How to Cheque dishonor
A paying banker is under a legal obligation to honor his customers mandate. He is bound to do so under his contractual relationship with his customer. A wrongful dishonor will have the worst effect on the banker. However, under the following circumstances, the payment of a cheque must be refused:
- Where the customer countermands the payment:
Countermanding is the instruction given by the customers of a bank requesting it not to honor a particular cheque issued by him. It is commonly known as ‘stop payment’ order of the customer. When such an order is received (from the drawer) the banker must follow that order very carefully to avoid liability thereon and thus refuse to pay that cheque. However, the instructions regarding ‘stop payment’ should be honored only if it is (a) in writing (b) signed by the drawer, and (c) contains/mentions all the details of the cheque, viz, the number, the date, name of the payee and the amount of the cheque. Incase of partnership account or joint account, any partner or any one of the joint account holders can stop the payment of a cheque. So also, any director of a company can stop payment of a cheque.
If the countermanding instructions are not clear, then the bank will not be liable. Where a customer is maintaining two accounts and the account number is not specified, it is advisable to register the stop payment order on the both the accounts. (Reade Vs. Royal Bank of Ireland). The countermanding instructions should be served to the banker in the banking house and during banking hours.
In case information regarding “stop payment” is received by telephone or telegram the payment should be postponed and the drawer asked to send a written confirmation so as to avoid the risk of any unauthorized stopping of payment. It is not advisable to act upon the oral instructions/orders because if the banker returns the cheque, the customer, if he happens to be an unscrupulous person, may claim damages for wrongful dishonor of the cheque by saying that he never informed the banker to stop payment of his cheque. If the situation is very critical, the banker can return the cheque by giving a suitable answer like “payment countermanded by telephone/telegram and postponed pending written confirmation.”
The drawer alone has the right to countermand the payment of a cheque. In case a cheque is lost by a holder, he should stop payment of that cheque only through its drawer. It is so because, a banker is always answerable only to the drawer, in the case of dishonor of a cheque. In the case of a draft, its purchaser has no right to countermand its payment.
Any countermanding instruction given to one branch is not effective, as a notice given to another branch, as was decided in the case of Burnett Vs. Westminster Bank.
If a banker, honors/pays a countermanded cheque:
(a) the payment does not amount to payment in due course,
(b) the banker will have to reverse the entry, and
(c) the banker will have to pay damages for dishonour of the customer’s subsequent cheques for want of funds in the account.
Therefore, countermanding instructions, once received, must be kept as a constant record. A ‘stopped payment’ register may be maintained for ready reference. It is advisable that a slip, containing the details of the countermanded cheque should be pasted on the customer’s account. Alternatively, a red ink mark may be made against the customer’s account, so that, the official concerned with posting and passing of cheques may be careful.
When a banker dishonours a countermanded cheque, it would be advisable to give answers like “orders not to pay”.
2) Upon the receipt of a notice of customer’s death: Death puts an automatic end to the contractual relationship between a banker and his customer. When a banker receives written in formation from an authoritative source, (preferably from the nearest relatives) regarding the death of a particular customer, he should not honor any cheque drawn by that deceased customer. However, if the payment is made without knowing the fact of the customer’s death, bank cannot be held liable.
It important to note that the banker should not rely on rumours and should ascertain the news of the customer’s death from reliable sources.
The account of a deceased person will cease to be operative till his successor or legal representative produces the succession certificate or probate of the will or a letter of administration.
In case an agent has signed a cheque of the principal, the banker should not stop payment of a cheque on account of the death of the agent. This is because the agent was not the drawer. Similarly, if a person signs a cheque in his official capacity such as Secretary of a club, Principal of a college, Director of a company, the death of such a person shall not make the account inoperative. Hence, cheques drawn on such accounts should be honored.
3) Upon the receipt of a notice of customers insolvency: In case of insolvency proceedings against the customer, the banker should stop payment from customer’s account as soon as it comes to know that insolvency petition has been filed against the customer. On passing of order of adjudication, the banker must close the account and intimate the balance of the account to the official receiver.
In case of joint account holder being declared insolvent, the banker must stop payment from joint account till their respective shares are determined.
In case a company goes into liquidation, the powers of the directors and managerial personnel cease on the commencement of winding up and they vest in the liquidator. Afterwards no cheues signed by the directors etc. should be paid by the bank form the company’s account.
4) Upon the receipt of a notice of customers insanity: Where a banker receives notice of a customer’s insanity, he is justified in refusing payment of the cheque drawn by him & i.e. the customer. The banker should make a careful note, when the lunacy order is received. It is advisable that the banker should act upon a definite proof of the customer’s insanity like a doctor’s certificate, a court order etc.
5) Upon the receipt of a 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). The term ‘Garnishee’ refers to the person who has been served with the order.
This Garnishee proceedings comprise of two steps. As a first step ‘Garnishee order Nisi’ will be issued. ‘Nisi’ means ‘unless.’ In other words, this order gives an opportunity to the banker to prove that this order could not be enforced. If the banker does not make any counterclaim, this order becomes an absolute one. This ‘Garnishee Order absolute’ actually attaches the account of the customer. If it attaches whole amount of a customer’s account, then, the banker must dishonor the cheque drawn by that customer. He can, however, honor the cheques to the extent of the amount that is not garnished. Hence, the banker should go through the terms of the order very carefully.
If the order is vague or if it gives a wrong description of the party, it is not effective. (Koch Vs. Mineral Ore Syndicate). A garnishee Order issued against a husband’s account can not attach a joint account in the name of the husband and wife (Hirschorn Vs. Evans). If the order is so worded as to attach two accounts in different capacities, then, it attaches both the accounts. (Plunkett Vs. Baraclays Bank Ltd.). A Garnishee Order in the name of a firm, attaches both firm’s account and the private account of the partners. A cheque in favour of a judgement debtor can not be attached by the order, because, the cheque is not the property of the payee until the money is paid to him. The proceeds of sale of shares, stock etc., are not attached, if they are not received by the bankers on the date of the order. This order cannot attach cheques paid into the account of the judgement debtor but not yet collected. However, in case where a cheque is sent for collection by one bank (principal bank) to another (agent bank), the moment the cheque has been realized by the agent bank, that realisation is deemed to be a realisation made by the principal bank itself, and as such, it could be attached as was decided in the case of Gerald C.S. Lobo Vs. Canara Bank. (1991). The fact that the realization slip was received by the principal bank at a later date was considered immaterial in the above case. Foreign balances are not attachable. If this order is sent to the head office, then, a reasonable time should be given for communicating this order to the concerned branch.
6) 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. Once an assignment has been made, the assignor has no legal rights over the bank balance and therefore, if he draws any cheque, the banker should refuse to honor it.
7) When the funds are not properly applicable: When the banker comes to know that the cheque has been drawn inconsistent with the purpose of opening of the account he must not honor the cheque. For example, personal cheques cannot be paid out of trust accounts.
8) Defective title: Where a banker comes to know that the person presenting the cheque is not entitled to receive the payment thereon, he should refuse to honor that cheque. For instance, a person who brings a cheque, which has been countermanded or which has been forged, has no title to it.
9) Other grounds: A banker is justified in dishonoring a cheque under the following circumstances also:
If a cheque is:
(i) Conditional one,
(ii) Drawn on an ordinary piece of paper,
(iii) A stale one,
(iv) A Post-dated one,
(vi) Drawn on another branch where the account is not kept,
(vii) Presented during non-banking hours,
(viii) If the words and figures differ,
(ix) If there is no sufficient funds,
(x) If the signature of the customer is forged,
(xi) If the endorsement is irregular,
(xii) If a crossed cheque is presented at the counter.
(xiii) If the customer closes the account before the cheque is presented for payment,
(xiv) Where a cheque is irregular, ambiguous or otherwise materially altered,
(xv) Where a joint account is operated by all jointly but the cheque is not signed by all of them.
Answers to the Dishonored Cheques
There is no statutory obligation upon a banker to give a written answer to satisfy the rules of the clearing house. In giving such answer while dishonoring a cheque. But, in practice the banker gives such answer to satisfy the rules of the clearinghouse. In giving such answer he must be very cautions and must see that his answer neither damages the customer’s credit nor mislead the party presenting the cheque. Usually the banker attaches a memorandum containing the different answers printed on it and they put a tick mark against the appropriate answer.
Some of the answers for dishonoring the cheques and the abbreviations there of are explained below:
- Amount Insufficient (A.I,) or Fund Insufficient (F.I): This abbreviation is used in those cases where the drawer does not have sufficient funds/money in the account of the customer. Previously, in such a case, the words “Refer to Drawer (R.D)” were used.
According to the newly introduced Sec. 138 of the N.1. Act 1881 (Amendment of 1994) if a cheque is returned with the words: (a) “amount insufficient to honour the cheque,” and/or (b) “exceeds the amount arranged to be paid from the account,” it constitutes an offence and is punishable under the Act. Since the expression R.D. does not disclose a definite reason, it is advisable on the part of the bankers in Bangladesh to give a more positive and definite reason (specifically the twin reasons mentioned under Sec. 138 if applicable) for the dishonor of a cheque, so that, the scheme of the new section would be more effective and meaningful.
- Not Arranged For (N.A.): This phrase is used in a case where payment of cheque will result in an overdraft which has not been approved by the bank.
- Exceeds Arrangement (E.A): It is used when the cash credit or O.D. is completely exhausted.
- Endorsement Irregular (E.I.): This phrase is used where endorsement is not in order, e.g the spelling of the payee’s name as given on the face of the cheque differs from that in the endorsement.
- Effects Not Cleared (E.N.C.): This phrase is used in those cases where the drawer has given certain cheques, drafts, etc., for collection and the same have not been collected yet and, therefore the banker is not in a position to meet the cheque drawn on account of insufficiency of funds in the drawer’s account at the moment.
- Drawer Deceased (D.D.): Where the banker receives intimation that the drawer has expired and, therefore, it has stopped payment of cheques.
- Words and Figures Differ (W. & F.D.): This phrase is used in cases where the reason for dishonour is differing of amount of cheque in words and figures.
- Irregularly Drawn Requires Confirmation: This expression is used where the cheque appears to have been drawn in an unusual or ambiguous manner or where the banker suspects the cheque haring been tampered with.
Payment of cheque by mistake
In case the payment of a cheque has been made by the drawee bank under a mistake, it can recover from the payee provided the payee’s position has not been altered to its prejudice before detection of mistake. (United Bank of India vs. M/s. A.T. Ali Hussain Co. & Others).
Consequence of a wrongful dishonor
If a banker, without justification, dishonors his customers cheque, he makes himself liable to compensate the customer for any loss or damage. While mentioning the liability of drawee of cheque, Sec. 31 of N.I. Act, 1881 states “The drawee of a cheque having sufficient funds of his drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required to do so, and, in default of such payment, must compensate the drawer of any loss or damage caused by such default.” The words “loss or damage” used in section 31 not only mean the pecuniary loss but also loss of credit or injury to reputation of the customer. Thus, if the customer is a trader or a businessman, the damages may be substantial. But, however, a non-trader is not entitled to recover substantial damages for the wrongful dishonour of his cheque. In Gibbs Vs. Westminster Bank, Mrs. Margaret Gibbsons, a non-trader, was awarded only nominal damages because of the absence of any special loss.
In assessing the damages for injury to credit, the courts give due consideration to various factors, such as financial position and business reputation of the customer and the customs of the trade to which he may belong.