Dishonour of Cheque : Meaning, Essentials, and Legal Implications

What is Dishonour of Cheque?

When a cheque is brought to the bank for payment and the bank declines to process it, this is known as Dishonour of Cheque. Several, factors, including insufficient cash in the account, a signature that doesn’t match, an overdrawn account, or a post-dated cheque, may result in this rejection. A dishonored cheque indicates that insufficient money or other problems are preventing the transaction for which the cheque was issued from being executed. A dishonored cheque is regarded as a criminal offense in many places and the person who issues it could face legal repercussions.

Geeky Takeaways:

• A cheque is one of the most preferred medium of transfer of money from one account to another.
• When a bank declines to pass a cheque on specific grounds, it results in a dishonored cheque.
• When a cheque gets returned unpaid, it is said to be dishonored.
• This can happen due to several reasons such as insufficiency of funds, signature mismatch, etc.

Types of Cheques

1. Bearer Cheque: This cheque is payable to the bearer and is cashable at any time upon presentation. It is important to note here that it must be signed. Bearer cheques are very risky and in case, such cheques are misplaced it can lead to a loss of the amount mentioned in the cheque.

2. Order Cheque: Payable to a designated individual or organization and can be withdrawn exclusively by that individual only. In this kind of cheque, the words ‘or bearer’ is canceled. Such cheques can only be issued to those persons whose name is mentioned on the cheque and the bank does the background check to authenticate the cheque’s bearer identity before releasing the payment.

3. Crossed Cheque: A Crossed Cheque has two parallel lines on it, meaning it cannot be cashed over the counter but only deposited into a bank account. Only the person whose name is written on it can get the amount transferred to his account. The crossed lines ensure that irrespective of who presents the cheque, the payment will be made only to that individual whose name is written on the cheque.

4. Open Cheque: These are not crossed or marked, and are payable to the bearer or a designated individual over the counter. An open cheque can be encashed at any bank, and the payment can be made to the person bearing the cheque. Here, the issuer needs to put his signature on both the front and back sides of the cheque.

5. Post-Dated Cheque: It is a cheque that is dated for a later time and is payable on or before that date. Post-dated cheques bear a later date of being encashed. The bank will process the amount for payment on the date mentioned in the cheque.

6. Stale Cheque: A cheque that hasn’t been paid for a predetermined amount of time, often six months, after it was issued, is a Stale Cheque. In other words, a Stale Cheque is a cheque that was written too long ago and that a bank may refuse to pay when someone tries to get the stated amount.

7. Traveler’s Cheque: This type of cheque can be used for withdrawing money while traveling. It is equivalent to carrying cash but one can travel safely without carrying heavy cash. They can be encashed abroad where foreign currencies are acceptable.

Section 138 of the Negotiable Instruments Act, 1881

Section 138 of the Negotiable Instruments Act, 1881 in India relates to the offence of Dishonor of a Cheque for shortage of cash or if it exceeds the amount stipulated to be paid by the drawer’s account. The section describes the punishments and legal consequences for those committing these crimes.

Section 138 is a legal provision and it specifically deals with the cheque bounce due to insufficient funds or any other reason. This section imposes criminal liability and provides a legal implication for the holder of the cheque. If a cheque gets dishonored, the holder can send a legal notice to the issuer demanding a payment within a specified time. If the payment is not made, the holder can file a complaint in the appropriate court.

Essential for an Action under Section 138

1. Cheque Dishonor: A cheque dishonored for insufficient funds or for more than what is scheduled to be deposited into the drawer’s account is a violation of Section 138. The provisions here do not cover the dishonor of other negotiable instruments.

2. Notice: Within 30 days after the dishonor, the payee is required to demand payment of the full amount of the cheque in writing to the drawer.

3. Drawer’s Obligation: The drawer has fifteen days from the date of notice to make the payment. The payee may file an action if the money is not received within this time frame.

4. Criminal Liability: The action covered by Section 138 is illegal. If the person who wrote the cheque is found to be guilty, he could face a two-year prison sentence, a fine equal to twice the value of the cheque, or both.

5. Compounding: With the court’s approval and within the terms the court deems appropriate, the drawer may, before the prosecution’s establishment, compound the offense.

Why do Cheques get Dishonoured?

1. Insufficient Funds: The most common cause of dishonor of a cheque is a lack of funds in the drawer’s account that exceeds the amount on the cheque.

2. Unusual Signature: When the signature on the cheque does not correspond with the sample signature kept on file by the bank, the cheque can be declined.

3. Overwriting or Alterations: Without the appropriate authentication, any unauthorized additions or deletions to the cheque could result in dishonor.

4. Account Closed: The cheque will be dishonored if the drawer has closed the bank account listed on it before it is presented.

5. Post-Dated Cheque: It is considered dishonorable to present a cheque before the date specified.

6. Crossing Issues: If a cheque is crossed improperly or if it is crossed and the payee tries to cash it over the counter rather than deposit it into a bank account, the cheque may be considered dishonored.

7. Payment Stopped: A cheque’s dishonor may result from the drawer giving the bank instructions to halt payment on a particular cheque.

8. Inconsistent Account Information: A cheque that has inconsistencies in the account number or other information could be refused.

Legal Implications in Cheque Bounce Cases

1. Notice of Content: A demand for payment within fifteen days of receipt of the notification, along with information about the type of dishonor committed and the associated amount, should all be included in the notice.

2. Time of Payment: After receiving the notice, the drawer has 15 days to make the payment. The payee may take legal action if the payment is not received within this time frame.

3. Making a Complaint: The payee may file a complaint with the Magistrate’s court according to Section 138 of the Negotiable Instruments Act if the drawer neglects to make the payment within the allotted time.

4. Court Cases: The drawer will receive a summon from the court to come before it. The drawer may be issued an arrest warrant by the court if they do not show up.

5. Proof and Analysis: Both the accused (drawer) and the complainant (payee) will present their evidence, and both may be questioned. The accused may face punishment from the court if it finds them guilty.

6. Penalties: If the drawer is found guilty, he could be sentenced to up to two years in prison, fined double the value of the cheque, or both.

7. Compounding: With the consent of the court, the drawer and payee may choose to settle the case by compounding before going to the prosecution’s initiation or throughout the trial.

Penalties in Cheque Bounce Cases

1. Financial Penalties: If a cheque is dishonored, the bank will impose financial penalties. The drawer of the cheque is responsible for paying the maximum penalty of ₹200.

2. Criminal Prosecution: Under Section 138 of the Negotiable Instruments Act 1881, the drawer of a cheque may face criminal charges if the cheque is returned for insufficient money. This is a crime, and the drawer faces a maximum of 2 years imprisonment, a fine equal to twice the amount of the cheque, or both.

3. Civil Lawsuit: To recover the cheque amount, the payee of the dishonored cheque may also bring a civil lawsuit against the drawer. A claim for damages for any loss or inconvenience resulting from the dishonored cheque may also be made by the payee.

4. Reputational Harm: The drawer’s reputation may be harmed by a rejected cheque. Future credit applications may be more challenging to get as a result, and relationships with both persons and businesses may suffer.

Conclusion

Thus, the involvement of penal provisions has given relief to the drawee. It has also helped in controlling the dishonest intention of doing fraud. The steps can be taken as a remarkable step in the banking sector. Getting involved in cheque bounce cases has serious legal implications, and the best way to handle it is to seek advice from legal professionals.

Frequently Asked Questions (FAQs)

1. Is it possible for someone to go to jail for a rejected cheque?

Answer:

Indeed, upon conviction under applicable legislation, the drawer may face jail in numerous places, including India.

2. After what time may a case involving a dishonored cheque be filed?

Answer:

Legal deadlines could apply, therefore it’s best to check the local laws. For instance, in India, the complaint needs to be submitted within a month of the notice’s expiration or within 15 days.

3. Is it possible to resolve a dishonored cheque dispute outside of court?

Answer:

Yes, with the consent of the court, the parties may decide to resolve the dispute by compounding either before or during the trial.

4. What legal action is available in India if a cheque is dishonored?

Answer:

In India, if the drawer is not paid within 15 days after the payee serves notice, a complaint may be filed under Section 138 of the Negotiable Instruments Act, which may result in fines and imprisonment.

5. What is the deadline in India for sending out a notice regarding dishonored cheques?

Answer:

When the payee learns of the dishonor, they have thirty days to send out a notice.