Cheques are used in facilitating different transactions from payment of loan, salary, fees, bills to buying of essential commodities. Banks are shouldered with the responsibility of processing and clearing of cheques daily.
Cheques serve as a proof of a transaction and have since been one of the most reliable methods of payment for most people and in businesses.
However, it is most advisable that crossed or Account Payee only cheques be issued to check its extent of misapplication.
Cheques are instruments of negotiation; however, only the payee can negotiate crossed or account payee cheques.
Cases of cheque bounce have increased and more will be witnessed in the future. In situations that you come face to face with the realities of cheque bounce; there are steps which you can take as will be discussed in this article.
There has been a proposition to amend the Negotiable Instrument Act 1881 which when passed into law will improve the use of cheques as an instrument for transactions in India.
The drawer of a dishonored cheque could decide to appeal to obtain a stay of execution or court proceedings. However, this might lead to a reduction in the credibility of the use of cheques in business transactions.
This article will provide you with the information you will need when you experience a cheque bounce or how you can avoid the experience of a cheque bounce.
WHAT IS A CHEQUE BOUNCE?
When a bank refuses to clear a cheque because of certain conditions, it is called cheque bounce and such a cheque is thus dishonored. It becomes a criminal offense under Section 138 of the Negotiable Instrument Act when a cheque is bounced because of insufficient funds in the customer’s account.
WHAT ARE THE REASONS FOR DISHONOURING OF A CHEQUE?
The following are the reasons cheques can be dishonored:
- Insufficient funds: this is where the value of the money in the account of the customer is lower than the amount that is to be withdrawn by the cheque.
- Stale cheque: this occurs when the cheque is presented after its 3 months of validity period must have expired.
- Post-dated cheque: this is where the date of presentation of the cheque is much earlier than the actual date that is captured in the cheque.
- Mutilated cheque: this is where the vital parts of the cheque have been damaged.
- Signature mismatch: a cheque will be dishonoured when the signature that appears on it is different from the signature of the customer.
- Undated cheque: where there is no clear date written on the cheque, then it is bound to be bounced.
WHAT ARE THE PROVISIONS OF SECTION 138 OF THE NEGOTIABLE INSTRUMENT ACT 1881
- Cheque bounce for inadequate funds in account: Where the amount of funds in the customer’s account is insufficient, such a cheque will be returned unpaid by the bank.
- Penalty: Cheque bounce is a violation of the Act and attracts a jail term of 2 years with or without an option of fine.
- Jurisdiction of cheque bounce case: Issues of cheque bounce should be directed to the courts within the jurisdiction of the payee’s branch bank where the cheque was presented for payment.
WHAT ARE THE PROPOSED CHANGES IN THE NEGOTIABLE INSTRUMENT AMENDMENT BILL 2017?
- The Act intends to ensure that the drawer of the bounced cheque should compensate the complainant with an interim payment.
- The interim payment that is provided to the complainant should not be more than 20% of the total amount in the cheque that has been bounced.
- The drawer of the bounced cheque will make the interim compensation in a summary trial of the case. The plea of the defendant will not change the position of this provision.
- The interim compensation will be paid by the drawer in a date not later than 60 days of making the order. As it may please the court, a 30-day extension period but not more than this may be provided to the drawer of the cheque to make the compensation.
- Where the drawer of the dishonored cheque is exonerated, the complainant must refund the interim compensation that was received to the drawer with an interest. This repayment must not be later than 60 days from the day the order was ruled by the court.
- The Negotiable Instruments Amendment Bill 2017 intends to limit unnecessary delay that may arise from dishonored cheque cases. However, the Bill is yet to be passed by the two Legislative chambers for it to become an Act.
TERMS THAT ARE COMMONLY USED IN CHEQUE BOUNCE
The following terms are commonly used in the description of a cheque related transactions:
- Drawer: the person who authors the cheque is known as a
- Payee: the person in that is entitled to receive the funds is referred to as
- Drawee: this is the bank with the responsibility of making the payment.
WHAT IS THE ACTION OF THE BANK AND THE PAYEE IN CASE OF A CHEQUE BOUNCE?
- Once the cheque is bounced, a ‘cheque Return Memo’ is immediately issued by the drawee to the payee’s bank stating the reasons for the action.
- At this point, the payee’s bank will hand over the cheque along with the memo to the payee.
- If the payee has a confirmation that the cheque will be honored by the bank at the second attempt, then the payee can resubmit the cheque within 3 months of its date.
- The payee has the right to take a legal action against the issuer of the cheque if it is returned unpaid again.
- The drawer may be sued by the payee for the dishonored cheque especially if the amount was meant for the payment of a debt and other liabilities.
- The drawer cannot be sued if the check was for the settlement of a gift, loan or any unlawful transactions.
WHAT ARE THE STEPS IN TAKING A LEGAL ACTION IN CASE OF A CHEQUE BOUNCE?
To proceed with a legal action in case of a cheque bounce, then you should fulfill the following conditions:
- The bank must have received the cheque within a period not later than 3 three months after it was issued by the drawer. Note that the Reserve Bank of India has released a directive that the validity period of cheques be reduced from 6 to 3 months and this has been in effect since April 1st, 2012.
- The payee should notify the drawer that the cheque is returned unpaid by the bank.
- The drawer must have failed to make payments to the payee after 3 months of receiving the notice of cheque bounce.
- Once the above conditions have been satisfied, then you can proceed to the court for a redress.
- The court where the case is filed and the bank must be in the same jurisdiction.
WHEN AND HOW YOU CAN ISSUE THE NOTICE OF THE CHEQUE BOUNCE?
- The demand for the payment should be forwarded to the drawer within 30 days of receiving the news of the bounced cheque from the bank.
- The notice should be forwarded by the payee to the correct address of the drawer.
- The notice will inform the drawer of his obligation to make the payment.
- Once the notice has been sent, then the payee has successfully satisfied his responsibility in the transaction.
WHO CAN BE PROSECUTED UNDER SECTION 138 OF THE ACT?
- The prosecution can be launched against the drawer who has failed to pay.
- In the case that a company fails to pay, the company and everyone who must have had a hand in the offense will be joined in the suit.
WHAT ARE THE IMPLICATIONS OF A DISHONOURED CHEQUE?
- It is a criminal offense which attracts a penalty of fine or imprisonment or both.
- The creditworthiness of the drawer can be negatively affected.
- It can bring a negative effect on the credibility and trust between the partners that are involved in the transaction.
- History of bounced cheques is usually reflected in the drawer’s bank statements which will have a negative report on the person’s credit history.
- Numerous cases of bounced cheques in a person’s bank statement will reduce his chances of securing a loan from the bank which in most cases will require you to submit your last 1-year statement of account.
WHAT ARE THE STEPS TO AVOID A CHEQUE BOUNCE?
The best ways you can avoid a cheque bounce are:
- Never write a cheque when you have insufficient balance in your account.
- Ensure that your signature on the cheque is well expressed.
- Be careful with the date to avoid a stale or post-dated cheque.
- The payee should handle the cheque leaflet with care to avoid it being mutilated.
- Ensure that the cheque is presented to the bank not later than 3 months from its issuance date.