Introduction

A cheque is given with the hope of receiving payment. But when that cheque comes back, unpaid, the problem doesn’t always end there. For the recipient, it usually means delayed payments, interrupted cash flow, and doubt over collection. For the issuer, it could lead to court action under section 138 of the Negotiable Instrument Act (NIA), 1881. And that is exactly why a cheque bounce case remains the most common form of corporate litigation in India. The law does not consider every bad cheque a crime. But if a cheque tendered towards a legally recoverable debt/liability is dishonoured and the amount due is not paid even after statutory notice, Section 138 NI Act offers legal protection to the payee and guarantees trust in trade.

Under What Circumstances Can a Dishonoured Cheque Amount to a Legal Issue?

For a dishonoured cheque to amount to a legal dispute, it must be in respect of an already existing obligation. Typically, cheque bounces occur out of business dealings, loan repayments, accounting settlement, professional payments, supplier payments and various other business dealings. Again, the circumstances that led to the bouncing of the cheque must be considered. A cheque may bounce due to insufficient funds, account closure, orders made to the bank, amongst other reasons. The bouncing of the cheque is, however, not an automatic situation under Section 138 NI Act.

What Should be done Immediately after Cheque is Dishonoured?

Step one is acquiring the bank return memo explaining the cause of dishonour of the cheque. It will become very important evidence during the whole process. The second step is normally where most good cases get weakened. It is at this stage that the holder must move with speed to make sure that a legal notice is served within the stipulated time. Delays, mistakes in the notice, wrong cheque details, or faulty service will create unnecessary problems even before going to court. Practically, the period right after dishonour is not just a procedural step but where legal rights are activated.

Rights Available to the Holder of a Dishonoured Cheque

Upon dishonouring the cheque, the holder of such instrument gets certain rights. Firstly, he has the right to give notice for demanding payment. It helps him to make sure that the drawer becomes aware of the breach and has the chance to mend his ways before any action against him is taken in court. In case the payment is not made after issuing such a notice, the holder can file a suit under Section 138 of NI Act for bounced cheque.

Law also aids the holder by considering certain presumptions in favour of the existence of any debt or liability once the issuance of the cheque is proved. The holder has the right to recover the amount through civil action as well. Dishonour of the cheque cannot nullify the original debt. On the contrary, it gives rise to other means to recover the money.

Remedies Available in a Cheque Bounce Case
One of the most important aspects of cheque bounce cases is the existence of multiple remedies. The first and foremost remedy is prosecuting the matter under Section 138 NI Act. The main aim behind this particular remedy is to enforce accountability in case payment is not made despite issuing the cheque. While pursuing criminal action, one can also recover the money that is owed through civil means. On the basis of the type of transaction, suits for recovery, suits in commerce, summary suits, and disputes arising out of the contract may also be filed. Yet another remedy that goes unconsidered in many cases is that of settlement. Many cases of cheque bounce are settled through negotiation before or during the course of the proceedings.

Procedure for Filing a Cheque Bounce Case
Steps involved in Section 138 NI Act process are laid out systematically.

Firstly, the cheque should be presented for encashment within its validity period. In case of dishonor, the bank issues return memo stating the cause of dishonor.

Subsequently, the payee draws up a statutory notice to make payments of the cheque amount. In the event where the accused does not make payment of the cheque amount within the stipulated time period, then there arises a cause of action to make a complaint in the concerned court. A complaint is generally filed with the cheque, return memo, legal notice and service of notice.

When the court comes to the conclusion that there is a prima facie case, then summons can be issued against the accused. The proceedings are continued through appearances, evidence, cross examination, defense and ultimately adjudication. Court proceedings may at times also encourage settlement during the course of the proceedings.

Common Mistakes That Often Affect Strong Cases

It can be observed that in many cheque bounce cases, problems arise not because of the lack of validity of the claim but due to procedural aspects being overlooked.
The common mistakes found in cheque bounce cases include failure to keep bank records, issuance of faulty legal notices, dependence only on the cheque without keeping the documents of transactions, and delay in filing lawsuits based on expectations of informal arrangements. Cheque bounce cases usually win or lose on paperwork rather than complicated legal jargon.

Conclusion

Cheque bounce entails much more than simply failing of the cheque to fulfil its purpose as an instrument of payment, but also entails a legal event which carries with it legal rights and legal remedies. NI Act Section 138 can prove to be a crucial weapon to combat issues relating to payment; but the key to using this weapon successfully lies in following the law properly. From the point of view of a businessman, a litigant, a law student and even a practicing lawyer, knowledge of the framework applicable in cheque bounce cases proves to be vital.