Implications of Cheque Bounce in India

In India, a person issuing a cheque will be committing an criminal offence if the cheque is dishonored (cheque bounce) for insufficiency of funds. Cheque bounce offence is punishable with imprisonment for a term upto two years or with a fine twice the amount of the cheque or both. Therefore, it is important for small & medium sized businesses to understand their rights & responsibilities of a cheque bounce and maintain financial discipline to avoid such instances.

When a cheque is considered bounced?

        A bank under certain conditions may refuse payment of cheque or is bound to dishonor a cheque, in such instances the cheque is considered bounced. When the cheque is dishonored for insufficiency of funds in the account of a customer, that cheque bounce is treated as an offence and action can be taken under Section 138 of The Negotiable Instruments Act.

What are the steps to initiate prosecution for a cheque bounce?

To initiate prosecution under Section 138, three condition precedents need to be fulfilled as below:

• The cheque should have been presented to the bank within three months of its issue or within the period of its validity. (The validity of cheques were considered to be six months previously; however, Reserve Bank of India vide Reserve Bank of India vide Notification No. RBI/2011-12/251DBOD.AML BC.No.47/14.01.001/2011-12 directed that the validity period of cheques to be reduced from six months to three months with effect from 1st April, 2012.).
• The payee [Person who receive the money] should have made a demand to the Payor [Person who is liable to pay the money] for payment by registered notice after the cheque is returned unpaid.
• The Payor should have failed to pay the amount within 30 days of the receipt of notice.
• If only all the above three conditions are satisfied, prosecution can be launched for the offence under Section 138.

How and when to give notice of dishonor?

The payee has to make a demand for the payment of money to the payor by giving a notice to the payor within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid. Therefore, to protect his rights under Section 138, the payee [affected party] has to make a demand to the payor within 30 days by giving notice that the person has a statutory oblication to make payment. As long as the payee sends a notice to the payor at the correct address, the responsibilities of the payee are considered to be fulfilled.

When prosecution can be launched under Section 138?

Prosecution can be launched against the payor under Section 138, if the payor failed to pay the amount within 30 days of the receipt of notice from the payee. A Cheque Bounce Notice under Section 138 can be found or generated using Make My Deed.

Who can the prosecution under Section 138 be launched against?

Prosecution can be launched against the payor and in the case where a company has committed an offence under Section 138, then not only the company, but also every person who at the time when the offence was committed,  was in charge of and was responsible to the company shall be deemed to be guilty of the offence and be liable to be proceeded against.

What are the other implications of a cheque bounce?

In addition to the criminal offence, bounced cheques can also impact credit worthiness or credit history. Though bounced cheques don’t usually show up on traditional credit reports, they are reported on your bank account statement. Banks both Nationalized & NBFC’s today require the customer to furnish their bank statement for a period of upto 1 year for any loan processing. Occurrence of many cheque bounces in a bank statement can affect loan eligibility and credit worthiness.

How to avoid cheque bounces?

The best policy to avoid a cheque bounce in your account is to NEVER write a cheque without money in your account. Providing a cheque to a person is a firm financial commitment you make to the person which has a lot of responsibilities and implication in case it is not honored. Therefore, it is best not to provide a cheque to a person without money in your account-  just to temporarily avoid financial pressure.