Understanding Cheque Bounce: Definition, Meaning & Charges

Understanding Cheque Bounce: Definition, Meaning & Charges

Anubhav Dwivedi's Picture
Anubhav Dwivedi
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  • In today's fast-paced financial world, cheques still hold a significant place in transactions, despite the rise of digital payment methods. However, there are instances where a cheque may bounce, leading to various complications for both the issuer and the payee. This article delves into the meaning of cheque bounce, its implications, and the associated charges.

What is a Cheque Bounce?

  • A cheque bounce occurs when a bank refuses to process a cheque due to insufficient funds in the issuer's account or when the cheque is found to be invalid for other reasons. When a cheque is presented for payment, the bank verifies that the funds are available. If the account has insufficient funds or the cheque has errors (like mismatched signatures, incorrect date, or altered amounts), the cheque will bounce back, and the transaction will not be completed.

Types of Cheque Bounce:

  • Insufficient Funds: This is the most common reason for a cheque bounce. If the account holder does not have enough funds to cover the cheque amount, the bank will reject the cheque.
  • Closed Account: If the account on which the cheque is drawn has been closed, the cheque will bounce.
  • Signature Mismatch: If the signature on the cheque does not match the signature registered with the bank, it may be considered invalid.
  • Post-dated Cheque: A cheque that is dated for a future date cannot be cashed before that date, leading to a bounce if presented prematurely.
  • Alteration: If the cheque has been altered in any way (such as changing the amount or the payee), it may be considered invalid.
  • Technical Issues: Sometimes, bank-related issues can cause a cheque to bounce, even if there are sufficient funds in the account.

Cheque bounce is not just a financial issue; it also has legal ramifications. Under Section 138 of the Negotiable Instruments Act, 1881, a cheque bounce can be treated as a criminal offense. The law provides for a punishment that may include imprisonment for up to two years or a fine that can be double the amount of the cheque. Here’s how the legal process generally works:

  • Notice: The payee must issue a formal notice to the drawer (the person who wrote the cheque) within 30 days of receiving information about the bounce.
  • Response Time: The drawer has 15 days from the receipt of the notice to make the payment.
  • Filing a Complaint: If the drawer fails to pay within the stipulated time, the payee can file a complaint in a court of law.
  • Court Proceedings: The court will examine the evidence and, if found guilty, the drawer may face penalties.

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Importance of Understanding Cheque Bounce:

Understanding cheque bounce is crucial for individuals and businesses alike for several reasons:

  • Financial Planning: Knowing the consequences of cheque bounce helps in better financial planning and management. Individuals should ensure they maintain sufficient funds in their accounts to avoid this issue.
  • Legal Awareness: Awareness of the legal implications allows both issuers and payees to take necessary precautions, such as sending timely notices or maintaining proper documentation.
  • Maintaining Reputation: Frequent cheque bouncing can damage an individual’s or a business's reputation. It may lead to loss of trust among clients and suppliers.

Charges Associated with Cheque Bounce:

When a cheque bounces, both the issuer and the payee may incur charges, which can vary based on the bank's policies and the reason for the bounce.

Charges for the Issuer:

  • Penalty Charges: Banks often impose a penalty fee on the account holder for issuing a bounced cheque. This fee can range from ₹200 to ₹500 or more, depending on the bank's policy.
  • Legal Charges: If the payee decides to take legal action due to a bounced cheque, the issuer may incur additional legal fees.
  • Reputation Damage: Although not a direct financial charge, frequent cheque bouncing can lead to a loss of credibility, making it challenging to secure loans or other financial services in the future.

Charges for the Payee:

  • Return Charges: When a cheque bounces, the payee may incur return charges, which can vary based on the bank’s policy.
  • Legal Fees: If the payee pursues legal action to recover the amount, they may incur legal costs, which could be substantial depending on the complexity of the case.
  • Time and Effort: While not a direct charge, the time spent managing the situation, including following up on payments and possibly pursuing legal action, can be significant.

Steps to Avoid Cheque Bounce:

To mitigate the chances of cheque bounce, both issuers and payees can take several precautionary measures:

For Issuers:

  • Maintain Sufficient Balance: Regularly monitor your account to ensure you have enough funds to cover any issued cheques.
  • Double-Check Details: Ensure all details on the cheque, including the date, amount, and signature, are correct before issuing it.
  • Communicate with the Payee: If you anticipate any issues with your account balance, communicate with the payee in advance to avoid bouncing the cheque.

For Payees:

  • Verify the Issuer: Before accepting a cheque, verify the issuer's credibility and their banking history if possible.
  • Deposit Promptly: Depositing the cheque as soon as possible reduces the likelihood of it bouncing due to the issuer's account status changing.
  • Keep Records: Maintain a record of all transactions, including copies of cheques received and any communication regarding payments. This documentation can be crucial in legal disputes.

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Conclusion:

  • Cheque bounce is a common issue that can have serious financial and legal implications for both the issuer and the payee. Understanding the reasons for cheque bounce, its consequences, and the associated charges is essential for effective financial management. By taking preventive measures and staying informed, individuals and businesses can avoid the pitfalls of cheque bounce and ensure smooth financial transactions.
  • Whether you are issuing a cheque or accepting one, being aware of the associated risks and charges can save you from future complications. Always prioritize clear communication, maintain sufficient funds, and ensure all cheque details are accurate to minimize the risk of cheque bounce.

FAQs:

What happens if a cheque bounces?

  • Under Section 138 of the Negotiable Instruments Act, 1881, the punishment for a cheque bounce can include imprisonment for a term of up to two years or a fine that may be up to twice the amount of the cheque, or both. Additionally, the payee has the right to file a civil suit against the issuer (drawer) to recover the cheque amount. This legal provision ensures that the person who has issued the bounced cheque is held accountable, providing both criminal and civil recourse for the payee.

What is the new rule of cheque bounce?

In India, dishonouring a cheque is considered a criminal offence under Section 138 of the Negotiable Instruments Act, 1881. If a cheque bounces, the drawer can face one of the following penalties:

  • Fine: The offender may be required to pay a fine, which can be up to twice the amount of the bounced cheque.
  • Imprisonment: The drawer may be sentenced to imprisonment for up to 2 years.

Can we file FIR against cheque bounce?

  • Yes, in addition to filing a complaint under Section 138 of the Negotiable Instruments Act, 1881, you can also file an FIR under Sections 406 (Criminal Breach of Trust) or 420 (Cheating) of the Indian Penal Code (IPC) if there is a criminal element involved, such as fraud or deliberate dishonesty by the drawer. These sections provide for additional criminal action when there is intent to deceive or misappropriate funds. Pursuing this route can lead to more severe penalties, including potential imprisonment, if proven.

How much penalty for cheque bounce?

If a cheque bounces due to insufficient funds, the drawer can be held criminally liable under Section 138 of the Negotiable Instruments Act, 1881. The penalties include:

  • Fine: The court can impose a fine up to twice the amount of the cheque.
  • Imprisonment: The drawer can face imprisonment for a term of up to two years.
  • Both: In some cases, the court may impose both a fine and imprisonment.

Additionally, the payee can pursue a civil suit to recover the amount on the cheque, allowing for both criminal and civil remedies against the drawer.

What is the legal action for a bounced Cheque?

  • Section 138 of the Negotiable Instruments Act, 1881 declares cheque bounce as a punishable offence. If a cheque is dishonoured, the drawer may face the following penalties:
  • A fine of up to double the value of the cheque.
  • Imprisonment for a period of up to two years.
  • In some cases, both fine and imprisonment can be imposed.

This legal provision aims to deter individuals from issuing cheques without maintaining sufficient funds or for engaging in fraudulent activities.

What should I do immediately after receiving a cheque bounce notification?

  • Upon receiving a cheque bounce notification, immediately contact your bank to understand the reason, inform the issuer for resolution, and explore if re-submission or alternative payment methods are feasible.

How long do I have to respond to a cheque bounce notice legally?

  • Legally, you have 30 days to respond to a cheque bounce notice from the date of receipt, either by making the payment or communicating with the issuer to resolve the matter.

Can a cheque bounce case affect my credit score?

  • Yes, a cheque bounce case can affect your credit score, especially if it leads to legal action or is reported by the bank. This can impact your ability to secure loans or credit in the future.

What are the common reasons for a cheque to bounce?

  • Common reasons for a cheque to bounce include insufficient funds in the account, mismatched signatures, account closure, post-dated or stale-dated cheque, overwriting without authorization, and discrepancies in the cheque details.

Is it possible to settle a cheque bounce case out of court?

  • Yes, it is possible to settle a cheque bounce case out of court through negotiation between the involved parties. The drawer can offer to pay the due amount along with any applicable charges to the payee to avoid legal proceedings.

How can I avoid cheque bounces in the future?

  • To avoid cheque bounces in the future, ensure sufficient funds are in your account before issuing a cheque, regularly monitor your account balance, avoid making errors on the cheque, keep track of post-dated cheques issued, and use alternative payment methods when possible.
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