Meaning of Cheque bounce and consequences of Cheque bounce

Although, there are several cheque bounce reasons to be considered such as incorrect date mentioned on the cheque, signature mismatch, mismatch of the amount and figures, damaged cheque, overwriting of the cheque, etc. The principal reason for a cheque bounce is insufficient funds. If a cheque is dishonoured because of insufficient funds in the payer’s account, or the cheque payable amount exceeds the amount arranged to be paid from that account by an agreement made with that bank, it is a criminal offence under the Negotiable Instruments Act of 1881. Sometimes, the issuer may choose to stop the payment. In that case, too, the cheque is considered as dishonoured. There could be various other reasons for a bank to dishonour a cheque.

However, the debt or other liability in such a case means a legally enforceable debt or other liability. If the payment by way of cheque is made as a gift or charity, it is not the payment for legally enforceable debt or liability. The dishonour of such a cheque does not attract the provisions of Section 138 of the Negotiable Instrument Act.

The implication of a bounced cheque is that the defaulter has to face dire legal consequences.  The punishment for a bounced cheque is very severe with a prison term of 2 years and/or a fine up to twice the cheque amount.

When a cheque is returned unpaid by the drawee bank with a cheque returned memo stating that the cheque is returned for the reason of ‘insufficient funds’ or ‘not arranged for’ in the account of the drawer. The cheque so returned is called a ‘bounced cheque’.  Legal remedies are available to the payee or the holder in due course, under section 138 of the Negotiable Instrument Act or under section 420 of IPC (for cheating) or through summary suit order 37 of CCP (code of civil procedures) 1908 against the defaulter. However, in all the above cases, action can be initiated under a Court of law only where the debt or liability of the defaulter can be proved. It means, no action can be taken against the defaulter if the cheque was received by the holder as a gift or donation.

The bounced cheque can be presented a second time to the drawee bank for payment within 3 months of the date of the cheque. In the cases of dishonoured cheques(bounced cheques), the payee normally prefers to initiate the legal action u/s 138 NI act, as it is faster and cases under the said section are reserved only for cheque bounces. The procedure for initiating legal action against the defaulter for a bounced cheque u/s 138 of the NI Act is simple. The first step is to send a legal notice to the defaulter within 30 days of receiving the cheque return memo from the bank, failing which legal remedy is not available. The legal notice would demand payment from the defaulter within 30 days from the date of the notice, in place of the bounced cheque amount. If the drawer (defaulter) of the cheque fails to make payment within 30 days of the notice period, the payee can file a criminal complaint u/s 138 of the NI Act, in a magistrate’s court. The case u/s N138 should be filed within a month from the expiry of the notice period. The court on perusal of the affidavit and other trial papers from the petitioner, issues a summons to the defaulter and hears the matter. If the payee or the holder or the holder in due course is able to prove the debt or liability of the defaulter, the court would award the punishment to the defaulter for the bounced cheque.

Section 141 covers 3 categories of the person liable (if the person committing the offence is a company) for an offence under Section 138-

1. The company is the principal offender.
2. Persons who were in charge and were responsible for the business of the company.
3. Any other person who is the director a manager secretary or an officer of the company

There must be a specific accusation against each of the persons alleged as accused that such person was in charge of and responsible for the conduct of the business of the company or the firm at the relevant time when the alleged offence was committed by the company or the firm.

Under Section 141, if the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.

Provided further that where a person is nominated as a Director of a Company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government as the case may be, he shall not be liable for prosecution under this chapter.

Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of or is attributable to, any neglect on the part of, any director, manager, secretary, or other officer and shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Related articles:

Definition of a cheque

Rules for cash payment of a cheque

Effects of not negotiable mark on a cheque

General and special crossing of a cheque

Meaning of inchoate cheque

Meaning of material alteration in a cheque

Difference between bill of exchange and cheque

Little more to know about a cheque