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What happens if a cheque bounces and how you can prevent it?
Whether you open a Savings Account online or offline, banks typically provide you with a complementary chequebook. A cheque is an official bank document that allows you to make payments to various beneficiaries. However, banks may reject cheques if the cheque drawer or payee fails to meet the requirements set forth by the bank. This article explains what a dishonoured cheque is and the steps you can take to prevent it.
A dishonoured cheque is a cheque presented to a drawee bank which remains unpaid. The drawee bank may refuse to pay the cheque amount to the payee due to insufficient funds, incorrect information, overwriting, mismatched signatures, etc. Such a cheque is also known as a bounced cheque or returned cheque.
The following are some common reasons for cheques bouncing.
Cheques typically bounce when their drawers have insufficient balances in their account. In such cases, the bank levies a cheque return penalty on the cheque drawer and the payee. Under Section 138 of the Negotiable Instruments Act, 1881, beneficiaries may prosecute cheque drawers for bounced cheques.
In India, a cheque is valid for up to 90 days from the date mentioned on it. The beneficiary must deposit the cheque within this period, failing which the bank can dishonour the cheque. Also, if the drawee writes the wrong year, the bank can bounce the cheque.
The bank records your signature when you open a Savings Account online or offline. They assess your signature before honouring a cheque. If they find that the signature in their records does not match the one on the cheque, they return it as a security measure to avoid fraud.
A cheque drawer can issue a stop payment order to stop their bank from crediting a beneficiary account. Common reasons for drawers to issue stop payment orders include lost/stolen cheques or unsatisfactory deliver of agreed-upon products or services from the beneficiary.
Banks may return the cheque if it is frayed, stained or torn. They may also return checks if they doubt that the payee may have overwritten the date, amount, etc.
Under Section 138 of the Negotiable Instruments Act, a cheque bounce in India could lead to severe penalties, including legal actions. Some of the key consequences of a dishonoured cheque are:
In India, cheque bounce charges are applicable when there are insufficient funds in the payer’s bank account. This triggers fees and legal penalties such as:
If your cheque has bounced or you have received a bounced cheque, you should resolve it urgently. Here are the following steps to rectify bounced cheques:
If your cheque has bounced:
If you received a bounced cheque:
A cheque bounce notice is a legal document sent by the payee to the drawer when the bank dishonours a cheque. This notice must be issued within 30 days of receiving the Cheque Return Memo from the bank. The issuer has 15 days from the receipt of the notice to pay the amount. For legal compliance, it is often recommended to send the notice via registered post to adhere to the 15-day and 30-day deadlines.
A cheque bounce notice must include specific mandatory elements to make it legally valid and effective. The contents of the cheque bounce notice include:
Upon receiving a cheque bounce message from the bank, you are required to respond within 15 days to avoid any legal action. Here are the steps to respond to a cheque bounce notice:
Step 1: Read the notice carefully, identify the reason for the bounce, and the date of receipt to determine the 15-day reply window.
Step 2: Consult a legal expert when responding to a cheque bounce notice. This is important, especially if the amount is significant, to avoid making admissions that can be used against you.
Step 3: Your response should be sent on a lawyer’s letterhead. It should detail your defence, such as disputing the debt, citing “stop payment” instructions, or pointing out technical errors such as signature mismatches.
Step 4: Compile all the relevant evidence, including bank statements, correspondence, invoices, and documents proving the cheque was not for a legally enforceable debt.
When using a cheque for any important payment, there are some measures one can take to prevent the issue of cheque bounce. Some of the key things to consider are:
By choosing to open a digital account with DBS Bank, you can manage your payments easily through the DBS digibank app, ensuring secure payments using a soft token integrated with your savings account, which instantly verifies transactions.
Cheques are generally safer than cash when the payments are for significant amounts. A cheque can bounce/ dishonoured due to reasons such as incorrect details, insufficient balance, overwriting, etc. To avoid any penalties or legal actions, one must take correct measures to prevent any defaults or notices from the payees or the bank. You may also consider opening a bank account with DBS Bank, one of the best savings accounts that offers more than 250 digital banking services through its DBS digibank app.
*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.
