One of the popular forms of collateral, lending companies demand from borrowers is a post-dated cheque. Post-dated cheques serve as one of the most popular forms of security to guarantee the risk of loan default. A post-dated cheque contains the total amount to be paid by the borrower; capital and accrued interest as well as the due date the loan has to be paid. The cheque can either be issued by the borrower or a guarantor of the borrower. And the cheque is kept safely in custody of the lender (financial institution).
As secured as this form of collateral might appear, lenders bear the risk of being disappointed when the cheque is issued to the borrower’s or guarantor’s bank. The risk of a failed cheque popularly known as a “bounced” or “dud” cheque is common in a loan transaction demanding collateral of this type. A bounced cheque is an event where a borrower’s or guarantor’s bank cannot accept a cheque as a result of insufficient funds or wrong signature on the cheque. This can be referred to as an empty or worthless cheque that has no monetary value or no money can pass through it. Hence a bounced cheque is both an embarrassment to the payee (lender issuing the cheque) and the bank. On the part of the lender, a bounced cheque poses greater exposure and can lead to insolvency if there are several occurrences. On the part of the bank, if a dud cheque is honoured mistakenly, it can lead to serious accounting and financial problems for the bank. A bounced cheque is considered a serious criminal offence in most countries including Nigeria. Unfortunately, most borrowers are not aware of the criminal implication of this. And have to face the consequence.
In Nigeria, the constitution regards a bounced cheque as a criminal offence with accompanying consequences. Just as a bank is obliged to honour a valid cheque, the drawer is also obliged to issue a valid cheque void of any issues. The DISHONOURED CHEQUES (OFFENCES) ACT, 1977 caters for the criminality of a bounced cheque. On conviction under Dishonoured Cheques Offences Act, 1977; an individual shall be sentenced to imprisonment for 2 years without an option of fine while in the case of a body corporate (Companies, Business and Non-Government Organisations, etc) it shall be sentenced to a fine of not less than N5, 000. A company involved in the issuance of the dud cheque is liable as a corporate body while its owners and staff by whatever title or description that consented, connived or was negligent in duty are punishable and liable individually.
Another serious implication of a bounced cheque on the part of the borrower is that the occurrence of a bounced cheque can negatively impact a borrower’s credit score. And the news can spread fast to other lending companies which can lead to a blacklisting of both the borrower and his or her guarantor from accessing loans in the future from other lending companies.
Now that you are aware of the implication of a bounced cheque, pay due diligence when next you are presenting a cheque as collateral. If the cheque would be issued by your guarantor, ensure it is well signed and follow up on the validity of the cheque.