- 1. Cut Your Payment Cycle
- 2. Ageing Analysis
- 3. Credit Policy
- 4. Reminder Scripts
- 5. MSME 45-Day Rule
- 6. Customer Advances
- 7. Cheque Bounce — you are here
- 8. Bad Debts
On the legal parts. The timelines below are the statutory scheme under Section 138 of the Negotiable Instruments Act, given so you know the clock exists and how fast it runs. They are not a substitute for advice on your matter. The limits are strict and unforgiving, so if you intend to proceed, involve a lawyer early rather than after a deadline has passed.
What to Do in the First 48 Hours
- Get the return memo from your bank and keep the original. It carries the date and the reason for return, and it is the document the entire legal timeline is measured from.
- Note the reason. "Insufficient funds" is a different situation from "signature mismatch" or "account closed" — the first two are often correctable, the third rarely is.
- Call the customer the same day, before anything formal. A genuine mistake is usually fixed within a day, and calling first preserves the relationship where it deserves preserving.
- Reverse the entry in your books immediately — see below.
- Diarise the 30-day notice deadline from the date on the memo, even if you expect to settle. You lose nothing by having the date, and everything by missing it.
The Reversal Entries
1. The original receipt (already posted)
| Account | Dr | Cr |
|---|---|---|
| Bank A/c | 1,84,000 | |
| Rajesh Traders | 1,84,000 |
2. On dishonour — reverse it
| Account | Dr | Cr |
|---|---|---|
| Rajesh Traders | 1,84,000 | |
| Bank A/c | 1,84,000 |
Narration: Cheque no. 004512 dated __ returned unpaid — insufficient funds.
Date it the day the bank returned it, not the day you noticed. Otherwise your bank reconciliation will not tie, and the invoice's ageing will restart from the wrong date — making a very old debt look recent.
3. The bank's return charge
| Account | Dr | Cr |
|---|---|---|
| Bank Charges | 590 | |
| Bank A/c | 590 |
Recovering the Charges from the Customer
If your terms allow it — and they should — debit the customer instead of absorbing it:
| Account | Dr | Cr |
|---|---|---|
| Rajesh Traders | 590 | |
| Bank Charges (or Charges Recovered) | 590 |
Tell the customer at the time, with the memo attached. Recovering it quietly and revealing it later turns ₹590 into a separate argument that delays the ₹1,84,000.
Why Reversing Late Is Dangerous
An unreversed bounce is worse than no entry at all, because it makes your books actively wrong in your customer's favour:
- The debt disappears from your ageing report — nobody chases it, because as far as the system is concerned it was paid.
- Your bank reconciliation will not tie, and the difference gets "adjusted" by somebody in a hurry.
- The customer's credit limit frees up, so you happily supply them again — often the very worst moment to do so.
- If you later go legal, your own books contradict your claim.
This is one of the five ways an ageing report silently misleads you — see Part 2.
The Section 138 Clock
Three deadlines, running one after the other. Miss any one and the remedy under this section can be lost.
| Step | Time limit | Runs from |
|---|---|---|
| 1. Issue written demand notice | 30 days | Receipt of the bank's return memo |
| 2. Drawer's time to pay | 15 days | Their receipt of your notice |
| 3. File complaint | 30 days | Expiry of that 15-day period |
Two further points worth knowing: a cheque is generally valid for three months from its date, and the cheque must have been presented within that validity. And Section 138 applies where the cheque was issued to discharge a legally enforceable debt — a cheque given as security sits in more contested territory.
On conviction, the section provides for imprisonment up to two years, or a fine up to twice the cheque amount, or both. In practice most matters conclude in settlement or compensation.
What the Notice Must Contain
Have a lawyer draft it. Broadly it should set out:
- Cheque number, date, amount, and the bank it was drawn on
- The debt or liability the cheque was issued to discharge, with invoice references
- The date of presentation and the date and reason of return, per the memo
- A clear demand for payment within 15 days of receipt
- A statement that legal proceedings will follow otherwise
Send it by a method that proves delivery — registered post with acknowledgement due, or courier with tracking, and keep every receipt. Service of the notice is one of the most commonly contested points, and it is entirely within your control to get right.
Settle or Pursue?
Legal action is a tool, not a reflex. Weigh it honestly.
| Lean towards settling when… | Lean towards pursuing when… |
|---|---|
| The amount is small relative to legal cost and your time | The amount is material |
| It is a first occurrence and the explanation is credible | There is a pattern of bounced cheques |
| The customer is engaging and offering a plan | The customer has gone silent or is avoiding contact |
| The relationship has genuine future value | The account was closed, or the cheque was knowingly issued against no funds |
| Your documentation has gaps | Your documentation is complete — invoice, delivery proof, memo, notice |
The 30-day window closes whether or not negotiations are going well, and it does not reopen. A properly served notice costs little, preserves every option, and in practice tends to accelerate settlement rather than prevent it — because it demonstrates that your deadlines are real.
Preventing the Next One
- Treat a bounce as an automatic credit event. Limit reviewed, account flagged, no new supply until cleared. Do not leave this to judgement in the moment — write it into your credit policy.
- Move repeat offenders to advance or UPI only. A customer whose cheque has bounced twice should not be receiving a third cheque facility.
- Prefer UPI, NEFT and RTGS for regular collections. They either succeed or fail immediately — there is no float and no reversal.
- Deposit cheques promptly. A cheque sitting in a drawer for a fortnight is a cheque whose validity and whose drawer's balance are both drifting away from you.
- Reconcile the bank weekly so a return is caught in days, not at month end when the notice window is half gone.
- Watch for post-dated cheques used as delay. A customer who keeps replacing one PDC with another is managing you, not paying you.
What's Next?
- Part 8 — Bad Debts: when recovery fails
- Part 3 — Credit Policy: a bounce should trigger a limit review
- Part 4 — Reminder Scripts
- Part 2 — Ageing Analysis