Bank Cheque

Bank Cheque may be a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. A cheque may be a document of great importance within the business world. It can pass from one hand to another easily then it’s become a well-liked mode of payment. A cheque is the most commercial and safe method of cash transaction because the transfer cost is extremely low and also the likelihood of loss is minimum.

Features of Cheque

• The instrument must be in writing.
• The instrument must be signed by the drawer.
• The instrument must contain an order to pay, which is to be expressed and unconditional.
• the quantity of cash to be paid must be sure.
• The payment must be legal tender money.
• A cheque may be payable to the bearer or to order but in either case, must be payable on demand.

Parties of a Cheque:

• The account holder who orders the bank to pay money from his/her account is called the drawer of the cheque.
• In a cheque, the drawer writes the name of the person to whom money is to be paid. The person so stated is called the payee of the cheque.
• In a cheque, the bank which is ordered to pay money from the depositor’s account is called the drawee of a Cheque.

Dishonor of Cheques

• When a cheque is drawn properly and there is a sufficient fund in the customer account, honoring the cheque is the primary obligation of a bank. At the time of account opening, the bank receives deposits from his customer on the footing that drawing against such deposits will be allowed on demand. So, without satisfactory reason, to dishonor a cheque may be treated as a breach of contract by the bank in the eye of law. In addition to this, section 31 of N.I. Act 1881 says, ” The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to try to, and in default of such payment, must compensate the drawer for any loss or damage caused by such default”. Despite all these, it is not always unlawful for a bank to dishonor cheques and there are circumstances when a banker is entitled to dishonoring the customer’s cheques.

Reasons for Dishonor of Cheque:

• Insufficient Fund: This is used when the funds in the customer’s account are insufficient to meet the cheque, which has been presented to the banker.
• Amount in figure and word differ: This answer is given when a banker wants to return the cheque on the ground that the quantity stated in words differs from that given in the figure. Although section 18 of N.I. Act. Says “If the quantity undertaken or order to be paid is stated differently in figure and words, the amount stated in words shall be the quantity undertaken or ordered to be paid”, yet we are in practice to return such a cheque.
• A cheque is undated / postdated / stale: Cheque should not be updated or postdated (where it is payable at a future date) or stale (where the date of the cheque is later than six months) on the date of its presentation. Undated, postdated, and stale cheques shall be returned unpaid.
• Drawer’s Signature differs/requires: If the drawer’s signature on the cheque differs from the specimen signature, the banker must return the cheque with the reason “Drawer’s signature differs”.
• Payment stopped by the Drawer: While the payment of a cheque is countermanded by the drawer and such cheque is presented for payment the same should be returned under the aforesaid reason.
• A crossed cheque must be presented through the bank: In case any customer presents crossed cheque over the counter for cash payment the same shall be returned because the payment of a crossed cheque cannot be made over the counter.
• Other Specific Reasons
• Mutilated cheque: Sometimes the cheque may be torned and pieces pasted together when it is presented to the paying banker. Such a mutilated cheque should be returned.
• Alternation in date/figure/words require drawer’s full signature: Date, figure and words are the material parts of the cheque. Any material alteration of a negotiable instrument renders the same null and void. So, unless the alteration in any material part of a cheque is authenticated by the drawer’s signature in full as per specimen recorded in the bank, the cheque shall be returned unpaid.
• Collecting bank’s endorsement require: Cheque crossed “A/C payee” as well as cheque crossed generally but payable to the order of the payee is required to be endorsed by the collecting banker. In the case of a cheque payable to the second payee, the collecting banker must confirm the endorsement of the first payee. The collecting bank must confirm the endorsement of the first payee.
• Payee’s endorsement irregular /illegible: Where transferring of the title to the cheque is necessary; it must be suitably endorsed by the payee. Without endorsement or with irregular / illegible endorsement of the payee, cheques will not be honored. It can be returned stating the reason as above. To satisfy the purpose of the negotiation, proper endorsement on the cheque is a must.
• “A/C Payee Only”, the cheque should be collected only through payee’s A/C:
• When a cheque is crossed “A/C payee only” it shall cease to be negotiable and it shall be the duty of the banker collecting payment of the cheque to credit the proceeds thereof only to the account of the payee named in the cheque. And as such, if a cheque crossed “A/c payee only” is negotiated either by delivery or by endorsement; it must be returned with the objection accordingly.
• Apart from all those, there are so many reasons for which cheques may be returned. For insanity, insolvency, or death of the customer, cheque may be returned. A Cheque is also returned while the credit balance of the account is assigned by the account holder or is attached by the order of the court.
• The cause of the cheque return should be specific and clear.
• Endorsement: The term “endorsement” of a negotiable instrument means writing a person’s name on the back of the instrument for the aim of negotiation. Section 15 of N.I. Act, 1881: “when the maker or holder of a legal document signs his name, otherwise than such maker, for the aim of negotiation, on the rear or face thereof or on an error of paper annexed thereto, he’s said to possess endorsed the instrument.
• The person who endorses is called ‘endorser’ and the person in favor of whom the endorsement is made is called ‘endorsee’.
• Forged Signature: A banker is expected to know the customer’s signature since a specimen is expected to be available with him/her for comparison. The banker is not duly-bound to honor any cheque which bears a signature not conforming to the specimen on record. If the signature is forged then no statutory protection is available to him/her under N.I. Act.

Dishonor of Cheque

• According to amendment in 1994 and 2000, 2006 penalties in case of dishonor of certain cheque for insufficiency of funds within the account of the drawer of the cheque is that such person shall be deemed to possess committed an offense and shall be punished with imprisonment for a term which can reach one year, or with fine which can extend thrice the quantity of the cheque, or with both; Provided that-
• The cheque has been presented to the bank within a period of validity.
• The payee or holder in due course of the cheque makes a requirement for the payment of the said amount of money by giving a notice, in writing to the drawer of the cheque within Thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid and
• The drawer of such cheque fails to form the payment of the said amount of cash to the payee or, as the case could also be, to the holder in due course of the cheque, within Thirty days of the receipt of the said notice.

Obligation to Honor the Cheque

When a customer opens an account there arises a contractual relationship between the banker and therefore the customer under which the banker undertakes an obligation to honor his customers’ cheques. This obligation is a statutory obligation under section 31 of the Negotiable Instrument Act, 1881.

However, this statutory obligation is not absolute. The statutory obligation to honor cheque is limited in the following ways:

a) The availability of the money in the account of the customer

b) The correctness of the cheque

c) Proper drawing of the cheque

d) Proper application of the funds

e) Proper presentation of the cheque

f) Reasonable time for collection

g) Existence of legal bar

Overriding the obligation: When a banker Overrides his statutory obligation and dishonors a cheque on reasonable ground, the banker is justified in doing so. Banker’s duty to maintain the secrecy of customer’s accounts: It is one of the principal duties of the banker to maintain complete secrecy of the status of consumers account. If Banker makes an unwarranted disclosure of the status of the account, a customer may close the account or may claim for any compensation.