A cheque is a bill of exchange which is payable on demand. There are two parties in a transaction, the person who issues the cheque is known as the drawer, whereas the person under whose favour the cheque is issued is known as the drawee. A cheque bounce is a situation in which the cheque cannot be processed because of the insufficient funds that are available in an individual’s bank account. There are many reasons which can lead to a cheque bounce. To overcome such scenarios, the drawee issues a cheque bounce notice or a demand notice to the drawer. The Cheque bounce notice states that if the amount due is not paid within the prescribed time, then the drawee will initiate legal proceedings under section 138 of the Negotiable Instruments Act 1881against the drawer.
According to section 13 of the Negotiable Instruments Act 1881, a negotiable instrument means a bill of exchange, promissory note, or a cheque. The cheques are governed under the Negotiable Instruments Act 1881. Section 138 of the Negotiable Instrument Act 1881 states the provision relating to the dishonour of cheque for insufficiency of funds in the bank account. If there is any cheque issued by the drawer to the drawee to pay any amount and the cheque is returned/dishonoured by the bank because of the insufficient amount in the bank accounts to honour the cheque. The cheque is also dishonoured if it exceeds the amount that has been arranged to be paid from that bank account (by an agreement made with the bank). Hence, an individual can file a criminal case under section 138 of the Negotiable Instrument Act 1881, and he can also file a Summary suit under Order 37 of the Civil Procedure Code 1908 There are obvious limitations to the applicability of this section, that said cheque needs to be submitted to the banker before six months of issue, and that the payee if he cheque sends a notice to the drawer of the same within 30 days of being intimated by the bank for insufficiency of funds, either available or disposable.
Cheque bounce cases are the most prominent among all proceeding s arising out of the Negotiable Instrument Act, with about 40 lakh cases pending according to the Law Commission 213th Report. In the same report, the Commission proposed a fast track court system to deal with cheque bounce cases to ease the burden on civil courts, plaintiff/ complainants.
Following are the reasons behind a cheque bounce:
- A wrong date mentioned on the cheque
It has been observed that the drawer of the cheque mentions a wrong date in the cheque which results in cheque bounce. Not only the wrong date but if the drawer mentions a date which is more than three months old, then also the cheque is dishonoured by the bank. Moreover, if the cheque is postdated and the drawee deposits the cheque earlier than the date, it results in cheque bounce. To avoid cheque bouncing drawer must mention the correct date in the cheque. Refer Javed Ahmad v Syed AzmathullaHussaini1993 CriLJ 2359, where the Andhra High Court held that when a person is accepting a postdated cheque that might exceed the limitations discussed herein, the same would be deemed done with â€˜open eyesâ€™ and allow the defendant to claim the same in defence.
Signature is mismatched
The bank dishonours the cheque if the drawerâ€™s signature is mismatched. It has been observed that many times people tend to forget their signature and end up by putting a wrong signature on the cheque. If the signature does not match with the bankâ€™s record, it results in cheque bounce. To avoid such situations, the signature of the drawer must match his bank record. This matter has been set to rest in M/s LaxmiDyechem v State of Gujarat and Ors. (2012) 13 SCC 375 here the court held that Sec. 138 could be extended to include all such situations where cheques have been dishonoured, despite the section only referring to two scenarios. Thereby envisaging even those situations where the cheque was returned because of a mismatched or unrecognizable signature.
- Funds in the drawerâ€™s bank account
The bank dishonours the cheque if there is any shortage/lack of funds in the drawerâ€™s bank account from which the cheque has been issued. In case of insufficient funds in the bank account, the bank will stop the payment. It will also levy a penalty to both drawer and drawee. Insufficient funds are one of the main reasons for cheque bounce cases. To avoid cheque bouncing, the drawer must ensure that there is sufficient balance in his bank account before issuing any cheque. This extends even to situations where the drawer of cheques pauses or prevents payments to be made from the account, or when the drawer specifically notices the payee not to present the cheque: Held thusly by the supreme court in Electronics Trade & Technology Development Corporation v Indian Technologists and Engineers (P) Ltd. (1996) 2 SCC 739.
- Overwriting on the cheque
A bank has the authority to dishonour the cheque if the drawer has scribbled or has done overwriting on the cheque. The cheques must be kept in good condition. If the bank finds that the cheque is in a bad condition or is damaged and the details mentioned in the cheque are not clearly/properly visible, then it results in cheque bounce. To avoid the cheque bouncing, one must keep the cheques in good condition.
- The different amount mentioned in words and numbers sections
The bank dishonours the cheque if there is an unusual amount mentioned in the words and numbers in the cheque. The amounts specified in words section must be the same with the amount mentioned under numbers section. This common mistake can lead to a cheque bounce. To avoid the cheque bouncing, one must write the same amount in both the sections (words and numbers).
- The first step is to issue a cheque bounce notice. The drawee issues a cheque bounce notice to the drawer within a period of 30 days from the cheque dishonour. The notice must consist of information relating to the nature of the transaction, the amount specified, the date on which the cheque is deposited, the date on which the cheque is dishonoured, the reason behind cheque bounce and to request the payment of the amount (that was dishonoured by the bank) within a period of 15 days from the receipt of such notice. The cheque bounce notice must also include the details of the drawer, and it should specify that the cheque was presented within the validity period, it should also specify that the cheque was not given as a loan or a gift but for discharging the debt (Sec. 139 of NI Act makes thus presumption). If the drawer makes the payment after receiving the cheque bounce notice, then there is no need to file a case against the drawer. Legal notice once sent and dishonoured, the same shall, under the provisions of this act does not bring cognizable offence, until a complaint has been made within a month of the original period of 15 days as specified under Sec. 138 (c).
- It is essential for any legal action under the act that notice for bouncing of a cheque needs to be served, and subsequently rejected, or ignored: Dalma Cement Ltd. v Galaxy Traders & Agency Ltd. (2001) 6 SCC 463.
- Further noticed, that while the jurisdiction shall usually be at the place of dishonour, a pre-arranged jurisdiction can be agreed upon, and the same cannot be changed or modified by actions of dishonour at a later point by the bank. In Madan v Videocon Industries Ltd.(2013) 3 BC 225it was held that since the agreement between parties set jurisdiction was set at Aurangabad, notice cannot be sent at the branch of service of the cheque: Delhi.
- Further, it was held in M/s Harmann Electronics v National Panasonic India Pvt. Ltd. (2009) 1 SCC 729 that the place of the notice shall in no way determine the jurisdiction of the court. Jurisdiction shall either be agreed upon or at the place of dishonour.
- The notice needs to be accurate in claims made, a held in Rahul builders v Arihant Fertilizers (2008) 1 SCC 703, here the notice was held defective and lacking in instituting cause of action since the amount mentioned was different from that on the cheque.
- Despite these above decisions, the payee may adduce additional claims other than the original cheque amount in the event that interest payment is sought: SumanSethi v Ajay Kumar Churiwala1998 C. Cr. LR (Cal) 106 held in the Calcutta HC.
- A legal notice as discussed shall be presented to the drawer of a cheque upon dishonour, and the same shall prevent the payee from presenting the same cheque to the bank again, Vijay Kumar v Yashpal Singh and Anr. (2003) 4 SCC 417.
- The next step is to file a case if the drawer does not make a payment within the prescribed time. If there is no payment within a period of 15 days by the drawer, then the drawee can file a criminal case within a period of 30 days from the expiry of the cheque bounce notice period (15 days). The case can be filed only in the city where the drawer presented the cheque to the drawee.
- If the drawer is found guilty, then the penal provision mentioned under section 138 of the Negotiable Instrument Act 1881will be applied by the Court. The punishment prescribed under the section is as follows: Either a sentence of imprisonment extending up to two years and/ or a fine extending to twice the value of the original cheque.
Despite the above discussion, it should be kept in mind that, since the passing of the Negotiable Instruments Act (Amendment) Bill 2017, the drawee is required to pay interim compensation amounting to 20% of the cheque amount, which may be returned depending in the outcome of the case (Sec. 143 A introduced under the act).
Section 143A of the Negotiable Instruments Act 1881 states the provision relating to the Interim compensation to the drawee for the inconvenience that has been caused due to the cheque dishonour. Hence, cheque bounce is one of the common problems which is still prevalent in India. To avoid the cheque bounce problem, one must keep in mind the reasons behind cheque bounce so that the cases of cheque bouncing is avoided. It is highly advisable to appoint a professional to draft a cheque bounce notice, or legal consequences may be attracted.