Dishonor of cheques and Remedies

Adv. Ashish Baheti   : Taxguru:14 Apr 2013 05:14 AM 


According to statistics of Supreme Court; there are over 40 lakh pending cases of cheque bounce in the country. Lack of adequate knowledge has brought most of people in the situation of losing money. Here are some of the remedies a person can opt for while dealing with issues pertaining to return of cheque:

Penalties for dishonor of cheques due to insufficiency of funds:

Section 138 of the Negotiable Instruments Act has provided for penalties in case a cheque gets dishonored for insufficiency of funds. When a cheque is drawn by any person from his account for payment to another person, it can get bounced due to the following reasons -

1.   Insufficiency of funds.

2.   The cheque amount is exceeding the agreed amount arranged to be paid from that account.

In the above mentioned cases, the person drawing the cheque is deemed to be the committer of offence and is liable to be punished under the act for a period of imprisonment that can extend up to two years. The person whose cheque gets dishonored is also liable to pay a fine which can be up to twice the amount of cheque.

However, in order to drag the drawer of the cheque for penalty it must be understood that following conditions need to be fulfilled -

1. Cheque should be presented to the bank within a period of three months (earlier it was 6 months) from the date mentioned.

2. In case the cheque gets bounced, the holder of the cheque should ask for the payment by giving a legal notice to the drawer in writing within 30 days of the receipt of information of nonpayment by the bank.

3. Even after receipt of notice if the drawer of the cheque fails to make the payment within the stipulated time, which is 15 days from the receipt of notice.

How to Recover the Money?

The notice sent to the drawer should be legal as explained earlier the same should mention that the cheque was dishonored and payment needs to be made.

This notice should be sent by registered post.

Even after 15 days of receipt of the notice, if the person fails to clear his dues, the payee has a right to file a criminal complaint under Section 138 of the Negotiable Instrument Act.

The complaint should be registered within one month of the expiry of the notice period.

Exemptions:

A cheque that was drawn in the name of the charitable trust as a donation or as an application amount of shares does not come under the purview of dishonor. 

There might also be other reasons for dishonor of cheque such as alterations or corrections in the cheque or difference in signature. In such cases, it is not termed as an offence. Banks might impose a penalty, though.

It should always be remembered that cheque should be a liability and legal enforceability on the person who has issued it

 One should always follow procedures like legal notification and demand of funds from the drawer.

Most of the pending cases in courts are because of lack of legal procedure followed.

A simple understanding of these rules can save you from cheque dishonor cases that happen in day to day life.

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About The Author: -
Adv. Ashish Baheti is an LL.B, MBA (Finance) and a Tax Consultant. He has spent over 20 years in Taxation Consultancy and Financial Consultancy Sector.