Home Cheque bounce Cheque bounce and its legal remedies: an overview

Cheque bounce and its legal remedies: an overview

June 26, 2024

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This article has been written by Bhaveshkumar Ashokkumar Ramnani pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Now-a-days cheque bounce cases are on the rise in India. By way of cheques it’s easy for businessmen to take goods on credit by giving a future dated cheque. There was a time when cheques were considered to be the most reliable form of payment. But now, due to an increase in cheque bounce cases, a fear is being created in the minds of people before accepting any payment by way of cheque.

What is cheque bounce

A cheque is a negotiable instrument. Whenever the cheque is not encashed after its due presentation to the bank, it is said to be dishonoured. As soon as a cheque is dishonoured, the bank issues a return memo mentioning the details of the cheque viz., presentation date, dishonoured date, cheque number, amount, reason for dishonouring the cheque, etc.

Negotiable Instruments Act, 1881.

Sections 138 to 142 of Negotiable Instruments Act, 1881, deal with cheque dishonour. These provisions state the procedure after a cheque has been dishonoured, as well as the penal provisions stating the punishment. There are some ingredients mentioned before filing a criminal complaint u/s 138 of Negotiable Instruments Act, 1881, which are as follows:

The cheque must have been issued for the discharge of legally enforceable liability.
The cheque must be presented to the bank within 3 months or before its validity period.
After the cheque gets dishonoured, a written notice should be issued to the drawer of the cheque within 30 days from the return memo, demanding the amount of money.
The drawer of the cheque must fail to comply with the notice and fail to make the payment within 15 days of the receipt.

Reasons for cheque bounce

Some common reasons for cheque bounce or cheque dishonour are mentioned as follows:

Insufficient funds: The most common reason for a cheque bounce is insufficient funds in the account. This can happen when the account holder has not deposited enough money into the account or has overdrawn the account.
Stop payment order: A stop payment order is a request made by the account holder to the bank to stop payment on a particular cheque. This can be done in case the cheque was lost or stolen or if the account holder has changed their mind about making the payment.
Account closure: If the account associated with the cheque has been closed, the cheque will bounce. This can happen if the account holder has closed the account voluntarily or if the bank has closed the account due to inactivity or other reasons.
Signature discrepancies: If the signature on the cheque does not match the signature on file with the bank, the cheque may bounce. This can happen if the account holder has changed their signature or if the cheque has been forged.
Other technical errors: Cheques may also bounce due to other technical errors, such as incorrect account numbers, incorrect dates, or missing information.

Remedies

Whenever a cheque gets dishonoured, the first thing to do is to notify the drawer regarding the dishonoured cheque. Ask the drawer to comply with the issues and then resubmit the cheque to the bank. However, in many cases, the drawer refuses to comply with the cheque amount, so the following are the remedies mentioned in case of such cheque dishonour.

Criminal complaint

Cheque is a negotiable instrument, dishonour of cheques is governed by Negotiable Instruments Act, 1881. This act provides a procedure for filing a criminal complaint along with penal provisions. We will discuss this procedure step-by-step in detail, along with their limitations.

Legal notice

After the cheque gets dishonoured, a legal notice should be sent by way of R.P.A.D. to the drawer of the cheque through an advocate within 30 days from the date of the cheque return memo. Demanding the amount of the cheque within 15 days from the date of receipt of the notice.

Complaint U/S 138 of N.I. Act

When the drawer fails to repay the amount within 15 days from the service of the notice, the receiver can file a criminal complaint against the drawer u/s 138 of Negotiable Instruments Act, 1881. The complaint must be filed before the Magistrate within 30 days after the expiration of 15 days from the service of notice.

The affidavit is filed and attached to the complaint. The Court examines the original documents and checks for validity and limitation of the complaint filed. The complaint can also be filed by the power of attorney of the complainant. After satisfaction, the court issues a summons against the accused, and the case is tried as a summary criminal proceeding.

When the accused presents himself before the court, the court asks the accused to furnish surety and to submit bail bonds, in order to make certain that the accused will remain present on every date of the proceedings. The plea of the accused is recorded, and particulars are framed.

At the stage of evidence, the complainant files all the original documents before the court, followed by an examination in chief and cross examination of the complainant. The complainant can give further witnesses if he wants to; otherwise, the evidence of the complainant is closed.

Section 139 of the Negotiable Instruments Act, 1881, provides presumptions in favour of a complaint. Accused can rebut the presumption by taking a probable defence. After competition of complainant’s evidence, statement u/s 313 of Code of Criminal Procedure, of accused is recorded. Accused can give his witnesses if he wants to.

After closing of evidence of both sides, arguments are heard by both parties and conducted by their respective counsels. Then the court pronounces judgement in open court.

Punishments

After the amendment of 2002, the term of imprisonment was extended to 2 years, or the fine, which may extend to double the amount of the cheque or both.

Case law

Dayawati vs. Yogesh Kumar Gosain

In this case, the court took into account the fact that the offence under Section 138 can also be solved by mediation. The offence under Section 138 is compoundable and no provision in the law provides for the criminal trial of cases specifically.

Dashrath Rupsingh Rathore vs. the State of Maharashtra

In this case, the court held that the criminal complaint has to be initiated at the place where the bank is located and where the payee went to encash the cheque. Before this case, the initiation of the complaint was at the residence or place of business of the holder of the cheque.

Metres and Instruments (P) Ltd. vs. Kanchan Mehta

In this case, the court held that the offence committed under Section 138 is a civil wrong and the compensation awarded under Section 138 is punitive. The court will not stop the parties from compounding the offence at an initial stage or a later stage.

Civil suit

In cheque bounce cases, mostly criminal complaints are filed. Although civil suit can also be filed as ‘Suit for Recovery of Money’ under Order IV of Code of Civil Procedure, 1908. Civil suit is filed in cheque bounce cases when limitation of issuing a notice or filing a criminal complaint is over.

Suit for recovery of money

These cases can also be tried summarily under Order XXXVII of the Code of Civil Procedure, 1908. The summary suits are not as time consuming as regular or special civil suits, as time is saved due to their summary procedure.

Procedure of summary suits

The summary suit is filed under order XXXVII of Code of Civil Procedure, 1908. The suit should specifically mention that it is filed under order XXXVII of CPC.
A summary suit must be filed within three years from the date of cause of action; otherwise, it is barred by the Limitation Act, 1963. After filling out the case, summons are issued to the defendant, mentioning that the defendant must appear before the court within 10 days from the date of service of the summons.
If the defendant fails to appear in court, an Ex-Parte decree is passed, awarding the plaintiff the amount not exceeding the sum mentioned in the complaint.
If the defendant appears within 10 days, judgement summonses are issued. Then the plaintiff files all his evidence and documents.
Defendant can only defend his case if he applies for leave to defend. If leave to defend is allowed, then the case is tried as a regular suit.
On the contrary, if the leave to defend is refused, then the court passes the judgement.

Preventing cheque bounce

Maintain sufficient funds: The best way to prevent cheque bounce is to maintain sufficient funds in the account to cover the amount of the cheque. This can be done by regularly monitoring the account balance and depositing money as needed.
Use cheques cautiously: Cheques should only be issued when there are sufficient funds in the account. It is important to be aware of the account balance before writing a cheque.
Stop payment orders: If a cheque has been lost or stolen, or if the account holder has changed their mind about making the payment, a stop payment order should be issued to the bank immediately.
Review bank statements: Bank statements should be reviewed regularly to identify any discrepancies or unauthorised transactions. This can help prevent cheque bounce and other financial problems.
Use alternative payment methods: In some cases, it may be more convenient and safer to use alternative payment methods, such as electronic funds transfer (EFT) or credit cards, instead of cheques.

Process of cheque bounce suit

The process of a cheque bounce in India, commonly referred to as “cheque bounce” or “cheque dishonour,” involves several steps. Here’s an elaboration and expansion of the input text:

Cheque issuance

A person or business issues a cheque to make a payment.
The cheque contains the account number, bank’s name, and relevant details, along with the amount and the date of issuance.

Presentation for payment

The cheque is presented at the bank where the account is maintained.
The bank verifies the availability of sufficient funds in the account.

Dishonor of cheque

If there is insufficient balance or other reasons for dishonour, the bank returns the cheque unpaid.
The cheque is marked as “dishonoured” or “bounced.”

Notice of dishonor

The bank sends a notice of dishonour (also known as a “cheque bounce notice”) to the drawer of the cheque.
The notice typically includes the reason for the dishonour and the amount of the cheque.

Legal consequences of cheque bounce in India

The Negotiable Instruments Act, 1881, governs the legal consequences of cheque bounce in India. This Act outlines the various penalties and liabilities that the drawer of a cheque may face if the cheque is dishonoured due to insufficient funds or any other reason.

Penalties for cheque bounce

Under the Negotiable Instruments Act, the drawer of a bounced cheque may face the following penalties:

Fine: The drawer may be fined up to twice the amount of the cheque.
Imprisonment: The drawer may be sentenced to imprisonment for up to two years.
Both: In some cases, the drawer may be both fined and imprisoned.

Additional liabilities

In addition to the penalties outlined above, the drawer of a bounced cheque may also be liable for the following additional charges:

Bank fees: The drawer may be charged a fee by the bank for dishonouring the cheque.
Interest: The drawer may be liable to pay interest on the amount of the cheque from the date of dishonour until the date of payment.
Damages: The drawer may be liable to pay damages to the payee of the cheque for any losses or expenses incurred as a result of the cheque bounce.

Defences to cheque bounce

There are a few defences that the drawer of a bounced cheque may raise in court:

Insufficient funds: The drawer may argue that there were insufficient funds in the account at the time the cheque was presented for payment.
Stop payment order: The drawer may argue that a stop payment order was placed on the cheque before it was presented for payment.
Forgery: The drawer may argue that the cheque was forged or altered without their knowledge or consent.
Mistake: The drawer may argue that the cheque was issued by mistake or under duress.

Repudiation of liability

The drawer can repudiate their liability for the cheque bounce if they have sufficient reasons.
This may involve proving that the cheque was issued without authorization, was stolen, or was presented after the stop payment period.

Legal proceedings

If the drawer fails to make good on the bounced cheque within a specified period, the payee (the person or business to whom the cheque was issued) may initiate legal proceedings.
This may involve filing a complaint under Section 138 of the Negotiable Instruments Act.

Resolution

The drawer can resolve the issue by depositing the required amount in the account to cover the bounced cheque.
The payee may also withdraw the complaint if the amount is received.

Impact on credit history:

A history of bounced cheques can negatively impact an individual’s or business’s credit history.
This may affect their ability to obtain loans or credit facilities in the future.

Preventive measures:

To avoid cheque bounce, individuals and businesses should ensure that they maintain sufficient funds in their accounts before issuing cheques.
They should also be aware of the stop payment period and use it promptly if necessary.

Case laws

Iram Feroz vs. Ayaz Gadhiya (2005)

In this case, the suit was filed due to the dishonour of the cheque given by the defendant to the plaintiff. In this case, the court held that the cheque is a bill of exchange according to Section 9 of the Negotiable Instruments Act, 1881, and a suit based on dishonour of the cheque is tenable as a summary civil suit. In this case, the Hon’ble Court decreed the suit with costs.

Rajesh laxmichand Udeshi @Bhatia vs. Pravin Hiralal Shah (2012)

In the present case, the lower court decreed the summary suit filed by the respondent in the case of dishonour of cheque. Hon’ble Court explained the legislative intent behind the Negotiable Instruments Act, 1881, i.e., it is to prevent the abuse of the banking system. Hon’ble court dismissed the appeal by appellant and modified the order passed by learned lower court.

V.K.Enterprises and Anr. vs. Shiva Steels (2010)

In this case the Apex Court has held as follows: “10. Order 37 CPC has been included in the Code of Civil Procedure in order to allow a person, who has a clear and undisputed claim in respect of any monetary dues to recover the dues quickly by a summary procedure instead of taking the long route of a regular suit. The courts have consistently held that if the affidavit filed by the defendant discloses a triable issue that is at least plausible, leave should be granted, but when the defence raised appears to be moonshine and sham, unconditional leave to defend cannot be granted.”

Conclusion

Cheque bounce is a much more serious issue than it looks, with legal complications. It affects both the parties, the drawer, and the receiver. As discussed above, there are numerous remedies available to the receiver in case a cheque bounces due to ‘insufficient funds’, including other reasons. The receiver can issue a legal notice to the drawer demanding the amount of the dishonoured cheque. In case of non-compliance, the receiver can file a criminal complaint u/s 138 of the Negotiable Instruments Act, 1881. The recipient of cheque can also file a civil suit against the drawer. If the drawer of cheque is unable to pay the amount that the court awarded in judgement, the court can attach the defendant’s property and assets to recover the amount. The court can also award damages and costs of proceedings to the plaintiff.

Now-a-days it has become necessary for individuals and companies to exercise caution while accepting any payment through cheques, by examining or drafting the supporting documents, which helps them to alleviate the risk of cheque bounce. The most important thing to note is that, whenever an individual or any company faces a cheque bounce, without wasting any time, legal advice must be sought. Approaching an advocate at the very start can help you explore legal remedies and provide a pathway for compensation and recovery of the said amount.