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Useful Information on Cheque Bouncing

CHEQUES

Cheque is a negotiable instrument.  Normally, cheques are issued either for the reason of statutory requirement or for the reason of securing proof of payment.  Crossed and account payee cheques are not negotiable by any person other than the payee.  It has to be deposited into his bank account.  In legal parlance, author of the cheque is called ‘drawer’, the person in whose favour it is drawn is called ‘payee’ and the bank who is directed to pay the amount is called ‘drawee’.  It is always safe to issue crossed “Account Payee Only” cheques in order to avoid its misuse.  Blank cheques are not safe.  It is better to date the cheque invariably.  A cheque is valid for payment only for six months from the date mentioned in the cheque.  After the period of six months, such a cheque is called ‘stale cheque’.

BOUNCING

A cheque becomes due for payment on the date mentioned on it.  Before issuing a cheque author of the cheque should ensure that he has sufficient funds in his account. Lest, it would bounce with remarks ‘insufficient funds’.  Bouncing in common parlance is referred to dishonour of  cheques.

WHAT HAPPENS WHEN A CHEQUE IS DISHONOURED?

Immediately upon dishonour the drawee bank issues a ‘Cheque Return Memo’ to the banker of the payee citing the reason for non-payment.  In turn the payee’s banker shall handover the dishonoured cheque and the memo to the payee.

WHAT IS TO BE DONE THEN?

The payee has an option open to him either to re-present the cheque if and when he thinks the cheque could be honoured but within six months from the date of the cheque or proceed legally to prosecute the drawer.  The payee may prosecute the drawer for dishonour of cheque only if the amount mentioned in the cheque is towards discharge of a debt or any other legal liability of the drawee towards payee.  Mere issuance of a cheque say for the purposes of gift, or towards lending a loan or for unlawful purposes would not amount to legal liability and the drawer cannot be prosecuted in such cases.

TO PROCEED LEGALLY

If he decides to proceed legally, then the drawer should be given an opportunity of making good the cheque amount immediately.  Such an opportunity has to be afforded only by means of a notice in writing.

LEGAL PROVISIONS

Under Section 138 of the Negotiable Instruments Act, 1881 as amended up to date, the notice has to be sent by the payee to the drawer in writing within thirty days from the date of receiving Cheque Return Memo from the bank and demand the cheque amount to be paid to him within fifteen days from the date of receipt of such a notice by the drawer.

CONDITIONS FOR PROSECUTION

Law prescribes certain conditions to be fulfilled in order to attract provisions of Section 138.

A) The cheque should have been drawn by the drawer on an account maintained by him.

B) It should have been returned 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.

C) Cheque must have been issued towards discharge of a debt or legal liability.

D) If after receiving the notice, the drawer does not make payment within fifteen days from the date of receiving such a notice, then he commits an offence punishable under Section 138 of the Negotiable Instruments Act.

PUNISHMENT

Punishment prescribed for such an offence is fine which may extend to twice the amount of the cheque or imprisonment for a term which may be extended to two years or both.

FILING COMPLAINT

If the drawer makes payment of the cheque amount within fifteen days from the date of receipt of the notice, then drawer does not commit any offence.  Otherwise, the payee may proceed to file a complaint in the court of the jurisdictional magistrate within one month from the date of expiry of fifteen days prescribed in the notice.

If the payee fails to file the complaint within thirty days, the complaint becomes barred by limitation of time.  The jurisdictional magistrate court may refuse to entertain such a belated complaint.  However, if the payee has sufficient reasons to justify delay in filing the complaint, he may make an application before the magistrate along with the complaint, to explain the reasons for delay and seek condoning of delay.  Cognizance of the complaint may be taken if the Court is satisfied that the payee had sufficient cause for not making the complaint within the prescribed period.

After the complaint is filed and taken on record the proceedings against the drawer begins.

CIVIL ACTION

The payee may also initiate money recovery procedure in a jurisdictional civil court apart from prosecuting the drawer for criminal offence.  It is essential in this case to consult an advocate who is well versed and experienced in this area of practice to proceed further in the matter.

FINER POINTS

The procedure of filing complaint and prosecuting the drawer in a court of magistrate involves certain finer points like cause of action, preparation of legal notice and complaint in accordance with legal requirements, modes of sending the written legal notice, service of summons and non-bailable warrants, conducting the criminal case etc.  It is advisable to consult an advocate who is well versed and experienced in this area of practice.

Type of Cheques that Can Be Presented In the CTS

 All the local cheques can be presented in the CTS. Banks may also present cheques on banks situated outside the NCR, but such banks have branches in the NCR region. The CTS also supports the intercity clearing and specialized clearing like high value clearing etc. The on-us instruments where both presenting and drawee banks are same are not allowed in the CTS. Images of such instruments would be stopped at the Clearing House Interface itself.

Benefit of Cheque Truncation to Customers of Banks

The cheques presented by customers, today, are sent to the clearing house at the drawee centres by the beneficiaries bank. The cheques at the bigger cities, in view of the large volume of paper instruments, are subjected encoding and then to mechanical sorting and thereafter reach the drawee branches. As per the existing banking practice, these instruments received at the counters of the drawee branches are paid or returned by them. The returned instruments are passed on to the presenting customers through the process of a return clearing. Only after the return clearing process gets over, banks release the credit to the customers. The beneficiaries account gets credited on the same day on which the drawees account gets debited; however, the beneficiary is permitted to use the proceeds only after the return clearing process. With the introduction of the imaging and truncation, the physical movement of instruments would be stopped and the electronic movement of images of cheques would speed up the process of settlements and ultimately alter the clearing cycles. The clearing cycle could be shortened and it would be possible for customers to realize the proceeds of cheques early. Thus cheque truncation would reduce effectively the time of float, i.e. time from the point of issue of cheque to the point of time the actual debit takes place. In case such clearing is introduced across the cities, it would ensure the realisation of inter-city instruments faster thus ensuring early availability of funds to beneficiaries. Thus the benefits could be summarized as:

a) Faster clearing cycle;

b) Better reconciliation/verification process

c) Better Customer Service and Enhanced Customer Window

d) T+0 for Local Clearing and T + 1 for inter-city clearing.

e) Elimination of Float and Incentive to shift to Credit Push payments.

f) The jurisdiction of Clearing House can be extended to the entire country and No Geographical   Dependence

g) Operational Efficiency will benefit the bottom lines of banks and Local Clearing activity is a high cost no revenue activity.

h) Minimises Transaction Costs.

i) Reduces operational risk by securing the transmission route.