BACKGROUND OF CHEQUE AS A NEGOTIABLE INSTRUMENT
When Trade and Commerce became more established in people’s daily lives, several forms of Negotiable Instruments were developed over time to make money transfers more certain and convenient than previously. People used to verbally pledge to pay the due money on a later date, but then back out of their verbal commitments to pay or stretch the date further and farther when the promised due date arrived. As a result, the concept of a Negotiable Instrument was created. The paper, not the real money, that carries a ‘promise to pay’ a certain sum of money to the person carrying such a document is referred to as a negotiable instrument. Cheque is one of the Negotiable Instruments which has been defined under Section 6 of the Negotiable Instruments Act, 1881 and has become a highly trusted and widely utilized means of payment as the Banking Sector has developed through time. But, as they say, “everything has its advantages and disadvantages”, and Cheque was not spared.
According to the procedure, a person bearing the Cheque deposits the cheque in the bank on or after the date specified on the Cheque (but no later than 30 days from the date specified on the Cheque), and after a few days of formal procedures, the designated bank account of the bearer of the cheque is credited with the amount specified on the Cheque. However, dishonoring cheques for various reasons became a chronic problem throughout time, and the ‘CONs’ of cheques grew increasingly prominent. Cheques began to lose credibility as a result of this.
Previously, the infringing activities against the dishonored cheque were tried in Civil Court. The legislature deemed it vital to shield honest drawers from undue persecution. However, it proved to be a time-consuming operation, defeating the purpose of the cheque as a quick mode of payment.
As a result, Section 138 and a few other pertinent provisions of the Negotiable Instruments Act, 1988, controlling ‘Cheque’, were altered in order to expedite the resolution of instances involving cheque dishonor. Even the penalty for cheque dishonor, which was formerly one year, was increased to two years. The goal of these revisions was to increase the use of cheques and strengthen their reliability, ensuring that day-to-day trade and commerce transactions are secure.
WHO ARE THE PARTIES TO A CHEQUE?
Drawer: An individual who issues the cheque i.e. ‘author of the cheque’ is called as Drawee. (Drawer could be the Debtor)
Payee: The individual to whom the amount mentioned in cheque is payable i.e. the person in whose favor the cheque is drawn is called as Payee. (Payee could be the Creditor)
Drawee: The Bank where the Drawer has an account from which the cheque amount shall be paid i.e the bank who is directed to pay the amount is called as Drawee.
Payee’s Bank: The Bank where the Payee has a bank account in which the cheque amount shall be deposited/credited (especially in case of crossed cheque) or the bank in which payee deposits the cheque is called as ‘Payee’s Banker’
WHAT IS A CHEQUE BOUNCE?
When a cheque is returned by the bank while still unpaid, it is referred to as having bounced or dishonored. It is also known as dishonor of cheque which is becoming the most widespread financial infraction and may be witnessed in everyday life. A cheque bounce can have a number of consequences for both the drawer and the drawee, including a large penalty from the bank, a bad impact on the CIBIL score, which might lead to being blacklisted for future loans, civil or criminal action against the drawer (accused), and many more. While there may be an innocuous cause on the drawer’s or banker’s end for the check to bounce, it may also be tinged with malice. In any case, the drawee has the right to be paid on time and can thus sue the drawer for the money owing to him. Cheque bounce is a crime under Section 138 of the Negotiable Instruments Act of 1881. The offended person may pursue both a criminal and civil complaint against the accused, who must have been legally obligated to refund the sum.
WHAT ARE THE CONDITIONS THAT MUST BE FULFILLED FOR ESTABLISHING OFFENCE UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881
We can see in the case of MSR Leathers vs. S. Palaniappan and Anrs[1] which is an important judgment laying down the condition of precedents that should be followed before an offence under Section 138 is made out. According to the case, the first condition is that a cheque must be 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. However, the validity of the cheque was reduced to three months as per the 2011 Reserve Bank of India’s notification.
As per the second condition, the payee or the holder must make a demand for the payment of the said amount by giving a notice in writing. It should be presented to the drawer of the cheque within thirty days of the receipt of the information by them from the bank regarding the return of the cheque as unpaid.
The last condition is that the drawee of such cheque should have failed to make payment of the said amount of money to the payee or the holders, as the case may be, in the due course of the cheque within fifteen days of the receipt of the said notice.
WHAT ARE THE REMEDIES AVAILABE FOR A CHEQUE BOUNCE?
Resubmission of the Cheque
When a cheque bounces, the issuer has the opportunity to rectify the error that led the cheque to bounce and ask the payee to resubmit the cheque for clearance. This can be done within three months of the day the cheque bounced. The bouncing of the check is communicated to the recipient by his bank by the issuance of a “cheque return memo”, which specifies the grounds for the non-payment of the money mentioned in the cheque. To make a legitimate claim, a person must present the cheque to the bank within three months of the day it was issued; otherwise, the cheque will expire.
Demand Notice
If the cheque bounces for the second time, the recipient has the option of sending a demand notice to the cheque’s issuer. The demand notice often demands that the issuer deliver the necessary amount within 15 days, failing which the receiver may file a complaint under Section 138 of the Negotiable Instruments Act. This demand notice must be submitted within 30 days of receiving the bank’s bouncing cheque. If a legitimate rationale is established, the court may consider a postponement.
Filing a Complaint
If the cheque’s issuer has not responded to the demand notice or fulfilled with its provisions, the receiver has 30 days to file a complaint with the courts. In terms of jurisdiction, the courts in the places where the cheque was drawn, presented, and/or returned by the bank have jurisdiction. A complaint under Section 138 under Negotiable Instruments Act, can also be brought against a company. It should be noted that gift cheques are not covered under the previously-mentioned section.
The original documents, such as the original cheque, a copy of the notice, and the acceptance receipt, must be confirmed by the Judicial Magistrate First Class once the Complaint is filed and the necessary court costs are submitted with the court. The complainant would be required to appear in court and answer questions from the Magistrate. The Magistrate would issue a summons to the cheque’s issuer to appear in Court, and if found guilty, the issuer would face jail or a fine under Section 138 of the Negotiable Instruments Act. In addition to seeking remedies through this route and the legal actions described below, the recipient of such a cheque may also file a cheating complaint under Section 420 of the Indian Penal Code, 1860.
After 30 days, you can still file a case for cheque bounce provided you can show an acceptable explanation for the delay. Typically, the time restriction for sending a notification in a cheque bounce case is 30 days.
An Alternate Civil Complaint
The form of the complaint detailed in the preceding sections is that of a criminal complaint, which may result in jail time for the defaulter but does not always result in the recipient of the bounced check receiving his dues. As a result, the beneficiary should initiate a separate civil claim to recover the sum owed to him.
This can be accomplished by filing a summary action under Order 37 of the Code of Civil Procedure, 1908. A summary litigation varies from a regular civil suit in that it does not allow the defendant the right to defend himself, and in order to defend himself, the defendant must first request permission from the court. Summary proceedings are only permitted in cases of recovery. In the case of a cheque bounce, a summary suit can be launched to collect the money.
In addition to the possibility of jail time or penalty that a defaulter faces, the bank from whence the defaulter issued the check has the option to prevent the defaulter from using its facilities and perhaps cancel the account.
WHAT IS THE PUNISHMENT FOR COMMITTING OFFENCE UNDER SECTION 138 NI ACT,1881?
A person shall be sentenced to jail for a term of up to two years, or to a fine equal to the amount of the cheque. A person can also be punished with both, depending on the facts and circumstances of each case.
WHAT ARE THE EXCEPTIONS TO THE LEGAL REMEDIES MENTIONED ABOVE?
These legal remedies are only accessible if there is a clear pending obligation or duty. As a result, if a bounced cheque was issued as a contribution or gift, the holder cannot sue the defaulter.
CONCLUSION
A cheque bounce can happen due to several reasons like insufficient funds in the account, expiry of the validity period of an issued cheque, the date mentioned on the cheque, signature mismatch, difference in the amount mentioned in words and numbers, overwriting in the cheque, a damaged cheque. The cheque bounce is a term used to elaborate the unsuccessful processing of a dispensed cheque due to various reasons as mentioned above.
It is to be noted that the above-mentioned remedies are possible only if the pending debt or liability can be established. For instance, the holder cannot sue the defaulter if a bounced cheque was issued as a gift or donation. It is wise to keep track of available balance and maintain extra cash in your account as a buffer. In case, you find out there is insufficient money in your account, you can inform the payee in writing and issue stop payment/cancellation at your bank or pump in funds into your account before the date of the cheque.
Witten By,
Kalpana Nailwal,
Intern, Chanchlani Law World
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