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How to protect yourself from Section 138 cheque bounce case?

What is Section 138?

Section 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.

Explanation. — For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.”

What are the ingredients to Section 138 of the Negotiable Instruments Act?

  • The cheque should have been issued for the discharge, in whole or part, of any debt or other liability.

  • The cheque should have been presented within a period of six months normally or within its validity period whichever is earlier.

  • The payee or holder in due course should have issued a notice in writing to the drawer within 30 days of the receipt of information by him from the Bank regarding the return of the cheque as unpaid.

  • After receipt of the said notice from the holder in due course, the drawer should have had failed to pay the cheque within 15 days of receipt of the said notice.

How can you prevent yourself from ending up in a situation where a cheque written by you is returned by the bank?

We should make sure that our bank account has more than sufficient balance to felicitate the payment of the amount mentioned on the cheque. One of the primary reasons that cheques are returned by the bank is because of Non-Sufficient funds in the account of the person from whose account money is to be withdrawn.

What is the punishment for a cheque bounce?

In India the punishment for cheque bounce which is mentioned in Section 138 of the Negotiable Instruments Act. It says that a person may 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 as decided by the court.

What are the fines and charges for a cheque bounce and who pays them?

If a cheque bounces due to insufficient funds (NSF) or any other technical reason, such as signature mismatch, both the defaulter and the payee are charged by their respective banks. The penalty charges for cheque outward return are around near Rs. 300 for most banks, while charges for cheque inward return are about Rs. 100 in India. The penalty charges vary from bank to bank and are different for different types of account. Premium accounts usually have higher penalty charges than other accounts.

What is the time limit for cheque bounce case in India?

What is meant by cheque bounce?

When a bank returns a cheque because of Insufficient Funds in the account from which the money is to be drawn. The bank in such cases is said to bounce or return the cheque.

What is the procedure for a cheque bounce case?

The step by step process for this is as follows:

  1. The cheque has been dishonoured,

  2. After receiving the Bank endorsement, you should issue a legal notice to the person concerned.

  3. The notice is to be issued within 30 days by RPAD (REGISTERED POST) and thereon if the notice is received or returned unclaimed then you have to wait for 15 days for him to make the payment.

  4. After expiry of the 15 days, you should file a complaint before the Jurisdictional Magistrate within 30 days, under section 138 of the Negotiable Instruments Act of 1881 read along with Section 200 of the Cr.P.C.

What are some of the possible reasons for a cheque bounce?

  • Insufficient funds in the account of the drawer
  • Crossing the limit of the overdraft
  • Mismatch in the account number
  • An expired validity of the cheque
  • A Post-dated cheque
  • A Crossed cheque
  • Signatures are missing on the cheque
  • The bank is suspicious of a forged cheque
  • The cheque is presented at the wrong branch of the bank concerned
  • The account has been closed by the drawer
  • Payment stopped from the account by the drawer
  • The cheque does not have the seal of the company
  • The drawer is either dead or suffering from insanity
  • Signatures on the cheque mismatch
  • There is some difference in the mentioned amount in words and numbers
  • The cheque is disfigured or damaged
  • Scribbling, Overwriting on Cheque

What is meant by a dishonoured cheque under negotiable instrument act?

What is the Negotiable Instruments Act of 1881? (NI Act)

The Negotiable Instruments Act was enacted in India in 1881, formalising the usage and characteristics of instruments like the cheque. The NI Act provided a legal framework for non-cash paper payment instruments in India. Cheques are recognised as negotiable instruments under the above act.

What is a 'Bounced Check'

A cheque that can’t be processed because the account holder does not have sufficient funds is termed as a bounced cheque. Banks return or bounce the cheques that they can’t process these are known as rubber cheques. The banks charge Non-Sufficient Funds or NFS fees for such cases. Passing such kinds of cheques commonly called bad cheques is illegal in some cases and the corresponding crime ranges from a misdemeanour to a felony, depending on the amount and whether the activity involved crossing state lines.

How to prevent your cheques from getting bounced?

Since a bounced cheque is the direct result of Non-Sufficient funds they can be avoided in many ways. Some consumers use overdraft protection or attach a line of credit to their accounts.

What is a dishonoured cheque?

This comes under Section 138 of the Negotiable Instruments Act. It was inserted into the Act vide amendment of 1988. The drawer pays off his lability to the payee through cheque and when bank returns the cheque unpaid due to insufficient balance on the account held by the drawer, the liability/debt remains due to the drawer and the amount remains unpaid. The return of cheque can be because of insufficient funds in the account or due to exceeding the limit of the amount which was agreed to be paid by the bank. Such a default by any person creates a liability under the said provision.

Is there a difference between a bounced cheque and dishonoured cheque?

Yes, there is a slight difference between the 2 terms.  A bounced cheque is in a way a subset of dishonoured cheques because a bounced cheque is a cheque that has been returned because of Non-sufficient funds while a dishonoured cheque could be a cheque which has not been honoured for various other reasons also.

All you need to know about cheques in India

What is a cheque?

In simple words, it is a negotiable instrument used to make payment in the day to day business transactions minimizing the risk and possibility of loss. It is defined in the Negotiable Instruments Act 1881 under 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.

Are cheques valid in India?

Yes. However, there have been certain changes as to the period of written cheques validity. Before they were valid for 6 months but with effect from 1st April 2012 they are valid only for 3 months as per RBI guidelines.

What is legal tender?

Legal tender is a medium of payment recognized by a legal system to be valid for meeting a financial obligation. E.g. Paper currency.

Do cheques come under legal tender? No, they do not, this means that you are not obliged to take payment in the form of a cheque it is just that this is a new and convenient way of making payments popularly accepted by most sellers.

What is the Negotiable Instruments Act of 1881? (NI Act)

The Negotiable Instruments Act was enacted in India in 1881, formalising the usage and characteristics of instruments like the cheque. The NI Act provided a legal framework for non-cash paper payment instruments in India. Section 138 of this act is very important it provides that in case of dishonour of a cheque, it will be considered a criminal offence and its punishable by imprisonment up to two years or with a monetary penalty or with both.

Types of Cheques in India

There are many kinds of cheques such as: –

  • Bearer Cheque: When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called a bearer cheque. This essentially allows the money to be given not only to the person whose specified therein but also to anyone who presents in the bank for payment. These however come with the risk that if lost, the finder of the cheque can collect payment from the bank.

  • Order Cheque: When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to anyone else to whom it is endorsed (transferred).

  • Uncrossed/Open Cheque: When a cheque is not crossed, it is known as an "Open/Uncrossed Cheque". The payment of these kinds of cheques can be obtained at the cash counter. An open cheque may be a bearer cheque or an order one.

  • Crossed Cheque: Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be encashed at the cash counter, but it can only be credited to the payee's account.

  • Anti-Dated Cheque: If a cheque bears on it a date earlier than the date on which it is presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid up to three months from the date written on the cheque.

  • Post-Dated Cheque: If a cheque bears a date which is yet to come (future date) then it is known as a post-dated cheque. A post-dated cheque cannot be honoured earlier than the date written on the cheque.

  • Stale Cheque: If a cheque is presented for payment three months from the date of the cheque it is called a stale cheque. A stale cheque is not honoured by the bank

  • Mutilated Cheque: When cheque gets torn into two or more pieces and presented in the bank for payment. Such cheques are called mutilated cheque. Bank requires confirmation by the drawer before honouring such cheques.