A cheque is a negotiable instrument and one of the most commonly used methods of payment in banking. When a cheque is presented to a bank for payment, the bank examines it carefully before making payment. If the cheque does not meet the required conditions, the bank may refuse payment. Such refusal or non-payment of a cheque by the bank is known as return of cheque or dishonour of cheque.
Meaning of Return of Cheque
Return of cheque means the non-payment of a cheque when it is presented for clearing or payment, and the cheque is sent back unpaid to the presenting bank along with a return memo stating the reason for non-payment. The return may occur due to reasons attributable to the drawer, the cheque instrument, or the banking system.
In simple words, when a cheque cannot be honoured for any valid reason, the bank returns it unpaid, and this process is called return of cheque.
Legal Basis for Return of Cheques
The return of cheques is governed mainly by the Negotiable Instruments Act, 1881, banking rules, and RBI guidelines. Under Section 31 of the Negotiable Instruments Act, the banker is bound to honour a customer’s cheque only when:
- There are sufficient funds in the account
- The cheque is properly drawn
- The cheque is presented within its validity period
- There is no legal or contractual restriction on payment
If any of these conditions are not fulfilled, the banker has the right and duty to return the cheque.
Common Reasons for Return of Cheques
Banks return cheques for several reasons, which can broadly be classified into financial reasons, technical reasons, and legal reasons.
1. Financial Reasons
Financial reasons are the most common causes of cheque return and are directly related to the customer’s account balance or limits.
- Insufficient funds: When the balance in the drawer’s account is not enough to meet the cheque amount.
- Exceeds arrangement: When the cheque amount exceeds the overdraft or drawing power sanctioned to the customer.
- Account closed: If the drawer’s account has been closed before presentation of the cheque.
- Payment stopped by drawer: When the drawer instructs the bank to stop payment of a specific cheque.
- Funds not cleared: When the balance includes uncleared effects and not available for withdrawal.
It is important to note that cheque bounce due to insufficient funds or exceeds arrangement attracts legal consequences under Section 138 of the Negotiable Instruments Act.
2. Technical Reasons
Technical reasons relate to defects in the cheque instrument itself. These returns usually do not involve criminal liability but may cause inconvenience to customers.
- Cheque is stale or outdated: A cheque presented after its validity period (currently 3 months).
- Post-dated cheque: Cheque presented before the date mentioned on it.
- Date missing or illegible: When the date is not written or not readable.
- Amount in words and figures differ: When there is a mismatch between the two.
- Signature differs: When the signature on the cheque does not match the specimen signature available with the bank.
- Incomplete cheque: Missing essential details such as amount, date, or signature.
- Cheque torn or mutilated: If the cheque is damaged and material particulars are unclear.
- Alterations not authenticated: Corrections on cheque not signed by the drawer.
Banks are required to exercise due care while returning cheques for technical reasons to avoid customer complaints.
3. Legal Reasons
Certain cheques are returned due to legal restrictions or statutory provisions.
- Garnishee order: Court order attaching the funds in the customer’s account.
- Death of the drawer: If the bank has knowledge of the drawer’s death.
- Insolvency of the drawer: When the customer is declared insolvent.
- Lunacy or incapacity: When the drawer becomes mentally incapacitated.
- Account under dispute or freeze: Due to regulatory or legal instructions.
In such cases, the bank must return the cheque even if sufficient funds are available.
Cheque Return Memo
When a cheque is returned unpaid, the drawee bank sends it back along with a cheque return memo. The return memo is an important document as it clearly states the reason for dishonour.
Key points regarding cheque return memo:
- It is generated electronically in CTS (Cheque Truncation System)
- It contains a standardized return reason code
- It acts as documentary evidence in legal cases
- It is required for initiating action under Section 138 of the NI Act
Remember that proper mentioning of return reason is crucial, as incorrect reasons may expose the bank to legal risk.
Customer Intimation on Cheque Return
Banks are required to promptly inform customers when a cheque deposited by them is returned unpaid. The intimation may be given through:
- SMS alerts
- Email notifications
- Physical return of cheque with memo
- Internet banking alerts
Timely communication helps customers take corrective action, such as re-presenting the cheque or initiating legal proceedings.
Charges for Return of Cheques
Banks levy cheque return charges as per their approved schedule of charges. These charges may differ based on:
- Reason for return (financial or technical)
- Type of account
- Amount of cheque
However, banks are required to display these charges transparently and ensure customers are informed in advance.
Legal Consequences of Cheque Return
The return of cheque due to insufficient funds or exceeds arrangement has serious legal implications under Section 138 of the Negotiable Instruments Act, 1881.
For offence under Section 138, the following conditions must be satisfied:
- Cheque issued for discharge of a legally enforceable debt
- Cheque returned unpaid due to insufficient funds or exceeds arrangement
- Payee issues legal notice within 30 days of receiving return memo
- Drawer fails to make payment within 15 days of receiving notice
If these conditions are fulfilled, the drawer may face criminal prosecution, which may result in fine or imprisonment.
Role of Banks in Cheque Return Cases
Banks play a crucial role in handling cheque returns responsibly. Their responsibilities include:
- Verifying the cheque carefully before returning
- Using correct and standard return reason codes
- Maintaining proper records of returned cheques
- Providing return memo without delay
- Avoiding wrongful dishonour of cheques
Wrongful dishonour of a cheque when sufficient funds are available may make the bank liable for damages to the customer.
Importance of Cheque Return Management in Banking
Efficient handling of cheque returns helps in:
- Reducing customer grievances
- Avoiding legal disputes
- Maintaining trust in the banking system
- Ensuring compliance with RBI and legal requirements
With the introduction of Cheque Truncation System (CTS), cheque return processing has become faster, more transparent, and standardized across banks.
Conclusion (Exam-Oriented)
Return of cheques is a sensitive and legally significant area in banking operations. A banker must clearly understand the valid grounds for returning a cheque and must exercise due care while doing so.