In modern commercial transactions, cheques play a vital role in facilitating payments. However, the incidence of cheque bounce has become a recurring problem, affecting both individuals and businesses. To address this issue, the Indian legislature introduced provisions under the Negotiable Instruments Act, 1881 (NI Act) to ensure the sanctity of cheque-based transactions. This blog explores the concept of cheque bounce, its causes, legal remedies available under the NI Act, and significant case laws that have shaped the legal landscape.
WHAT IS A CHEQUE BOUNCE?
A cheque bounce occurs when a cheque presented for payment is returned by the bank due to insufficient funds, mismatched signatures, or any other reason that prevents the cheque from being honoured. Such a situation not only disrupts business transactions but also erodes trust between parties.
LEGAL PROVISIONS UNDER THE NI ACT
Section 138 of the Negotiable Instruments Act, 1881, addresses the dishonour of cheques for insufficiency of funds or if it exceeds the amount arranged to be paid. If a cheque is dishonoured, the payee (the person receiving the cheque) has the right to initiate legal proceedings against the drawer (the person issuing the cheque).
KEY REQUIREMENTS TO PROVE CHEQUE BOUNCE UNDER SECTION 138
- Cheque Presentation: The cheque must be presented for payment within its validity period (usually three months from the date of issue).
- Dishonour by Bank: The bank must return the cheque unpaid due to insufficient funds or other valid reasons.
- Demand Notice: The payee must send a written notice to the drawer within 30 days of receiving the dishonour memo from the bank, demanding payment of the cheque amount.
- Failure to Pay: If the drawer does not pay the cheque amount within 15 days of receiving the notice, the payee can initiate legal proceedings under Section 138.
If these conditions are met, the drawer of the dishonoured cheque can face imprisonment for up to two years, a fine up to twice the cheque amount, or both.
DEFENCES AVAILABLE TO THE DRAWER
While Section 138 aims to protect the payee, it also allows the drawer to present valid defense, such as:
- Absence of Legally Enforceable Debt: The drawer can claim that the cheque was issued as a security deposit or for a loan that was never disbursed.
- Alteration of Cheque: If the cheque is materially altered without the drawer’s consent, it becomes invalid.
- Post-Dated Cheque: If a cheque was presented before its due date, it may not attract liability under Section 138.
- PENALTIES FOR CHEQUE BOUNCE
If a person is found guilty under Section 138, the penalties may include:
- Imprisonment: Up to 2 years.
- Fine: Up to twice the cheque amount.
- Compensation: The introduction of Section 143A of the NI Act empowers courts to order payment of interim compensation up to 20% of the cheque amount during the pendency of the trial. And the same is to be paid within 60 days of the order of the court passed under (sub section 1) of the said section. But an additional 30 days can be given after directed by the Court on sufficient cause being shown by the drawer of the
cheque.
But the court’s power to grant interim compensation is discretionary and not mandatory. Case(RAKESH RANJAN SHRIVASTAVA VERSUS THE STATE OF JHARKHAND & ANR) (2024 INSC 205)
RECENT DEVELOPMENTS
To reduce the burden on courts, amendments were introduced to allow for speedy disposal of cheque bounce cases. Alternative dispute resolution methods, such as mediation, have been encouraged. The In Re: Expeditious Trial of Cases Under Section 138 of NI Act (2021) judgment issued guidelines for the speedy disposal of these cases.
CONCLUSION
The Negotiable Instruments Act, 1881, is a crucial tool in ensuring the credibility and reliability of cheque transactions. Section 138 acts as a deterrent against dishonouring cheques, thereby safeguarding the interests of payees. While the law tilts in Favor of the payee, it also provides sufficient defences to drawers. Understanding one’s rights and obligations under this law is essential to avoid legal entanglements. Businesses and individuals alike must maintain financial discipline to prevent cheque bounces and ensure smooth commercial dealing.
Author: Devansh Bansal (Symbiosis Law School, Nagpur, Maharashtra)
Wish to read similar articles? Click the link to read more: https://jpassociates.co.in/section-74-of-the-cgst-act/
Link to the Negotiable Instruments Act, 1881: https://www.indiacode.nic.in/bitstream/123456789/15327/1/negotiable_instruments_act%2C_1881.pdf
