Dishonour of Cheque and Debt Recovery

a. We often transact through cheque either as the drawer or as payee of the cheque. Though, cheques are drawn to ease the transaction, however in case of dishonour, serious consequences can be faced.

The cheques are dishonoured for “insufficient fund” or direction to “stop payment” etc. and such dishonour is subject to civil as well as criminal prosecution. Under criminal prosecution, the offence is punishable with imprisonment for a term which may extend to 2 years or with fine which may extend to twice the amount of cheque. Under a civil suit for recovery, the Court can award the cheque amount alongwith interest and cost of litigation.

The moment a cheque is issued, it is presumed under law that the cheque has been issued to discharge a legally enforceable debt or other liability unless contrary is proved. The drawer of the cheque cannot take the defence that he had no knowledge that the cheque would get dishonoured.

The law accords an opportunity to the drawer of the cheque to prove that the dishonoured cheque was not issued in discharge of legally enforceable debt or other liability. On the other hand, if the drawer of the cheque admits the liability to pay the dishonoured cheque, the offence can be compounded (compromised) with the consent of the payee and permission of the Court.

b. The Negotiable Instrument Act, 1881, contains provisions for criminal prosecution. After the dishonour of cheque, there is a requirement under the Act to give legal notice to the drawer of the cheque within 30 days of receipt of information from the
Bank regarding the return of the cheque. In case of failure to make payment of the cheque amount within 15 days from the receipt of legal notice, the payee has a right under law to institute a criminal complaint within one month from the expiry of the notice period of 15 days.

c. In case the payee of cheque is forgetful or neglects to send legal notice within 30 days of receipt of information from the Bank regarding the return of the cheque, the payee still has remedy under law to recover the cheque amount by filing a civil suit for recovery. The civil suit for recovery is dealt in an expeditious manner under a summary procedure. Unlike criminal proceedings, the civil suit attracts court fees to be paid ad valorem (certain proportion of the recovery amount) on the cheque amount and is filed at the place where the drawer of the cheque resides or carries on business or where the cause of action arose i.e. where the cheque was transacted. This suit is to be filed within three years from the date of dishonour.

d. The drawer of the cheque should be cautious in issuing post dated cheques to deter its misutilization by payees with whom the relationship or transaction get strained in future. The payee on the other hand should verify the antecedents of the drawer before accepting the cheque as in case of dishonour the recovery procedure calls for unnecessary interference of the Court resulting in loss of time and harassment.