Comprehensive Guide to Understanding Dishonoured Cheque Cases in India

8 hours ago8 min read

What occurs if a cheque you deposit is returned? Can legal issues arise from a bounced cheque?

A cheque is said to have bounced or been dishonoured when a bank refuses to process it for technical or financial reasons. Common causes include stop-payment requests, expired cheques, mismatched signatures, and insufficient funds.

When a cheque bounces, there are consequences for both the payer and the payee. The issuer may be subject to bank penalties, legal liability, and damage to their creditworthiness, while the recipient may have trouble recovering the past-due payment. Issuing a cheque with insufficient funds is illegal under Section 138 of the Negotiable Instruments Act, 1881 and can result in fines or even jail time.

Understanding dishonoured cheque

A bounced cheque, also referred to as a dishonoured cheque, is one that a bank refuses to process due to various financial or non-financial reasons. Some of the most common reasons for cheque bounce include insufficient funds in the issuer’s account, an incorrect date, signature mismatch, an expired cheque, or a stop-payment request issued by the drawer.

When a cheque gets dishonoured, it can create significant challenges for both the payer (issuer) and the payee (recipient). The issuer may have to deal with bank penalties, legal proceedings, and damage to their financial credibility, whereas the payee may struggle to recover the payment. As per Section 138 of the Negotiable Instruments Act, 1881, issuing a cheque without adequate funds is considered a criminal offense, which can result in monetary fines and even imprisonment in severe cases.

Why Do Cheques Bounce?

There are several reasons why a cheque may be rejected by a bank. Some of the most frequent causes include:

Insufficient Balance: Insufficient funds in the payer's bank account are the most frequent cause of cheque dishonour. The bank will not process the payment if the account balance is less than the cheque amount.
Mismatch between Amount Figures and Words: The cheque will be deemed invalid if the amount written in words and numerical digits differ.

Signature Inconsistencies: If the signature on a cheque differs from the one on file with the bank, the cheque will bounce. An out-of-date signature or an unintentional signature mismatch could cause this.
Expired or Stale Cheques: Within three months of the date of issuance, checks must be presented for clearance. The bank is not required to process a cheque that is presented after this time, which could result in dishonour.
Damaged or Illegible Cheques: The bank may not honour a cheque if it is physically damaged, has smudged information, or has unclear handwriting.

Consequences of a dishonoured cheque:

A dishonoured cheque can have multiple financial, legal, and reputational consequences. It can result in monetary fines, legal action, and adverse effects on one’s financial credibility. Let’s break down the potential repercussions.

1. Legal Consequences

If a cheque is dishonoured, the payee (recipient of the cheque) has the legal right to take action against the payer (issuer of the cheque) under Indian law. The key legal implications include:

Cheque Bounce Notice: The payee can issue a legal notice to the issuer within 30 days of receiving the cheque return memo from the bank. Once the notice is sent, the issuer has 15 days to make the payment. If they fail to settle the dues, the payee can initiate legal proceedings.
Fines and Penalties: According to Section 138 of the Negotiable Instruments Act, 1881, if the court finds the issuer guilty, they may be asked to pay a fine up to twice the cheque amount.
Imprisonment: In serious cases, if the issuer does not pay the outstanding amount despite legal notice, they may face a prison sentence of up to two years.
Civil Lawsuits: In addition to criminal charges, the payee also has the option to file a civil suit to recover the due amount without involving criminal proceedings.
Additional Legal Charges: If the cheque bounce is linked to fraudulent activities, the issuer may also be prosecuted under Section 420 (cheating) or Section 406 (breach of trust) of the Indian Penal Code (IPC).

2. Impact on Credit Score

A bounced cheque does not directly impact an individual’s credit score, but frequent cheque dishonours can affect financial credibility in the following ways:

Difficulty in Availing Loans & Credit Facilities: Banks and financial institutions may consider repeated cheque bounces as a sign of financial instability, which can make it harder to obtain loans, credit cards, or overdraft facilities.
Higher Interest Rates: A history of cheque dishonours may lead to higher interest rates on future loans or credit approvals, as banks might classify such individuals as high-risk borrowers.

3. Bank Charges & Financial Penalties

Apart from legal consequences, cheque bounce incidents often lead to monetary penalties imposed by banks and financial institutions.

Bank Penalties: Both the issuer and recipient of the cheque may be charged a penalty fee when a cheque bounces. These charges vary depending on the bank’s policies.
Additional Charges by Businesses & Merchants: If a cheque dishonours during a business transaction, merchants or service providers may refuse to accept future cheque payments from the concerned party.

Common Reasons for Cheque Bounce

A cheque can bounce due to several reasons, including:

Insufficient funds in the payer’s account.
Discrepancies in cheque details, such as mismatched amounts in words and digits.
Signature mismatch between the cheque and the bank’s records.
Stale cheques, which remain undeposited beyond the validity period of three months.
Damaged or illegible cheques that banks cannot process.

Cheque Bounce Charges by Leading Banks

Different banks impose varying penalties for bounced cheques. Here's a comparative overview:

Bank	Outward Cheque Bounce	Inward Cheque Bounce	Technical Reasons
SBI	₹150–₹250 + GST	₹150 + GST	Varies
HDFC Bank	₹400–₹500	₹200	₹500 for NACH returns
ICICI Bank	₹200	₹500	₹500 for NACH returns
PNB	₹150–₹500	₹200–₹2,500	Nil
Axis Bank	₹500	₹500	₹500

How to Prevent Cheque Bounce as an Issuer

If you are issuing a cheque, taking the right precautions can help prevent a cheque from bouncing. Here are some essential steps to follow:

1. Maintain Sufficient Funds

Make sure you have enough money in your bank account to cover the payment before writing a cheque. The cheque will be refused if there are not enough funds, which could result in fines and legal issues.

2. Double-Check All Cheque Details

Make sure all details on the cheque are correct, including:

Amount in words and digits – Both should match to avoid rejection.
Signature – Use the correct and updated signature registered with your bank.
Date – Ensure the cheque is dated correctly to prevent issues.

3. Issue a Crossed Cheque for Added Security

A crossed cheque (one with two parallel lines drawn across it) can only be deposited into a bank account and cannot be encashed over the counter. This provides extra security for both the issuer and recipient.

4. Allow Sufficient Time for the Payee to Deposit the Cheque

Cheques are valid for three months from the date of issuance. If the recipient delays in depositing it, the cheque may expire and get rejected by the bank.

How to Respond to a Cheque Bounce Notice as an Issuer?

It can be upsetting to receive a cheque bounce notice, but if you act quickly, you can avoid more legal issues. Take these actions:

1. Carefully Read the Cheque Bounce Notice

When you receive a legal notice from the payee, analyze the reason for the cheque dishonour. Verify details such as: ✔ Cheque amount ✔ Date of issuance ✔ Signature correctness ✔ Bank account details

2. Respond Within the Given Timeframe

You generally have 15 days to respond to a legal notice. Draft a response and communicate with the payee within this period to avoid further legal escalation.

3. Request an Extension or Offer an Alternative Payment Method

If you are unable to clear the dues immediately, try negotiating with the payee to extend the repayment period or settle the amount through another mode of payment.

4. Seek Legal Assistance and Build a Defense

If legal action is taken against you for a bounced cheque, consult a lawyer to prepare your defense. You may argue that the payment was already made through another method, that the cheque was rejected due to a signature mismatch caused by banking record changes, or that the payee wrongfully presented the cheque at the bank. A strong legal defense can help resolve the issue effectively.

What can a payee do if a cheque bounces:

As a cheque recipient, you have legal remedies if a cheque issued to you is dishonoured. The first step is to communicate with the payer and request them to verify the reason for the cheque bounce. If the issue was a clerical error or a minor mistake, the payer may be able to reissue the cheque or provide an alternative mode of payment. It is also advisable to check with the bank to ensure there was no processing error.

If the payer refuses to comply or reissue the cheque, legal action can be initiated. The payee must send a formal cheque bounce notice to the issuer within 30 days of receiving the cheque return memo from the bank. The notice should clearly state the reason for dishonour, whether it was due to insufficient funds, signature mismatch, an expired cheque, or any other technical issue.

If the payer does not settle the dues within 15 days of receiving the notice, the payee has the right to file a case under Section 138 of the Negotiable Instruments Act, 1881. Once the case is accepted by the Magistrate’s Court, the payer may face penalties or imprisonment based on the severity of the case.

In more serious cases, if the bounced cheque indicates fraudulent intent or breach of trust, the payee can initiate criminal proceedings by filing an FIR under Sections 406 or 420 of the Indian Penal Code. If the court finds the payer guilty, they may face strict legal consequences, including fines and imprisonment.

Latest Legal Updates on Cheque Bounce Cases

The Negotiable Instruments (Amendment) Act, 2018 introduced two key provisions:

Section 143A: Courts can order interim compensation of up to 20% of the cheque amount to the payee.

Section 148: If the payer appeals a conviction, the appellate court may require a deposit of at least 20% of the penalty amount.

RBI Guidelines for Cheque Handling

Customers must maintain a minimum balance to prevent cheque bounces.
24/7 cheque clearing under the National Automated Clearing House (NACH) speeds up processing.

Conclusion Financial losses, reputational harm, and legal issues can all arise from a dishonoured cheque. Both issuers and recipients can prevent unnecessary trouble by maintaining sufficient funds, verifying cheque details, and promptly addressing disputes. Staying informed about cheque bounce laws and legal rights ensures you handle such situations effectively.

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Frequently Asked Questions (FAQs)

1. If my cheque bounces, can I avoid going to court?

Yes, you can avoid legal action by making the due payment within 15 days of receiving a formal notice from the cheque recipient. If the payment is not made within this period, the payee has the right to file a case under Section 138 of the Negotiable Instruments Act, 1881, which can lead to legal proceedings.

2. Is it illegal to have a bounced cheque?

Yes, issuing a cheque that bounces due to insufficient funds, mismatched signatures, or any other reason is considered an offense under Section 138 of the Negotiable Instruments Act, 1881. It can lead to penalties, fines, and even imprisonment if proven in court.

3. How often can a cheque bounce?

There is no specific legal limit on how many times a cheque can bounce. However, repeated cheque bounces can increase legal risks, harm your credibility with banks, and impact your ability to issue cheques in the future. In some cases, banks may even close accounts with frequent cheque bounce incidents.

4. Can I report a bounced cheque as a formal complaint?

Yes, if someone issues you a cheque that bounces, you have the right to file a legal complaint. Under Sections 406 and 420 of the Indian Penal Code (IPC), cheque bouncing can be considered a fraudulent act, especially if it is proven that the issuer had no intention to honor the payment. This can lead to criminal charges against the issuer.

5. How will a bounced cheque impact my credit score?

While bounced cheques are not directly reported to credit bureaus like CIBIL, frequent instances can harm your relationship with banks and financial institutions. This can lead to difficulties in obtaining loans, credit cards, or overdraft facilities in the future. Banks may also impose penalties or restrictions on your account.