Cheque Bouncing & Related Consequences

A single bounced cheque can lose all financial credibility that has been one gained in the market over the years of business.

In trade practice, Cheque Bounce is a financial offense. The drawer of the bounced cheque can either be issued a legal notice or be charged with a fine or can be imprisoned if, matter taken to the court of law on a complaint of the payee.

Cheques are used for negotiating payments between entities. As it is linked with the trust and financial security of entrepreneurs, the Reserve Bank of India bounds entities availing the cheque payment facility to certain payment obligations and legal consequences in case of default in payments.

Strict penal consequences have been led by the government for defaults made in situations of Cheque bounce, one might even get into legal trouble, penalty charges or face damages on his or her credit ratings.

How Cheque bounce is bounced?

There can be several causes for the happening of cheque bounce, it can be due to  any of the following reasons:

  • The wrong imprint of signature or overwriting of figures.
  • Issuing in a wrong manner, double-crossed / triple crossed issues, Torn Cheque, Name mismatch, etc
  • Insufficient funds in the account.
  • The account of the drawer or the recipient do not comply with KYC norms
  • Payment of cheque either withdrawn or stopped by banking authorities.
  • The bank account of drawer/issuer of cheque confiscated by any authority or is under any legal suit.
  • Intentionally defaulted by the drawer.
  • Or any other reason as per the situation.

What happens when a cheque is bounced?

With any of the reasons above on cheque bounce, the bank stops the processing of payments and returns the cheque to the payee unpaid or dishonored.

For defaults, the issuer and the recipient of a cheque might get charged with the Cheque Bounce fee which is deducted on account of both the recipient and the issuer of the cheque, repetitive defaults made by the drawer there is a huge possibility that the banks might charge a huge bounce cheque fees or might even stop cheque book facility or either seize or close account permanently (Usually done in case of defaults above Rs 1 crore ).

If the cheque is against repayment of any loan or any credit service taken from a bank or any financial institute the drawer of the cheque will later have to make payment to the bank with additional charges and penalty imposed.

Consequences to be faced for cheque bounce

The penalty from Bank:

To give a prior warning to the issuer of the bounced cheque, the bank charges a standard penalty amount or a fine amount depending on the cheque amount which is deducted from the account of the issuer.

The slump in the credit score

While availing any loan, the issuing authority checks for the past credit score and the current financial standing of the person. Banks or NBFCs issuing loan require a processing cheque or an installment cheque from the applicant, to ensure that the person availing the loan is financially stable.

For any default made in the payment of processing fees or any loan installment through cheque, the bank provides negative feedback of the person’s creditability to the Credit Agencies which reduces his eligibility for future loans, declining his credit rating.

Issue of legal notice by the payee

For persons receiving payments through cheque, RBI and Government of India provide a legal remedy to claim damages from the issuer of bounced cheque.

From the drawer for defaulting payment of cheques, citing insufficient funds, wrong signature or any other appropriate reason, the recipient or the bank can file a complaint under Section 138 of the Negotiable Instrument Act and can issue a legal notice to the drawer.

* Before you get to such remedy, it is recommended to confirm for the reason of dishonor from the issuer, re-apply the bounced cheque or take suggestion from a legal expert for the future move.

The aggrieved party within 3 three months of dishonor of cheque can file a suit in the court of law for claiming damages for the dishonored cheque.

Not responding to any notice or complaint filed against the defaulter, an additional penalty of as high as twice the amount of the cheque or a jail term of 2 years can be levied on the defaulting party.

For breach of law or not confirming to legal notices issued for bounced cheques by the issuer, the aggrieved party can also file a case under Section 420 of the Indian Penal Code, stating the reason of dishonor to be “issue of a cheque for cheating purpose”.

Issue of Cheque Bounce Notice

If on a single dishonor of cheque, the person holding the cheque is of the belief that the cheque will be honored the second time he should resubmit the cheque for clearance within 3 months from the date specified on the cheque.

If it is not honored, the second time also the aggrieved person can go through the following procedure:

  1. With the consultation of a legal expert, a written notice in a prescribed format shall have to be issued within 30 days of the receipt of a cheque return memo from the bank.
  2. Response required from the drawer of the notice issued should be within 15 days.
  3. If the issuer fails to provide any response or pay the required amount within the notice period. The payee with the help of a legal expert can reach out to the competent court to file a suit.

Terms to Know

* Cheque Return Memo: A written declaration which bank issues stating the reason for the dishonor of cheque.

* Drawer: Person/entity issuing the cheque.

* Payee: Recipient of cheque or payment. keeps you in the loop with all legal remedies and recourse options while you’re stuck in any legal matter related to business, taxation, corporate compliance, licenses, etc. Email us your concern at

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