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Recovery of Debts by Corporate: Cheque & Negotiable Instruments Act, 1881

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Recovery of Debts by Corporate: Cheque & Negotiable Instruments Act, 1881

In the modern world, cheques are being used in almost every form of transaction, be it debts, loan guarantees, employee salary payments etc. But there comes a bane with every boon. “Check Bounce” nowadays, is one of the most prevalent and common forms of financial problems in India, and this problem is also being faced by many corporate houses at a large scale. The law deems this to be a criminal offence in accordance with Section 138 of the Negotiable Instruments Act, 1881 respectively.

Under this act, there are three parties involved in a cheque bounce dispute:

  1. The drawer, who is the author of the cheque.
  2. The payee, in whose favor the cheque is made and issued.
  3. The drawee, i.e., the bank which is responsible to make the payment.

A cheque may be rejected or dishonored by the drawee bank due to any of the following reasons:

  1. Discrepancies in the signature in the cheque
  2. Insufficiency of funds
  3. Funds being inapplicable
  4. If the cheque is altered
  5. Cheque is stale
  6. If the cheque is post-dated
  7. Drawer’s account frozen
  8. The account was closed prior to the transaction

Furthermore, in regard to the rules of evidence which may be applicable in such a case, the rules of the Indian Evidence Act 1872 are applicable whereby the evidences and documentary proof of the debt should be direct.

While filing the case, the company must take the following points into consideration:

  1. Legal demand notice which was served on the check bounce defaulter has to be served within 30 days from the date on which the cheque was bounced.
  2. A memo containing information regarding the dispute and the parties so involved
  3. The complaint filed in accordance with Section 138 of the Negotiable Instruments Act, 1881.
  4. Document stating the pre-summoning of evidence by filing an affidavit for the same.
  5. List containing the names and details of witnesses
  6. The company must ensure that the amount so mentioned in the cheque is primarily towards the discharge of a debt or any other form of a liability of the defaulter towards the company, which is the company in this case.

In the case of M. Meeran Mohideen v. B. Vijayakumar, Crl. M.P. No. 1870 of 2018 the Hon’ble High Court of Madras quashed a check bounce case where it was found that the cheque had been presented to the bank post its validity period, whereby the cheque was found to be stale. In Maxworth Realty India Ltd. v. M.K. Veerendra Babu, 2010 (1) KCCR 467, the Hon’ble High Court of Karnataka went on to hold that, where the legal demand notice had been issued to the managing director of the defaulting company, then it can be assumed that the company had a known regarding the same, thus ensuring that the cheque bounce case was maintainable.
Authored By: Adv. Anant Sharma & Abhijith Christopher

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