Cheque Bounce Notice: Understanding the Consequences
Updated: Aug 28
According to Section 138 of the Negotiable Instruments Act, 1881 ("Act"), bouncing a cheque is a crime that carries a maximum two-year jail sentence, a fine up to double the value of the cheque, or both. To prevent this kind of situation, it is crucial for small and medium-sized enterprises to be aware of their rights and obligations if a cheque bounces and to practise financial discipline. We shall discuss the reasons for cheque bounces as well as their effects and ramifications in this article.
Table of Contents
Potential Causes of Cheque Bounce
A cheque bounce can happen for a number of reasons, but it becomes an infraction under the Act if the bounce is caused by insufficient money in the drawer's account. The cheque that is being presented for payment must be rejected by the bank with a return memo indicating that there are not enough funds. Here are the potential causes of cheque bounce in detail:
Insufficient account balance: The bank will reject and return the cheque to the payee along with a memo explaining that there are not enough funds in the drawer's account to cover the cheque amount.
Cheque expiration date: The cheque must be submitted for payment within three months of the drawer issuing it. If the cheque is not submitted to the bank within three months, it expires. The cheque bounces if it is given to the bank after it has expired.
Cheque damage: A cheque will bounce if it is distorted, damaged, or has marks on it that make the details invisible.
Signature mismatch: The cheque will bounce if the drawer's signature is illegible, missing, or different from the one on file with the bank.
Overwriting: A cheque that has been rewritten with the drawer's signature, the cheque amount, or any other statement bounces due to overwriting.
Inconsistency between figures or amounts: If the amount on the cheque is different between what is written on it and what it actually is, it will bounce.
Consequences of a Bounced Cheque
A returned cheque can have detrimental effects. Legal action as well as monetary fines are possible outcomes. Here is a thorough examination of the different results.
Notice of Cheque Bounce to Payee: Within 30 days of the cheque bounce and receipt of the cheque return memo, the payer may get a legal notice in the form of a cheque bounce notice. The payee may file a lawsuit in the form of a "cheque bounce case" if the drawer does not make the payment within the allotted 15 days of receiving the legal notice.
Bank Penalty to Payee and Payer: When a cheque bounces, banks typically charge both the payer and the payee a fee. The payee may also be charged for depositing a cheque that was not cleared, and the payer is penalised for any reason other than insufficient money that resulted in the cheque being returned.
Fine or Jail Time: The payee may file a complaint in court under Section 138 of the Negotiable Instruments Act, 1881, if the drawer does not make the payment after 15 days of getting the notice about the bounced cheque. This may result in two years in prison, a fine equal to twice the value of the cheque, or both.
The payee may request that the drawer provide another cheque to correct the error if the cheque bounces because of overwriting, a mismatched signature, a mismatch between the amount written on the cheque and its figures, or damage to the cheque. The payee may file a civil lawsuit against the drawer to recover the money owed to him rather than having the cheque bounce if the drawer refuses to give another cheque.
Cheque Bounce Rule Update
In early August 2021, the Reserve Bank of India (RBI) published a notice stating that clients who plan to utilise cheques or whose financial activities substantially rely on them will need to maintain a minimum bank balance. The cheque will bounce if the minimum balance in the account is not kept up to date. Furthermore, there's a chance the client who wrote the cheque will also be required to pay a penalty. The RBI also declared that the National Automated Clearing House (NACH) would be open twenty-four hours a day in addition to these modifications. All private and national banks are subject to these modifications. The purpose of the rule modification was to expedite and generally streamline the cheque-clearing process. Sundays will also be a day on which the entity can process and clear a cheque because the new rule guarantees that NACH will be operating every day of the week.
Legal Framework Governing Cheque Bounce Situations
The Negotiable Instruments Act of 1881, Section 138, describes the process for submitting a complaint and addresses the penalty for dishonouring cheques.
Section 420 or Section 406 of the Indian Penal Code: In certain circumstances, a cheque bounce may also result in prosecution of the payer by means of a formal complaint made under Section 420 or Section 406 of the IPC, which addresses deceit and fraudulently obtaining property delivery.
Steps for Legal Action Against a Bounced Cheque
The measures a payee can take to address a bounced cheque as the recipient are outlined below:
Step 1: Request a double check of the cheque's legitimacy and information from the payer. Make sure that the payer's bank account is adequately funded.
Step 2: Send a formal notice of a bounced cheque if the recipient declines to cooperate or refuses to reissue the cheque.
Step 3: Notify the payer that their cheque has bounced and provide the cause (technical or financial problems). In India, the following paperwork is needed to register a case over a bounced cheque:
A copy of the notice sent to the drawer
Evidence of notice delivery, such as a registered post or courier receipt
Record of the original cheque
Memorandum on cheque return sent to the drawer by the banker
Evidence that a debt or obligation is enforceable under law.
Step 4: After you get the bank's memo about the return of the cheque, you have 30 days to record this notification by filing a formal cheque bounce notice. The Negotiable Instruments Act of 1881, Section 138, is followed by this notice. It allows the payer to repay the agreed amount within 15 days.
Step 5: If the problem is not rectified within a month of sending the cheque bounce notice, you should file a lawsuit. A magistrate's court may hear the complaint in the cheque bounce case. The payee may make the complaint in any of the following locations before the magistrate:
The location of the cheque being drawn
Where payment for the cheque was made
Where the money needed to be paid
Where the cheque is returned unpaid
Where the notice of demand was delivered
If the cheque bounce litigation is filed in a metropolitan area, the complaint must be made to the Metropolitan Magistrate. The Judicial Magistrate must receive the complaint if the suit for cheque bounce occurs in any other city.
Step 6: Submit a formal complaint under Indian Penal Code sections 406 or 420. Hearings will take place if the payer receives a court summons.
While a civil lawsuit can be filed against bounced cheques, the bounces that are the result of inadequate funds are punishable by law under Section 138 of the Act. A fine equal to twice the value of the cheque or up to two years in jail are the possible penalties for cheques that bounce. The civil lawsuit for recovery, on the other hand, just seeks to recoup the amount of the cheque bounce and does not penalise the drawer.
Cheque Bounce Notice under Section 138
When a cheque bounces due to a lack of adequate money in the drawer's account to cover its amount, Section 138 of the Negotiable Instruments Act comes into play. The payee may require that the cheque be resubmitted if the cheque bounces for any reason other than inadequate money. In such a case, no notice of the bounce will be sent. If the cheque was written out as a gift, donation, or for any other purpose that isn't legally enforceable, there can be no formal notice of bounced cheques. For the cheque to be considered an infraction under the Act, it must be written to satisfy a debt or legally enforceable responsibility.
Preventing Cheque Bounce as an Issuer
As the payer, there are some precautions you may take to make sure your cheque doesn't bounce. Now let's examine them:
Keep your bank account sufficiently financed, and before writing a cheque, make sure you have adequate money in there.
To make sure there hasn't been an error, double-check every element on the cheque, including the amount, date, account number, signature, etc.
Present a crossed cheque or a cheque with two parallel lines written on it, one in the upper left corner and the other across the cheque. Such a cheque offers the payee extra security because it can only be put into a bank account and cannot be cashed by a bank or other financial institution.
To prevent the cheque from expiring or going stale, give the payee enough time to cash the cheque.
Responding to a Cheque Bounce Notice
To stop future legal action, you should respond to the legal notice for your defence or pay the required amount by cheque. Nevertheless, you should speak with a lawyer who specialises in cheque bounce before responding. The issue will be settled then and then if the cheque amount is paid at the outset. There is no set format for responding to the legal notification, however, you should make sure to cover the following aspects:
Send the drawee's attorney the legal notice's response
Name, address, description
Issue specifics such as issue date, memo regarding cheque return, etc.
Reply to the accusations levelled against you
Avoid acknowledging any of the accusations made against you in the notification
Any grievances directed at the cheque drawee
An overview of your argument against the claims made in the legal notification regarding the bounced cheque
Any legal notification response needs to be submitted on a lawyer's letterhead
The drawee may legally file a complaint with the court, starting legal procedures against you, if you do not respond to the legal notification or pay the amount on the cheque within 15 days.
Conclusion
Cheque bounce prevention is essential to avoiding fines and legal issues. You can safeguard yourself by keeping adequate finances, double-checking the facts on cheques, and responding quickly to bounce alerts. For cheque transactions to go smoothly, you must be aware of your rights and obligations and keep up with any new legislation.
FAQ
Q1. When is a cheque considered bounced?
The bank has the right to withhold payment of a cheque under certain circumstances, in which case the cheque would bounce. A bounced cheque is considered an infraction under Section 138 of the Negotiable Instruments Act, and action may be taken when the cheque is dishonoured due to insufficient money in the customer's account.
Q2. What happens if a cheque bounces?
The payee or their bank will first send you a cheque bounce notice if your cheque bounces. You will then have 15 days to either reprint the cheque or use another payment method to cover the cheque amount. The payee may file a lawsuit against you if, thirty days after giving you the cheque bounce notification, the outstanding balance is still not refunded to them. If found guilty, you might receive a fine equal to twice the value of the cheque or a maximum 2-year jail sentence. You will also be responsible for paying your bank's cheque bounce fees.
Q3. Is cheque bounce a crime?
When a cheque fails because there is not enough money in the bank account, it is against the law. In accordance with Section 138 of the Negotiable Instruments Act of 1881, the payee may bring a criminal complaint. Following the filing of a criminal complaint, the cheque's issuer can be sent to jail.
Q4. Can a person file an FIR for a cheque bounce?
Yes, you have the right to report the individual who gave the cheque in a formal complaint. Then, a person may bring a complaint in a criminal court against the cheque issuer under Section 420 or 406 of the Indian Penal Code (IPC). Alternatively, after receiving a cheque bounce notification, the payee may directly submit a complaint under Section 138 of the Negotiable Instruments Act, 1881 with the Magistrate.
Q5. How much is the cheque bounce penalty charge?
Under Section 138 of the Negotiable Instruments Act, 1881, there are bank costs, legal notice fees, and a fine that can be up to twice the value of the cheque in addition to possible two-year jail time.
Q6. Can a person be arrested in a cheque bounce case?
If someone writes a cheque and it bounces because there aren't enough funds in the account, it's a criminal offence and they could be arrested. The goal of the jail sentence is to keep dishonest persons from tricking innocent people about payments and from fleeing the country. But it's a crime for which bail is required. Therefore, if one promises to appear in court when required, they may be granted bail.
Q7. What is the bail amount for the cheque bounce case?
The bail amount in these situations varies from case to case. The amount of bail is determined by a number of factors, including the amount for which the cheque was written, the number of related cases that are still outstanding against the drawer in the same transaction, the financial situation of the drawer, etc.
Q8. What is a cheque return memo?
When a cheque is returned unpaid, the bank sends a written notification to the sender that includes the reason for the return, the date the cheque bounced, the cheque number, and the date the cheque was issued. This memo is called a cheque return memo, and it is necessary in order to send out a cheque bounce notification. A cheque bounce notice may be sent by the payee in accordance with the cheque return memo that was supplied by.
Q9. Can there be both civil and criminal proceedings for a cheque bounce?
Yes, if a cheque bounces, the issuer may face both civil and criminal penalties. Either criminal or civil procedures may be started by filing a complaint with the magistrate, under Section 138 of the Negotiable Instruments Act.
Q10. Can I send the cheque again to the bank if it has already bounced once?
Yes, you can still return the cheque to the bank even if it bounced once. It has no bearing on your capacity to send the cheque to the bank to be paid whether it is dishonoured once or twice. The number of times a cheque can be presented is unlimited. On the other hand, if you present the cheque and it is returned unpaid once more, you will have grounds to file a complaint under Section 138 of the Negotiable Instruments Act, 1881.
Q11. How many times can a cheque bounce?
A cheque can bounce as many times as it wants, but each time it does, there could be fines and a higher chance of legal action. Furthermore, if a cheque has already bounced more than once or twice, banks may refuse to process it.
Q12. How to escape from a cheque bounce case?
By paying the cheque amount within 15 days of getting the legal notification, you can prevent legal action. Inaction on your part may result in legal action. But even in the face of legal action, you can still be exonerated provided you can mount a convincing enough defence against the cheque bounce case.
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