Despite this advancement, the traditional method of using cheques remains prevalent among many individuals.  People have valued cheques for a long time as they are a secure means of transferring funds and making purchases of any kind. 

However, when you write a cheque, there is a risk that it might not work or get dishonoured. It can happen for different reasons, and if it does, you could face fines or even end up in jail. 

This article will help you understand the meaning of a dishonoured cheque, the reasons for its occurrence, the charges involved, and the serious consequences which you may encounter.

Dishonoured Cheque Meaning

When a bank refuses to process a cheque you have submitted, it is known as a dishonour of cheque. This rejection can occur for reasons such as insufficient balance in an account, a signature mismatch, or a post-dated cheque. 

A dishonoured cheque signals that there are issues which are preventing the completion of a transaction for which you have issued the cheque. In India, dishonour of a cheque for insufficient balance is considered a crime, and the person who issued this cheque could face legal repercussions under the Negotiable Instruments Act, 1881.

Reasons for Dishonour of Cheques

Understanding the reasons for dishonoured cheques is crucial for preventing such situations and dealing with the complexities. Here are some crucial reasons for cheque dishonour:

• Low Account Balance: When you do not have sufficient funds in your bank account to cover the cheque amount, it will bounce.
• Account Closure: Closing the bank account mentioned on the cheque before presenting it to the bank will cause the cheque to bounce.
• Post-Dated Cheques: Presenting a cheque before the date specified on the cheque is considered dishonourable.
• Mismatch of Signature: If your signature on the cheque does not match with the one that the bank has on file, the bank can reject your cheque.
• Changes to the Cheque: Making unauthorised changes or alterations to the cheque can lead to dishonour.
• Crossed Cheque Issues: Presenting crossed cheques at a different bank or not following the specified instructions for a particular bank or account may lead to the dishonour of the cheques.
• Account Information Errors: If there are mistakes in the account number or other details on the cheque, the bank might not accept it.

Cheque Dishonoured Charges

The following table highlights the dishonoured cheque charges of different leading banks in India:

It is important to note that these charges do not include GST and other applicable taxes. Additionally, the fees mentioned may vary at the discretion of a bank.

Consequences of Wrongful Dishonour of Cheques

The following are some consequences of dishonoured cheques:

• Legal Impact

A dishonoured cheque due to insufficient funds is considered a serious offence in India. It means you could face fines or even end up in jail for a dishonoured cheque.

• Financial Setbacks

When your cheque bounces, the bank charges you extra fees, leading to financial losses. It includes the bank charges, opportunity costs and potential legal fees.

• Credit Rating Impact

Dishonoured cheques can also lower your credit rating, which affects your ability to borrow money or obtain credit cards in the future. Many financial institutions view bounced cheques as a sign of financial unreliability.

• Impact on Trustworthiness

These types of cheques can damage the relationships between the parties involved in the transaction. The weakening of trust can lead to difficulties in future dealings and collaborations.

What is Section 138 for Cheque Bouncing?

Section 138 of the Negotiable Instruments Act of 1881 in India focuses on the offence of cheque bouncing due to insufficient funds or exceeding the specified amount in the drawer’s account. This legal provision outlines the penalties and consequences for individuals involved in such actions.

This section makes the person issuing the cheque legally responsible and lays out the legal consequences. If a cheque bounces, the bank will intimate the payee about the dishonour of the cheque. 

Upon receipt of the intimation, the payee must make a demand for the payment of the cheque amount in the form of a cheque bounce notice in writing to the cheque issuer by post within 30 days.

If the cheque issuer fails to make the payment of the cheque amount within 15 days of receiving the cheque bounce notice, the payee can file a complaint in the appropriate court.

Cheque Dishonour Cases

Below is the process of a cheque dishonour case due to insufficient funds:

• The payee will issue a cheque bounce/ dishonour notice to the drawer (person who issues the cheque) to make the cheque amount payment within 15 days of receipt of the notice.
• If the amount is not paid, the payee will file a complaint before the Magistrate within 30 days of the expiry of the 15 days notice period.
• The payee has to appear before the court and give the case details. The Magistrate will issue a summons to the drawer to appear before the court.
• The drawer must go to the court and either accept or deny the complaint filed by the payee. If the drawer refuses the complaint, the court will proceed with a criminal trial of the case.
• The drawer will file his/her statement; the court will take evidence and hear arguments from both sides.
• If the court finds the drawer guilty of the cheque dishonour offence, the court will pass judgment against the drawer for the offence of cheque bounce.

Remember, failing to respond to the legal notice or settle the cheque amount within 15 days of the cheque bounce notice may result in the payee filing a complaint in court and initiating legal proceedings against you.

The punishment for cheque dishonour is imprisonment for not more than two years or a fine extending to twice the cheque amount or both.

Cheque Dishonoured Journal Entry

To reflect the non-payment and its impact on the books of accounts, you record a dishonoured cheque as a journal entry titled ‘Cheque Returned’ or ‘Cheque Dishonoured’. In the journal entry, you debit the account of the party who issued the dishonoured cheque and credit the bank account depending on the mode you receive the payment.

Analysing the reason behind dishonouring a cheque and taking proactive steps to prevent it is crucial for maintaining trust and credibility in financial transactions. Dishonoured cheques not only create financial inconveniences but they are also considered serious offences with legal and financial implications.  

Moreover, before issuing a cheque, you must ensure sufficient funds are in the account, fill out the cheque correctly, and see if all the necessary details are accurate to avoid any potential issues.