All about the term ‘Cheque Bounce’ and the legal provisions associated with it

Submitted by asandil on 5/16/2024

Understanding the Concept of Dishonoured Cheques

In layman terms, a dishonoured cheque, often referred to as a bounced cheque, is a cheque that is presented for payment but by the bank, it is returned unpaid. The bank might return a cheque unpaid due to several reasons such as a mismatch in signature, insufficiency of funds in the account of the person who has issued the cheque, discrepancies in the cheque’s date, or in case the payer stops the payment. The terminology ‘cheque bounce’ commonly signifies this scenario of cheque dishonour, painting a picture of the cheque ‘bouncing’ back from its destination due to a significant error. In terms of legal parlance and proceedings, cheque bounce falls under Section 138 of the Negotiables Instruments Act, 1881 in India. The Noteworthy aspect of Section 138 is the criminal liability that it imposes on the defaulters, framing cheque bounce as a criminal offence. Legal action incurs, when the recipient of the bounced cheque sends a legal notice to the payer within 30 days of receiving the cheque return memo. The prospects of dishonouring a cheque inadvertently initiate a legal process, thereby associating the dishonouring of a cheque with severe consequences.

The Negotiable Instrument Act, 1881 provides a comprehensive legal framework to address the issue of dishonoured cheques. According to this act, if a payee or holder in due course of the cheque doesn’t receive the value of the cheque due to it being bounced, a cheque bounce notice is necessary. The payee must send this notice to the drawer of the bounced cheque within 30 days of receiving the “Cheque Return Memo” from the bank. The failure of the drawer to make payment within the stipulated time leads to a cheque bounce case being registered against them. The act requires the payee to file a complaint before a Magistrate court within one month from the expiry date mentioned in the cheque bounce notice. If found guilty, the defaulter can face imprisonment up to two years, a fine double the cheque amount, or both, as specified under section 138 of the NI Act. This protects the rights of the payee to receive the security or value for which the cheque was initially drawn.

The Role of Negotiable Instruments Act, 1881 in Dealing with Bounced Cheques

Under the tenets of the Negotiable Instruments Act, 1881, dishonoured cheques are considered a criminal act and are treated quite seriously. Section 138 of the Negotiable Instruments Act was specifically designated to provide recourse in these situations. After the bank notifies the bearer of the bounced cheque, the holder has 30 days to serve a legal notice to the drawer of the cheque, or the issuer of the cheque. The notice stipulates the amount due and requests that the amount be paid within a specified period. If the drawer of the cheque fails to remit payment within the time frame specified in the legal notice, the holder of the cheque can file a complaint. This must be done within one month of the expiry of the notice period. By invoking section 138 of the Negotiable Instruments Act, the holder of the cheque can seek legal redress that includes both monetary remuneration and punishment for the drawer of the cheque which drives the seriousness of the Act of 1881.

Procedure to Follow when a Cheque Bounces

In situations where a cheque gets bounced, there is a certain procedure one must diligently follow. After the dishonour of cheque, the bank immediately issues a ‘Cheque Return Memo’ to the payer stating the reason for non-payment. Additionally, the holder of the cheque can legally demand the owed money from the defaulter as per the bounce notice to the drawer. Within a period of 30 days from the receipt of information from the bank regarding the cheque bounce, it is crucial to send a legal notice to the drawer demanding payment. If the drawer fails to make the payment of the amount of the cheque within 15 days of the receipt of the notice, the payee has the right to file a complaint against the drawer. This complaint must be filed within a month of the expiry of the notice period. It’s important to note that the case can only be filed in a court that lies within the jurisdiction of the bank branch of the payee, where the cheque was presented to the bank. To ensure the best legal recourse possible, it is advisable to consult with a lawyer during this process.

Penalties and Punishments in Case of Cheque Dishonour

The immediate aftermath of a dishonoured cheque often begins with the issue of a cheque return memo by the bank to the drawer. This memo, much like a physical receipt, details the specific reasons for the unsatisfactory transaction. For example, the memo might indicate an insufficient balance or a mismatch between the account number and cheque details. Irrespective of the reason, the issuance of the return memo is a signal that the drawer is on the brink of facing dire consequences under the law, particularly an offence under section 138. If the drawer fails to promptly rectify the issue detailed in the cheque return memo, it paves the way for more severe action under the Negotiable Instruments Act (NI Act) of 1881. Pursuant to the NI Act, legal notice to the drawer is the initial step. This notice is intended to demand the payment of the defaulted sum within a window of 15 days. Failure to comply with this demand could escalate the matter into a criminal offence, warranting imprisonment or a hefty fine, or sometimes, both. In short, a dishonoured cheque, if not properly addressed, or worse, ignored, can rapidly evolve from a minor financial transgression into a major legal offence.

Steps to Take if Your Cheque is Bounced

When a cheque bounces due to insufficient funds or any other reason, there is a defined process that the payee must efficiently follow. Crucially, you should present the cheque to the bank within 30 days from the date of bounce. This minimizes the chances of the drawer rectifying the deficiency before the amount can be withdrawn. However, do make a note that this is to be done within three months from the date mentioned on the cheque, even if you were not able to deposit it immediately after receipt. In the case the cheque is again dishonourd upon representation, legal action can be initiated against the drawer. Demonstrating this, the bank will provide a ‘cheque return memo’ or a statement indicating the reason for non-payment. You can then send a legal notice to the drawer within 30 days from the receipt of the ‘cheque return memo.’ The initiation of legal proceedings should be taken as a last resort, as it can be a lengthy and exhaustive process. Nonetheless, the law, specifically section 138 of the NI Act, is designed to offer protection in such scenarios, and proceeding legally when necessary provides the best chance of recovery.

How to File a Complaint Against a Bounced Cheque

When dealing with a case of cheque bounce, it’s imperative that the payer is given an opportunity to make the payment that they failed to deliver. The process begins by sending them a notice under section 138 of the Negotiable Instruments Act, 1881, detailing the transaction, the dishonoured cheque, and a demand for payment. This notice is a legal clarification and a condition precedent for taking any legal action. This notice should reach the drawer within 15 days from the date you, as the payee, receive the cheque return memo from the bank. If the drawer doesn’t respond to the notice or fails to make the payment within the stipulated time frame - which is 15 days from the receipt of the notice - the payee can proceed with legal actions. Remember, timeliness and clear communication are vital in the case of cheque bounces to ensure appropriate measures are taken.

Preventive Measures to Avoid Cheque Bounce

Foremost on the list of preventive measures is the importance of ensuring adequate funds in the account before issuing a cheque. Cheques are commonly dishonoured due to insufficient funds in the account of the drawer. Consequently, making an honest assessment of available funds and future deposits can help prevent a situation where the cheque is dishonoured. Just as importantly, it is always advisable to maintain a buffer amount to account for any unforeseen obligations or changes in the bank’s fees or charges. To be on the safer side, a demand notice must be sent immediately anytime a cheque bounce occurs. This notice in writing affirms to the drawer that a cheque issued by them has not been honoured. It is recommended to send the notice within 30 days from the time the payee or the holder in due course obtained knowledge that the cheque is not accepted. This legal step compels the drawer to make the payment promptly, and in case of failure, the person can claim twice the amount of the cheque. With these elaborate precautionary steps in place, the incidents of cheque bounce can be substantially reduced.

The Role of Banks in Cheque Dishonour Cases

Banks play a vital role when it comes to cases of cheque dishonour. When a presented cheque must be cleared, the bank scrutinizes the details to ensure everything is in order, including verification of the payment of the amount, the signature match, the date, and other particulars specified on the cheque. If there’s any discrepancy or if the payer’s account lacks sufficient funds, the bank will dishonour the cheque and return it to the payee’s bank with a ‘Cheque Return Memo’ stating the reason for non-payment. Still, the bank’s role isn’t limited to just this. The bank also has the responsibility to inform the payee about the bouncing of a cheque within 24 hours from the moment of dishonour. The payee in turn can proceed with legal proceedings against the payer, who would then be held responsible to pay the amount mentioned in the cheque, failing which imprisonment for a term can be a court-decreed consequence. This stringent and vigilant system facilitated by banks helps to maintain the sanctity of cheques as a trusted mode of transaction.

Cheque Bounce Case: An Analysis of Landmark Judgments

Over the years, several landmark judgments have set precedents in addressing cheque bounce cases, often referring to section 138 of the act. One noteworthy instance is when the Supreme Court directed the lower court to “issue a summons” against a defaulter and complete this trial within a specific duration. Rather than allowing the case to stretch indefinitely, the apex court displayed intolerance towards delays in delivering justice, making it a benchmark for future cheque bounce cases. However, a recurring problem in these cases is the absence of funds in the account. A groundbreaking judgment was made concerning this issue in the ICDS Ltd Vs Beena Shabeer and Anr case. The honorable court stated that if the dishonour occurs due to a lack of funds in the account, the issuer cannot evade payment by closing the account. This verdict underlined that the account holder’s responsibility doesn’t cease with the closure of their account, serving as an essential reference in understanding the legal responsibilities associated with cheque bounces.