Although most of the transactions these days take place online, cheques are a popular mode of payment in India. Cheques are a popular payment method among business owners because they provide documentation. Cheque bounce is one of the most common financial offences in India, and it can have disastrous consequences for the issuer.
In India, a person who issues a cheque commits a criminal offence if the cheque is dishonoured (cheque bounces) due to a lack of funds. Cheque bounce is punishable by imprisonment for up to two years or a fine equal to twice the amount of the cheque, or both. In order to prevent situations like this, it is crucial for us to understand the cheque bounce rules.
When does a Cheque Bounce?
The following are the numerous circumstances that lead to a bounced cheque:
- Insufficient account balance
The bank will reject and return the cheque to the payee with a memo stating that there are insufficient funds to cover the cheque amount if there is not enough balance in the drawer’s account to make the payment of the cheque.
- In case of date expiry
Cheque that has passed its expiration date must be presented for payment within three months of the drawer issuing it. If the cheque is not submitted to the bank within three months, it becomes invalid. When a bank receives an expired cheque, it bounces.
The cheque bounces due to overwriting if the drawer’s signature, the amount of the cheque, or any other statement has been altered. Cheque that has been destroyed or defaced, with the details obscured or covered in stains or marks, will bounce. The cheque will bounce if the drawer’s signature is illegible, missing, or does not match the one on file with the bank. Mismatch of figures or amounts – If the amount on the cheque is different in words and figures, the cheque will bounce.
What Happens When a Cheque Is Bounced or Dishonoured?
The issuer may be liable for the dishonoured cheque’s penalty depending on the cause of the bounce. It is a crime under the Negotiable Instruments Act of 1881 to dishonour a Cheque for lack of funds. Charges for writing a Cheque against an account that doesn’t have enough money must be covered by the payer. The payee has three months to file a lawsuit against the payer or consent to a cheque reissue. If the payer writes a dishonoured cheque, they might spend up to two years in prison. Additionally, if a cheque is returned to you unpaid, banks will incur penalty costs. Depending on the bank, different penalties apply. Different penalty categories may be used by banks depending on the amounts of issued dishonoured cheques.
Consequences of cheque dishonour
- The bank will fine you
Both the defaulter and the payee incur fees from their respective institutions when a cheque bounces. If the bounced cheque was intended to pay back a loan, you would also be responsible for paying late fees in addition to the bank’s penalty.
Some consumers use their overdraft account, which allows the banks to pay for bounced cheques. On the unpaid balance of an overdraft loan, the client is responsible for paying interest.
- Credit score will fall
Checking whether you have enough money in your account is crucial before applying for a home loan. The bank may reject the approved loan right away if the processing fee cheque bounces. As a result, make sure you consistently maintain the minimal average balance and steer clear of any strange or irregular bank transactions. Repeated cheque bounces can negatively impact your financial credit history, making it more challenging for you to obtain loans in the future.
- Being charged with a crime
A complaint may be made under Section 138 of the Negotiable Instruments Act by the payee, who may be a person or a bank, if a cheque bounces with the justification that there are insufficient money in the account. When a cheque bounces for the first time, the bank promptly produces a “Cheque Return Memo” outlining the reason for non-payment. Within three months of the date written on the cheque, the holder is given the opportunity to resubmit it to the bank.
The party that has been wronged may also take legal action against the defaulter by serving a legal notice within 30 days of receiving the memo for the returned cheque. The holder of the cheque has the right to file a criminal complaint against the cheque issuer or drawer if a new payment is not made within a month of receiving the notice.
However, if the party who feels aggrieved does not make a complaint within 30 days, the court will not hear the case unless the delay is legitimately excused.
- Facing a civil lawsuit
In a cheque bounce case, a second civil lawsuit is typically filed in order to recover the money owed, including the costs incurred and any missed interest, as bringing a criminal prosecution has no effect on collecting the outstanding debt. However, under Section 420 of the Indian Penal Code, the party that feels mistreated may launch a cheating case. The notified Negotiable Instruments (Amendment) Act, however, allows the complainant to do so in the city where he resides or the location of the cheque’s deposit. The victim will find it simpler to pursue legal action as a result.
The payee may ask the drawer to reissue the cheque if any cheque fails owing to erasure, inconsistent signatures, a discrepancy between the numeral figures and the text of the paid amount, or a damaged cheque. Let’s say the drawer declines to accept a new cheque. In that instance, rather than dealing with the cheque bounce, the payee may seek legal action or criminal charges against the drawer to retrieve the money owed to him.
According to Section 138 of the Negotiable Instruments Act, the payee must give notice. A cheque bounce notice is issued in accordance with Section 138 of the Negotiable Instruments Act when a cheque is returned unpaid because there is not enough money in the drawers’ fund to cover the generous cheque amounts. No one will send out a bounce notice if a cheque fails for any reason other than insufficient money, and the payee may ask that the cheque be redone.
The first step after a cheque bounces due to inadequate funds is to mail a cheque bounce notice to recover penalties under the Negotiable Instruments Act. The payee may file a cheque bounce notice within thirty days of receiving bank notification that the cheque was refused, stating that the bank is unable to cash the cheque due to insufficient funds.
The payee must give the drawer 15 days from the date of getting the notice that the cheque has bounced to pay the amount after receiving a warning that the cheque has bounced. The payee may file a lawsuit against the drawer within 30 days following the expiration of the 15-day period if the drawer still has not provided the cheque’s payment amount.