Dishonour of Cheque or Cheque Bounce: A Legal Guide

The dishonour of a cheque is a common issue in business and financial transactions in India, regulated under the Negotiable Instruments Act, 1881. This article will guide you through the legal process, consequences, and steps involved in cases of cheque dishonour, along with providing insights into how to handle such cases. Understanding these aspects is crucial to protect your legal rights and take timely action if a cheque issued to you is dishonoured.

What is Dishonour of Cheque?

A cheque is considered dishonoured when a bank refuses to process it for payment. This usually happens due to insufficient funds in the account or discrepancies like mismatched signatures, incorrect date, or overwriting.

Dishonour of cheques primarily falls under Section 138 of the Negotiable Instruments Act, 1881. This section imposes both civil and criminal liabilities on the drawer (the person who writes the cheque).

Common Reasons for Cheque Dishonour

1. Insufficient Funds: The account does not have enough balance.
2. Post-dated Cheques: Presented before the due date.
3. Mismatch of Signature: The drawer’s signature does not match the bank’s records.
4. Overwriting: Corrections or overwriting on the cheque.
5. Stop Payment Instructions: The drawer instructs the bank to stop the payment.
6. Incorrect Payee Name: If the name of the payee is not correctly filled.

Legal Process for Dishonour of Cheque

If a cheque is dishonoured, the following legal steps can be taken:

1. Demand Notice

Once the cheque is dishonoured, the payee (the person to whom the cheque was issued) must issue a demand notice to the drawer within 30 days of receiving the return memo from the bank. This notice should state that the cheque has been dishonoured and demand repayment of the amount within 15 days.

Sample Scenario: If a cheque is dishonoured on September 1, the payee has until September 30 to send a legal notice, demanding the repayment within 15 days of the notice.

2. Filing a Complaint

If the drawer does not make the payment within 15 days after receiving the notice, the payee can file a criminal complaint under Section 138 of the Negotiable Instruments Act. This must be done within 30 days of the expiry of the 15-day period.

• Jurisdiction: The complaint can be filed in a magistrate’s court where the cheque was presented for payment.
• Punishment: Upon conviction, the drawer may face imprisonment up to 2 years or a fine up to twice the cheque amount, or both.

3. Pre-trial and Summons

Once the complaint is filed, the court issues a summons to the drawer. If the accused (drawer) fails to appear in court, a bailable or non-bailable warrant may be issued.

4. Trial and Judgment

During the trial, the court examines evidence, including the cheque, bank’s return memo, and the demand notice. Both parties (drawer and payee) will present their cases. Based on the facts and evidence, the court will pass a judgment.

If the drawer is found guilty, the court may order the repayment of the cheque amount along with penalties or imprisonment.

Defences Available to the Drawer

1. Post-dated cheque presented prematurely.
2. Cheque issued under coercion or fraudulent conditions.
3. Stop payment was due to a legitimate dispute with the payee.
4. Cheque was not issued for any legally enforceable debt.

Civil Remedies

Along with criminal prosecution, the payee can also file a civil suit for recovery of the cheque amount under Order XXXVII of the Code of Civil Procedure, 1908, which allows summary proceedings for swift disposal of cheque bounce cases.

Penalties for Dishonour of Cheque

1. Imprisonment: Up to 2 years.
2. Fine: Up to twice the cheque amount.
3. Compensation: The court may also order the drawer to pay compensation to the payee.

FAQs on Dishonour of Cheque

  What is the first step if my cheque is dishonoured?

• When a cheque is dishonoured, the first step is usually to issue a legal demand notice to the drawer of the cheque (the person who issued it). The law typically requires this notice to be sent within 30 days of receiving the cheque return memo from the bank, notifying the drawer of the dishonour and demanding payment of the amount within 15 days. If the drawer fails to respond or make the payment within this period, further legal action can be taken.

  Can a cheque dishonour result in legal action?

• Yes, cheque dishonour can lead to both civil and criminal legal action under the Negotiable Instruments Act, 1881, specifically under Section 138. However, legal action is initiated only if certain conditions are met, such as sending a proper demand notice and waiting for the 15-day period to elapse without payment. The drawer may face penalties like fines, imprisonment, or compensation orders, depending on the court’s decision.

  How long do I have to take legal action after a cheque bounces?

• After the cheque is dishonoured, you generally have 30 days to issue a legal notice to the drawer, and after the expiry of the 15-day notice period (if no payment is made), you have an additional 30 days to file a complaint in the appropriate court. It’s important to adhere to these timelines to ensure that your case remains valid and actionable under the law.

  Can I face criminal charges for dishonouring a cheque?

• Yes, under Section 138 of the Negotiable Instruments Act, dishonouring a cheque can lead to criminal charges. The drawer of the cheque can be prosecuted and, upon conviction, may face imprisonment of up to 2 years or a fine up to twice the cheque amount, or both. However, criminal liability typically arises only if the cheque was issued for a legally enforceable debt and if the payee has followed the correct legal process.

  Is there a way to avoid legal penalties for cheque dishonour?

• To avoid legal penalties, the drawer can choose to resolve the issue by paying the amount mentioned in the cheque within 15 days of receiving the legal notice. If the payment is made within this period, no further legal action will be taken. Additionally, if the dishonour was due to a technical issue (such as a signature mismatch), it may be possible to reissue the cheque, depending on the circumstances.

  What happens if I ignore a legal notice for cheque dishonour?

• Ignoring a legal notice can lead to serious consequences. If the drawer does not respond to the notice or fails to make the payment within the 15-day period, the payee has the right to file a criminal complaint in court. Ignoring the notice may result in the issuance of a court summons, and if the accused (drawer) fails to respond to the summons, a warrant for arrest may be issued. It’s advisable to seek legal counsel if you receive such a notice.

  Can a cheque dishonour case be settled out of court?

• Yes, cheque dishonour cases can often be settled out of court at any stage of the legal process. Settlement negotiations between the drawer and the payee are common, and courts often encourage amicable settlements. If both parties agree to a resolution, the case can be withdrawn, and no further legal proceedings will take place. This option helps avoid the time and cost associated with prolonged litigation.

  What are the penalties for cheque dishonour?

• The penalties for cheque dishonour can vary depending on the facts of the case and the court’s decision. Under Section 138, the drawer may face imprisonment for up to 2 years, a fine of up to twice the cheque amount, or both. In some cases, the court may also order the drawer to pay compensation to the payee. The severity of the penalty depends on factors like the amount involved and whether the dishonour was intentional.

  Can I file both civil and criminal cases for a dishonoured cheque?

• Yes, you can file both civil and criminal cases in response to a dishonoured cheque. The criminal case is filed under Section 138 of the Negotiable Instruments Act, seeking penal action against the drawer. At the same time, you can also file a civil suit for recovery of the money under Order XXXVII of the Civil Procedure Code, which allows for summary proceedings. Both cases can run parallelly, with the criminal case focusing on punishment and the civil case focusing on the recovery of the cheque amount.

  How can I avoid cheque dishonour in the future?

To avoid cheque dishonour, it’s essential to ensure that there are sufficient funds in your bank account before issuing a cheque. Additionally, make sure the details on the cheque (such as the date, payee’s name, and amount) are filled in correctly and legibly, with no overwriting. Ensuring that your signature matches the one registered with the bank and avoiding post-dated cheques can also help prevent dishonour. Regularly monitoring your account and communicating clearly with payees can further minimize the risk of cheque dishonour.