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CHEQUE BOUNCE

When a cheque bounces, it can lead to a series of financial and legal consequences for both the issuer and the payee. The bank issues a “Cheque Return Memo” to the payee, stating the reason for non-payment. The payee then has the right to notify the issuer formally and demand payment of the cheque amount within a specific time frame. If the issuer fails to make the payment even after receiving this notice, the payee can take legal action under Section 138 of the Negotiable Instruments Act, 1881, which treats cheque dishonour as a criminal offence. The consequences of cheque bouncing can include monetary fines, imprisonment for up to two years, or both, depending on the severity and frequency of the offence. For businesses, a bounced cheque can damage professional relationships, affect credibility, and disrupt cash flow. Individuals may face difficulties in obtaining loans, credit cards, or other banking services if they have a history of dishonoured cheques. Moreover, repeated cheque bounces may lead banks to suspend cheque issuance facilities or close the issuer’s account altogether. It can also attract civil liability, where the payee may seek compensation for losses incurred due to non-payment.

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Description

When a cheque bounces, it refers to the situation where the bank declines to honor the payment due to various reasons, primarily because of insufficient funds in the issuer's account. This can happen for several reasons, including the issuer not maintaining enough money in their account to cover the cheque amount, discrepancies in the signature, mismatched details, or a closed account.

  Causes of Cheque Bounce: 

1.   Insufficient Funds  : This is the most common reason for a cheque bounce. When the issuer does not have enough money in their bank account to cover the amount mentioned in the cheque, the bank refuses to honor it.

2.   Mismatched Signature  : If the signature on the cheque does not match the specimen signature recorded by the bank, they may reject the cheque.

3.   Post-Dated Cheque  : If a cheque is presented for payment before the date mentioned on it, it will be bounced by the bank.

4.   Stale Cheque : A cheque is considered stale if it is presented to the bank after a specified period (usually 3 to 6 months) from the date of issue. Banks typically do not honor stale cheques.

5.   Account Closed  : If the issuer's bank account is closed or frozen at the time of cheque presentation, the bank will bounce the cheque.

  Consequences of Cheque Bounce: 

1.   Penalty Charges  : The issuer of the bounced cheque may incur penalty charges imposed by their bank for insufficient funds or other reasons.

2.   Legal Action  : In some cases, the payee (the person to whom the cheque was issued) may take legal action against the issuer under the Negotiable Instruments Act, 1881.

3.   Impact on Credit Rating  : Multiple instances of cheque bouncing can negatively impact the issuer's creditworthiness and banking relationships. It may affect their ability to obtain loans or other banking services in the future.

4.   Reputation Risk  : It can damage the issuer's reputation and trustworthiness in business and financial dealings.

Frequently Asked Questions

Browse practical answers curated by our CA and CS desks for CHEQUE BOUNCE.

Understanding Cheque Bounce
Legal Process & Notice
Liability, Penalties & Defences
BizPriest Assistance & Practical Guidance

Understanding Cheque Bounce

 A cheque bounce occurs when the bank returns a cheque unpaid due to reasons such as insufficient funds, signature mismatch, or account closure. It becomes a criminal offence under Section 138 of the Negotiable Instruments Act, 1881 if the cheque was issued for a legitimat

  • Insufficient balance in the drawer’s account
  • Signature mismatch
  • Overwriting or incorrect details on a cheque
  • Cheque validity expired (older than 3 months)
  • Account closed or payment stopped

It is a criminal offence under Section 138 NI Act, but it can also lead to a civil recovery case to claim the due amount.

The payee must send a legal notice within 30 days of receiving the return memo, and the drawer must make payment within 15 days. If not paid, a case must be filed within 30 days after the notice period expires.

Legal Process & Notice

It’s a formal demand notice issued by the payee (or their lawyer) to the drawer asking for payment within 15 days as per Section 138 requirements.

 If payment is not made within 15 days, the payee can file a criminal complaint before the Magistrate Court within the next 30 days.

  • Original cheque
  • Bank return memo
  • Copy of legal notice sent
  • Proof of delivery of notice (postal or courier receipt)

Yes. The parties can mutually settle the matter at any time before or during trial. Courts encourage settlement to save time and costs.

Liability, Penalties & Defences

 If convicted, the drawer may face up to 2 years of imprisonment, or a fine up to twice the cheque amount, or both.

Yes. If a company issues the cheque, both the company and the responsible directors or authorised signatories can be held liable.

  • The cheque was not issued for a legally enforceable debt.
  • Notice was sent after the prescribed period.
  • The cheque was materially altered or post-dated incorrectly.
  • The payee has already received payment.

 No. Section 138 applies only to cheques issued for repayment of a debt or liability, not for gifts or voluntary payments.

BizPriest Assistance & Practical Guidance

We assist by reviewing your case, preparing or responding to legal notices, coordinating with advocates, and guiding you through every procedural step.

Not always. If represented by a lawyer, appearances can often be managed by your legal representative unless the court specifically requires your presence.

 It varies by jurisdiction, but typically 6 months – 1 year, depending on case complexity and court workload.

  • Ensure sufficient balance before issuing cheques.
  • Keep accurate cheque records.
  • Avoid issuing post-dated cheques casually.
  • Use digital payments or online transfers when possible.

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