A step-by-step guide for legal recourse when Cheque is Dishonored

|A Cheque is a mode of payment that is widely used for transactions including loan re-payment, payment of salary, bills, fees, and so on. Banks on a daily basis process and clear the vast majority of cheques. Issuing cheques are essentially proof of payment. However, cheques undeniably are a reliable mode of payment for most people. Conversely, issuing crossed “Account Payee Only” the cheque is advisable and indeed recommended so that the cheque is not misused in any way, shape or form.  A cheque basically is a negotiable instrument and they are of two types including Crossed and Account payee cheques which are non-negotiable by any person excepting the payee. The issued cheques have to be deposited into the bank account of the payee.

The legal definition of the author of the cheque is ‘drawer’ and the cheque is drawn in favor of the ‘drawee’ and the paying bank is typically known as the ‘payee’. Cheque bounce cases in recent times are quite common. Occasionally, huge cheque amounts remain unpaid and payee banks return them dishonored.

Dishonor of cheque results in the drawee bank issuing a ‘Cheque Return Memo’ to the payee’s banker pronto stating the reason for non-payment of the cheque. The banker of the payee then returns the memo and the dishonored cheque back to the payee. The cheque can be reissued or the payee can reissue the cheque within the timescale of three months of the cheque date if the drawer believes issued cheque will be honored the second time around. However, if the issuer of the cheque fails in making a payment, then its the payee’s right to proceed along the lines of legally prosecuting the drawer. 

The defaulter/drawer may be legally prosecuted by the payee for the fact that the cheque was dishonored. However, the only exception to the rule is if the cheque amount is huge and the cheque payment is towards discharging debt or other defaulter liabilities towards the payee.

In the case of a gift cheque, which may have been towards obtaining a loan or for illegal purposes, then the drawer is exempt from being prosecuted.

Legal action

In case of payee deciding to proceed legally, then the payer ought to have the chance of repaying the cheque amount pronto. The chance ought to be given only in the form of notice in writing.

The notice ought to be sent to the drawer within a month of receipt of the “Cheque Return Memo” notice from the bank. The notice also ought to allude to the fact that the cheque amount ought to be paid to the payee within a fortnight from the receipt date of the notice by the issuer. If the issuer of the cheque is unable to pay within a month of receipt of the notice the payee is entitled and indeed empowered to file a criminal complaint under Section 138 of the Negotiable Instruments Act.

Consult Lawyer for Cheque Bounce Matter