How to recover money after cheque bounce - A step by step guide for everyone
Cheques are among the most popular medium of payment.
For businesses and individuals, be it payment of loans, bills, fees or salary, cheques are the primary mode of payment. From time to time, government and law encourage making of payments through cheques to keep the economy cashless. The biggest issue with cheque-based payments is that cheques can be dishonored by the issuing party under some circumstances and the payment can get stuck. In the following guide, we will lay out clear steps to recover money when a cheque given to a payee is bounced.
Cheque bounce is a situation when the bank refuses to make the payment against a cheque due to number of reasons. Most popular reasons for cheque bounce are
Insufficient funds in the bank account of person who issued the cheque.
Credentials mismatch - There is overwriting on cheque, the signatures doesn’t match or any case where bank cannot verify the credentials on the cheque.
Stop payment instruction given by the drawee to the bank.
Since cheques are most popular form of payment adopted by business and time to time encouraged by government, the law has made very rigid and simple rules to punish cheque bounce cases in non payment of dues matters.
In case of cheque bounce or dishonor due to credential mismatch, the payee is required to fetch a fresh cheque from the drawee and resubmit it in the bank. If the drawer doesn’t issue a fresh cheque the payee can file a civil court against him.
Cheque bounce due to insufficient funds and stop payment in the account of drawer causes lots of distress in business. The lawmakers of India have made the process of recovery of money from bounced cheques extremely linear and step-wise. The section of law that deals with cheque bounces is section 138 of “The negotiable instruments act”.
Reading the whole NI Act for cheque bounce and trying to understand the procedure of cheque bounce money recovery can be confusing and tiresome. So we have made this extremely simple “step by step guide” to understand the procedure of how to proceed with cheque bounce recovery.
What to do when a cheque bounces?
When someone gives you a cheque you have to submit the cheque into your bank to get the payment. In case a cheque is bounced you get a notification from the bank which mentions the reason of the bounce, the reason of the cheque bounce plays an important part in recovery proceeding, to realize the benefits of section 138 of the NI act [whose procedures we will learn shortly] the reason of the cheque bounce should either be stop payment or insufficient funds. In such cases you have to follow a certain procedure to ensure you get your money quickly.
Requirements to be fulfilled for cheque bounce recovery through section 138 of the negotiable instruments act.
In order to apply for speedy recovery of money in cheque bounce cases through section 138, the payee must ensure that the following conditions are met:
The drawer must have drawn the cheque on a bank account maintained by him/her.
The cheque should have been issues in discharge, in whole or in part, of any debt or other liability.
The cheque should have been presented to the bank within its validity period.
The cheque should have been bounced only due to insufficient funds or stop payment.
The payee makes a demand for payment (cheque bounce notice) within 30 days from dishonor of the cheque.
The drawer has failed to make the payment of the cheque amount within 15 days of receipt of the notice.
The complaint should have been filed within one month from the expiry of 15 days mentioned in the demand notice of reminder of payment.
Cheque bounce case step by step procedure in India.
To recover the money stuck due to cheque bounce, section 138 of The NI act recommends the following procedure:
Step 1) The payee has to submit the cheque in the bank, in case the cheque bounces the payee has to collect the bounce notification slip with clearly mentioned reason for bounce and recollect the cheque from the bank.
Step 2) Within 30 days from the day of cheque bounce event [the date written on cheque bounce receipt issued by the bank] the payee has to send a legal notice mentioning the cheque details, reason of bounce and amount to the drawer and notify him to pay the amount within 15 days of sending the notice.
Step 3) In case the payment is not made within 15 days the payee can file a complaint against the drawer under Section 138 of the negotiable instruments act 1881. The complaint should be filed with 30 days of the end of notice period in front of the magistrate.
Step 4) The court will follow its duty to issue a summon to the drawer. On receiving the summons the drawer should present himself in the court and file an appearance through his elected advocate. After the hearings are done, evidences are produced, the magistrate passes an appropriate order to conclude the matter.
How to draft and send a legal notice for cheque bounce?
You can draft the initial legal notice of demand either yourself or you can consult a lawyer to draft and send the same. Sending it through a lawyer is recommended as it gives a professional angle to the case and the drawer is more likely to make payment if the notice is sent by the lawyer, having said that, the notice sent by you is also equally valid in the court of law.
Make sure to double check the following details in the notice:
Date of cheque bounce.
Amount in the cheque.
The demand should be within 15 days of the issue of the notice.
Cheque number/reference number and other cheque details.
Reason for cheque bounce.
Attach a copy of cheque and bank notification memo.
Lawyers for cheque bounce
As mentioned in the previous section, you are not bound to send a legal notice through a lawyer and can do it yourself. But after studying numerous judgements and case laws it has been observed that if the cheque amount is large it is strongly recommended to go via a professional lawyer who is specialist in cheque recovery 138 matters, to recover your hard earned money.
But how do you find the right lawyer for your cheque bounce case?
Most of the people rush into their network of friends and relatives to find a lawyer, some even go to google to find lawyers from online directories. However, it is typically complex to get the lawyer with the right credentials, experience, price, and trust. Getting all four points (credentials, experience, trust, price) right is almost impossible to find on online directories and referrals. You should always try to go to managed legal service providers to manage your cases, in such arrangements the case is completely managed by the manager and you get saved from following up endlessly with lawyers.
How to file a cheque bounce case?
If the drawer doesn’t make complete payment within 15 days of demand notice, the payee has the right to move to the magistrate with the lawyer to file the case against the drawer.
As a first step towards filing the case, the payee needs to prepare a petition to present before the judicial magistrate of 1st class or the metropolitan magistrate. The integral parts of the petition are:
Background of the transaction [Why did the transaction take place].
Proforma invoices or any bills, digital or physical raised by the payee to the drawer [if applicable].
Agreements if any made between the payee and the drawer.
Copy of original cheque.
Copy of cheque bounce notification memo.
Copy of legal notice of demand sent to the drawer.
Postal acknowledgment receipt for delivery of demand notice to the drawer.
Jurisdiction in cheque bounce cases
The cheque bounce cases come under the jurisdiction of the court in the area where the cheque is bounced i.e. where the payee’s bank account is present.
Cheque bounce money recovery.
Once the petition is filed in the court, if the court finds all the allegations to be correct, it will issue a summon to the drawer. The drawer has to present himself in the court and file an appearance through his advocate. The drawer is required to put their side of the case and the court will take a decision based on proofs and evidence presented by both the parties. Generally, if the payee has a valid contract and bounced a cheque, the cheque bounce cases are held in favor of payee. If the drawer doesn’t present himself in the court, the court can go to the extent of issuing an arrest warrant against them.
If the drawer is found guilty, the court can order a punishment to the drawer to pay as much as twice the amount of the cheque or even 2 years in jail.
Legal Action, Punishment, and Penalty for cheque bounce in India.
Section 138 covers the interest of payee thoroughly. In cases when the drawer is found guilty the court can order a punishment to the drawer to pay as much as twice the amount of the cheque, along with the payment of costs which the payee has to bear to follow the legal procedure such as court fees, cost of sending legal notice, lawyer fees etc. The court can additionally sentence up to 2 years in jail.
Cases and situations when Negotiable instruments act 138 doesn’t apply.
The legal recourse of NI act is not available under following conditions:
If the reason for cheque bounce are credential mismatch errors [Overwriting etc.].
If the cheque validity is expired before the first deposit.
If the cheque was obtained from the drawer inappropriately.
If the cheque was issued as a gift, donation or charity.
What is the court fees in cheque bounce case.
The court fees for filing a legal case in cheque bounce is fixed by the court as 2% of the total disputed amount.
For example: If the cheque amount is 1,00,000 INR the court fees will be 2,000 INR.
As mentioned in the previous sections the payee can put in the prayer section of the petition to recover the cost of court fees and other costs from the drawer only.
Total time is taken for cheque bounce case resolution in India.
Practically a good portion of cheque bounce cases are settled itself by sending the first demand notice, if an expert lawyer is involved in the notice stage the chances of settlement are even more.
If the matter goes to court, the settlement may take anywhere from 8 - 10 months to some years and the timeline depends on the lawyer expertise and presentation of evidence and viewpoints before the court.
The parties can also choose to go for out of the court settlement by making a consensus.
Conclusion and how to get legal help
Cheque bounce is one of the pressing issues in business and personal transactions nowadays. Sometimes it may put payee into extreme financial problems due to unpaid dues.
The right steps at the right time can help you recover money quickly.
We at MyLegalWork help businesses and individuals to quickly recover money through legal means by working with expert lawyers and agents.
In case you need help, please feel free to get in touch with us for an absolutely free consultation.