Cheque Bounce Notice

Cheque Bounce Notice – An Overview

A Cheque bounce notice is a legal document sent by the payee to the drawer when a cheque is dishonoured by the bank due to any one of the reasons, such as insufficient funds, signature mismatch, or any other discrepancy pointed out by the bank. The cheque bounce notice is managed according to Section 138 of the Negotiable Instruments Act, 1881. This notice must be issued within 30 days of receiving the Cheque Return Memo from the bank.

The Cheque bounce notice notifies the drawer that the cheque has been dishonoured and that the stipulated amount payable as per the cheque must be paid within 15 days of receiving the notice. In case the drawer fails to adhere to the notice and comply, the payee is entitled to file a complaint against the drawer in court. The complaints, however, must be filed within one month after the expiry of the 15-day period.

The cheque bounce notice gives the drawer one chance to settle the payment before a legal case or monetary penalty is processed. Cheque dishonour can attract a fine up to twice the amount mentioned in the cheque while the imprisonment can be for up to two years. In some cases, the drawee is penalised with both.

What is a Cheque?

According to Section 6 of the Negotiable Instruments Act, 1881, a cheque is described as a bill of exchange drawn on a specified banker, which is not expressed to be payable except on demand. It is a negotiable instrument which directs a bank to pay a particular amount from the drawer's account to the payee or to the bearer of the cheque. In India, cheques are used as a mode of payment and for transactions since owing to a secure and documented method of fund transfer.

However, cheques can be crossed or opened. A crossed cheque mandates that the particular cheque be deposited into a bank account. However, an open cheque is payable over the counter. Irrespective of their status, the cheques serve as a significant financial tool for personal as well as business transactions.

What are the Key Elements of a Cheque?

The key elements of a cheque include:

• Drawer – A drawer is defined as a person or an entity who writes the cheque.
• Payee – A payee is defined as a person or an entity to whom the cheque is payable.
• Drawee – A drawee is defined as the bank on, which the cheque is drawn.
• Date – The date specifies the day and month on, which the cheque is written.
• Amount – Amount is the total sum of money to be paid. The amount is written in two formats - words and numerals.
• Signature – Signature refers to the drawer's signature, which authorises the bank to make the payment.

What is Cheque Bounce?

Cheque bounce is a condition when a bank rejects a cheque for one of various reasons, including insufficient funds in the drawer's account, signature mismatch, expired validity, or any other reason that the bank deems fit. Cheque bounce leads to the non-payment of money to the payee, and it can attract legal action and monetary fines.

Types of Cheques in India

In India, cheques are a financial instrument commonly used for various banking transactions. There are different types of cheques used depending on the factors such as who is issuer, who is the drawee etc. Based on these factors, let us explore different cheque types below:

1. Bearer Cheque

A bearer cheque is the one that’s payable to the person who presents it at the bank. These cheques are transferable by way of delivery, which means that anyone carrying the cheque can receive the payment from the bank. A bearer cheque does not need any additional authorization from the issuer to process the payment. One can easily identify a bearer cheque by the words "or bearer" printed on it.

2. Crossed Cheque

A cheque with two parallel lines with the words ‘a/c payee’ written on the top left is called a crossed cheque. The lines ensure that no matter who presents the cheque, payment will be issued only to the individual in whose name it has been issued. Crossed cheques can be encashed by the account payee only, and these cheques are considered safe.

3. Order Cheque                

Order cheques are the ones where the words "or bearer" is canceled. These types of cheques are issued to the issued to the person whose name is written on the cheque. In such a cheque, the bank does not release the payment until the cheque bearer's identity is verified.

4. Post-Dated Cheque

Post-dated cheques are the ones with a future date for encashment mentioned on them. In case such cheques are even presented immediately, the bank does not process the until the stipulated date, payment only on the specified date. The validity of such cheques starts from the date mentioned in them and not when they are presented.

5. Open Cheque

Any cheque that is uncrossed and can be encashed at the bank where payment is made to the bearer is called an open cheque. Open cheques can be transferred from the original payee to the other payee. However, such cheques must carry the signature of the issuer on the front as well as the back side of the cheque.

6. Traveller’s Cheque

Traveller’s cheques are popular with foreign tourists who do not wish to risk carrying hard cash to a new travel destination. Such cheques are issued by a particular bank and can be encashed in currency at another bank in another location or country. Since traveler’s cheques do not expire, they can be used for future trips.

7. Stale Cheque

A cheque that is way past its validity of three months from the date of being issued is called a stale cheque. 

8. Self Cheque

It is easy to identity a self-cheque since it has the word "self" written in the drawee column. Self-cheques can only be drawn at the issuer's bank.

Understanding the Circumstances Leading to Cheque Bounce

Cheque bounce arises for various reasons. Let us discuss the reasons and situations leading to cheque bounce, which in turn invite legal and monetary penalties.

 Various situations that result in cheque bounce are as follows:

1. Insufficient Account Balance – If the drawer’s account runs short of adequate funds for which the cheque has been issued, it leads to rejection from the bank, where the cheque is returned to the payee. This, in turn, leads to cheque bounce.   
2. Stop Payment Instruction – The cheque gets dishonoured if its issuer issues an instruction to stop the payment through ‘stop payment’.
3. Payee Name– If the name of the payee is either missing or lacks clarity on the cheque, it leads to the cheque getting dishonoured.
4. Account Number – The cheque also gets dishonoured if the account number mentioned on the cheque is either unclear or missing.
5. Case of Insolvency – The cheque also gets dishonoured if the bank is informed about the death, lunacy or insolvency status of the drawer.
6. Data Mismatch—The cheque is dishonoured if the amount mentioned in the figures does not match the other.
7. Bank Issue – The cheque also gets dishonoured when the cheque isn’t presented to the bank on which it was drawn.
8. Signature Mismatch – The cheque gets dishonoured in case the signature of the drawer does not match the specimen signature registered with the bank.
9. Alterations & Overwriting – In case the bank finds alterations or overwriting on the cheque, it becomes a ground for being dishonoured.
10. Validity – Expired cheques or cheques that have passed the validity are automatically dishonoured. It is important that cheques issued by the drawer must be presented for payment within three months.
11. Damaged Cheque – Damaged or disfigured cheques where details are not visible or that have marks or stains when presented to the bank get dishonoured.
12. Frozen Account – A cheque issued by an account frozen by the government or by court order leads to the cheque getting dishonoured.

Essentials of Cheque Bounce Notice

Since a cheque bounce notice holds legal consequences, it must comply with the legal framework and include all necessary elements to meet lawful requirements. Besides, it should communicate the message effectively to the drawer, explaining the implications of ignoring and breaching. Let us look at the essentials of cheque bounce notice below:

1. Sender's Details – A cheque bounce notice must include the sender’s name, address and contact information, in this case the drawer.
2. Recipient's Details – A cheque bounce notice must include the recipient’s name, address, and contact information, which, in this case, the payee.
3. Date - A cheque bounce notice must include the date on which the notice is being sent.
4. Subject - A cheque bounce notice must include a clear and concise subject line for effective communication, such as "Notice of Dishonour of Cheque.”
5. Details of Dishonoured Cheque - A cheque bounce notice must include details of the dishonoured cheque, such as the cheque number, date of issuance, bank name, branch name and the amount for which it was issue.
6. Statement of Dishonour – A cheque bounce notice must visibly indicate that the cheque issued by the drawer has been dishonoured by the bank through a clear statement. The statement should also specify the exact reason given by the bank for dishonouring (e.g., insufficient funds or signature mismatch).
7. Demand for Payment – A cheque bounce notice must request payment of the cheque amount within 15 days of receiving the notice. This must be done as a warning settlement or face legal action under Section 138 thereafter.
8. Legal Consequences – A cheque bounce notice must contain a statement informing the drawer of the legal consequences if he fails to settle the cheque amount within 15 days of the issuance of the notice under Section 138 of the Negotiable Instruments Act, 1881.
9. Signature - A cheque bounce notice must include the signature of the sender/payee alongside their name and designation (if applicable).

Implication of a Cheque Bounce

As soon as a cheque is dishonoured, the bank notifies the payee through a 'cheque return memo', which states the reason for the dishonour. The payee has the option to resubmit the same cheque, hoping that it will be honoured upon re-submission. However, if the cheque gets dishonoured again, it attracts legal action against the drawer. However, this condition is applicable only if the dishonoured cheque was issued to settle a debt or liability.

In such a case, the payee can exercise legal measures against the drawer through a written notice that allows them to repay the cheque amount. However, in case the drawer defaults in making the payment within 30 days of receiving the notice, the payee is then entitled to lodge a criminal complaint under Section 138 of the Negotiable Instruments Act. The payee can do this independently or through the power of attorney.

Compensation in case of Cheque Bounce

The court is entitled under Section 357 of the Code of Criminal Procedure, 1973 to compensate the payee for the drawer's defaults. However, no limit has been defined so far as compensation is concerned.

Cheque Bounce Law when a Company defaults

As per the cheque bounce law, if a company is found to be liable for a bounced cheque, the person responsible for issuing the cheque on behalf of the company, as well as the company, are held guilty.

Misleading Allegations of Cheque Bounce

Various businesses demand a cheque to be submitted in lieu of security for dealings where one party offers a cheque to the other. However, the recipient may frequently deposit the cheque meant for security despite the transaction's completion, which results in a false accusation of cheque bounce. In such cases, the onus lies on the issuer to prove that the cheque was meant as security and wasn’t issued to clear any debt or loan payment.

Penalties Imposed in the Cheque Bounce Case

The cheque bounce case punishment includes:

1. Penalties and Imprisonment – A dishonoured cheque can invite penalties for both the drawer and the payee. The penalties to be imposed in the offence of the cheque bounce are a fine up to twice the amount of the cheque, imprisonment for a term up to two years or both.
2. Revocation of Services – If the drawer defaults again and again, the bank may revoke privileges such as chequebook or even close the account.
3. Impact Credit Rating – Since institutions report defaults to credit bureaus, a bounced cheque can negatively impact the drawer's credit history.

Fees to be Charged in the Cheque Bounce Case

The fees charged by professionals for handling cheque bounce cases can vary significantly based on several factors related to the case. However, the minimum fee starts from Rs 5,000, but it may increase depending on the complexity of the case, the experience and expertise of professionals, the duration of the legal proceedings, and various factors.

Timeframe for Raising Cheque Bounce Complaints

Once the complaint has been raised by the payee within a month’s time from the date of the offence, the courts acknowledge it under Section 138. However, post an amendment in 2002, the payee can now raise the complaint even after the expiry of the one-month period, provided the complainant has reasonable grounds to prove for the delay. The complaint must be made to a court equal to or higher than a Metropolitan Magistrate or a Judicial Magistrate of the first class.

Timeline for Resolving Cheque Bounce Notice Cases

There is no set timeline for resolving cheque bounce cases. The duration can range from 6 months to 1-2 years, depending on various factors.

How does Corpbiz Assist in Resolving Cheque Bounce Cases?

With a network of 200+ lawyers, the team of Corpbiz has successfully assisted in resolving 1000+ cheque bounce cases. Given below are the ways through which Corpbiz can extend support in cheque bounce cases-

1. Pre-litigation Services

• Case Assessment and Consultation
• Demand Notice Drafting
• Negotiation and Settlement Facilitation

2. Litigation Services

• Complaint Drafting and Filing
• Court Representation
• Evidence Collection and Management

3. Post-judgment Services

• Execution of Court Order
• Appeal Management

4. Additional Services

• Legal Compliance Guidance
• Client Communication and Support