The article has been written by Pragyna Panigrahi a 1st-year student of Amity Law School, Amity University Chhattisgarh.
A bounced cheque is a cheque that was used for any payment, but it could not process because the cheque writer did not have sufficient funds available for payment. When an account has insufficient funds, the cheque writer bank will reject the cheque and it will return it to the payee’s bank. Instead of transferring money to the payee, the request for payment ‘Bounces’ back. When people pay by cheque, there is a trust involved in this whole process. It takes several days for the funds to move from one account to other. The payee doesn’t really know how much money the check writer has available in his account, but most of the customers doesn’t make a habit of bouncing cheques. So cheques are often accepted on faith. We can say that the person accept the cheque assuming the cheque will clear without any difficulty.
It’s possible to write a cheque of any amount, whether those amount are really available or not in your checking account. Writing a rubber cheque intentionally is illegal. Sometimes cheques bounce by misfortune. A cheque writer might believe that they have sufficient funds available, but unexpected withdrawals reduce their balance. For example – Automatic electronic payment, cheques that hit an account unexpectedly, and large debit card holds can cause cheque to bounce. Sometimes people just forget to make deposits or check their account balance.
If the checking account is closed due to any reason, then the cheque will be rejected. This is a sign of fraud; it can also happen when payee is slow to deposit cheques.
If the cheque writer placed a stop payment on the cheque, the bank should respect the request of the cheque writer. In such cases, payees need to find out the reason behind the stop payment and make arrangements for an alternative form of payment.
Sometimes banks can refuse to accept a cheque if there’s anything inappropriate. Some of the common problems are missing signature and stale-dated cheques.
How to avoid Cheque Bouncing:-
There are steps that can be taken to prevent cheque bouncing:-
- Know your balance: – Check your available balance often. Use finance apps and text messages with your bank to understand when money leaves your account.
- Keep a buffer: – Always leave some extra money in your checking account for unexpected expenses. That can help you when need cash urgently. That money can help when you forget about payment that hit your account. If you constantly keep your account balance above zero, you are more likely to pay overdraft charges.
- Balance your account: – Always check your account balance, deposit and withdrawals. If you balance your account, then you will have the knowledge about your account before your bank does.
- Communicate to the payee: – If you write a cheque and later on you realize that you don’t have sufficient amount in your account for payment, then you can contact to the payee immediately let the payee know before he deposit the cheque and make other arrangements. This will save time and money for both of you.
Legal consequences of Cheque Bounce
Almost every bank gives a ‘cheque return memo’ along with returned cheque stating the reason of the bounce. If you hold the cheque, you need to inform this to the drawer and ask if you can re-present it to the bank within the 3 months period. If cheque is rejected even for the second time, then you can take a legal action against it. First step, send a legal notice to the defaulter within 30 days from receiving the cheque return memo. The notice should contain all necessary facts of the matter, as well as the details of the first cheque that was rejected. The defaulter needs to make a payment within 15 days from receipt of the notice. If the defaulter still does not make the payment within the given period of time, then you can file a complaint in the magistrate court. This case should be filled within a maximum period of 1 month from the date of expiry of the 15 days time period.
The complaint should be filed within the time frame specific. If this is not done, then the case will become time barred and will not be entertained. When your case comes for hearing, the defaulter can be punished with a jail term for two years or a penalty which can be up to twice the cheque amount. The defaulter can appeal against the order within a time period of 1 month of judgement
- Bouncing of a rent Cheque: It is a common practice for the landlord to take post dated cheques from the renter. In case, if a rent cheque bounces, the landlord can follow certain procedure to recover the money from the renter. It may happen that the renter does not have the funds because the landlord did not drop the cheque at the expected time. So, the landlord is bound to first inform the renter and only then proceed with the legal process. There may be another case in which the renter wishes to set off an amount from a particular month’s rent towards some expense he incurred on behalf of the landlord, which the latter refuses to pay. If there is a cheque bounce because of this, then the criminal case will continue against the renter till he is able to establish that there was a legitimate set up.
- Bouncing of an EMI payment: When a cheque which is for an EMI payment on a loan is rejected, the bank can also file a case against the defaulter. Firstly, hefty penalties, loan default charges are levied. These keep building up for every month of default and added to the EMI amount. In case secured loans, banks also have the security as collateral. If the defaulter does not make the payment even after continuous reminder, the bank can give sufficient notice and auction the security to recover the dues.
- Bouncing of a cheque in a business transaction: If you receive a cheque from a business debtor and this gets bounced, then you have the follow certain procedure to recover the dues. In case of bounced cheques in business transactions, the added penalty would be the loss of face in business circles, affecting your reputation and business deals. According to some reports, a person who has defaulted in making the payment will not face jail term and the cases will be handled only through arbitration and settlement by Lok Adalats. A more stringent and rigorous punishment should be put in place to reduce instances of bounced cheques in the country.