What if the bank dishonoured a cheque by mistake?

A cheque should always be checked before they are presented to the bank.’  A cheque is a widely used modern method of payment and if there is a default with it, our financial relations may get disrupted. So it is of great importance to know about the dishonor of a cheque, not just as a law student, also to avoid being cheated!

Overview: A cheque is a financial instrument (exchange bill) that is drawn upon a banker so that, on submitting it to the bank, the bank gives the designated amount of money as demanded by the applicant. The individual/ organization issuing the cheque is known as the ‘drawer’ and in whose favor the cheque is drawn is known as ‘drawee’. It is a written document, specifying the bank and having an unconditional order.

A cheque is bounced when, after giving it to the bank by the drawee for encashing, is returned unpaid by the bank. It is also known as cheque dishonored. This may happen due to a lot of reasons, like insufficient balance in the account of the drawer. In a cheque dishonor case, the bank always issues a cheque return memo for non-payment as soon as it gets bounced.

What is wrongful dishonor of cheque?

It refers to a mistake on the part of the bank to honor a valid negotiable instrument like a cheque by mistake that has been presented to it for payment. If all the essentials of a valid cheque are fulfilled and there is enough money in the account for its payment and it’s still not honored within the time period specified by the Uniform Commercial Code (UCC), it results in wrongful dishonor. This is in accordance with Article 4, section 402 of UCC. In case of wrongful dishonor of cheque, the payer bank is liable to its customer for damages. The bank is liable for actual, provable damages only including any potential consequential damages. The damages include actions such as arrest or prosecution of the customer caused by the wrongful dishonor of the instrument in question. Dishonor of cheques by a banker without any justifiable reason is called wrongful dishonor of cheques.

What happens when a bank dishonors a cheque?

If a cheque is dishonored by mistake or for some other reason, the drawee bank issues a ‘cheque return memo’ to the banker of the payee mentioning the reason for non-payment. Thus, the dishonored cheque gets canceled. The holder or payee can then resubmit the cheque within three months of the date on it if he can recover the circumstances, the presence of which makes the cheque dishonored. However, if the issuer of the cheque fails to pay the stipulated amount of money, the payee has the right to prosecute the drawer legally. For suing, the amount mentioned in the cheque should be towards discharge of a debt or any other liability of the defaulter towards the payee. If the drawer is sued under Section 138 of the act, he should be given a chance for payment of the money mentioned in the cheque immediately in the form of a written notice.

The payee has to send notice of cheque bounce within 30 days from the receiving of the memo by the bank. The drawer has to pay within 15 days from the receiving of such notice. If the drawer fails to make payment within 30 days from the date of the notice, the payee can file a suit against him under Section 138 of the Negotiable Instruments Act, 1881. However, registration of the complaint is necessary within a month of the expiry of such notice. Also, a cheque bounce lawyer should be consulted. For the prosecution, it is also necessary that the cause for cheque bounce should be insufficient balance in the account of the drawer and the cheque is issued towards discharge of a debt or legal liability.