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Home » Dishonor of Cheque – Reasons

Dishonor of Cheque – Reasons

By Richard Daniels Reading Time: 4 mins
Updated March 22, 2021

Dishonor of Cheque

There are a number of reasons for dishonor of cheque and without any valid reason, the bank never refused to make payment. If the bank for a valid reason refuses to make the payment of a cross cheque, this cheque is called a “Dishonored Cheque”. It is the duty of the bank to honor the cheque of his clients if complete or valid in all respects. However, the bank can refuse to make the payment of a cheque in the following cases:

Reasons to Dishonor of Cheque

Below are a few specific reasons for dishonor of cheque, you must be well familiar with all of them.

Drawer’s Countermined

When the drawers instruct the bank to stop payment of a cheque, he must refuse its payment. This is the most common reason to dishonor of cheque.

Drawer’s Death

Bank must stop the payment of a cheque of a notice of the drawer’s death. Another, valid reason to dishonor of cheque and bank may refuse to make payment.

Insolvency of Customer

On receiving the notice of insolvency or bankruptcy, the bank must refuse to pay cheque. Also, one more reason to dishonor of cheque.

Garnishes Order

If the order of the court is received attaching the account of the customer, the bank should stop honoring his cheques. Dishonor of cheque may occur generally due to the following reasons to.

  1. Insufficient balance in depositor’s account.
  2. When the date is not entered.
  3. When the drawer has closed his account.
  4. Amount in words and figures differs.
  5. Signatures of the drawer’s differ.
  6. When a cheque is mutilated or spoiled.
  7. Post-dated or stale cheque.
  8. When alterations are not signed by the drawer.
  9. Payee’s endorsement required.
  10. Refer to the drawer.
  11. When the cheque is anti-dated.
  12. No advice is received.
  13. Bank directs to present again.

Endorsement

The word endorsement means the act of writing one’s name on the reverse side of negotiable instruments (cheque, bill of exchange and promissory note) with a view to transfer its property to another. The person who signs the cheque is called “Endorser” and to whom the cheque is transferred, called Endorsee”. Endorsement is usually made on the reverse side of the cheque. But if no space is left on the back of the cheque for further endorsement, a slip of paper may be attached to the cheque. The slip is called “Allonge”. By endorsing a cheque, the endorser engages that it shall be paid on presentment and that if it is not paid he will compensate the holder.

Essentials for Endorsement

The following are the essentials for a valid endorsement;

  1. The endorsement must be on the reverse side.
  2. It must be signed by the endorser in exact spelling as appearing on the face of the instruments.
  3. The endorsement should be written with Ink. Endorsements in pencil are usually not accepted.
  4. The endorsement must be of the whole amount of the instrument.
  5. No prefix or suffix to the name of the endorser should be included. E.g. A.A Farooq Ali, while endorsing should write Farooq Ali only.
  6. If the names of the payees are exceeding from two, it must be kept in mind that the endorsement always be in the similar class.

Types of Endorsement

There are five kinds of endorsement which are as under;

Conditional Endorsement

If the endorsement formulates the disbursement of bill subject to the implementation of a circumstance, then it is known as “Conditional Endorsement’. The bank or payee can discharge the condition and make the payment to the endorser.

Blank Endorsement

If the endorser signs his name on the bill but does not identify the name of any other person to whom the instrument has been transferred, such endorsement is called “Blank Endorsement”.

Special Endorsement

It is the kind of endorsement in which the name of transferee is shown for payment of the instrument called “Special Endorsement”. So, it is payable to order.

Restrictive Endorsement

A restrictive endorsement is one which restricts or prohibits the additional negotiation of the bill. For instance, pay to Rashid only, signed by John.

Partial Endorsement

If the bill endorsed for part of the amount payable the endorsement is called “Partial Endorsement”. Partial endorsement is legally ineffective.

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Significance

When a transfer endorses an order bill and passes it on the transferee, he himself makes first sure that the previous endorsement if any are regular. If he is satisfied with genuine endorsement previous to his own, he endorses the order bill. Moreover, if the bill is dishonor the accept of the bill or the drawee will be primary liable for the payment of the bill. The subsequent holders of the bill can also be engaged for compensation. If a bill is accepted and endorsed by the bank, the bill is regarded as a “First class bill”. Hence, in case a bill which bears the endorsement of the bank is dishonored, the bank will also become one of the parties liable to pay the amount.

 

Author at Business Study Notes
Richard DanielsAuthor at Business Study Notes

Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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Filed Under: Banking & Finance Tagged With: consequences of dishonour of cheque, Types of Endorsement

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