What is a Cheque Bounce?
A cheque bounce is an infraction under Section 138 of the Negotiable Instruments Act, 1881 (“Act”), punishable by a fine of up to twice the value of the cheque, imprisonment for no more than two years, or both. When a payee presents a cheque to a bank for payment and the bank returns it unpaid with a memo indicating insufficient funds, the cheque is said to have bounced.
A cheque can bounce for a variety of reasons, but if it bounces due to inadequate funds in the drawer’s account, it is an infraction under the Act. The bank must reject the cheque offered for payment and issue a return memo indicating the cause as insufficient funds. In this instance, the cheque’s recipient might submit a cheque bounce notice to the drawer, requesting payment of the cheque amount.
Common Causes of Cheque Bounce
Insufficient Funds
The most common cause of a cheque bounce is having inadequate balance in the issuer’s account to pay the cheque amount.
Incorrect Date
Post-dated cheques submitted before the specified date, as well as cheques with obsolete dates (more than three months old), are refused.
Signature Mismatch
If the signature on the cheque does not match the bank’s records, it will be dishonoured.
Account Closure
Automatic rejection occurs when checks are drawn from closed accounts.
Technical Errors
Rejection may result from overwriting, damage to the cheque, or differences between the amount indicated in words and numbers.
Non-Maintenance of Minimum Balance
Checks may bounce if the minimum balance required by the bank is not maintained.
Expired Cheque Validity
The validity of checks is three months from the date of issuance. They are considered invalid after this time.
Torn or Damaged Cheque
If the cheque is physically damaged, it may become unreadable and be rejected.
Legal Aspects of Cheque Bounce
Checks that bounce due to inadequate cash are penalised under Section 138 of the Negotiable Instruments Act, 1881. The legal ramifications include:
- Fines:up to double the amount on the cheque.
- Imprisonment: A duration of up to two years.
- Civil Suit: To reclaim the cheque amount without incurring criminal penalties.
Steps in Legal Action
- Notice Issuance: After receiving the bank’s memo, the payee sends a cheque bounce notice within 30 days.
- Response Period:The drawer has fifteen days to make the payment.
- Court Complaint:The payee has 30 days following the 15-day period to bring a complaint in court if the issue remains unresolved.
The legal case against the drawer may be weakened if these deadlines are missed.
Bounced Cheque Fees and Penalties
A bounced cheque can result in costs for both issuers and payees. Frequent occurrences can:
- Harm credit ratings.
- Result in increased fines.
- Lead to restrictions or the closure of the account.
Banks usually levy a cheque bounce fee, which varies depending on the financial institution, to both the issuer and the payee. In addition, if the case goes to court, legal fees can be imposed.
New RBI Cheque Bounce Regulation
Customers who significantly rely on checks or intend to use them must keep a minimum level in their bank accounts, according to a guideline issued by the Reserve Bank of India (RBI) in August 2021. The cheque will bounce if the necessary minimum balance is not kept. Additionally, a penalty fee could be imposed on the cheque issuer.
In order to speed up and streamline cheque processing, the RBI also declared that the National Automated Clearing House (NACH) will be open around-the-clock, including on Sundays and holidays. All national and private banks are subject to these rules, which guarantee smooth cheque clearance even on non-business days. The modifications are intended to encourage clients to keep sufficient funds in their accounts while improving the effectiveness of cheque transactions.
Cheque Bounce Solutions You May Consider
1. Requesting a New Cheque
The payee may ask the drawer to issue a new cheque if a cheque is returned because of problems including overwriting, mismatched signatures, differences between the amount in words and figures, or physical damage. The payee may pursue a civil lawsuit to recoup the money due if the drawer rejects this request. This method, however, deals with the amount owed rather than the actual cheque bounce.
2. Issuing a Cheque Bounce Notice (Section 138 of the Negotiable Instruments Act)
Only when there are insufficient funds in the drawer’s account can a cheque fail and a bounce notice be issued under Section 138 of the Negotiable Instruments Act. A notice requesting a reissue of the cheque is more suitable than a lawsuit for a bounced cheque for other reasons, such as technological faults.
Procedure for Sending a Cheque Bounce Notice
In the event that a cheque is returned for lack of cash, the payee is required to do the following:
Drafting and Sending the Notice: A formal cheque bounce notification, clearly noting that the cheque has been dishonoured due to insufficient funds, should be sent by the payee via postal service.
Timelines: After the bank notifies you that the cheque bounced, you have 30 days to send this notice.
Demand Period: After receiving the notification, the drawer has fifteen days to pay the sum.
The payee has 30 days after the demand period ends to launch a lawsuit if the drawer does not make the payment within the allotted 15 days.
However, if the cheque was provided as a gift, donation, or to satisfy a non-enforceable duty, no bounce notification can be issued. The cheque must have been written to pay off a valid debt or obligation in order to be subject to Section 138 proceedings.
Legal Action After Notice Period Ends
Legal action may be taken by the payee if the drawer fails to make the payment within the allotted 15 days.
- A court of competent jurisdiction must receive the complaint in accordance with Section 138 of the Negotiable Instruments Act.
- The issue will be handled as a criminal matter since a cheque that bounces because there are not enough money is considered a criminal crime.
Where to File the Complaint
The following locations are where the complaint can be filed:
- The location where the cheque was written.
- The place where the payment cheque was deposited.
- The location where the money was supposed to be paid.
- The address at which the cheque was returned.
- Where the demand notification was delivered.
While cases in other regions should be submitted before the Judicial Magistrate, cases in metropolitan districts must be filed before the Metropolitan Magistrate.
Cheque Bounce Involving Companies
Section 148 of the Negotiable Instruments Act also allows for legal action against a firm when a cheque it issues bounces because there are not enough funds.
- Both the corporation and its directors may be held liable in this situation.
- If found guilty, the directors and other accountable parties may face fines or jail time.
Resolution Before Legal Action
No crime is considered to have occurred and no legal action under Section 138 may be taken if the drawer settles the cheque amount within 15 days of receiving the notice that the cheque bounced.
Payees can make sure their legal rights are upheld by following these processes, and drawers can correct their errors and prevent more repercussions.
How to Avoid Cheque Bounce
- Maintain Sufficient Funds: Make sure that all of the issued checks are covered by your account balance.
- Monitor Transactions: Monitor the amount of checks issued and the balance in your account.
- Overdraft Facility: To avoid money constraints, use an overdraft service.
- Verify Details: Verify the check’s date, amount, and signature one more time.
- Communicate with Payees: Inform payees of any possible delays.
- Opt for Digital Payments:Cut back on using checks for expensive transactions.
- Set Alerts:Turn on email or SMS notifications for cheque clearances and low balances.
- Educate Stakeholders: Make sure staff members and associates that handle checks understand the correct protocols.
Cheque Bounce Charges
When a cheque is returned for lack of money or for other reasons, banks typically charge fines. These fees, which vary from Rs. 100 to Rs. 750 depending on the bank and the amount involved, are referred to as cheque bounce charges or fees. Banks have the authority to impose a cheque bounce fee on both the payee and the drawer. Additionally, if a matter involving a bounced cheque is brought before a court, they might also have to pay legal fees.
Therefore, the payee is required to notify the drawer when a cheque that was offered for payment is returned for insufficient money or for other reasons. If there are any errors, the drawer must promptly make the payment by either resubmitting the cheque or making arrangements for the cheque amount if there are not enough money in the account. The payee may submit a legal notice and possibly bring a criminal prosecution against the drawer to recoup the money if the cheque bounces because there are not enough funds.