In India, cheque bounce cases are becoming more problematic with the increase in the use of security and post-dated cheques. Not only does a cheque bounce lead to economic losses, it incurs legal expenses as well. This post explains the complete legal procedure for cheque bounce cases so both the issuer and the recipient of the cheque are informed of their obligations and rights.
What Is Cheque Bounce and What Are Its Causes?
When a bank refuses to honor a cheque, it is termed as bounced cheque. Some of the more common reasons are lack of sufficient balance in the account, signature mismatch, overwriting, closed bank accounts, stale cheques, and so on. In India, the legal implications of cheque bounce are dealt with under Section 138 of The Negotiable Instruments Act, 1881.
Legal Basis: Section 138 of the Negotiable Instruments Act
Section 138 addresses only the dishonour of a cheque due to insufficient funds or exceeding the account balance. Treats cheque bounce as an offence and punishment in the form of imprisonment alongside a monetary charge is instituted on the offender. This provision is only relevant when a cheque is presented in discharging a legally enforceable debt or liability.
Step 1: Presenting the Cheque in the Bank
The initial stage of the process involves the physical or electronic presentation of the cheque(s) to the bank. Cheques should be presented for payment within their validity period, which is usually three months from the date of issuance. In case of dishonor, the bank issues a cheque return memo detailing the reasons for non-payment.
Step 2: Sending A Legal Notice For Cheque Bounce
The moment the cheque gets dishonoured, the payee must initiate a legal notice to the drawer within thirty days of receiving the cheque return memo. The notice must also bear the particulars of the cheque including amount, date of issuance, and payment demand within fifteen days from the date of receipt. This notice is needed mainly to comply with the legal requirement.
Step 3: Lodging a Criminal Complaint with the Court
Where an issuer of a payment has not made payment within 15 days of receiving notice, such a payee may prefer a criminal complaint at the level of a magistrate’s court. This is, however, subject to failure to make payment within 30 days after the expiration of the 15-day notice. The complaint must contain:
- Bounced cheque
- Cheque return memo
- Copy of any legal notice sent
- Postage receipt or proof of sending notice via courier
- Affidavit that describes in detail the facts of the case
Upon acceptance of the complaint, the court may proceed to issue summons to the complainant for attending court and defending the case.
Step 4: Trial, Evidence and Defence by the Respondent
Each party in a trial has divergent roles, and for this case, each party shall give their evidence. The complainant shall bear the burden of proof by showing that the defendant issued a cheque for an obligation that is legally enforceable. The defendant shall have the right to defend himself or herself and the defenses may include any of the following: stop payment, no liability, or that the payment was gift or some security.