Category Archive Cheque Bounce Law Guides

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Draft Legal Notice/Reply To A Legal Notice For Cheque Bounce

What is Cheque Bounce/Dishonour of Cheque

Cheque bounce or dishonour of cheque occurs when the cheque that is presented to the bank for payment, is returned back either due to insufficient funds in the drawer’s account or the signature on the cheque does not match with the drawer’s signature or any other reason. In India, cheque bounce is considered a legal offence and the law regulating the offence is section 138 of the Negotiable Instrument Act, 1881. 

Reasons for Cheque Bounce

Following are some of the reasons why a cheque is bounced or dishonoured:

1. Insufficient funds in the account of the person issuing the cheque
2. Unmatching signature on the cheque
3. Post dated cheque i.e. the date mentioned on the cheque is yet to come
4. Stale cheque i.e. the cheque is presented to the bank 3 months after the cheque was issued
5. When the payment is stopped- if the drawer asks the bank to stop the payment and not to pay for cheque already issued
6. Difference in amount in words and number 
7. Disfigured or Damaged cheque- a cheque will be dishonoured if it is torn, damaged or not in a good condition or has some details not clearly visible 

What happens when a Cheque is bounced?

After the cheque is dishonoured, the bank offers ‘cheque return memo’ to payee stating why the cheque has been bounced. The cheque can be resubmitted by the payee if he believes that it will be honoured the second time. If the cheque is bounced again, then the payee can prosecute the drawer legally.

Legal Remedies available in a Cheque Bounce case?

SEND A LEGAL NOTICE/ DEMAND LETTER TO THE DRAWER
Before filing a suit against the drawer, a legal notice/demand letter must be sent to him. The notice must be sent within 30 days from the date on which the bank returns the cheque along with the information that the cheque is dishonoured.
You can take assistance from a lawyer to draft the legal notice in such a case. 

FILE A COMPLAINT IN THE COURT 
If the drawer does not make the payment within 15 days from the date on which the notice has been sent to him, then the payee can initiate legal action against such person within 30 days from the date of expiry of the 15 days period provided to the drawer. 

Documents Required

You must essentially have the following documents when filing a complaint of cheque bounce: 

1. Original cheque
2. Cheque returning memo
3. Copy of the legal notice sent to the drawer demanding the payment of money
4. Power of Attorney signed by the complainant 
5. Preliminary evidence in shape of Affidavit

Reply to the Legal Notice

In case you receive a legal notice for payment of money in a cheque bounce case, then you have to send a reply to such notice within 15 days from the date on which the notice has been received. Along with the notice, you must also send a cheque in favour of the payee of the same amount as was the previous cheque. The reply must also specify the reason for the dishonour of cheque. If the reply is not made within the stipulated time period then a legal action will be initiated against you. 

However, if you do not have an outstanding debt against the person who has sent the notice, then you should mention the same in your reply to the notice, which is to be sent within 15 days. 
You can always take assistance of a lawyer who is an expert in this field 

What’s Included

a) Advise and consultation from lawyer on a 30-minute phone call
b) Draft of Legal Notice. The advocate will share the draft of the legal notice for your approval.
c) Dispatch of Legal Notice. Once the notice is finalized after your approval the advocate will dispatch the legal notice through registered post and share the tracking number.

What’s Not Included

a) Filing of any case post sending out the legal notice is not included in this service.

You May Also Want To Know

1. What is the punishment in a cheque bounce case?
The maximum punishment that can be awarded to the accused in a cheque bounce case is 3 years of imprisonment along with fine that can extend upto double the cheque amount. 


2. How long after the notice has been served can I file a case against the drawer?
A case under section 138 of the Negotiable Instrument Act, 1881 can be filed within 30 days from the date of expiry of 15 days period from which the notice has been served to the drawer, i.e. 45 days from the date on which notice has been served. 


3. What can I do if the time for filing a case under section 138 expires? 
If the time for filing a case under section 138 is expired, then another remedy available in such a case is to file a summary suit for recovery of money or initiate criminal proceedings under section 420 of IPC against the drawer within 3 years from the date on which the cheque is issued. 


4. What is a summary suit for recovery of money?
Summary suit is a civil legal proceeding initiated for recovery of money due under any written agreement, cheque etc. These proceedings are different from normal recovery suit, as here the liability to prove that petitioner is not liable to recover any amount is on defendant for which he needs to obtain leave to defend from the court.


5. What can I do in case I do not know the drawer’s address? 
You need to know to address of the drawer for serving legal notice to him, in case you do not have any information regarding his current address then you can serve the legal notice to the last known address. 


6. What is the average time in which a cheque bounce case is resolved?
The average time for resolution of a cheque bounce case depends on the district court you are filing your case before. The case load and infrastructure a court has, are factors to consider. A cheque bounce case will realistically take you anywhere from 1 to 2.5 years to conclude. 


7. Which court should I approach for filing a cheque bounce case?
According to the Negotiable Instrument (Amendment) Act, 2015, a cheque bounce case can be filed in a court within whose local limit of jurisdiction is the bank to which the cheque is presented is situated.


8. Can I recover interest and legal expenses from the drawer of the dishonouredcheque?
Yes, you can recover interest and legal expenses from the drawer of the dishonoured cheque in a summary suit for recovery of money, but not in the proceedings initiated under Section 138 N.I. Act. However, under Section 138 N.I. Act the award may be higher than the cheque amount.

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Do’s & Don’ts in case of a Cheque Bounce

Introduction: What is a cheque?

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 as ‘drawer’ and the person in whose favour the cheque is issued is called as ‘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. 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


What is cheque bounce/ dishonour of cheque?

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 a cheque is generally bounced :

  1. Signature is not matching
  2. There is overwriting in the cheque
  3. Cheque was presented after 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. Disparity in the 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 account number
  11. In case of 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 trust
  17. Alteration in cheque
  18. Doubt in genuineness of the cheque
  19. Presented at the wrong branch
  20. Crossing limit of overdraft (OD)


Legal Remedies available in case your cheque is bounced

Cheque bounce is a criminal offence in India, covered under section 138 of the Negotiable Instruments Act. The following information will act a useful guide in what steps can be undertaken in case your cheque is bounced:
 

Step 1: Demand Notice:

Once the cheque has been returned by the bank, then before filing a legal complaint against the drawer, you must first send a demand letter/ legal notice to such drawer within a period of 30 days from the date the cheque has been returned to you by the bank. The letter must demand the amount from the drawer and also the legal action that can be initiated against him under the Negotiable Instruments Act in case the amount is not paid within a stipulated time period (usually 15 days).

Even though there is no prescribed format for this notice, its purpose of demanding payment and informing the issuer that s/he will be prosecuted in case payment is not made should be highlighted very clearly. Further, proof of delivery of such letter should be preserved carefully.

Demand letter can be sent by the complainant her/himself. However, it is advisable to get the draft vetted by a cheque bounce lawyer before sending it to the person concerned.
 

The following information should be stated clearly in the demand notice:

  1. A statement that the cheque was presented within its period of validity
  2. Statement of debt or legally enforceable liability
  3. Information regarding dishonour of cheque as given by the bank
  4. Demanding the issuer to pay the amount due within 15 days of receiving such notice

Step 2: Drafting of Complaint:

If the drawer has not replied to your demand notice within a period of 15 days from the date of the delivery of the demand letter or has refused to pay your amount, then the next option available in such a case is to file a complaint in court within a stipulated time period of 30 days. Before filing a legal complaint, it is important to understand that which court should you approach in such cases. You can file the complaint in a court within whose local limits of jurisdiction any of the following incidents have taken place:

  1. Where the cheque was drawn
  2. Where the cheque was presented
  3. Where the cheque was returned by the bank
  4. Where the demand notice was served by you
  5. You must have all the following documents:
  6. Complaint
  7. Oath letter
  8. Photocopy of all the documents such as cheque, memo, notice copy, and acknowledgement receipts

Step 3: Court Process for filing the case:

Amounton cheque                  Court fee

Rs. 0 to Rs. 50,000/-                            Rs. 200

Rs. 50,000/- to Rs. 2,00,000/-              Rs. 500

Above Rs. 2,00,000/-                           Rs. 1000

 

Memo of Advocate is essential at the time of filing of the suit along with signatures of the complainant

  • After the case is filed in the court, all documents are cross-checked by Judicial Magistrate First Class, so original documents such as original cheque (bounced), original memo, a copy of the notice, receipt of the post office, receipt of U.P.C., acknowledgement receipt, are required at the time of cross-checking
  • The period of limitation is also verified at this stage
  • The Process Form, also known as the Bhatta, is filed by the complainant or lawyer, along with the address of accused
  • The court then issues summons to accused to appear in the court on the specific date
  • If the accused does not appear in court on the date of hearing, the court can also issue a bailable warrant on the request of the complainant
  • It the accused still does not appear before the court, the court may issue a non-bailable warrant of arrest


Important things to be kept in mind

  1. A delay in filing the complaint after the lapse of 30 days may be excused by the magistrate only in exceptional circumstances
  2. Dishonour of a cheque due to stop payment is also covered under Section 138 of the NI Act
  3. Presentation of the cheque at the request of the drawer after the demand notice has been sent and the consequent dishonour of the cheque will not mean that the drawer’s time limit under the notice has increased
  4. A cheque issued as a gift/donation/any other obligation, will not be covered under Section 138 of the Act. For this section to apply, the cheque has to carry a legal obligation
  5. A cheque expires after three months from the date on which it is issued
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Director’s liability in cheque bouncing matters

Cheques are a widely used means of payment, especially in business transactions involving Companies. A cheque is said to bounce when it is returned by the bank without being encashed.

The question that arises is when cheques issued by Companies are bounced, who is held liable, the Company or its Directors? The article deals with this question.
 

When Does Cheque Bouncing Occur?

Cheques are bounced or dishonoured due to any defect in them, which may have been caused intentionally by the issuer of a cheque to escape payment. The several reasons leading to bouncing of cheques are:

  • Insufficient funds
  • Presenting of cheque to the Bank after 3 months
  • Alterations or overwriting in cheque
  • Mismatch in account number
  • Crossed cheque
  • Closed Account
  • Insolvency, insanity, or death of the customer
  • Stopping of payment by account holder
  • Non-matching of signature, etc
     

However, it is an offence under the Negotiable Instruments Act, 1881 if the unpaid cheque is returned by the bank when:

  • Fundsin the bank account are insufficient, or
  • The amount on the cheque exceeds the amount to be paid in agreement with the Bank
  • Issuer of cheque instructs his bank to “Stop cheque payment”


Penalties for Cheque Bouncing Matters: 

Punishment for Cheque Bouncing, which is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881 can be:

  • Imprisonment extending up to two years, or
  • Fine which may extend to double the amount on the cheque, or
  • Both of the above
     

Is The Director Liable When Cheque Issued By Company Is Dishonoured? 

When the person who commits the offence of cheque bouncing is a Company which is an artificial entity, how does it face the punishments, especially imprisonment? The Directors are appointed to control and manage the affairs of a Company. Hence, the Directors can be accountable for the misdeeds of the Company.

Directors may be held liable when the Company has committed the offence of cheque bouncing, under Section 141 of the Negotiable Instruments Act, 1881. According to this Section, every person who was in charge of the Company and responsible for its business, at the time the offence was committed will be liable, along with the Company.

Even a manager, secretary, or officer of the Company can be accountable in matters where the offence of cheque bouncing was committed due to the consent or neglect of such persons.
 

Legal Remedies Available To Payee If A Cheque Issued By A Company Is Dishonoured

Reason for issuance of the cheque:

  1. The cheque must have been issued for discharge of a debt or liability, to invoke Section- 138.
  2. Time Limit to submit cheque: the cheque should have been submitted to the Bank within three months from when it was drawn/issued.
  3. Legal Notice: When the cheque is returned unpaid by the bank, the payee (receiver of the money) must send a legal demand notice to the drawer (Company). This legal notice must demand the amount to be paid by the Company, and must also state that the Company will be prosecuted in case it fails to do so, within 15 days. It is advisable that the payee gets the draft of the notice vetted by a lawyer specializing in cheque bouncing cases before sending it to the Company.
  4. Filing of Complaint: If the Company has yet again failed to pay the amount of the cheque, or reply to payee within fifteen days from the legal notice, the payee should then file the complaint in a court of appropriate jurisdiction with the help of a lawyer, within a stipulated time period of 30 days. The complaint should be accompanied by the following documents:

·         The original cheque with the “memo of return” from the bank

  • Copy of the demand notice sent to the company
  • Affidavit


Specific Statement to be made in the Complaint:  It should be specifically stated in the complaint how and in what manner the accused Director was in charge of and responsible for the conduct of the business of the Company at the time the cheque was bounced. However, the Apex Court has held that in certain situations, as given below, one need not specifically state the responsibility of the accused person in the complaint:

  • When the accused is the Managing Director or a Joint Managing Director of the Company
  • When the accused Director signed that specific cheque on behalf of the Company


When and if the Company is found guilty in the case, and if it is proved that the Director was in charge of the business of the Company, he will have to bear the punishments as directed by the Court.
 

Situations When Directors Are Not Liable

The Director would not be held liable for the acts of the Company if he is able to prove the following:

  • That when the offence was committed he had no knowledge regarding it, and
  • That he applied due diligence, or
  • That there is proof beyond doubt, that the director due to his prolonged illness, was not involved in the proceedings
  • That the complaint has not been made in accordance with Section 138 or 141 of the Act, or
  • That before the cheque got dishonoured, he resigned from his post
     

Only when a person is responsible for the Company and was in charge of the conduct of its business, he could be held liable. Hence, the reason to hold a person guilty of a cheque bouncing case cannot solely be based on the fact that he is a Director of a Company.

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The new law on territorial jurisdiction for cheque bounce matters

The Gujarat High Court in its recent judgment of Brijendra Enterprise v. State of Gujarat and another has explained the law relating to territorial jurisdiction for filing a complaint for dishonor of cheques.   

As per the Negotiable Instruments (Amendment) Act, 2015 a complaint can be filed under Section 138 for dishonor of cheque at a court within whose local jurisdiction:-
 

  • The branch of the bank is located
  • The payee or the holder maintains an account
     

In view of this recent amendment, a complaint for dishonor of cheque under Section 138 of Negotiable Instruments Act can be filed in the court situated at a place where the bank of the payee is situated.

For better understanding, consider the following examples-
 

  1. Mr. A holds an account in Navrangpura Branch, Ahmedabad of “XYZ” Bank, issues a cheque payable in favor of B. B, who holds an account with the M.S University Road Branch, Vadodara of the “PQR” bank, deposits the said cheque at Surat Branch of ‘PQR bank’ and the cheque is dishonored. The complaint will have to be filed before the court having jurisdiction where the M.S University road branch is situated.
     
  2. A holds an account with the Navrangpura branch, Ahmedabad, of “XYZ” Bank issues a cheque payable in favor of B. B presents the cheque at the Vadodara Branch of the ‘XYZ’ Bank ( but B does not hold an account in any branch of the “XYZ” bank) and the cheque is dishonored. The complaint will have to be filed before the court having jurisdiction over the Navrangpura branch, Ahmedabad, of “XYZ” Bank.
     

To summarise, when the cheque is delivered for collection through an account, the complaint is to be filed before the court  where the branch of the bank is located, where the payee or the holder in due course maintains his account and, when the cheque is presented for payment over the bank, the complaint is to be filed before the court where the drawer maintains his account. 

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Section 138 Negotiable Instruments Act 1881 (NI Act): Cheque Bounce or Dishonor of Cheque

Dishonor of cheque for insufficiency, etc., of funds in the account. —

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless—

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation.— For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.]

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Know your legal rights in case of cheque bounce

Dishonor of cheque

Dishonor of cheque or cheque bounce occurs when a cheque that is presented in the bank is returned unpaid. It could occur due to insufficient funds in the bank account of the person who issued the cheque or if the signatures on the cheque do not match with the original signature of that person. You can proceed against the person who has issued such a cheque under various provisions of law. The most important and useful provision to consider is Section 138 of The Negotiable Instruments Act.

Important things to keep in mind

The first step that must be taken in a cheque bounce case is to send a demand letter or legal notice to the person who has issued the cheque also called as ‘drawer’. You must take help from a lawyer to draft the legal notice. The legal notice must be sent within 30 days from the date on which the receipt of cheque bounce is given by the bank. However, if the drawer does not pay the amount within the stipulated period of 15 days from the date on which the legal notice is sent to him, then the aggrieved person can file a cheque bounce case against the drawer in such a situation.

Documents Required:

The following documents are required before filing a cheque bounce case : 
1) Original cheque and return memo
2) Copy of notice and original postal receipts.
3) Evidence affidavit.

Where can a cheque bounce case be filed?

There has been quite some debate regarding the area of jurisdiction of a cheque bounce case. But recent Supreme Court rulings have clarified the issue. The cheque bounce case should be filed in the area where the cheque was submitted by you, to be honoured.

Who can file a cheque bounce case?

Ordinarily, the payee of the cheque files the cheque bounce case. But in special cases, the case can also be filed through a power of attorney. An important thing to keep in mind is that it is mandatory for the complainant to appear before the magistrate and examined under oath.

What is a material alteration?

Changing the amount of the cheque, changing the name of the payee (the person to whom the check is given), or making other changes on the cheque, such as the date or the name of the drawee (the person from whose bank account the cheque is withdrawing funds) or paying bank can be considered as material alteration. If the cheque has been dishonored and the bank finds out that there have been material alterations on the cheque, then you are not entitled to file a cheque bounce case.

How do I defend against a frivolous cheque bounce case?

In certain business transactions, cheques are used as a method for payment of money or as a security. However, there have been instances where after the completion of the business transaction, the person tries to fraudulently encash the cheque. And subsequently files a false complaint in the court. Hence, the manner to defend a frivolous cheque bounce case is to show that there was no legal subsistence debt at the time the cheque was issued. Hence, you will have to show that the cheque was given as a way of security and no debt existed at that point in time.

Alternate remedies

Generally, a civil suit for recovery of money is filed in a cheque bounce case. However, in serious cases where the cheque amount is big and in cases where it is applicable, a criminal complaint for cheating could also be filed under section 420 of the Indian Penal Code.

Cheque bounce case against companies and firms

If you want to file a cheque bounce case against your company or firm, the people you can file the cheque bounce case against are the directors and/or partners of the company or firm. You could even file a cheque bounce case against the firm or company.

Read the Do’s and Dont’s in a Cheque Bounce Case here.

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How to File a Cheque Bounce Case

How to file a Cheque Bounce Case

When a cheque is refused by a bank and returned to the person who wrote it due to reasons like insufficient funds, it is called abounced cheque. In case the cheque bounces the first time, the bank issues a ‘cheque return memo’ and refuses to honor it, stating the reasons for non-payment. The bank also charges a fee for the bounced cheque.

In such a scenario the account holder is eligible to resubmit the cheque within 3 months of the date of issue if he knows that it would not be dishonoured the next time.

Yet another way is to send a legal notice 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 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 138 of 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 summons 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 judgment of the lower court. If a prolonged court battle is not acceptable to both the 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 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.

According to the Ordinance passed by the Govt. of India in June 2015, where the person has presented the cheque i.e. where the Complainant has the Account, the complainant can file the case in that city.

Risk faced by defaulters

Along with a prison term or heavy penalty faced by the accused, the bank has the right to stop the cheque book facility and close the account for repeat offences of bounced cheques.

The RBI clearly states that such action can be taken only if the default has taken place at least four times on cheques valued at over Rs 1 crore.

Get legal details about cheque bounce charges along with a list of dos and don’ts in case of bounced cheques

Read the Do’s and Don’t of Cheque Bounce case here.