Common Reasons Due To Which A Cheque Bounces

Published on 12 Jan 2017 by Team

Any transaction that involves the usage of the 'Negotiable Instrument' - Cheque, is a tripartite transaction involving at least 3 parties one of them always being a bank.

Parties in A Cheque Bounce Case

  • The person who transfers the money through the cheque is called Drawer
  • Person to whom the cheque is given is called Payee
  • The bank that pays the stipulated amount is known as Drawee

If an employer (Drawer) sends their employee (Payee) a cheque first day of the month as salary, and HDFC (Drawee) is the bank which has issued the instrument as well as the bank in which employers account happens to be. There can be two scenarios how this situation can play out- 

1. Payee goes to his bank and deposits the cheque to receive his salary. There are sufficient funds in Drawer's Account which happens to be in HDFC. Upon presenting and submitting the cheque in the due time Payee receives money from Drawee (HDFC Bank) which is deducted appropriately from the Drawer's Account. The transaction stands completed. This Transaction is an example of 'Honoring' a cheque.

2. In the second scenario all facts remaining the same- when the Payee goes to present and submit the cheque drawn by Drawer, instead of payment into his account, it is returned by his bank for the reasons 'Insufficient Funds'. This transaction is an example of dishonour of cheque. A cheque bounce case lawyer in India can be consulted to know more about a cheque bounce case.

Definition of dishonour of cheque

The definition of "Dishonor of Cheque" is given under Section 138 of the Negotiable Instrument Act, 1881. Section 138 of the Negotiable Instrument Act, 1881 can be divided into the following elements-

  • Where any cheque was 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 of dishonour of cheque”.

Reasons/ grounds of dishonour of cheque

  1. The insufficient amount in account: this is the first reason of dishonour when the account of the drawer is not having sufficient amount for the payment of amount mention on the cheque and it gives failure to the payee in attaining the amount.
  2. Stop payment instructions: when the cheque has been drawn and issued to the payee but before the payment, the payment has been stopped by the court or drawer himself. In this situation, the payee can not get the payment.
  3. No clarity in the name: when the mentioned name on the cheque is not clear or having some mistakes so due to this problem the bank is unable to give the amount to the payee, that is also the ground of dishonour.
  4. No clarity in the amount: the mentioned amount is not clear or it is not written in word, due to this the drawee is unable to understand that how much money should be given to the payee so drawee refuses to pay the amount.
  5. Account Closed:  It is an offence under section 138 of the Act – Closure of account would be an eventuality after the entire amount in the account is withdrawn –  It means that there was no amount in the credit of ‘that account’ on the relevant date when the cheque was presented for honouring the same.
  6. The expiry period has expired: From 1st April 2012, the RBI has issued a new rule that the cheque will be valid for the 3 months from the date of issue. If payee gets late in attaining the payment of cheque for 3 months then the cheque will be said dishonoured.

Relief after Dishonor of Cheque

When a cheque is dishonoured, the drawee bank immediately issues a ‘Cheque Return Memo’ to the banker of the payee mentioning the reason for non-payment. 

Cheque Bounce is a criminal offence and is punishable by imprisonment up to two years or with a monetary penalty which may increase to twice the amount of cheque or with both. You can hire the best cheque bounce case lawyers in India to file or defend a cheque bounce case.

The only caveat to obtaining relief when a cheque has been dishonoured for the lack of sufficient funds- if the amount mentioned in the cheque is towards discharge of a debt or any other liability of the defaulter towards payee.

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