+91-80695 78416 +91-89571 85858 welisten@finnid.in
Hire Virtual CFO Finnid ERP for FPOs & MSMEs Book a Consultation Sign in

CHEQUE BOUNCING

Cheque bouncing, also known as dishonour of a cheque, is a serious financial and legal matter governed under Section 138 of the Negotiable Instruments Act, 1881, in India. It occurs when a cheque presented to the bank is returned unpaid for reasons such as insufficient funds, account closure, signature mismatch, post-dated cheques presented prematurely, or irregularities in cheque details. When a cheque is dishonoured, it not only disrupts financial transactions but also damages the creditworthiness and reputation of the issuer. The process following a cheque bounce involves several formal steps. Once the cheque is returned unpaid, the payee (the person or entity who was supposed to receive the payment) receives a “Cheque Return Memo” from their bank indicating the reason for dishonour. The payee then has the legal right to send a demand notice to the issuer within 30 days from the date of receiving this memo, demanding payment of the cheque amount within 15 days. If the issuer fails to make the payment within the stipulated time, the payee can initiate a criminal complaint under Section 138, leading to possible penalties including imprisonment for up to two years, a monetary fine, or both.

Schedule a ₹99 consultation Connect with us

Description

Cheque bouncing, also known as dishonoring of a cheque, occurs when a cheque issued by an individual or organization cannot be processed by the bank due to insufficient funds in the issuer's account or other technical reasons such as mismatched signatures or errors in the cheque. This situation has legal and financial repercussions for both the issuer and the recipient.

 Process and Consequences:

1.  Insufficient Funds:  The most common reason for a cheque to bounce is insufficient funds in the issuer's bank account. When the recipient presents the cheque for payment, the bank returns it unpaid due to lack of funds.

2.  Technical Issues:  Apart from insufficient funds, other reasons for cheque bouncing include mismatched signatures, overwriting, post-dated cheques presented before the date, stale cheques (cheques presented after the validity period), or the account being closed.

3.  Legal Implications:  In many jurisdictions, bouncing a cheque is considered a criminal offense and can lead to legal consequences for the issuer. The recipient has the right to take legal action against the issuer to recover the amount owed, which may involve filing a complaint with the police or pursuing civil litigation.

4.  Penalties and Charges:  Banks typically charge a penalty fee to the issuer for bouncing a cheque. This fee can vary depending on the bank's policies and the amount of the bounced cheque. The recipient may also charge additional fees or interest for the inconvenience caused.

5.  Impact on Credit Rating:  Bouncing a cheque can negatively impact the issuer's credit rating and financial reputation. Banks and financial institutions consider bounced cheques as a sign of financial instability, which can affect the issuer's ability to obtain credit or financial services in the future.

6.  Preventive Measures:  To avoid cheque bouncing, issuers should ensure sufficient funds are available in their account before issuing a cheque. They should also double-check all details on the cheque to avoid technical errors that could lead to dishonor. Recipients can verify the validity of the cheque and ensure it meets all legal requirements before depositing or presenting it for payment.

Understanding the complexities and consequences of cheque bouncing underscores the importance of financial discipline and adherence to banking procedures. Both issuers and recipients should exercise caution and diligence to mitigate risks associated with cheque transactions and uphold financial integrity.

Frequently Asked Questions

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

Basics of Cheque Bounce
Procedure & Timelines
Legal Consequences & Defences
Support & Practical Tips

Basics of Cheque Bounce

A cheque bounce occurs when a cheque drawn by a person on his banker, for payment of any amount, is returned unpaid by the bank due to insufficient funds or the amount exceeding the arrangement with the bank.

The offence is covered by Negotiable Instruments Act, 1881, specifically Section 138, which treats dishonour of cheques in certain circumstances as a criminal offence.

No — the cheque must have been issued for the discharge of a legally enforceable debt or liability, and certain procedural steps must be followed (presentation within validity, notice to drawer, etc.).

Typical reasons include insufficient funds in the account, the account being closed, a mismatch of signatures, expiry of the validity of the cheque, stop-payment instructions, or an invalid cheque itself.

Procedure & Timelines

The payee should retain the return memo (bank’s dishonour note) and then issue a formal demand notice to the drawer within 30 days of receiving the memo.

After the demand notice is served, the drawer has 15 days to make the payment. If payment is not made within this period, the payee may initiate legal action.

The complaint must be filed within 30 days of the expiry of the 15-day payment period after the demand notice.

The case may be filed in the Magistrate’s court where the cheque was drawn, presented or where the payment ought to have been made.

Legal Consequences & Defences

The drawer may face imprisonment for up to two years, or a fine of up to twice the amount of the cheque, or both.

Yes — if a company issues a cheque and it bounces due to insufficiency of funds, both the company and its directors / authorised signatories can be held liable under Sections 138 & 141

Defences may include: a cheque issued as security (not for debt), no legally enforceable debt existed, notice or procedural defects, cheque not presented within its validity.

Yes, if the parties settle and execute a compromise deed before or during the trial, courts have held that a conviction may not be sustained.

Support & Practical Tips

 Essential documents include: original cheque, bank return memo, demand notice proof (sent by registered post/acknowledgement), drawer’s details, correspondence, etc.

The drawer should respond promptly, either make payment within 15 days, bargain for settlement or seek legal advice to avoid criminal liability.

Maintain sufficient funds, avoid issuing cheques as security only, update account and signatory details, and adhere strictly to cheque validity and presentation timelines.

BizPriest can help with drafting demand notices, guiding on procedural compliance, coordinating legal action or defence, assessing settlement strategies, and collecting & organising relevant documents.

Connect Ask Empower. CHEQUE BOUNCING?

Submit your query and our CA/CS desks will respond with a vetted answer within 24 working hours.

Max 500 characters

Live community responses

Explore verified answers. Filter by topic and follow threads for updates.