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What to do if cheque by the client bounces?

A check is considered dishonoured or bounced when the bank returns it unpaid. Cheques can bounce for a number of reasons, including a lack of funds, among others. The bank produces a “cheque return memo” listing the reasons for non-payment after a check bounces for the first time.

A Cheque is a bill of exchange drawn upon a specified banker and is payable only on demand. Legally, the person who has issued the cheque is called a ‘drawer’ and the person in whose favour the cheque is issued is called a ‘drawee’. The following are the essential characteristics of a cheque:

  1. It has to be in writing
  2. It has to be an unconditional order
  3. The banker has to be specified
  4. Payment should be directed to a specified person
  5. It should be payable on demand
  6. It should be for a specific sum of money
  7. Should have the signature of the drawer

Cheque Bounce Reasons

A cheque is said to be dishonoured or bounced when it is presented for payment to a bank but it is not paid because of some reason or the other. The following are some of the reasons why cheque bounce really o occurs:

  1. The signature is not matching
  2. There is overwriting in the cheque
  3. The cheque was presented after a lapse of three months, i.e. after the cheque has expired
  4. Account was closed
  5. Insufficient funds in the account
  6. Payment stopped by the account holder
  7. Opening balance insufficient
  8. The disparity in words and figures mentioned on the cheque
  9. In case the cheque is issued by a company, the same does not bear the seal of the company
  10. Mismatch in the account number
  11. In the case of a joint account where both signatures are required, only one sign is there
  12. Death of the customer
  13. Insolvency of the customer
  14. Insanity of the customer
  15. Crossed cheque
  16. When a cheque is issued against the rules of the trust
  17. Alteration in cheque
  18. Doubt in the genuineness of the cheque
  19. Presented at the wrong branch
  20. Crossing the limit of overdraft (OD)

Legal provisions for cheque bounce in India:

The key clause addressing bounced checks in India is Section 138 of the Negotiable Instruments Act 1881. Cheque bounce is a criminal violation, according to the Act, and is punishable by a two-year prison sentence, a fine equal to twice the amount on the check, or both. According to Section 141 of the NI Act, every person participating in the discharge of liability for an infraction under Section 138 committed by a firm will be held accountable for the offence of cheque bounce.

How to file a Cheque Bounce case?

Cheque bounce is a criminal offense in India, covered under Section 138 of the Negotiable Instruments Act . In case of cheque bounce, the following actions can be taken by the payee of a cheque:

Filing a Cheque Bounce case:

In case of a cheque bounce,the payee is eligible to resubmit the cheque within 3 months of the date of issue if he knows that it would not be dishonored the next time.

Yet another way is to send a legal notice with the help of your lawyer , to the defaulter within 30 days of receiving the cheque return memo. All the relevant facts of the case, including the nature of the transaction, amount, date of depositing the instrument in the bank, and the subsequent date of dishonoring should be clearly mentioned in the notice. If no action is taken on the notice and a fresh cheque or repayment is not done within 30 days of receiving the notice, the payee has the right to file a criminal complaint under Section 138of the Negotiable Instruments Act .The complaint should be registered in a magistrate’s court within a month of the expiry of the notice period.

On receiving the complaint, along with an affidavit and relevant documents, the court will issue a summon and hear the matter. If found guilty, the defaulter can be punished with a prison term of two years and/or a fine, which can be as high as twice the cheque amount. However, the defaulter can appeal to the session’s court within one month of the date of the judgment of the lower court. If a prolonged court battle is not acceptable to both parties, an out-of-court settlement can be attempted at any point.

Filing a civil suit:

In case of non-recovery of the due amount during the long battle of legal dispute, one can separately file a civil suit with the help of a cheque bounce lawyer , for recovery which would cover the costs borne by the petitioner during the legal battle.

This is where a summary suit under Order 37 of the Code of Civil Procedure 1908 comes in. A summary suit is different from an ordinary suit as it does not give the accused the right to defend himself. Instead, the defendant has to procure permission from the court to do so. Summary suits can be availed of only in recovery matters, be it promissory notes, bills of exchange, or cheques.

Essential Documents for a Cheque Bounce Case

Certain documents for filing a complaint for cheque bounce have been stated below:

  1. The original cheque.
  2. Memo of returning cheque which would contain the reason for non-payment by the bank.
  3. Copy of demand notice and the original receipts.
  4. An affidavit stating pieces of evidence.
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Consequences of Cheque Bounce

Cheque bounce is one of the most common financial offenses in India that can cause disastrous consequences to the issuer. Below-mentioned is a few ways through which a cheque bounce can affect a defaulter:

• Bank Penalty:

If a cheque bounce takes place due to insufficient funds or a signature mismatch or any of the other technical reasons previously mentioned in this article, the defaulter and the payee are charged a penalty amount by their respective banks. This penalty is generally an NSF fee, i.e. when there are insufficient funds in the account and the bank decides to bounce the cheque. The amount of this fee depends upon the reasons and nature of the cheque bounce along with the type of account. In case the bounced cheque is towards repayment of a loan, the bank would also levy additional late payment charges along with the penalty charges.

• Negative influence on the CIBIL score:

A cheque bounce can badly impact your financial credit history. A cheque bounce for the first time can only damage your CIBIL score irreparably to an extent that you might get denied a loan in the future. In order to ensure a healthy CIBIL score, one must always make sure that his cheques never get dishonored and must keep at least some thousands more than the minimum balance in the account even after the cheque has been encashed.

• Civil or Criminal action against the issuer:

A bounced cheque can also attract possible civil or criminal action against the issuer if the aggrieved party does not receive the promised funds. In a situation where a cheque has been dishonored, the aggrieved party has an option to file a case under section 138 of the Negotiable Instruments Act , 1881 or Section 420 (Cheating) of the Indian Penal Code, 1960. If a case has been filed under section 420, a non-bailable warrant can be issued against the issuer of the cheque. However, to initiate proceedings under this section, a case of cheating has to be proven against the issuer. In case the bounced cheques are more than one, separate cases for different cheques can be filed.

• Other Risks:

According to the RBI guidelines, the banks can prohibit the issuance of cheque books to any customer if he has been charged at least four times for cheque bounce for an amount of over Rs. One Crore. Further, if the cheque that has bounced is the one issued as an EMI towards repayment of a loan, the bank has all the rights to issue a legal notice and to deduct money from your active account.

Dos and Don’ts in case of Cheque Bounce

After all the points and information given above, the following are 10 key points and essential factors that one must keep in mind in case of dishonour of cheque:

  1. After getting a check, the amount shouldn’t ever be changed.
  2. Once the date is placed on the check, it should never be changed.
  3. The concerned check must be validly redeemable in the nation against liability or debt.
  4. The three-month grace period on the check required that it be presented during that time.
  5. When a check bounces, a demand notice must be sent out within 30 days after the dishonour. A lawyer should be retained for the same.
  6. The payer or drawer must be unable to satisfy the outstanding payment within 15 days of receiving the notice in order for the case of cheque bounce to be correctly registered.
  7. The complaint should be made as soon as the 30-day period from the date of the notice expires. Any delay in the filing of the complaint will only be granted in certain exceptional circumstances if the Court deems fit.

One of the most frequent crimes affecting the financial world today is the issue of a bounced check. According to the Indian Supreme Court, there are more than 40 lakh active cases of cheque bounce in India. Numerous repercussions, including bank fees, a hit to the CIBIL score, legal or criminal action against the issuer, etc., can result from a bounced check for both the payee and the recipient. Additionally, because a case for a bounced check is time-bound, the receiver of the cheque may not have any recourse if no action is taken against the payee by the receiver within the allotted period. Thus, it is important to address a cheque bounce case as soon as possible in order to avoid all the consequences involved.

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