Bounced Cheque Explained

Bounced Cheque Explained

I intend to explain in the simplest way possible how a cheque work and how it becomes a bounced cheque as per the UAE law.

If you are a resident of United Arab Emirates, you must have came across a situation that involved cheques, either by giving or receiving one. Regardless of the circumstances in which a cheque was given or received, the problems arising from using cheques are due to the lack of knowledge of the relevant UAE laws when it comes to understanding of how the cheques work.

Take the example of being a landlord, it is when you will receive cheques from the tenant for the rent value. As per the UAE law and the common practice the tenants can pay the rent by one or more post-dated checks, pay the real estate broker's fees using a cheque as well as the amount for the security deposit.  

If you present such cheque to the bank and they get honored, you have nothing to worry about. However, if the bank could not clear the cheque, they will inform you that such cheque has bounced and that they cannot help you to obtain the funds you are entitled to, they can only issue a letter of rejection, then you should pursue further legal actions.

It is safe to say that UAE residents are safeguarded by a well-established legal framework protecting their rights and helping them recover any losses they may have suffered when faced with a bounced cheque. 

Cheques belong to a more prominent family of commercial papers, along with bills of exchange, promissory notes, bearer instruments, and are used as instruments of payment in different types of transactions.

Taking the same example as above where you are the landlord, if the tenant renting your apartment, gives you a cheque as a mean of payment for the rent value, he (the tenant) is the Drawer, and he is giving an order to the bank (the Drawee) to pay on a certain date a specific amount of money to you (the Payee).

Since a cheque can be cleared only starting from the date mentioned on the cheque itself and onward up to six month from the date of issuing the cheque, if on that specific date you to go the bank to cash the cheque and the bank informs that you cannot collect the funds due to failure of meeting specific criteria, that is when the cheque is considered to be “bounced.”

The most common scenario for a cheque to be bounced is due to the insufficiency of funds, which means that the Drawer’s account does not have enough funds to honor the cheque he handed to the Payee (You). Sometimes, the bank account of the Drawer (the tenant) did had enough funds in it when the cheque was passed to you, but – for whatever reason – the funds were spent in full or partially, so the funds remaining in the account become insufficient to support the issued cheque at the date and time of collection.

Unavailability of funds is the most well-known reason for a cheque to bounce. However, it is not the only one. As well, other causes can impact the effectiveness of the cheques, like when the Drawer’s signature on the cheque is different than the signature registered with the bank (also known as specimen signature). Also, if the bank account is closed on the date of collection, once the cheque will be presented at the bank, it will bounce.

*The article was previously published on the UAE Jurist legal blog

Sandipan Mohanty

Commercial Lawyer | Life Sciences | Healthcare | Medical Devices

4 年

Will the temporary freezing of accounts be deemed as insufficiency of funds for the purpose of Cheque Bounce?

Prakriti Rijal

Corporate Lawyer

4 年

What are the legal actions to consider after the cheque is bounced?

Akshay Verma

Advocate | Legal Advisor | Mergers & Acquisitions | Arbitration Disputes | Commercial Law

4 年

Thank you for sharing and keep these good articles coming!

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