Out of court settlements in cheque bounce cases

Recently, the Supreme Court encouraged ‘compounding’ or arriving at a compromise in cheque bounce cases  to reduce judicial delays and the backlog of pending cases in Indian courts. The Court highlighted that the Negotiable Instruments Act, 1881 allows for compounding and prioritises compensation over punishment in cases of cheque bouncing. 

In this Weekly, we tell you what you can do in case of cheque bouncing through both legal action and compounding. 

What is cheque bouncing?

Cheques are documents of promise written by one person to another to unconditionally pay the money specified on that document. To get this money, the payee of the cheque (the person to whom the money has to be paid) must produce it before a bank. The bank then provides the equivalent amount in cash or credits it to their account by debiting the amount from the payer’s account. 

A cheque is said to have ‘bounced’ if, when presented, the amount given on it cannot be withdrawn from the payer’s account due to insufficient funds or any other reason. This is also known as dishonouring of a cheque and is a punishable offence. 

What is the punishment for cheque bouncing?

According to Section 138 of the Negotiable Instruments Act, 1881, cheque bouncing is an offence. It can be punished with jail time of up to two years and/ or a fine up to double the amount of the cheque. 

What to do in the event of a cheque bouncing?

If a cheque you are encashing bounces, you should send a notice to the person who issued the cheque to pay the due amount, along with the cheque return memo that you have received from the bank. This is known as the demand notice. You should send this demand notice within 30 days of the date of bouncing. The payer has to respond within 15 days of the date of the demand notice. 

If the payer does not respond to the notice within that time, you can file a case against them to recover the promised amount. If the reason for cheque bouncing is insufficient funds, then you will have to file a criminal case within 30 days. For reasons like stopping the payment or any advance or gift, you can file a civil suit within 3 years of the cheque bouncing. 

How can cheque bounce cases be compounded?

Section 147 of the Negotiable Instruments Act states that if both parties are willing, they can settle the matter by way of a compromise. However, if there is a case pending before a court, then they should get the court’s permission before entering into any compounding agreement. 

In the current case, the parties had entered into a compromise. Here, the defaulting payer had paid the disputed amount to the payee. The payee had given in writing that they are willing to have the case against the payer set aside. Admitting this compromise, the Supreme Court acquitted the payer and upheld the act of compounding. The Supreme Court also noted that cheque bouncing cases are the largest number of pending cases before Indian courts. 

To understand how cheques work and your rights against cheque bouncing, read our explainer here.