What happens if a Cheque Bounces in India?

8 Dec 2022  Read 2449 Views

Most of us today have shifted to online payment modes such as UPI for making any transaction, as it is safer than carrying a lot of cash. But as the UPI transactions are restricted to a certain amount, one more method for making heavy payments is writing a cheque. So, imagine if our cheque bounces, then it can be so expensive & awkward for us.

But, what exactly do you mean by this 'cheque bounce'? See, if you write a cheque for Rs. 50,000/-, but you have only Rs. 25,000/- in your account, then your cheque will bounce when the payee (the person who receives the money) tries to cash it as you didn’t have enough funds in your account to cover the amount written on a cheque & this will be committing a criminal offence, i.e., a cheque bounce offence. This article discusses the meaning of cheque bounce, charges on cheque bounce, how you fight a cheque bounce case, exceptions, legal consequences and cheque bounce cases. 

When is a cheque bounced?

Mostly, when the bank may refuse payment of a cheque or dishonour a cheque, the cheque is considered a bounce in such cases. When the cheque is dishonoured for funds insufficiency in a customer's account, such cheque bounce is treated as a crime and action can be taken under S. 138 of the Negotiable Instruments Act (NIA).

How do you fight a cheque bounce case?

To initiate prosecution under Section 138 of NIA, one needs to fulfil these requirements:

  • Give the cheque to the bank within 3 months of its issue or within the period of its validity. (Did you know that previously the validity of cheques was six months, but RBI vide Notification No. RBI/2011-12/251DBOD.AML BC.No.47/14.01.001/2011-12 directed that the validity period must be reduced to three months from 1st April 2012.).

  • The bank immediately issues a ‘Cheque Return Memo’ briefing the reason for non-payment when a cheque bounces for the first time, and then the amount has to be paid to the bank within a period of 3 months of the date mentioned on it.

  • Now bank notifying the payee- If the payee (person receiving money) makes a demand for the payment of money to the payor by giving notice to the payor or defaulter within 30 days of receiving of information by him from the bank regarding the return of the cheque as unpaid. Then,

  • The payor, if fails to pay the amount within 30 days of receiving the notice of dishonour. Then,

  • Only after satisfying all the above three requirements, a case can be filed under S. 138 of NIA.

Exceptions to Cheque Bounce Notice

In cases where a cheque is drawn in the name of a charitable trust as an application amount or a donation, it won’t get dishonoured. And if there are some minor changes in the cheque, the banks, in such cases, can excuse small mistakes. But, the banks might impose penalties for these.

Legal consequences of cheque bounce

  • Penalty by the bank

When the cheque bounces, both the defaulter & the payee are charged by their respective banks. If the bounced cheque is against the loan repayment, you would have to additionally pay late payment charges alongside the penalty fee charges by the bank.

An alternative to avoid cheque bounce is to use a cheque from your overdraft (OD) account, wherein the banks would cover cheques with the amount parked in the OD account, on which the customer then pays interest on the outstanding balance of an overdraft loan.

  • Financial credit history

Say, you want to avail home loan, and the processing fee cheque gets bounced; the bank can reject the sanctioned loan immediately, ensuring that you keep the minimum average balance and avoid any irregular bank transactions. Also, recurring cheque bounces can affect your financial credit history, making it difficult for you to avail loans in future.

The aggrieved party can either file a case under Sec. 138 of the NIA, 1881 (civil) or Sec. 420 (Cheating) of the IPC (criminal).

Facing criminal charges

In cheque bounce cases, If it has been filed under Sec. 420, a non-bailable warrant can be issued against the issuer or payor of the cheque. But, to initiate proceedings under this provision, a case of cheating has to be proven against the issuer. In case the bounced cheques are more than one, separate cases for separate cheques can be filed. The issuer is punished with imprisonment for up to 2 years and would need to pay twice the amount stated in the dishonoured cheque. 

Facing civil suit

Generally, a separate money recovery civil suit, including the cost borne and the lost interest, is filed in a cheque bounce case, because filing a criminal case does not help in recovering the pending dues. If a case is filed under Sec. 138 of the Negotiable Instruments (Amendment) Act, then the complainant can file a complaint in the city where he is based or where the cheque was deposited. This makes it easier for the victim to take legal recourse.

Do’s and Dont’s of Cheque Bounce

  1. One must never alter a cheque amount after receiving the cheque.

  2. One must never alter the date once written on the cheque.

  3. The said cheque must be legally enforceable in the country.

  4. The cheque must have been presented within its validity period of three months.

  5. It is always advisable to hire a lawyer, especially when issuing the demand notice within 30 days of dishonour.

Landmark Judgments on Cheque Bounce in India

1. Smt. Asha Baldwa v. Ram Gopal (2017)

One of the most landmark judgments on Section 138 NIA. The petitioner filed a petition under Sec. 482, CrPC to quash the proceedings instituted against him for perpetrating a crime under section 138 NIA. 

The Court ruled that the objective is that a person who promises to pay abides by his promise as provided under section 139 under which, it shall be presumed that the cheque holder received the cheque of the nature mentioned in Section 138 of NI Act for the discharge, in whole or in part, of any debt or other liability. (a presumption will be made)

2. Kishan Rao v. Shankargouda (2018)

The Supreme Court in this case reiterated the scope of revisional jurisdiction of a High Court & held that the High Court must not interfere with any orders of the Magistrates unless it seems to be absolutely unreasonable or there is no consideration of relevant material. Also, the Magistrate's order cannot be set aside on the mere ground that no other view on the issue is possible.

3. Modi Cements Limited v. Kuchil Kumar Nandi (1998)

The Supreme Court’s three-judge bench held that even if the payor or issuer issues a notice to stop the payment before the payee has deposited the cheque with his bank, this act would not protect the payor and it will amount to a crime. Once the payor issues the cheque, it must be presumed that just because the payor issues a notice to the payee or to the Bank, it will not stop action under section 138 by the holder of the cheque in due course. Hence, a defence under a strict interpretation of “insufficiency of funds” stands weak to some extent.

4. Dashrath Rupsingh Rathod vs the State of Maharashtra (2014)

The Supreme Court’s three- judges bench ruled that the complaint regarding the dishonour of a cheque can be filed only in the Courts within whose local jurisdiction the offence has been committed. 

5. Krishna Janardhan Bhat vs. Dattatraya G. Hegde (2008)

This case listed many mandatory ingredients like the existence of the legally enforceable debt, the cheque supposed to be paid in due course of fulfilling the liability and the issued cheque must be returned due to insufficient funds.

About the Author: Kakoli Nath | 275 Post(s)

She is a Legal Content Manager at Finology Legal! With a Masters in Intellectual Property Rights (IPR), a BBA.LL.B from ITM University, and patent analyst training from IIPTA, she truly specializes in her field. Her passion for IPR and Criminal laws is evident from her advanced certification in Forensic Psychology and Criminal Profiling from IFS, Pune.

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