Beware! Cheque bounce can lead to hefty penalty and imprisonment

Keep sufficient funds in account, fill cheque details accurately and legibly, and ensure your signature hasn't changed

Cheque bounce is back in the news with three cases making the headlines. A court in Maharashtra’s Thane district sentenced a businessman to rigorous imprisonment for three months and directed him to pay double the bounced amount. A metropolitan court punished a man in Gujarat with a one-year jail sentence. 

The Sikkim High Court recently ruled that offences under Section 138 of the Negotiable Instruments Act can be compounded at any stage.

What is a cheque bounce?

Cheque bounce or “dishonour of cheque” occurs when a drawee is unable to withdraw money using a cheque due to certain limitations. It is covered by the Negotiable Instruments Act (NI Act), 1881, which aims to deter the issuance of cheques without sufficient funds in the bank account, and provides legal remedy to the aggrieved party. 

Insufficient funds

Section 138 of the NI Act mentions two reasons for cheque bounce. Tushar Agarwal, advocate, Supreme Court of India, says, “First, there is insufficient money in the account. Second, the cheque amount exceeds the arrangement the account holder has with the bank.” The second reason refers to the cheque amount being higher than the account’s withdrawal limit.

Over time various other reasons have emerged.  

Signature or number mismatch: A cheque can be dishonoured if there is a discrepancy between the drawer’s signature on the cheque and the specimen signature available with the bank. Pratyush Miglani, managing partner, MVAC Advocates & Consultants, says, “This is done to avert fraudulent activities like forgery.”

A number mismatch may arise if the cheque number entered in the MICR (Magnetic Ink Character Recognition) code line doesn’t correspond with the pre-printed cheque number.

Expired or damaged cheque: A cheque is usually valid for three months from the date of issuance. If presented after this period, it is not honoured.

The bank may also declare a damaged or mutilated cheque as invalid. Miglani says, “Essential elements like the date, payee’s name, amount, and signature must be legible and undamaged for successful processing.”

Stop payment instruction: The issuer may have instructed the bank to stop the payment due to reasons like a dispute, suspicion of fraud, loss of the cheque, or change in circumstances.

Legal consequences

Cheque bounce is a criminal offence under Section 138 of the NI Act Suhael Buttan, counsel, SKV Law Offices, says, “The sentence can be for up to two years; a fine, which can be extended to twice the amount covered by the dishonoured cheque; or both.”

Anushkaa Arora, principal & founder, ABA Law Office, adds, “Bail can be secured when the matter is pending in lower court. Post-conviction the chances of bail become bleak.” 

Regarding legal notice, Abhinay Sharma, managing partner, ASL Partners, points out, “The receiver of the bounced cheque can send a legal notice to the issuer within 30 days of receiving the bounce memo from the bank.”

Sections 143A and 148 have been inserted through recent amendments. Buttan says, “These sections give the trial or the appellate court the right to direct payment of interim compensation during the trial and deposit of a certain minimum sum in an appeal by the drawer of cheque against conviction.”

The Sikkim HC recently ruled that offences under Section 138 of the NI Act can be compounded at any stage. This means the parties can enter into a compromise and settle the matter out of court.

Proceed with caution

Keep sufficient funds in your bank account until the cheque is cleared. Fill all details correctly. If there is any doubt, verify with the bank that your signature hasn’t changed. Also avoid overwriting. If availability of funds is an issue, communicate with the payee and resolve the matter instead of issuing the cheque. Use the Sikkim HC’s recent ruling to compromise and settle out of court.

M Barve, founder, MB Wealth Financial Solutions suggests making online payments. Landlords can use cheque bounce laws to their advantage. “Take one or a few signed cheques in advance. The stringent consequences of bounced cheques will ensure you get the rent on time and there is no default.” 

Check bounce: Fallout can be expensive

• The bank may charge the issuer a penalty, which can range from Rs 50 to Rs 750
• If the cheque amount is not paid within the stipulated time, the receiver may be entitled to claim interest on the cheque amount
• The issuer’s credit score could take a beating
• This can make it difficult to obtain credit in the future

Source: ASL Partners