Understanding Dishonoring Cheques

Unveil the reasons behind bounced cheques, understand the legal outcomes, and find straightforward solutions for common comprehension in financial matters.

Overview

A cheque is the most preferred medium of transfer of money from one account to another. When the bank fails to pass a cheque due to specific grounds it results in a dishonoured cheque. At this juncture, the recipient will have to investigate the available legal remedies to procure the amount.

A cheque is a negotiable instrument that can be issued to a bank requesting it to pay the specified amount of money, which is mentioned both in digits and in words, to the respective person whose name is presented on the cheque. Cheques are widely used in several transactions including but not limited to the repayment of loans, salaries, etc. A cheque is payable only on demand when it is drawn upon a specific bank.  

Ideally, when a Dishonoring of Cheque is presented in the bank, it is cashed and the amount is deposited in the account of the stipulated person. But under certain circumstances, when the cheque gets returned unpaid, it is said to be dishonored or bounced. This could happen due to a variety of causes such as insufficiency of funds, signature mismatch etc. When a cheque bounces, the bank issues a ‘cheque return memo’ with the causes for non-payment mentioned alongside.

The person who writes the cheque is known as the ‘drawer’ and the individual in whose favor the Dishonoring of Cheque is written is called the ‘drawee’.Cheques are mostly preferred due to the security it offers as compared to other forms of money transfer such as NEFT (National Electronics Funds Transfer). A crossed cheque for instance cannot be cashed by any person other than the payee and it will be deposited in the payee’s account only.

Dishonoring of Cheque

A cheque is dishonored or said to be bounced when a bank refuses to encash it for various causes such as – insufficient balance in the account, overwriting, expired validity of the cheque, etc. Cheque bounce cases happen around every corner of the country and there is nothing surprising when the statistics state that there are about 40 lakh pending cases in front of the Courts of law.

 A cheque bounce happens due to a number of  causes as described below:

• Expiry: Presenting a cheque after 3 months from the date of issuing it makes it invalid
• Erroneous Account Number: Entering an incorrect account number renders the cheque invalid
• The contradiction of the amount mentioned in words and figures: When the amount entered in numbers is different from that mentioned in words the cheque will be dishonored
• Inconsistency in Signature: When the signature in the cheque doesn’t match the signature of the account holder in official documents the cheque gets dismissed
• Overwriting or illegible writing: In a cheque, when the details such as the account number, name, or amount are overwritten, the cheque is dishonored
• Bank Account is Terminated: When the account is closed by the account holder or by the bank, the cheque gets returned
• Insanity or Insolvency: When the drawer of the cheque exhibits insanity or turns insolvent, the cheque gets dismissed
• Limits of Overdraft Exceed: When the overdraft amount, which is the maximum withdrawal limit is exceeded, it will lead to the dishonoring of the cheque
• Payment Withheld: If the Account holder stops the payment, it will result in the dishonoring of cheque
• Insufficiency of Opening Balance and Insufficiency of Funds: A cheque would bounce when the opening balance of the account drawer is less than the stipulated amount or when the funds in the account are not sufficient enough to pay for the cheque.

Why Do Cheques Get Dishonoured?

A dishonoured cheque, also known as a bounced or returned cheque, occurs when a cheque cannot be processed or honoured by the bank. Several reasons contribute to the dishonouring of cheques, and understanding these factors is crucial for both payers and payees.

Common Causes for Cheque Dishonour

• Insufficient Funds: One of the primary reasons is insufficient funds in the payer’s account when the cheque is presented for payment.
• Overdrawn Account: If the payer’s account is overdrawn, meaning the available balance is negative, the cheque will be dishonoured.
• Signature Mismatch: Discrepancies in the signature on the cheque compared to the signature the bank has on record can lead to dishonour.
• Stale Cheques: Cheques presented after a certain period, typically six months, become stale and may be dishonoured.
• Post-Dated Cheques: If a cheque is dated for a future date, it cannot be encashed before that date.
• Frozen Accounts: Accounts that are frozen, either due to legal issues or at the account holder’s request, will result in dishonoured cheques.
• Crossed Cheques: If a cheque is crossed, it must be deposited into the payee’s bank account. Attempting to cash a crossed cheque may lead to dishonour.
• Technical Issues: Errors in the cheque, such as incorrect date, amount discrepancies, or issues with the format, can cause dishonour.

Essential for an Action Under Section 138

For legal actions under Section 138 of the Negotiable Instruments Act, the following elements are essential:

• Issuance of a Cheque: A valid and legally enforceable cheque must be issued by the drawer.
• Presentation for Payment: The cheque must be presented to the bank within the validity period.
• Dishonour of Cheque: The cheque should be dishonoured by the bank due to reasons like insufficient funds.
• Notice to Drawer: The payee must serve a notice to the drawer within thirty days of receiving information about the dishonour.

Failure to Make Payment: The drawer fails to make the payment within fifteen days of receiving the notice.

Section 92: Dishonour by Non-Payment

A bill or a cheque is considered dishonoured by non-acceptance when the person who is supposed to pay doesn’t do so even after being asked to. If the bank refuses to pay when the bill or cheque is presented, it means it has been dishonoured. In this case, the person who has the bill or cheque has the right to ask the person who wrote it to pay, as well as other people involved with the cheque.

 Section 92 of the Negotiable Instruments Act, 1881, deals with the dishonour of a cheque due to non-payment in India. When a cheque is presented for payment and the bank refuses to honour it due to insufficient funds or any other reason, it is considered dishonoured by non-payment. This section outlines the consequences and legal implications for such dishonoured cheques.

Section 138 Negotiable Instruments Act 1881

Section 138 of the Negotiable Instruments Act, 1881, is a legal provision in India that specifically deals with the cheque bounce due to insufficient funds or any other reason. This section imposes criminal liability on the issuer of a dishonoured cheque and provides a legal recourse for the holder of the cheque. If a cheque is dishonoured, the holder can send a legal notice to the issuer demanding payment within a specified period. If the payment is not made within the stipulated time, the holder can file a complaint in the appropriate court. 

Upon conviction, the issuer may be subjected to imprisonment for a term of up to two years or a fine that may be twice the amount of the dishonoured cheque, or both. This provision aims to deter the issuance of dishonoured cheques and protect the interests of the holders.

 Sec 138 Dishonoring of Cheque Due to ‘Insufficient Funds’ in the Account

A person commits a crime if they write a cheque to pay someone out of their bank account, but the bank won’t cash it because there isn’t enough money in the account or the amount is higher than what was agreed upon. The person who wrote the Cheques can be punished with at least one year in prison, in addition to other punishments mentioned in the law.

Dishonoring of Cheque- Ingredients of Offence

Section 138 of the Negotiable Instruments Act, 1881, encompasses several crucial elements. These include:

1. The act of issuing a cheque by an individual to settle a debt or liability
2. Presenting the cheque  to the bank within a span of six months from the date it was issued or within its validity period
3. The bank’s refusal to honour the cheque , resulting in its return as unpaid
4. Serving a written notice to the drawer of the Cheque  within 30 days of receiving information about the cheque ‘s non-payment, typically in the form of an advance debit or return memo
5. The drawer’s failure to make the payment within fifteen days of receiving the notice.

These ingredients form the foundation of Section 138 and define the process through which dishonoured cheques are dealt with under the law.

Legal Procedures Pertaining to Cheque Bounce Cases

The bank charges both the drawer and the drawee when the cheque bounce case due to technical causes or when there are insufficient funds. Section 138 of the Negotiable Instruments Act, of 1881 deals with cheque bounce cases.  It also enlists the possible actions to be taken when a cheque is dishonored as described below:

Submitting the Cheque Again for Perusal

When a cheque has bounced and once the issuer of the cheque has got an opportunity to correct the errors in the issued cheque, the individual can resubmit the cheque for clearance. This must be performed within 3 months from the date the cheque has bounced. The bank notifies about the dishonoring of the cheque to the recipient by issuing a ‘cheque return memo’ which states the causes for the non-payment of money mentioned in the cheque. To make a valid claim, the prospective recipient must submit the cheque to the bank within three months from the date of its issue, else, the cheque will expire.

Issuing Demand Notice

If the cheque is dishonored consecutively for the second time, the recipient of the cheque can present a demand notice to the issuer. The demand notice usually instructs the issuer of the cheque to indemnify the required funds within 15 days of such notice. This demand notice has to be issued within a time period of 30 days from the date on which the cheque was bounced. The court does not accept any delay in issuing the notice unless there is a reasonable cause for such delay.

Lodging a Complaint

If the issuer of the cheque fails to respond to the demand notice, the recipient of the bounced cheque can formally lodge a complaint within 30 days from the date of expiry of the demand notice. A case can still be registered after this time period, provided there are justifiable causes for such delay. But, the usual time limit to solve cheque bounce cases is 30 days.

The jurisdiction of the courts, wherein such complaints can be raised, depends on the place where the cheque was drawn, presented, or given back by the bank. Although Section 138 of the Negotiable Instruments Act, of 1881 can be invoked under these circumstances, cheques that are issued as a gift will not be covered under this ambit.

When a complaint pertaining to a cheque bounce case is registered, the First-Class Judicial Magistrate should verify if the stipulated court fee is deposited, and if the mandatory documents such as the copy of the notice, the original cheque, and the acknowledgment receipt are furnished. It is also necessary that the complainant appears physically before the Court to be examined by the Magistrate. Thereafter, the summons required to be sent to the issuer of the cheque will be forwarded by the Magistrate, asking the respective individual to appear before the Court. If the issuer is thus found guilty, the individual will be penalised with a fine or imprisonment under Section 138 of the Negotiable Instruments Act. The recipient of a bounced cheque is also empowered to take protection under Section 420 of the Indian Penal Code, 1860, as the act amounts to cheating.

Lodging a Civil Complaint

A cheque bounce case is usually treated as a criminal case, wherein the issuer of the cheque is penalised with imprisonment or fine. But oftentimes, the victim, who is the recipient of this bounced cheque is not compensated with the stipulated dues. Therefore, it is advised that the victim also files a separate civil suit for the recovery of the amount due to him. This can be accomplished by filing a summary suit under Order 37 of the Code of Civil Procedure, 1908. This differs considerably from an ordinary civil suit as it does not grant the defendant with the right to defend himself. To achieve this, the defendant is required to seek prior permission from the court. 

Apart from punishing the defaulter fittingly with imprisonment or by imposing a fine, the bank should also take steps to warn the defaulter by withholding access to banking facilities. It is also prudent on the part of the bank if it insists that the specific account of the individual be terminated. Recently, compulsory suspension of bank withdrawals, for a few days following the bouncing of cheques, has also been proposed to make the defaulters accountable for their actions. It has also been suggested that cheque bounce cases be settled within a span of 90 days through mediation.

Dishonoring of Cheque- Filing of Complaint

The offence is only considered to have happened after the fifteen-day period is over. A complaint under Section 138 must be made within one month of the cheque  bounce. The day when the cheque bounce is not considered while filing the complaint under Section 138 of the law.

Jurisdiction

In a case called K Bhaskaran v. Sankaran Raidhyan Balan, which was reported in (1999) 7 SCC 510, the highest court in the country said that a certain type of crime can only happen when several actions are done together. These actions include:

• Writing and giving a cheque to someone
• Taking the cheque to the bank
• The bank not accepting the cheque and returning it
• Sending a written notice to the person who wrote the cheque, asking them to pay the amount
• If the person who wrote the cheque doesn’t pay within 15 days after receiving the notice
• All of these actions combined make up the crime of dishonoring a cheque.

The Court also mentions that according to the rules of law for criminal cases, the person who complains about the crime can choose any court that has the power to handle cases in any of the areas where any of these actions took place. The court also suggests that the court in the area where the person who wrote the cheque and the person who received it live can have the power to investigate and decide on the complaint.

Case Laws

In a case called Dayawati v. Yogesh Kumar Gosain in 2017, the Delhi High Court talked about whether they could use mediation to solve a certain offense under Section 138. The Court said that the government didn’t make a rule that lets the court use a different way to solve the problem with the people involved in the case.

Punishment

Breaching  Section 138 of the Negotiable Instrument Act of 1881 can result in big trouble. They might have to face imprisonment for up to two years and pay a fine that is double the amount of the Cheque, or both.

Dishonoured or Bounced Cheques Can Lead to Penalties and Attract Legal Action

In the digital era, where various payment options have become prevalent, cheques continue to maintain their significance in India. Acting as a tangible proof of payment, cheques facilitate a wide range of transactions, including bill and loan repayments. The inherent security measures in cheque processing by lenders expedite the overall transaction process, making them a reliable method of payment. However, despite their advantages, cheques are not without drawbacks, and dishonoured or bounced cheques can lead to severe repercussions for both the issuer and the recipient.

Penalties and Charges

When a cheque is dishonoured, it can result in a range of penalties and charges. The bank levies charges on the issuer for insufficient funds, and the recipient may also incur charges from their own bank. These additional costs can accumulate and create financial strain for both parties involved. Moreover, if the cheque was issued to repay a loan or settle a bill, the delay caused by the dishonoured cheque could attract additional interest or late payment fees, exacerbating the financial burden.

Legal Action and Consequences

The consequences of dishonoured cheques extend beyond financial penalties. In India, dishonoured cheques are considered a criminal offence under the Negotiable Instruments Act, 1881. The recipient of a bounced cheque has the right to take legal action against the issuer by filing a complaint in court. If found guilty, the issuer could face imprisonment for a term that may extend to two years or with a fine that may extend to twice the amount of the cheque, or both.

Impact on Credibility and Reputation

Beyond the legal implications and financial losses, dishonoured cheques can significantly impact the credibility and reputation of the issuer. This can lead to strained relationships with banks, businesses, and individuals, making it challenging for the defaulter to conduct future transactions smoothly. Moreover, a tarnished reputation may deter potential business partners or lenders from associating with the individual or company, hindering growth opportunities.

Conslusion

It might be tough and excruciating to be involved in a cheque bounce case. The agony is best handled when it is outsourced to a legal professional. At Vakilsearch, our legal team can be approached when you face cheque bounce issues. Our team will ensure that the matter is handled meticulously and you get the issues sorted out at the earliest.

Frequently Asked Questions on Dishonoring of Cheque