We are a service provider company and we receive cheque payments from many of our customers. One of our clients is not paying us regularly. His cheques are frequently bouncing. We have requested him many times to make timely payments and to ensure that his cheques are honoured. We would now want to take legal action regarding the cheque bounce. Thank You.
Thank you for query. We understand your position. Unfortunately, now-a-days we see many situations when cheques are not honoured. In most of the transactions, be it re-payment of loan or payment of fees/price for business purpose, payments are made by cheque. These cheques sometimes remain unpaid and are returned by the bank on which they are drawn. If the cheque is not honoured by the Bank for some reasons, the same may amount to criminal offence on the part of the person issuing the cheque. Section 138 of the Negotiable Instruments Act, 1881, popularly known as NI Act, provides for such punishment.
As per section 138 of the NI Act, where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or part, of any debt or other liability, is returned by the bank unpaid because of the amount of money standing to the credit of that account in insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and be punished with imprisonment for a term which may extend to one year, or with fine which may extend to thrice the amount of the cheque, or with both.
It is worth noting that offence of dishonour of cheque as mentioned in section 138 of the Act is considered as a criminal offence. The law has been designed to punish and not to recover an amount due. The section, however, keeps the possibility of recovery as the holder of the cheque may be paid by the court an amount up to the cheque amount from any fine that is recovered. If someone wishes to recover unrealized money then he or she can file a civil suit for recovery of money. However, in reality it has been found that filing a criminal proceeding under s.138 has been the most effective form of recovery of money. Most of the times, the drawers pay the amounts due when cases under NI Act are commenced in the anticipation of conviction.
There are certain procedures that need to be complied with before you can proceed with filing a criminal prosecution. Firstly, present the cheque before the bank for encashment within the validity of the cheque. A cheque is valid for 6 months from the date of the cheque. In a situation when, the cheque if not honoured, you will receive a bank memo stating the reason for return of the cheque. After getting the information from the bank send your client (the drawer of the cheque), if the reason is 'insufficient fund' or 'instruction from the issuer' then you can start the process under the NI Act. You need to send a notice within 30 days from the date you have received such information from the bank to the issuer requesting payment allowing him to pay within 30 days of the receipt of the notice. Such notice shall be served by personal delivery, by registered post with A/D or may be by publication in the widely circulated newspaper. If the drawer fails to pay within this period, then a cause of action will arise against him. In such scenario, you must file a case before the Court of Judicial Magistrate of First Class within the next 30 days from the date when such cause of action arose. Maintaining the timeframe state above is the key to file action under the NI Act.
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