Circumstances Under Which A Cheque May Be Dishonoured

Circumstances Under Which A Cheque May Be Dishonoured

A paying banker is under a legal obligation to honour his customer’s mandate. He is bound to do so under his contractual relationship with his customer. A wrongful dishonor will have, the worse effect on the banker. However, under the following circumstances, the payment of a cheque may be refused.

a)    Countermanding: Countermanding is the instruction given by the customer of a bank requesting the bank not to honour a particular cheque issued by him. When such an order is received, the banker must refuse to pay the cheque.

b)    Upon receipt of notice of death of a customer: When a banker receives written information from an authoritative source, regarding the death of a particular customer, he should not honour any cheque drawn by that deceased customer.

c)    Upon the receipt of notice of insolvency: Once a banker has knowledge of the insolvency of a customer he must refuse to pay cheques drawn by him.

d)    Upon the receipt of notice of insanity: Where a banker receives notice of a customer’s insanity, he is justified in refusing payment of the cheque drawn by him.

e)    Upon the receipt of notice of Garnishee order: Garnishee order refers to the order issued by a court attaching the funds of the judgement debtor (i.e. the customer) in the hands of a third party (i.e. the banker). In such a case, the banker may refuse payment.

f)     Upon the receipt of notice of assignment: The bank balance of a customer constitutes an asset and it can be assigned to any person by giving a letter of assignment to the banker. In such case also the banker may refuse payment.

g)    When a breach of trust is intended: In the case of trust account, mere knowledge of the customers intention to use the trust funds for his personal use is a sufficient reason to dishonor his cheque.

h)   Defective Title: If the person who brings a cheque for payment has no title or his title is defective, the banker should refuse to honour the cheque presented by him.

i)     Other Grounds: A banker is justified in dishonouring a cheque under the following circumstances also:

• a conditional one,
• drawn on an ordinary piece of paper,
• a stale one,
• post-dated one,
• mutilated,
• drawn on another branch where the account is not kept,
• presented during non-banking hours.
• If the words and figures differ,
• If there is no sufficient funds,
• If the signature of the customer is forged,
• If the endorsement is irregular and,
• If a crossed cheque is presented at the counter.