Understand The Concept Of Refer To Drawer

Cheques are a popular method of payment in India, both for personal and commercial uses. But occasionally, cheques are dishonored or "bounced," which can cause anxiety and confusion for both the individual writing the cheque and the one attempting to collect it. "Refer to Drawer" is one of the most frequent explanations a bank uses for a dishonored cheque.

Since "Refer to Drawer" doesn't specifically address why the cheque wasn't paid, it may initially seem confusing or perplexing. Rather, it's a generic message that banks employ to let the person presenting the cheque know that they should get in touch with the drawer—the person who issued the cheque—for further details. This could occur for a number of reasons, including a lack of funds, a signature difficulty, or other technical difficulties.

It’s super important for you to understand why it might appear and what it means for both the cheque issuer and the recipient. Since it’s such an important part of the business world and day-to-day transaction, we will talk about the concept ‘Refer to Drawer’ in detail. Additionally, we will go over the legal consequences of the Negotiable Instruments Act of 1881 and offer simple instructions on what to do in the event that you come across a cheque that reads "Refer to Drawer."

What Is Refer To Drawer?

When a cheque is given for payment, the issuing bank is required to either honor the cheque or, in the event that the payment cannot be executed, to explain why it is dishonored. One such explanation offered by the bank when it returns an unpaid cheque is "Refer to Drawer." The holder (the person attempting to cash the cheque) should get in touch with the drawer (the person who issued the cheque) for more information, as this endorsement implies that the bank is unable to pay the cheque amount.

The expression "Refer to Drawer" is purposefully ambiguous because it could mean multiple reasons for the dishonor. It could indicate that there are not enough funds in the drawer's account, that there is a problem with the drawer's signature, or that there are other procedural or technical problems. Essentially, banks use it as a general endorsement when they are unable or reluctant to provide an exact explanation for nonpayment.

Common Reasons Behind “Refer To Drawer” Notation

Insufficient Funds

The drawer's (the person who wrote the cheque) account not having enough money is one of the most common causes of a cheque being marked as "Refer to Drawer." Upon receiving a cheque for payment, the bank verifies that the drawer has sufficient funds to cover the amount shown on the cheque. Instead of saying "insufficient funds" outright, the bank may decide to utilize the "Refer to Drawer" notation if the account balance is less than the cheque amount. This approach may be viewed as a means of preserving some discretion regarding the drawer's financial situation, but it may leave the cheque bearer in the dark regarding the reason for non-payment.

Irregular Signature

A discrepancy between the signature on the cheque and the one on file with the bank is another frequent reason why a cheque may be dishonored. Every account holder has their signature registered with the bank, and the bank may refuse to accept a cheque if the signature on it looks different—whether from forgery, a simple mistake, or a change in the drawer's signing technique. Banks frequently use the more general "Refer to Drawer" notation rather than specifying the problem as a "Signature Mismatch" in order to avoid disclosing particular issues that can cause disagreements or miscommunications between the drawer and the payee (the one submitting the cheque for payment).

Post-Dated Cheques

If a cheque is dated for a future date, it is regarded as post-dated. If a cheque is written for the 30th of the month but is submitted for payment on the 15th, for instance, the bank will not honor it until the designated date has passed. In these situations, the bank may label the cheque as "Refer to Drawer" to show that it is not yet ready for processing, instructing the holder to wait until the appropriate date before submitting the cheque again.

Stop Payment Instruction

The bank will follow the drawer's instructions if they have previously told them to halt payment on a particular cheque—possibly because the cheque was misplaced, or stolen, or they no longer want to make the payment. When this occurs, the bank may utilize the "Refer to Drawer" notation in place of providing specifics regarding the stop payment request. This encourages the cheque-holder to get in touch with the drawer for clarification while maintaining the confidentiality of the stop payment details.

Account Closure

The cheque will not be paid if the drawer's account has been closed or frozen, whether as a result of inactivity, legal concerns, or a personal request. The bank may label the cheque as "Refer to Drawer" in these circumstances. This notation informs the holder that there is a problem with the account, but it doesn't say why; instead, the holder must contact the drawer to find out further details.

Technical Errors

A cheque marked "Refer to Drawer" may also be the result of technical difficulties. These could consist of:

• Overwriting or Alterations: The bank may be reluctant to process the cheque if it shows any indications of overwriting, such as changes to the date or amount.
• Discrepancies in Amounts: The bank will frequently decide not to process the cheque if the amount printed on it is different from the amount stated in words. Instead of identifying the precise inconsistency, the bank may choose to utilize "Refer to Drawer" to signal that there is a problem with the way the cheque was filled out.
• Expired Cheques: In general, cheques remain valid for three months after they are issued. A cheque that is presented for payment after this time will not be honoured by the bank. The bank may choose to utilize the "Refer to Drawer" indication rather than mark it as "expired," which would require the holder to make additional inquiries.

Legal Implications Of “Refer To Drawer”

Under Indian law, there are serious legal repercussions for dishonouring a cheque. The Negotiable Instruments Act, 1881, in especially Section 138, which addresses the offence of cheque dishonour, is the most relevant provision in this respect.

Section 138 Of The Negotiable Instruments Act, 1881

A cheque that is dishonored for "insufficient funds" or that exceeds the amount scheduled to be deducted from the drawer's account is illegal, according to Section 138. However, it becomes crucial to determine the underlying cause of the dishonor when a cheque is returned with a "Refer to Drawer" statement. The drawer may be prosecuted if it is found that the reason has to do with inadequate funds or other comparable issues covered by Section 138.

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Liability Of The Drawer

If the cheque is dishonored and the drawer does not settle the payment within 15 days of getting a legal notice from the payee (the person who was intended to receive the cheque amount), they may be held criminally accountable under Section 138. The payee has 30 days from the end of the 15-day period to register a complaint if the drawer does not make the payment.

If convicted, the drawer can be punishable by up to two years in prison, a fine equal to twice the cheque amount, or both. Thus, if a cheque dishonoured with a "Refer to Drawer" line is because of inadequate money, the drawer may face serious penalties.

Other Relevant Provisions Under The Negotiable Instruments Act

• Section 139: A presumption in favour of the chequeholder is established in this clause. Until the drawer demonstrates otherwise, it is assumed that the cheque was written for a legitimate debt or liability. Therefore, until the drawer can show that the dishonour was caused by something other than a lack of funds, it is assumed that a cheque that is dishonoured and marked as "Refer to Drawer" was issued for a valid purpose.
• Section 141: The liability of partnerships and corporations is covered in this section. The individuals in control, including the firm's directors and executives, may be held accountable under Section 138 if a cheque issued by the company is dishonoured and marked "Refer to Drawer."

Legal Recourse For Payees And Holders

To safeguard your legal rights, you should do the following if you receive a cheque that says "Refer to Drawer":

• Contact the Drawer: The first step is to contact the drawer to find out why they were dishonoured, as advised by the bank. Without taking legal action, this could help settle the dispute amicably.
• Re-Present the Cheque: You can choose to re-present the cheque within the three-month validity period if the drawer guarantees that there was a brief problem (for example, insufficient funds that have since been replenished). To prevent issues regarding the validity of the cheque, it is crucial to act quickly.
• Send a Legal Notice: Under Section 138 of the Negotiable Instruments Act, a formal legal notice must be sent to the drawer if the cheque is dishonoured once more or if the drawer is unwilling. In addition to demanding payment within 15 days, the notice should explicitly outline the specifics of the dishonour.

Initiating legal procedures requires the issuance of a legal notice. A complaint may be filed in the relevant court by the holder if the drawer does not reply or pay the sum within the allotted time.

• Filing a Complaint in Court: The payee may submit a complaint with a Judicial Magistrate or Metropolitan Magistrate if payment is not received within the allotted 15 days. The complaint needs to be submitted within 30 days of the notice period ending.

The drawer has the initial duty of proving throughout the trial that there was a legitimate reason other than a lack of finances for the dishonour. The court may convict the drawer under Section 138 if they don't.

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Defences Available To The Drawer

If the cheque is dishonoured with a "Refer to Drawer" note, there are a number of defences possible, even if Section 138 establishes a presumption against the drawer:

• No Debt or Liability: If the drawer can demonstrate that the cheque was not written to settle a legally enforceable debt or obligation, the Section 138 prosecution may be unsuccessful. For example, this would be a good defence if the cheque was given as a gift or as a security deposit that wasn't meant to be paid right away.
• Technical Defects: The drawer may contend that there was not a lack of cash, avoiding Section 138 prosecution, if the dishonour resulted from technical flaws such as a postdated cheque or a mismatched signature.
• Forgery or Fraud: The drawer might not be held accountable for the dishonour if they can show that the cheque was obtained fraudulently or that the signature was fake.

Practical Steps For Avoiding Cheque Dishonor

cheque holders and drawers must take care to prevent issues that could arise from a "Refer to Drawer" scenario. The following tips could prove useful:

• Maintaining Adequate Funds: Drawers should constantly make sure they have enough money in their accounts to cover cheques that are issued. Account balances should be regularly checked to avoid dishonours brought on by inadequate funds.
• Properly Filling Out Cheques: The likelihood of technical errors resulting in dishonour can be reduced by making sure that all information on the cheque, including the date, amount (in words and figures), and signature, is filled out accurately.
• Avoid Issuing Post-Dated Cheques: When issuing post-dated cheques, drawers should exercise caution because it might be dishonourable to present them prematurely. Before delivering the cheque to the bank, holders should also confirm the date on the cheque.
• Issuing and Receiving Cheques Responsibly: The legal consequences of cheque transactions should be understood by all parties. Holders should make sure they deposit the cheque as soon as possible within its validity period, and drawers should only issue cheques when they are certain of the payment.

Conclusion

By gaining an in-depth understanding of "Refer to Drawer" and its legal implications, individuals and businesses can better manage their cheque transactions and minimize the risk of legal issues. Understanding this endorsement, especially under Section 138 of the Negotiable Instruments Act, is crucial for preventing cheque dishonour and its consequences. With this knowledge, you can handle financial transactions more confidently and reduce the possibility of disputes. Understand the concept of Refer to Drawer to protect your interests and ensure smoother banking operations.