Using a cheque to pay for goods or services is a common practice, allowing you to make payments safely and conveniently. However, it is very important to understand what happens if a cheque you have issued, or one you have received, cannot be paid by the bank. This situation is known as a “cheque bounce,” and there are specific laws in place to handle it, particularly Section 138 of The Negotiable Instruments Act. Understanding these rules can help you avoid serious penalties and protect your financial interests.
What is a Cheque?
A cheque is essentially a written instruction you give to your bank. It tells your bank to pay a specific amount of money from your account to another person or organisation. It acts like a promise of payment.
How You Pay with a Cheque
When you decide to pay someone using a cheque, you write down the date, the name of the person or company you are paying (the ‘payee’), the amount in both words and numbers, and then you sign it. You then hand this cheque to the payee. The payee will then take the cheque to their own bank to deposit it. Their bank will then send the cheque to your bank, asking for the money to be transferred from your account to the payee’s account.
The Role of Banks in Cheque Payments
Banks play a crucial role in making sure cheque payments work smoothly. When a bank receives a cheque for payment, it checks several things. It ensures that the cheque is valid, that your signature matches the one they have on file, and most importantly, that you have enough money in your account to cover the amount written on the cheque. If everything is correct, your bank will transfer the money to the payee’s bank.
Understanding a Cheque Bounce
Sometimes, a cheque cannot be paid by the bank. This is what we call a “cheque bounce.” It means the bank cannot complete the payment as instructed.
What “Bouncing” Means for Your Cheque
When a cheque bounces, it means your bank has refused to pay the amount written on it. It’s like a promise of money that could not be kept. The cheque is returned to the person who deposited it, along with a note explaining why the payment failed. This is a serious matter, and it carries legal consequences.
Common Reasons Why Cheques Bounce
There are several reasons why a bank might not honour a cheque. The most frequent reasons include:
- Not Enough Money: This is the most common reason. You did not have sufficient funds in your account to cover the cheque amount.
- Signature Mismatch: Your signature on the cheque does not match the one your bank has on record.
- Date Issues: The cheque might be post-dated (dated for a future day) or stale-dated (too old, usually more than three months past its date).
- Amount Discrepancy: The amount written in words does not match the amount written in numbers.
- Overwriting or Alterations: Any changes on the cheque that are not properly confirmed by your signature can cause it to bounce.
- Account Closed: The bank account from which the cheque was issued has been closed.
- Stop Payment Instruction: You might have instructed your bank to stop payment on that specific cheque.
The Importance of Having Enough Money
It is your responsibility to ensure that you always have enough money in your bank account before you issue a cheque. This is the most critical step in preventing a cheque from bouncing. Not having enough money is a serious financial mistake and is often the primary cause of legal issues related to bounced cheques.
Section 138 of The Negotiable Instruments Act
In India, the law specifically addresses bounced cheques to protect people and ensure that financial promises made through cheques are taken seriously.
The Law Governing Bounced Cheques
The main law that deals with bounced cheques is Section 138 of The Negotiable Instruments Act, 1881. This Act sets out the rules for various financial instruments, including cheques, and defines the legal implications when a cheque is dishonoured (bounces). This law applies to cheques that are issued to pay off a debt or other legal liability.
What Section 138 Says You Must Do
Section 138 states that if a cheque you have issued bounces due to insufficient funds or other specified reasons, and it was given to pay off a debt or liability, you could face legal action. The law aims to prevent people from issuing cheques without having the means to honour them. It ensures that those who receive cheques as payment can trust that they will be paid.
Penalties for Bouncing a Cheque
If a cheque bounces and the legal process is followed, the consequences can be severe. Under Section 138, if you are found guilty of issuing a bounced cheque, you could face:
- Imprisonment: You could be sent to prison for a period that may extend up to two years.
- Fine: You might have to pay a fine which can be up to twice the amount of the cheque.
- Both: In some cases, you could face both imprisonment and a fine.
These penalties highlight the seriousness with which the law treats cheque bounces.
The Process After Your Cheque Bounces
If a cheque you issued bounces, or if a cheque you received bounces, there is a specific legal process that typically follows.
Receiving a “Cheque Return Memo”
When a cheque bounces, your bank will send a “Cheque Return Memo” to the person who deposited the cheque. This memo explains the exact reason why the cheque could not be paid. You, as the person who issued the cheque, will also be informed by your bank about the dishonoured cheque.
Sending a Legal Notice to the Person Who Wrote the Cheque
If you are the person who received the bounced cheque, you must send a formal legal notice to the person who wrote it. This notice must be sent within 30 days of receiving the Cheque Return Memo. The legal notice demands that the person pays the cheque amount within 15 days of receiving the notice.
Filing a Complaint in Court
If the person who wrote the cheque fails to make the payment within those 15 days after receiving the legal notice, you, as the receiver, can then file a complaint in a court of law. This complaint must be filed within one month after the 15-day notice period has ended. The court will then officially begin the legal proceedings.
What to Expect in Court
When a complaint is filed, the court will summon the person who issued the bounced cheque. Both sides will have the opportunity to present their case, provide evidence, and argue their position. The court will examine all the facts and evidence before making a decision. Sometimes, the parties involved might reach a settlement outside of court.
How to Prevent Your Cheques From Bouncing
Preventing a cheque bounce is straightforward if you follow some simple, responsible financial practices.
Always Maintain Enough Money in Your Account
This is the most important step. Before you write and issue a cheque, always check your bank account balance to make sure you have enough money to cover the cheque amount. It is wise to keep a little extra money in your account as a buffer. Regularly tracking your expenses and income can help you manage your funds effectively.
Double-Checking Cheque Details Before You Issue Them
Carelessness can also lead to a cheque bounce. Before you hand over a cheque, take a moment to double-check all the details you have written:
- Date: Ensure the date is current and correct.
- Payee’s Name: Make sure the name of the person or company you are paying is spelled correctly.
- Amount: Verify that the amount written in numbers matches the amount written in words exactly.
- Signature: Ensure your signature is clear and matches the one your bank has on file.
- No Overwriting: Avoid making any corrections or overwriting on the cheque. If you make a mistake, it is better to cancel the cheque and write a new one.
Keeping Your Cheque Book Safe
Your cheque book contains valuable instruments. Keep it in a secure place to prevent it from being stolen or misused. If you ever lose your cheque book or suspect it has been stolen, report it to your bank immediately so they can take necessary action to protect your account.
What to Do if Someone Else’s Cheque Bounces to You
If you have received a cheque as payment, and it bounces, you have specific rights and steps you can take to recover your money.
Your Rights as the Person Receiving the Cheque
As the person who received the cheque, you have the right to receive the payment that was promised to you. The law provides a mechanism to help you recover your money and hold the person who issued the cheque accountable if they fail to honour their payment.
Steps to Take When You Receive a Bounced Cheque
If a cheque you deposited bounces, follow these steps carefully:
- Contact the Issuer: First, try to contact the person who gave you the cheque. There might be an innocent mistake, and they may be willing to resolve the issue quickly by making the payment through other means.
- Re-present the Cheque: If the cheque bounced due to insufficient funds, you might be able to deposit it again within its validity period (usually three months from the date of issue). Sometimes, the person might have deposited money into their account after the first bounce.
- Initiate Legal Action: If the cheque bounces a second time, or if the issuer refuses to pay, you must then follow the formal legal process as outlined earlier:
- Send a legal notice to the person who wrote the cheque within 30 days of receiving the Cheque Return Memo.
- If they do not pay within 15 days of receiving your notice, file a complaint in court within one month after that 15-day period ends.
- Keep all documents, including the original cheque, the Cheque Return Memo, and copies of the legal notice, safe as evidence.
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