Cheque Bounce: Concept, Rules, Notice, Procedure & Penalty

Cheque Bounce: Concept, Rules, Notice, Procedure & Penalty | Overview

• Introduction
• Concept of Cheque bounce
• What is a Demand Notice?
• Rule
• Landmark Judgements. (In Brief)
• Penalty
• Procedure and recourses in cases of Cheque Bounce
• Criminal Proceedings
• Civil Proceedings
• Recent Amendments
• Conclusion

A cheque bounce can occur due to various reasons such as inadequate balance, when the validity of the cheque has expired, in case of a torn cheque, overwriting in the cheque.

Introduction

Cheques have always been the most convenient and appreciated mode of payment in all kinds of commercial transactions. Businesses would come to a halt in case these cheques would not exist or be recognized as a bonafide method of payment in business transactions.

Similarly, in cases were a cheque which has been accepted in good faith, gets bounced would again make the business suffer, the cheque will lose its authenticity and trust. Section 138-142 of the Negotiable Instruments (NI) Act, 1881, deals with an aspect of dishonour of cheques in cases where there is a shortage or insufficient funds in a drawers account. The 213th Law Commission Report[1] and various newspaper reports there are about 38 to 40 lakhs of bounced cheques cases in India that is stagnating the Indian justice system. [2]

Concept of Cheque bounce

A cheque bounce can occur due to various reasons such as inadequate balance, when the validity of the cheque has expired, in case of a torn cheque, overwriting in the cheque. The Act which deals with the punishment in relation to such cheque bounce and safeguards protection against the same, is the Negotiable Instruments Act, 1881.

Dishonour of a cheque resulting due to insufficient funds in the bank account of the drawer, if the amount exceeds the arrangement with a bank, it leads to the emergence of criminal liability against the drawer of the defaulted cheque. Mens Rea is not required in case of Cheque Bounces and cannot be taken as a defence by the drawer.[3] Liability arising out of Section 138 may also lead to a criminal offence of cheating under provisions of IPC and would be punishable. [4]

What is a Demand Notice?

In cases where the cheque presented before the bank gets dishonoured, a demand notice needs to be sent to the payee or the drawer of the check within 30 days from the date of the cheque bounce. This notice will provide the drawer 15 days’ time, to deposit the required amount in the bank account of the drawee. In case the drawer fails to comply with the notice within a time span of 15 days, a complaint can be registered under Section 138 of the NI Act in the magistrate court possess the jurisdiction of the same.

The notice must clearly mention the statement of debt being drawer’s legal liability. In addition to this, it is also required to give the information intimated by the bank with regards to the dishonour of the cheque, a copy of the cheque can also be enclosed. There should be explicit and precise demands to pay the dues within 15 days’ time and state the consequences in case it is not complied with.

Rule

Chapter XVII encompasses Sections 138 to 142, was formulated to enabling confidence in the efficiency of business operations and providing authenticity to the negotiable instruments used in these business transactions.

Section 138: Dishonour of cheque for insufficiency, etc., of funds in the account.—Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for[5] [a term which may be extended to two years’], or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless—

1. the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
2. the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving notice; in writing, to the drawer of the cheque,
   [6][within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
3. the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation. —For the purposes of this section, “debt of other liability” means a legally enforceable debt or other liability.[7]

Format of the Cheque Bounce Notice

Click Here to Download Word File

Landmark Judgements. (In Brief)

• Dashrath Roopsingh Rathod v. State of Maharashtra & Anr.[8]

Here the courts held that the criminal case can be instigated from the place of the bank branch where the cheque was drawn is located.

• Kishan Rao v. Shankargouda [9]

The accused was convicted by the Trail court due to the failure to rebut the presumption under Section 139 of the NI Act, this conviction order was set aside by the High Court. In a further appeal, the Supreme Court ruled in favour of the Appellant and set side High Courts order and put forth two necessary points: (i) Scope of High Court’s revisional jurisdiction (ii) presumption in favour of the holder of the cheque under Section 139.

Penalty

In case the drawer of the cheque, within 15 days of receiving the notice of the cheque bounce does not make the payment, in that case under Section 138 of the NI Act would be bound to face the legal consequences. The drawee then can proceed to file a cheque forgery case on the basis of the cheque bounce memo provided by the bank within one month from the issue of the notice of the cheque bounce.

The punishment for cheque bounce in India is – (i) imprisonment for up to 1-year (ii) Fine which maybe twice the amount of the cheque or both.

Procedure and recourses in cases of Cheque Bounce

Criminal Proceedings

• A legal notice should be issued to the drawer of the dishonoured cheque within a time period of 15 days by a registered post along with relevant facts. The drawer is provided 15 days within which he has to make the payment, in case the payment is made the matter becomes settled. In case the payment is not made within 15 days, the complainant can file a criminal case process under S 138 of the NI Act, against the drawer within a time period of 30 days from the expiry of 15days of serving the notice, with the magistrate court concerned, within the jurisdiction.
• The complainant or the respective agent should be presented within the witness box and supply relevant details for filing of the case. In a case where the court is satisfied to find solidity in the complainant’s case, a summons will be issued to the accused (drawer) to present before the Court.
• After the accused has been summoned, in case the accused abstains from appearing before the court, in that case, the court may issue a warrant which is bailable. In case the drawer still chooses not to appear before the court a non-bailable warrant may be issued.
• On the appearance of the drawer, he may present the bail bonds to ensure that he would be present during the trial. Post this the plea of the accused is recorded. If the accused pleads guilty, this will lead to the punishment of the accused. In case he denies the charges, he will be serving a copy of the complaint.
• The complainant can present his evidence in the way of affidavits and producing every document inclusive of the originals relevant to his/her complaint. The complainant would be cross-examined by the accused or his/her lawyer.
• An opportunity would be given to the accused to lead his evidence. In addition to this also be granted the opportunity to yield the evidence and witnesses to support his case. The accused and witnesses will be cross-examined by the complainant.
• In the last stage of the criminal proceeding, the court will pass judgement after scrutinizing. In case the accused is convicted, he can file an appeal in the Session Court. Likewise, in case the accused is acquitted, the complainant can proceed to an appeal in the High Court.

Civil Proceedings

In case the complainant wants to proceed with a civil suit for the recovery of rather than obtaining a criminal procedure. A Summary Suit can be executed under Order 37 of the Civil Procedure Code, 1908.

A civil suit filed by the complainant is to retrieve the unpaid amount along with the costs that he/she bears during the procedure of litigation. In this scenario, he/she can restore to the option ‘Summary Suits’ under Order 37 of the CPC, 1908, unlike normal suits, the drawer here cannot defend himself, in order to do that he would require the permission of the court in order to defend himself.

Recent Amendments

The following additions have been made in Negotiable Instrument (Amendment) Act, 2018

• Section 143A– The have been new amendments in relation to certain provisions of the NI Act, Negotiable Instrument (Amendment) Act, 2018. Section 143 has now a new proviso, 143A which entrusts the court to try an offence under S 138 in order to enable the drawer of the cheque to pay compensation to the drawee in summary trail/ summons case where he argues not guilty to the allegations of the drawee. The compensation shall not surpass 20% of the amount mentioned in the cheque and shall be payable within a time span of 60 days. [10]
• Section 148– It empowers the Appellant Court to demand the payment that is pending the appeal against conviction under S 138 of the NI Act. The Appellant Court may give directions to the appellant in order to deposit an amount which would be a minimum of 20 % of fine or compensation awarded by the trial court. In addition to the interim compensation paid under section 143A. In case of acquittal, the court can now empower to direct the complainant to repay the interim compensation, at interest rates as directed by the Reserve Bank of India. [11]

Conclusion

Analysing the ways in which other countries and judicial systems deal with the issue of cheque bounce is important, particularly to see if their methods can help influence effective suggestions for India. The legal liabilities for the dishonour of cheque in the following five countries were analysed.

Scrutinising how other countries deal with the same issue of cheque bounce is essential to determine the future changes that can be brought in India through recommendations.

In Australia, the Cheques Act, 1986 and in the UK, the Bills of Exchange Act, 1882, provides civil remedies and civil suits where the payee has the option of filing a civil suit to claim compensation and damages. Singapore imposes civil liability, and no criminal liability is present. France imposes civil liability in addition to this has a database called Fichier Central des Chèques (FCC) which monitors and keeps a track of those individuals who have issued dishonoured cheque more than once. In the United States of America, the laws vary from state to state and there exists both civil and criminal liability. [12]

The Amendment Act in India without any doubt is a significant step towards ensuring the authenticity of cheques. However, some critics have this view that the Act still is not stringent enough to work efficiently with regards to deterring defaults of the drawer of the cheque.

Harsher punishments should be imposed upon the defaulter in case the offender is repeating the same offence, this can be done by increasing fines and forbidding issuing of cheques for a specific period. Express provision should be placed for the speedy trial in cheque bouncing cases within the directed time period. Regardless, the recent NI Act in India will truly lead to ensuring that the relief is being granted to the injured party in relation to dishonoured cheques.

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[1] Law Commission of India. 2008. Report No. 213: Fast Track Magisterial Courts for Dishonoured Cheque Cases. New Delhi: Government of India, p. 10. Available online at lawcommissionofindia.nic.in/reports/report213.pdf

[2] Ramya Sridhar Tirumalai, “Approaches to Justice in India (2017) Promise to Pay: An Analysis of Cheque Dishonour Cases”

[3] Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129.

[4] “Dishonour of a Cheque – A Deemed Offence Under Section 138 of the Negotiable Instruments Act 1881 (As Amended in 1988)”, 33 JILI (1991) 346 at page 346

[5] Subs. by Act 55 of 2002, s.7, for certain words (w.e.f. 6-2-2003).

[6] Subs. by s. 7, ibid., for “within fifteen days” (w.e.f. 6-2-2003).

[7] Section 138, THE NEGOTIABLE INSTRUMENTS ACT, 1881

[8] (2014) 9 SCC 129

[9] (2018) 8 SCC 165

[10] SCC Online Blog, Auroshree, “The Negotiable Instruments (Amendment) Act, 2018” [Highlights] (August 4, 2018) Link

[11] Ibid

[12] Ramya Sridhar Tirumalai, “Approaches to Justice in India (2017) Promise to Pay: An Analysis of Cheque Dishonour Cases”

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