What are the legal Remedies for Cheque Bounce and Dishonoured Cheque ?

In the realm of financial transactions, cheques have long been a reliable instrument for facilitating payments. However, when a cheque bounces or is dishonoured, it can create a myriad of legal and financial complications for both the issuer and the payee. Understanding the legal remedies available in such situations is crucial for navigating this complex landscape effectively. Negotiable Instrument Act 1881, deals with matters related to usage of Negotiable Instruments such as Promissory Notes, Bills of Exchange and Cheques. Why does a bank dishonour a check ? If the bank declines to honour the cheque then it is know as Dishonoured Cheque and Cheque Bounce. A bank may decline to honour the cheque if there is insufficient funds, Crossing limit of overdraft, missing of information such as date, signature, mismatch of word numbers and expiry. As a confirmation regards to the reason for non-payment, The drawee bank issues a ‘Cheque Return Memo’ to the payee’s bank mentioning the reason. In turn, the payee’s bank handovers the bounced cheque and the memo to the payee.

Definition of Cheque under Negotiable Instrument Act: Section 6 of Negotiable Instrument Act 1881, defines Cheque as 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. Which section deals with cheque bounce and dishonour of cheque ? Sec 138. Dishonour of cheque for insufficiency, etc., of funds in the account.— Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless—

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice."

Apart from the above conditions, The drawer cannot be sued in such cases in which the cheque was handed out as a gift or to lend a loan to the payee or for unlawful purposes.

What are the steps to be undertaken for remedy under Sec 138 of the Negotiable Instrument Act ?

1. Issuing Legal Notice: Upon the dishonor of a cheque, the payee must dispatch a legal notice to the drawer via registered mail within 15 days, providing comprehensive details regarding the dishonored cheque.

2. Initiating Criminal Proceedings: Should the payment remain unsettled within the specified timeframe stipulated in the notice, the payee has the option to commence criminal proceedings under Section 138 of the Act. This involves lodging a complaint with the appropriate magistrate court within 30 days from the expiry date mentioned in the notice.

3. Court Appearance: The defendant or their legal representative is required to attend court proceedings and furnish relevant details regarding the case. If the court deems the complaint credible, the accused will be summoned to appear before the Court.

4. Warrant Issuance: Should the accused fail to appear despite being duly served with summons, the court may issue a bailable warrant. Should the non-appearance persist, a non-bailable warrant may subsequently be issued.

5. Recording Plea and Evidence: Upon appearance, the accused may furnish a bail bond, following which their plea will be recorded. In the event of a guilty plea, the court may proceed with determining the appropriate punishment. Conversely, if the accused pleads not guilty, a copy of the complaint will be furnished.

6. Presentation of Evidence: The complainant may present evidence supporting their complaint through an affidavit and submission of relevant documents. The evidence provided may be subjected to cross-examination by the accused or their legal representative.

7. Defense Presentation: The accused will be afforded the opportunity to present their defense, including the submission of documents and witnesses supporting their case. The complainant reserves the right to cross-examine the accused and their witnesses.

8. Closing Arguments and Judgment: Following the presentation of evidence, both parties will present their closing arguments, after which the court will render its judgment. Should the accused be acquitted, the matter will be concluded. However, if a conviction is handed down, the accused retains the right to appeal to the High Court or Court of Sessions.

9. Compoundability: It is essential to note that the offense under Article 138 of the Act is compoundable, allowing for potential resolution between the parties outside of court.
   

Documents Needed to Pursue Legal Action for Cheque Dishonor under Section 138:

1. Legal Notice: This serves as the formal demand for payment of the dishonored cheque amount and initiates the legal process. It should be sent to the drawer within the stipulated timeframe, clearly outlining the details of the dishonored cheque.

2. Cheque Copy: A clear copy of the dishonored cheque is essential to establish the validity of the transaction, including crucial details such as the cheque number, date, amount, and signature.

3. Bank Return Memo: The bank's return memo or dishonor slip provides official confirmation of the cheque's dishonor and specifies the reason, such as insufficient funds or signature mismatch. This document is crucial evidence supporting the claim of dishonor.

4. Proof of Dispatch: If the legal notice is sent by registered mail, proof of dispatch, such as the postal receipt or tracking details, should be retained. This confirms that the notice was sent within the prescribed timeframe.

5. Acknowledgment Receipt: If the legal notice is delivered personally, obtaining an acknowledgment receipt signed by the recipient or their authorized representative serves as evidence of receipt and acknowledgment of the notice.

6. Account Statements: Bank statements or transaction records reflecting the issuance and subsequent dishonor of the cheque, as well as any related transactions, provide a comprehensive overview of the financial transactions relevant to the case.

7. Affidavit: An affidavit sworn by the complainant (payee) attesting to the facts of the case and their intention to pursue legal action under Section 138 strengthens the credibility of the claim.

But what if the account was maintained by a Joint Account Holder ? When an individual signs a cheque drawn on their own account to settle a debt or obligation, and the cheque is subsequently dishonoured by the bank, it constitutes an offence under Section 138 of the Negotiable Instruments Act. Sec 138 does not explicitly address joint liability. In cases involving joint liabilities, individuals other than the one who issued the cheque from their account cannot be prosecuted under Section 138 unless they were also signatories to the cheque and the account was jointly maintained. Therefore, while a person may share joint liability for a debt, they cannot be prosecuted under Section 138 unless they meet these specific criteria of jointly maintaining the account and signing the cheque.

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