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Cheques are an accepted mode of payment in India and are used for personal and business transactions. But when the cheque is defined as ‘bounced’, it can open a financial and legal disaster in their financial affairs. Cheque bounce according to the Negotiable Instruments Act (NI Act), 1881 or specifically Section 138 of the Act is a criminal offence provided some conditions are met. There is a clear legal framework in cheque dishonour cases to penalise the issuer who fails to meet his payment obligations.

What is a cheque?

A cheque is an order instrument in writing signed by the drawer authorising the bank to pay a specified amount to the person or organization indicated on the cheque. Cheques are safe and non-cash methods of making payments and are widely used in individual and business transactions. 

Types of cheques

  • Bearer Cheque: This should be paid to whoever presents it at the bank.
  • Order Cheque: Acceptable only for endorsement by the person to whom it is made payable.
  • Crossed Cheque: It is specifically required that the cheque is to be deposited in a bank account.
  • Stale Cheque : A cheque that is no longer valid for encashment, mostly used in India, unused for three months from the date of issue.

What is unique about a cheque different from those of any other forms of payment?

A cheque is an instruction in writing made by the banker that instructs the bank to pay money from the customer’s account, which is more secure than cash for big transactions and generates a record of the payment.

Are cheques encashable from the time of issue? 

Of course, it is possible to cash a cheque when it is presented for encashment and there is nothing wrong with it unless it will be a postdated cheque, which can only be encashed when the date stated becomes current.

What can happen to those cheques which are not encashed before the expiry of the validity of the cheque in question?

In case a cheque does not reach the payee's hand in a period of three months or may not be cashed within this period, then this cheque will turn stale. If the payment is still due, the drawer has to issue another cheque.

What is cheque bounce?

Cheque bounce or dishonour is when a bank returns a cheque for various reasons including lack of sufficient funds, a forged signature, overwritten or account issues. In case the cheque is returned unpaid, the bank gives the payee a “Cheque Return Memo” which among other things gives the reason for the return. This memo acts as a framework from which the payee can write to the drawer demanding his payment and in the event of the drawer’s failure, can proceed with legal action.

Common reasons for cheque bounce

Cheque bouncing has become a common problem in recent years mainly due to the following causes:

  • Insufficient funds: The account balance cannot support the amount on this cheque.
  • Signature mismatch: The signature on the cheque was forged as per the records of the drawer’s bank.
  • Overwriting or alterations: Augmentations on the cheque may lead to dishonour of the cheque.
  • Account issues: They can be a current, inactive, frozen or even closed account.

Why do cheques get rejected because of lack of funds?

A low account balance occurs when the available balance in the account is below the sum for which payment through cheque has been made, and the bank bounces the cheque. It is the most frequent cause of cheque bounce and may invite legal proceedings under Section 138.

Can a cheque bounce for reasons that are not the drawer’s fault?

Indeed, other factors such as faults in the banking system or system faults may at times lead to dishonour. In such cases, the drawer may have to present another cheque without causing a bounced cheque issue.

Is a bounced cheque an automatic criminal affair?

Not immediately. Under Section 138, the act becomes a criminal offence only if the payee has followed the complaint process and the drawer has not paid within the stipulated period.

Why is cheque bounce such a grave offence in India?

Cheque bounce is regarded as a criminal offence mainly because any loss-making business or individual is likely to lose his/her money, and repeated dishonours are likely to impune the proper flow of business. According to Section 138 of the NI Act, to maintain the trust and accountability of cheque payments it has prescribed a criminal offence.

What is cheque bounce, civil or criminal? 

Cheque bounce is a criminal offence under Section 138 of the Negotiable Instruments Act which can involve punitive measures such as fines or imprisonment. But the payee can still seek other civil redressible remedies that would entitle the payee to monetary recovery.

How does the NI Act operate within cheque transactions?

The NI Act spells down regulations for cheque business, especially for cases of dishonour and holds the issuers responsible in the event that they do not honour cheques.

Negotiable Instruments Act, 1881

According to the NI Act, 1881 there are provisions which deal with cases relating to cheque dishonour. Cheque bounce is governed by Sections 138 to 148 state penalties, complaints and protection of payees.

Other provisions relevant to Cheque bounce

Some key provisions associated with the Cheque bounce are the following;

Section 138: Properly outlines the common non-trivial bounced check offence occasioned by lack of funds or account-related complications. Under Section 138:

Through the Cheque Return Memo, the payee must give a formal demand notice within 30 days from the payee.

The drawer has 15 days from the date of the notice to pay if he is to avoid being declared an offender.

If payment has not been made then the payee can present a complaint to the proper court within 30 days.

Section 139: Takes that the cheque was made in the discharge of a debt or liability unless evidence to the contrary is adduced. This puts back the burden of evidence on the drawer.

Section 140: Claims that the drawer cannot plead ignorance of lack of sufficient funds as a reason.

Section 141: Liable for companies and their officers in case of being found guilty of the dishonour of a cheque drawn by the company.

Section 142: Gives details on how to lay a complaint under Section 138 in terms of time bar and jurisdiction.

Section 143: Permits the courts to conduct summary trials when dealing with offences related to cheque bounce.

Section 144: Permits the court to look at documents concerning the dishonoured cheque during trial.

Section 145: Authorizes the admissibility of affidavits and documentary evidence during the trial to make the trial more efficient.

Section 146: It also affords to the bank’s slip or memo character as evidence of dishonour.

Section 147: Enables aggravated offense making it possible for parties to resolve their disputes out of court.

Section 148: Enables the appellate courts to order the drawer to pay up to 20 per cent of the cheque amount during the appeal.

What is the objective of Section 138?

Section 138 was intended to curb the misuse of cheques by those who make cheques for reasons prohibited under the NI Act.

Can organisations also be prosecuted under the NI Act for cheque bounce?

Indeed, subscriptions to Section 141 of the NPC mean that both companies and their officers specifically engaged in the issuance of cheques may be prosecuted.

What does Section 147 mean by compounding offences? 

Aggregate of offenses enables the parties to clear the matter out of court and in such cases the case may be dismissed in a courtroom if by agreement.

The process of filing a complaint for cheque bounce

If a cheque issued to you has bounced and you want to pursue legal action, here is the step-by-step process:

Step 1: issue a demand notice

After the Cheque Return Memo has been received the payee must then issue a demand notice to the drawer not later than thirty days. The notice should:

  • Briefly state the amount of the cheque, the date of dishonour and the reason behind it.
  • Payment should be made within 15 days.

Step 2: Wait for payment

In receipt of the demand notice, the drawer has 15 days within which to make the payment. If they agree and cooperate, then the problem is solved.

Step 3: File a complaint in court

If the payee has still not received payment after the 15-day period, he may file a complaint in a magistrate’s court in the drawer’s area within the next thirty-day period.

Step 4: Court summons

An order for the drawer to show cause as to why the sum should not be paid may be made and the drawer may be summoned to a hearing.

Step 5: Court trial and judgment

The subsequent trial follows each side of the case putting forward its evidence. In case the drawer is found guilty, the court may then pass a ruling that includes a penalty of fining or imprisonment.

What information should be included in a demand notice?

It should state cheque details (amount, date) and call for its payment within 15 days from the date of receipt.

Is it possible for the drawer to respond to the matter after receiving the demand notice?

Of course, the drawer has 15 days to settle the account. If they do, there is no recourse to the law anymore.

Where is a complaint lodged?  

It should be filed in the magistrate’s court of the place where the drawer is located.

Legal Consequences of Cheque Bounce

If found guilty under Section 138, the drawer may face the following penalties:

  • Fines : Up to double the amount of the cheque.
  • Imprisonment : Up to 2 years at the court’s discretion.
  • Settlement options : The parties may settle under Section 147, outside the court.

Additional Consequences

  • Banking restrictions : Accidents are likely to be met and banking restrictions can be expected.
  • Credit impact: While it is not utilized in the calculation of credit scores, it influences the drawer’s credit with the banking and financial institutions.

What is the Maximum penalty for cheque bouncing?

A court may fine the accused twice the amount of the cheque that was passed.

Is a bounced cheque a factor of credit rating?

No, but it deteriorates the banking reputation of the drawer.

Does the repeated dishonour of cheques lead to the restriction of accounts?  

Indeed, constant dishonouring can result in reduced access to banking facilities.

Situations which permit a banker to dishonour his customer’s cheque

Banks have certain duties in regard to cheques and according to the law, they cannot accept payment in some cases. Knowledge of these circumstances can aid the customer as well as the banks in a better manner in the world of cheques. Here are the key situations in which a banker may justifiably dishonour a customer’s cheque:

When being paid payment may be countermanded by the drawer

When the drawer of a cheque requests for stop payment or instructs the bank to stop the payment on the cheque, the cheque must be paid. This means that should the drawer have in any way issued an instruction to the bank not to encash the cheque, the bank is legally bound to follow these instructions. The cheque that is returned will normally include the remark, “payment countermanded by drawer.”

Notice of drawer’s death

If a bank gets authentic information about the death of an account holder then any cheque drawn by the deceased has to be returned unpaid. The bank will write on the cheque the words “Drawer deceased.” It also safeguards the estate of the deceased and checks some unauthorised transactions.

Notice of customer’s insanity

If the account holder is certified insane by a medical practitioner known for practising in the account holder’s place of residence, the banker is obliged not to honour any cheques drawn by the holder of such an account.

In such occurrences, the cheques will be returned unpaid so that nobody shall perform any transactions with the affected account under questionable mental capacity.

Information about customers who have become insolvent

In case the customer is declared bankrupt, the bank has no other option than to dishonour any cheque presented by the customer. This protects the balance of the insolvent customer so that the assets are well handled in the same way that creditors are protected when the customer goes insolvent.

Liquidation of company

Such cheques include any cheque drawn by the company and as soon it receives a notice from a liquidator in terms of the Companies Act asking for a transfer of funds into the liquidator’s account all such cheques must be dishonoured. This is to ensure that the assets are properly utilised when selling them and that the payments do not in one way or the other hinder the clearing of debts by the company.

What must a drawer do if he/she wants to ‘ban’ the cheque from being cashed?

It is recommended that the drawer should write to his/her bank to make a stop payment order as soon as they receive it.

In what manner does a bank substantiate the confirmation of the death of his/her account holder?

Banks normally obtain information from official sources such as a death certificate or a letter from a reputable organisation.

Where do cheques drawn by a company which is in the process of liquidation stand?

Many cheques distributed will be to discourage unapproved expenditures and to follow legal sale procedures including the liquidation process should such cheques be returned unpaid to the respective holders.

Conclusion

It is important for the account holders and the financial institutions to know the situations where a bank can dishonour the check of its customer to avoid expensive losses in the future. Cheques are used in monetary transactions and are very important however they demand trust and responsibility. This is because by identifying the critical occasion payment stopped by the drawer, knowledge of the drawer’s death, insanity, insolvency and company liquidation affect cheque transfers between the customers and banks.

They also safeguard the freedom of every person participating in these transacts and other measures that banks have to undertake to uphold legal measures that result in the enhancement of the banking sector. They should also consider taking caution with these conditions to minimize any financial disputes that may be involved. Finally, all this knowledge leads to improved financial literacy and assists in sustaining the trust on which the banking relationship is built.

FAQs

What legal repercussions follow the presentation of a cheque that has been dishonoured?

Where a cheque is dishonoured for whatever reasons arising from insufficient funds or stopped payment, the drawer of the cheque incurs legal repercussions under Section 138 NI Act including fines and imprisonment.

Can I make a complaint for a cheque bounce for a post-dated cheque?

Yes, it is possible to file a complaint for dishonour of a post-dated cheque either in cases when the cheque is given after the date mentioned on it and is returned due to lack of funds etc. But the complaint has to be filed only after the date on which the cheque has been returned.

Can the complaint involve only a small cheque or is it limited to a certain amount?

That is, the NI Act does not contain any prohibition with regard to the maximum amount of the cheque in dishonour cases. However, it is also significant in the aspect of the cost-effectiveness of suing for smaller amounts.

Is it legal for a bank to levy fees on processing a bounced cheque?

Yes, some banks may insist on the drawer and the payee shoulder fees associated with bounced cheques. Banks can charge different fees and these charges are described under the various banks’ general conditions.

What is available to a payee if the drawer fails to reply to a demand notice?

Since the drawer is given 15 days to respond to the demand notice, if there is no response, the payee can immediately make a complaint to the appropriate magistrate’s court.

What are the time constraints for filing a cheque bounce complaint?

Of course, action in the nature of a complaint must be instituted after 30 days from the end of the 15-day period after the demand notice has been issued. Such delay may cost the right to seek legal redress in many cases if done beyond the set limit.

Does a cheque bounce if it is written in a foreign currency?

Indeed, a cheque that has been issued in a foreign currency can bounce, due to the fact that the bank where the cheque has been tendered for payment does not accept foreign currency cheques; or where there are insufficient funds held in an individual’s account to cover the face value of the cheque in foreign currency as translated to the home country currency.

What legal remedy is available to a drawer who believes that the cheque has been dishonoured unfairly?

Any drawer finding that a cheque was dishonoured without merits should approach his or her bank for an explanation. where unsatisfied they can approach the banking ombudsman or seek legal redress for further action.

 

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