Categories: Others

Indian Law: Guide for legal recourse on Cheque bounce

New Law: Guide for legal recourse on Cheque bounce under Negotiable Instrument Act

  • Cheques are used in almost all transactions such as re-payment of loan, payment of salary, bills, fees, etc. A vast majority of cheques are processed and cleared by banks on daily basis.
  • The Cheques are issued for the reason of securing proof of payment. Nevertheless, cheques remain a reliable method of payment for many people. On the other hand, it is always advisable to issue crossed “Account Payee Only” cheques to avoid its misuse.
  • In legal parlance, the author of the cheque is called ‘drawer’, the person in whose favour it is drawn is called ‘payee’ and the bank who is directed to pay the amount is called ‘drawee’.
  • Fortunately, the cases of search bounce are popular these days. Often the large sums of the checks remain unpaid and are returned to the bank from which they are received.

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 has issued the cheque or the signature on the cheque is not matching 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.

New Provision of Section 143A 

  • A new section has been introduced under Section 143A has been added to the existing Act, which will allow the court has order the payment of temporary damages by the cheque drawer to the claimant. No more than 20% of the cheque amount can now be charged as conditional damages in cases where the accused may not plead guilty in a summary trial or summons case.
  • The section specifies that interim damages be received within 60 days of the date of the order. The clause further notes that the interim reward so obtained must be refunded by the claimant, together with interest at the bank rate as specified by the Reserve Bank of India, if the accused is released after the trial.

Steps to initiate prosecution

To initiate prosecution under Section 138, three condition precedents need to be fulfilled as below:

  • Cheque should have been presented to the bank within three months of its issue or within the period of its validity. (The validity of cheques were considered to be six months previously; however, Reserve Bank of India vide Notification No. RBI/2011-12/251DBOD.AML BC.No.47/14.01.001/2011-12 directed that the validity period of cheques to be reduced from six months to three months with effect from 1st April, 2012.).
  • The payee [Person who receive the money] should have made a demand to the Payor [Person who is liable to pay the money] for payment by registered notice after the cheque is returned unpaid.
  • Payor should have failed to pay the amount within 30 days of the receipt of the notice.
  • If only all the above three conditions are satisfied, the prosecution can be launched for the offence under Section 138.

Legal action

  • The Negotiable Instruments Act, 1881 is applicable for the cases of dishonour of cheque. This Act has been amended many times since 1881.
  • According to Section 138 of the Act, the dishonour of cheque is a criminal offence and is punishable by imprisonment up to two years or with the monetary penalty or with both .and is punishable by imprisonment up to two years or with the monetary penalty or with both.
  • If payee decides to proceed legally, then the drawer should be given a chance of repaying the cheque amount immediately. Such a chance has to be given only in the form of notice in writing.
  • The payee has to send the notice to the drawer with 30 days from the date of receiving the “Cheque Return Memo” from the bank. The notice should mention that the cheque amount has to be paid to the payee within 15 days from the date of receipt of the notice by the drawer.
  • If the cheque issuer fails to make a fresh payment 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.

Fair observations: conditions of prosecution

  • For the practical reasons for the enforcement of the provisions of Section 138, these conditions must be satisfied.
  • The cheque was supposed to be drawn by the drawer on the account held by him.
  • Cheque should also have been returned or disbursed due to insufficient funds in the drawer’s account.
  • cheque shall be issued for the payment of a debt or legal liability.
  • Upon receipt of the notice, if the drawer fails to make the payment within 15 days of service of the order, the drawer shall commit an offence punishable within Section 138 of the Negotiable Instruments Act.

By whom -prosecution under Section 138

The prosecution can be launched against the payor and in the case where a company has committed an offence under Section 138, then not only the company but also every person who at the time when the offence was committed, was in charge of and was responsible to the company shall be deemed to be guilty of the offence and be liable to be proceeded against.

Amendment in relation to cheque dishonour

The Cabinet has approved an amendment to current law to allow for payment of an interim compensation in cheque dishonour cases with a view not to allow unscrupulous elements holding payments, pending long trial, sources said. An amendment to the Negotiable Instrument Act will allow a court to order for payment of an interim compensation ( interim compensation can be an amount not exceeding 20 per cent of the amount of the cheque) to those whose cheques have bounced due to dishonouring parties.

  • If the drawer is acquitted, the court may direct the payee to repay the amount paid as interim compensation with interest.
  • The said interim compensation has to be paid within a period of 60 days from the date on which the order to that effect is made.
  • Appellate courts would be enabled to order the appellant to deposit a part of the compensation awarded by the trial court at the time of filing appeal.
  • The said amount of interim compensation may be recovered in the manner provided under section 421 of CrPC – by way of attachment and sale of any movable property of the drawer.
  • The best policy to avoid a cheque bounce in your account is to NEVER write a cheque without money in your account.

Punishment & punishment

  • Upon receiving a complaint, along with the affidavit and the related paper trail, the court will issue a summons and hear the matter. If found guilty, the defaulter may be disciplined with a monetary penalty which may be double the value of a cheque or imprisonment for a period that may be extended to 2 years or both.
  • The Financial institution also has the right to interrupt the cheque book service and to close the account for the recurrence of bounced cheques.

  • Unless the drawer allows paying of the Chq Amount before 15 days of receipt of the invoice, the drawer shall not commit any offence. Anything other than that, the payer can bring a complaint to the court of the competent magistrate within one month from the date of expiry of the 15 days specified in the notice.
Rajput Jain & Associates

Rajput Jain & Associates is a Chartered Accountants firm, with it's headquarter situated at New Delhi (the capital of India). The firm has been set up by a group of young, enthusiastic, highly skilled and motivated professionals who have taken experience from top consulting firms and are extensively experienced in their chosen fields has providing a wide array of Accounting, Auditing, Taxation, Assurance and Business advisory services to various clients and their stakeholders. Rajput jain & Associates, a professional firm, offers its clients a full range of services, To serve better and to bring bucket of services under one roof, the firm has merged with it various Chartered Accountancy firms pioneer in diversified fields. We have associates all over India in big cities. All our offices are well equipped with latest technological support with updated reference materials. We have a large team of professionals other than our Core Team members to meet the requirements of our prospective clients including the existing ones. However, considering our commitment towards high quality services to our clients, our team keeps on growing with more and more associates having strong professional background with good exposure in the related areas of responsibility.

Recent Posts

All about Financial Forensics & its Applications

All about Financial Forensics & its Applications Financial Forensics and Forensic Audit Techniques  Financial forensics and forensic audit techniques are… Read More

1 week ago

All About on Code of Conduct in Forensic Audit

Code of Conduct in Forensic Audit: Introduction: A forensic audit is a specialized examination that investigates financial records to uncover… Read More

2 weeks ago

When is the cancellation revocation applicable?

When is the cancellation revocation applicable?  Procedure for Implement Revocation for GST cancellation This applies only if, on its own… Read More

2 weeks ago

Enhancement Made to the GST Portal – Significant Update

Enhancement Made to the GST Portal - Significant Update Goods and Services Tax Network is pleased to inform that an… Read More

2 weeks ago

How to responses DRC-01C Intimation under Rule 88D

ITC Mismatch GSTR-2B vs GSTR-3B  - DRC-01C Intimation under Rule 88D New mechanism to deal with Input Tax Credit mismatches… Read More

2 weeks ago

Hurdles with Hindu Undivided Family Dissolution

Hurdles with Hindu Undivided Family Dissolution: The Hindu Undivided Family (HUF) is a recognized legal entity under the Income-tax Act,… Read More

2 weeks ago
Call Us Enquire Now