What if a cheque bounces?

Introduction to Cheques and its Definition under The Negotiable Instruments Act, 1881.?

The origin to the concept of cheques can be traced back to ancient times and the concept was there in the ancient banking system. In India, a form of bill of exchange called the ‘adesha’ was in use, which was an order on the banker to pay a third person. Later, in the 13th Century, bills of exchange were developed in Venice as a legal device to allow international trade. It also eliminated the need to carry huge amounts of gold and silver. By the 17th Century, bills of exchange were being widely used for domestic payments in England. They were called drawn notes. They were so called because it enabled a person to withdraw a specific amount from the balance he/she had in her account with the bank.?

It was in 1717 when the world’s first pre - printed cheque came into existence. It was used by the Bank of England. They were originally created for the purpose of avoiding frauds and customers had to attend in person and obtain a numbered form from the cashier. Once written, the cheque was brought back to the bank for settlement. They were initially called drawn notes. In America, cheques were issued by the Bank of New York after its establishment in 1784. In the late 19th Century, countries began formalising and making laws regarding cheques and their usages. For example, The United Kingdom passed the Bills of Exchange Act in 1882, and India passed the Negotiable Instruments Act in 1881. These laws covered a variety of instruments which also involved the use of cheques.?

In the contemporary world, cheques are used widely in India. It is a document which directs the bank to transfer money from the bank account of an individual or an organisation to another bank account. Cheques and other negotiable instruments in India are governed by the The Negotiable Instruments Act, 1881. Under Section 6 of the aforementioned Act, cheque has been defined. According to Section 6, a “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.?

To this day, cheques continue to be a very reliable method of transferring money from one bank account to another account. Cheques are widely used in India as it is considered to be a very secure form of payment and many payments and transfers are processed using cheques. A vast majority of cheques are processed and cleared by banks on a daily basis. It is drawn to secure proof of payment as well. Therefore, it is generally considered to be a very reliable and secure method of transferring money from one bank account to another bank account.?

Legally, the author of the cheque is called the ‘drawer’. The person, on whose favour the cheque is drawn is called the ‘payee’ and the bank, who is directed to pay the amount of money, is called the ‘drawee’.?

A cheque has four main parts, they are as follows:

• Drawer: Drawer is the person who draws the cheque. The amount is paid from the account of the drawer himself.?
• Payee: Payee refers to the person who is to be paid the amount.?
• Drawee: Drawee refers to the bank who is directed to pay the amount of money to the payee. It can also refer to the bank to which the cheque can be presented.?
• Amount: It refers to the currency amount which is to be paid to the payee. It is usually written in words and figures.?

The process of depositing a cheque is as follows:?

1. Visiting a bank branch: The first step is to visit a bank branch and asking the bank representative to issue a cheque deposit slip,?
2. Filling out a deposit slip: The next step is to fill out the deposit slip with the correct information required.?
3. Depositing the cheque and collecting the receipt: The last step is to visit a given bank branch and deposit the cheque there. The cheque is generally handed over to the bank representative who is incharge of cheque collection. The person who is depositing the cheque should also collect the cheque receipt which is nothing but the second, perforated section of the deposit slip, with the bank’s stamp.

Cheque Dishonoured: Meaning and Conditions.

However, situations may occur when the payer’s or the payee’s bank refuse to honour this cheque or the commitment to transfer the amount from one bank to another. In such a case, the cheque bounces and the cheque is deemed to be Dishonoured. There can be many reasons for a cheque being dishonoured by a bank. The issuer of the cheque may not have sufficient balance in his/her account. It might also be the case that the signature does not match, or the bank account numbers do not match or are incorrect. The cheque may also be dishonoured if the cheque is torn or damaged.?

When a cheque is dishonoured, the drawee bank immediately issues a ‘Cheque Return Memo’ to the banker of the payee with the reason for the dishonouring of the cheque or the reason behind the non payment. The banker of the payee then submits the dishonoured cheque along with the memo to the payee. If the payee believes that the cheque will be honoured the second time, he may submit another cheque within three months of the date on it. However, if the issuer fails to make such payment, then the payee gets a right to prosecute the issuer for non - payment of the cheque.?

Cheque Dishonoured: Legal Recourse and Remedy

The Negotiable Instruments Act, 1881 is applicable in cases of dishonour of cheque. According to Section 138 of the Act, the dishonour of cheque is a criminal offence and is punishable by imprisonment up to two years or with monetary penalty or with both. The payee may sue the issuer only if the payment was to be made in respect of discharge of a debt or any other liability the defaulter has towards the payee. The payee cannot bring a suit upon the drawer if the cheque was issued as a gift, towards lending a loan or any other unlawful purposes. If the payee decides to go ahead legally, then the issuer should be given another chance to pay the amount. Such a chance has to be given only in the form of notice in writing.?

The payee has to send the notice to the drawer within 30 days from the date of receiving “Cheque Return Memo” from the bank.The notice should contain the amount of the cheque which has to be paid to the payee within 15 days from the date of receipt of the notice by the drawer. If the cheque issuer fails to make such payment within 30 days of receiving the notice, the payee has the right to file a criminal complaint against the issuer under Section 138 of The Negotiable Instruments Act, 1881.?

However, before a suit can actually be brought upon against the issuer, certain conditions must be fulfilled. They are as follows;?

1. The cheque should be drawn on the account maintained by the drawer, by the drawer himself.?
2. The cheque should have been dishonoured because of insufficient funds in the account of the drawer.
3. The cheque was issued to clear a debt or to discharge from any liability.
4. The drawer has not made any payment within 30 days of receiving any legal notice.?

If all these conditions are fulfilled, then it can be said that the drawer has committed a criminal offence which is punishable by Section 138 of The Negotiable Instruments Act, 1881.?

On receipt of the complaint, an affidavit and the relevant documents, the court will issue summons and hear the matter. The defaulter can be charged with monetary penalty and can also be imprisoned for a term which may be extended to two years or both if he/she is found guilty. The bank may also stop the cheque book facility and may even close the account in case of repeat offences.?

Conclusion

Dishonouring of cheques is a major issue faced by the party when a certain sum of money has to be transferred from one bank account to another. It will make the drawer liable, even to face criminal charges even if he/she was unaware about the insufficiency of funds in his/her account. However, the Act does provide sufficient time for the drawer to pay back the amount, failing which, it would become a criminal offence under the aforementioned Act. Thus, it must be observed that the law has made it clear for the parties to be aware of the amount they have in their banks before signing a cheque.?