What Happens if Cheque Bounces: A Legal Matter and Its Implicati Implications

What Happens if Cheque Bounces: When a bank refuses to honor a customer’s cheque, they are required to provide a written explanation, signed by an authorized official. This returned cheque can be handed back over the counter or sent through the clearing process. Here are the usual reasons for the return of cheques. bounced cheque

What Happens if Cheque Bounces

(a) Refer to Drawer: Historically used when there were insufficient funds in the drawer’s account to honor the cheque. However, following the addition of section 138 in the NI Act, this reason is discouraged, except in situations where the drawer becomes incapacitated.

(b) Not Arranged For: Indicates the drawer’s failure to organize funds in their account for the cheque.

(c) Effects Not Clear, Present Again: Applies when the drawer has deposited cheque(s) for clearing but they haven’t been realized yet.

(d) Funds Expected, Present Again: Relevant when the drawer has submitted bills for collection, anticipating payment.

(e) Exceeds Arrangements: Arises when honoring the cheque would surpass the sanctioned overdraft or cash credit limit.

(f) Payment Countermanded by the Drawer.

(g) Drawer’s Signature Differs / Required.

(h) Cheque is Outdated (Stale) / Post Dated.

(i) Amount in Words and Figures Differs: Though NI Act favors honoring, bankers often return such cheques.

(j) Cheque Crossed to Two Banks: Unless the presenting bank acts as an agent for another bank with a crossing on the cheque.

Elements of Cheque Bouncing Offence

Bouncing a cheque leads to potential criminal prosecution under Section 138 of the NI Act. The punishment for this offence includes imprisonment for up to two years or a fine, which could be twice the cheque amount, or both. This offence is bailable, compoundable, and non-cognizable. The crucial components of this offence under the section can be summarized as follows:

  1. The person should have issued a cheque from a bank account in their name.
  2. The cheque must have been provided to settle, wholly or partially, any debt or liability.
  3. The cheque has to be presented to the bank within its valid period, typically three months from its issuance date.
  4. The bank returns the cheque unpaid due to insufficient funds or surpassing the arranged payment amount.
  5. The payee demands payment by issuing a written notice within 30 days of being informed by the bank.
  6. The drawer fails to settle the specified amount within 15 days of receiving the notice.
  7. Filing a complaint within one month from the date of the cause-of-action.

A Noteworthy Exception

If no action is taken after the first dishonor, and the cheque is presented a second time, a complaint can be filed upon the second dishonor. Nevertheless, prosecution occurs solely for the most recent instance the cheque bounced, precluding multiple prosecutions for successive returns of the same cheque. return of cheques

Additional Considerations

  1. Violating Section 138 can occur even if the cheque is returned due to “closure of the account.”
  2. A cheque returned unpaid with the advice “account operation jointly, other Director’s signature required” is considered dishonored under Section 138.
  3. If a joint account cheque bounces and only one signer is involved, action can be taken under Section 138 against the signing individual.
  4. If a cheque is returned marked “Refer to drawer,” evidence is required to prove the drawer had sufficient funds when the cheque was returned for reasons other than insufficient funds.
  5. When a cheque’s payment is stopped, proof of sufficient funds at the time of return is necessary to justify the stoppage, aside from lack of funds (elaborated below).
  6. Lack of Mens rea (criminal intent) is not a valid defense in cheque bouncing cases.
  7. Initiating action under the NI Act doesn’t preclude the holder of a bounced cheque from filing an FIR with the police station or lodging a criminal complaint under relevant sections of the IPC. Proceedings under these acts are independent and can run concurrently. This aspect often leads to debate, and the Supreme Court has offered varying perspectives based on case specifics. The excerpt from Sangeetaben Mahendrabhai Patel vs. State of Gujarat and Anr (MANU/SC/0321/2012 dated 23rd April 2012) illustrates the Supreme Court’s stance on the matter. return of cheques

Counterfeit Documents

A forged instrument denotes a signature fraudulently replicated by another person. A negotiable document carrying a forged signature of its drawer, maker, or acceptor becomes entirely ineffective, rendering the holder incapable of enforcing payment upon it. For instance, if A forges B’s signature on a check and transfers it to C, who accepts it as a transaction, C does not acquire any legal claim. What Happens if Cheque Bounces

What Happens if Cheque Bounces, return of cheques
What Happens if Cheque Bounces

If such a holder obtains payment, the legitimate owner can legally pursue recovery. Without the genuine signature of the drawer, maker, or acceptor, the instrument holds no value, and even a holder in due course doesn’t gain any rights to it. The forged signature cannot be validated because the forger lacks the authority to act on behalf of the individual whose signature is forged.

A negotiable instrument bearing a forged endorser’s signature doesn’t transfer valid ownership to the endorsee, even if the latter is an innocent holder for value. The true owner retains entitlement, and payment to the wrong person does not release the drawee, acceptor, or maker of the instrument from their obligations. Nevertheless, the paying banker is safeguarded by law against paying checks with forged endorsements, although not against forged signatures of the drawer.

What Happens if Cheque Bounces FAQ

What does it mean when a cheque bounces?

When a cheque bounces, it indicates that the bank has refused to honor the payment due to various reasons such as insufficient funds, account closure, or other issues.

Can a cheque bounce even if there is enough balance in the account?

A2: Yes, a cheque can bounce for reasons other than insufficient funds, including issues like mismatched signatures, post-dated cheques, or exceeding overdraft limits.

What does “Refer to drawer” mean on a returned cheque?

A3: “Refer to drawer” suggests that the drawer’s account needs attention, and the cheque cannot be processed as is. It could be due to various reasons, and further action is required by the account holder.

Can I re-present a bounced cheque?

A4: Yes, you can re-present a bounced cheque. However, it’s crucial to address and rectify the issue that led to the bounce before re-submitting.

Is there a time limit for presenting a bounced cheque again?

While there is no strict time limit, it’s advisable to re-present the cheque promptly to avoid complications and ensure a smoother resolution.

Sanjeet Kumar is a graduate of Journalism, Psychology, and English. Passionate about communication - with words spoken and unspoken, written and unwritten - he looks forward to learning and growing at every opportunity. Pursuing a Post-graduate Diploma in Translation Studies, he aims to do his part in saving the 'lost…

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