This article was written by Hardik Daga while he was interning at iPleaders.

What to do if a cheque given to you bounces

According to the Section 138 of the Negotiable Instrument Act, a person whose drawn cheque has been dishonoured is liable and shall be made to pay fine which is double the amount written in the cheque or should be imprisoned for two years or both. This means that the person who wrote a cheque and then dishonored it for any reason (insufficiency of funds, stop payment order etc) can be punished under the criminal law for his action. If you have money stuck in a bad debt, then if a cheque was issued to you – then you can use this as a threat to recover your dues.

Steps which should be taken when cheques bounce

1) The cheque has to be presented to the bank within a period of 3 months (earlier it was 6 months) from the date on which it is drawn or within the period of its validity, whichever is earlier.

2) The holder of cheque should send a notice to the drawer mentioning the dishonoring of the cheque by the bank within 30 days after cheque has been dishonored.

3) The drawer has 15 days to repay the amount and if he fails to do this then holder has to take a civil action within a month.

The drawer will only be liable when he has legally enforceable liability or debt to pay to the holder. If the cheque is drawn for donation or to the charitable organization then it won’t come under dishonoring of a cheque. Even application amount paid for shares falls in this category.

Earlier, if the signature mismatched or some alterations were made in the cheque, it didn’t fall under the ambit of willful dishonor of cheque but in a recent judgment of the Supreme Court it was held that dishonouring of a cheque due to a signature mismatch with the one submitted as a specimen to the bank could make drawer pay a hefty fine or get him prosecuted.[1]

Sometimes the name of the drawer is not clear on the cheque and also there is no mention of address of the drawer. Holder may contact the bank on which cheque is issued and request the bank to provide him drawer’s contact information.

The Bombay High Court has ruled that bank cannot prosecute borrowers under the stringent anti-cheque bouncing law if blank post-dated cheques issued by them as collateral security are dishonoured.[2]

What if a cheque issued by a company or LLP bounces?

Under Section 141 of the Negotiable Instrument Act if a cheque issued by a company or LLP bounces then every person, who at the time the offence was committed, was in charge of and was responsible to the company or LLP for the conduct of the business shall be deemed to be guilty of the offence and will be tried under Section 138. The word ‘in charge’ of means the person who is in overall control of the day to day conduct of the business. The very fact that they (MDs and directors) have signed a cheque is enough to prosecute or fine them for the act.

What can be the defence of a company official against a case of cheque bouncing?

A senior official of the company who is tried under Section can take a defense that he had no knowledge of this act or was diligent while exercising his duty and he could not have done anything to avoid it.

According to the recent Judgment of the Supreme Court a managing director is prima facie in charge of and responsible for the company’s business and affairs and can be prosecuted for offences by the company. Directors can be prosecuted only if they were in charge or had a hand behind the act. Similarly, company cannot be held liable if one of its branch issues a cheque and it is dishonoured.[3]

Other officers of a company cannot be made liable under sub-section (1) of section 141, they can be made liable only under sub-section (2), by looking into their position and duties into the company and their role in regard to the issue and dishonor of the cheque, disclosing consent, convenience or negligence. For E.g. Signatories who hold the responsibility to look after the transactions made by the companies by cheques.