Introduction
Cheques, despite the rapid advancements in digital payment systems, continue to hold a significant position in India’s real estate sector. These instruments are frequently utilized for substantial financial transactions, including earnest money deposits, down payments, and final installment payments in property deals. Their continued use underscores a traditional preference for a tangible paper trail and a sense of formality in high-value agreements. However, this reliance also exposes both homebuyers and builders to a prevalent and disruptive issue: the dishonour of cheques, commonly referred to as cheque bounce (see here).
The persistent prevalence of cheque bounce incidents, even with the availability of instantaneous and irreversible digital payment alternatives like RTGS and NEFT, suggests a continued, albeit sometimes problematic, reliance on cheques for large transactions. The substantial backlog of such cases in the judicial system indicates that this reliance frequently encounters significant legal friction. This situation can progressively erode confidence in cheques as a dependable payment method, potentially accelerating a shift towards purely digital transfers for high-value real estate transactions. While cheques offer a perceived advantage of a physical record, the associated legal complexities and delays may increasingly outweigh this benefit, prompting a broader move towards digital payment ecosystems in real estate. This trend could reshape banking practices and consumer preferences, potentially diminishing the overall volume of cheque transactions in the sector over time.
Understanding the Legal Provision Related to the Cheque Bounce
India has a well-defined legal structure to address cheque bounce cases, especially when the transaction involves a legally enforceable obligation, like monthly rent payments or security deposits in a tenancy. Section 138 of the Negotiable Instruments Act, 1881, specifically criminalises the act of cheque dishonour under certain conditions.
Jurisdiction for Filing Cases
A complaint for cheque bounce can be filed in any of the following places: where the cheque was drawn, where it was presented for payment, where the payment was supposed to be made, where the cheque was dishonoured, or where the demand notice was served.
Key Timelines in a Cheque Bounce Case (Section 138, NI Act)
| Event | Timeline |
| Cheque Presentation | Within 3 months of issue date |
| Receipt of Cheque Return Memo | Immediate notification from bank |
| Sending Legal Demand Notice | Within 30 days of receiving return memo |
| Drawer’s Payment Window | 15 days from receipt of legal notice |
| Filing Criminal Complaint | Within 30 days of expiry of 15-day notice period |
The success or failure of a cheque bounce case under Section 138 hinges entirely on adherence to strict statutory timelines. Missing any of these deadlines can lead to the dismissal of the case, regardless of its merits. For the accused, it highlights the windows within which they must act (e.g., pay or respond to notice) to avoid further legal escalation.
Common Reasons for Cheque Dishonour and Section 138 Applicability
| Reason for Dishonour | Section 138 Applicability |
| Insufficient Funds | Yes |
| Account Closed | Yes |
| Stop Payment | Yes (if debt is legally enforceable) |
| Signature Mismatch | No (technical reason, generally requires re-presentation) |
| Overwriting/Alterations | No (technical reason) |
| Incorrect Date (Post-dated/Stale) | No (technical reason) |
| Damaged Cheque | No (technical reason) |
Many individuals mistakenly believe that any cheque bounce automatically triggers criminal proceedings under Section 138. However, the law specifically targets dishonour due to financial reasons (insufficient funds, account closed, stop payment for a valid debt). Technical reasons do not fall under Section 138.
Implications and Recourse for Homebuyers
Cheque bounce incidents in real estate transactions can have profound and often devastating implications for homebuyers, who are typically investing their life savings into a property. The following are the risks associated:
1. Financial Risks and Potential Losses for Homebuyers
Homebuyers often make significant advance payments, earnest money, or even the full consideration for a property through cheques. When a cheque issued by a builder for a refund, compensation, or any other due amount bounces, it can lead to immediate financial distress for the homebuyer. This can result in the loss of their dream home, coupled with the burden of prolonged and expensive legal battles to recover their funds. A particularly concerning scenario arises in subvention schemes, where homebuyers are compelled to pay Equated Monthly Installments (EMIs) for properties they have not yet received possession of. If the builder defaults on their commitment to pay these EMIs, the homebuyer is left with the dual burden of paying EMIs for a non-existent asset and pursuing legal action against the builder, significantly exacerbating their financial strain.
2. Impact on CIBIL Score and Future Loan Eligibility
While a cheque bounce initiated by a builder does not directly affect the homebuyer’s CIBIL (credit) score, the situation changes dramatically if the homebuyer themselves issues a cheque that bounces.
For instance, if a homebuyer’s cheque for EMI payments, maintenance charges, or any other contractual obligation to the builder or bank is dishonoured, it can severely damage their creditworthiness. Repeated instances of bounced cheques can lead to a negative CIBIL score, making it exceedingly difficult for the homebuyer to secure future loans, whether for property, education, or other personal needs.
3. Specific Scenarios: Cheque Bounce in Subvention Schemes and Coercive Actions
The Supreme Court of India has expressed grave concern over coercive actions taken by trial courts, particularly in Gurugram, India, against homebuyers in cheque bounce cases that are linked to delayed housing projects. These courts have been observed issuing bailable and non-bailable warrants for money recovery against homebuyers, even when they have not received possession of their flats (see here). The Supreme Court has highlighted what it termed an “unholy nexus” between banks and developers. In this arrangement, banks allegedly disbursed sanctioned loan amounts directly to builders, who subsequently defaulted on their EMI payments, leaving innocent homebuyers to face aggressive recovery actions from banks despite the non-delivery of their promised properties (see here).
The Supreme Court’s strong observations about the “unholy nexus” between banks and builders reveal a deeper systemic issue beyond individual cheque bounces. This situation points not just to a builder’s financial mismanagement but to a potential collusion that actively harms homebuyers. The ongoing CBI probe into this nexus signifies a recognition of criminal elements operating within the real estate financing ecosystem (see here). This highlights the significant vulnerability of homebuyers to complex financial schemes, such as subvention plans, and underscores the urgent need for greater regulatory scrutiny from bodies like the Reserve Bank of India (RBI) and the Real Estate (Regulation and Development) Act (RERA) authorities. The legal recourse for homebuyers, therefore, must extend beyond individual cheque bounce cases to address these broader fraudulent practices by powerful entities.
Legal Remedies Available to Homebuyers
Homebuyers have several avenues for legal recourse when faced with cheque bounce issues or builder defaults in real estate transactions:
1. Under the Negotiable Instruments Act, 1881 (Section 138): If a builder issues a cheque (e.g., for a refund of advance payment or compensation) that bounces due to insufficient funds, homebuyers can initiate criminal proceedings against them under Section 138 of the NI Act.
2. Under the Real Estate (Regulation and Development) Act, 2016 (RERA): RERA provides robust protection for homebuyers. If a builder fails to deliver the property on time or defaults on promises made in the agreement, homebuyers can demand compensation, including a full refund with interest, or even cancel their booking. RERA tribunals across India have consistently ordered refunds with interest for delayed possession, affirming the allottee’s unqualified right to such remedies (see here).
3. Through Consumer Forums: Homebuyers can file complaints before District, State, or National Consumer Dispute Redressal Commissions for deficiency of service or unfair trade practices by builders.
4. Under the Indian Penal Code (IPC) [now The Bharatiya Nyaya Sanhita (BNS), 2023]: In instances where a builder’s actions involve fraud, cheating, or criminal breach of trust, homebuyers can file a First Information Report (FIR) under relevant sections of the BNS, such as Cheating) or Criminal breach of trust). This criminal action can be pursued in addition to proceedings under the NI Act.
5. Civil Suits: In addition, homebuyers can pursue a civil suit in court to reclaim their outstanding funds, along with any accrued interest and compensation for damages.
Implications and Protections for Builders
While homebuyers bear significant risks, builders also face substantial implications when cheque bounce incidents occur, whether they are the drawer or the payee. The following are some of them:
1. Reputational Damage and Business Impact for Developers
Cheque bounces by builders, whether for refunds to homebuyers, payments to vendors, or contractors, can severely damage their professional reputation. Such incidents lead to a significant loss of trust among potential buyers, existing clients, investors, and financial institutions.
2. Legal Liabilities for Builders: Criminal and Civil Consequences
Builders, as entities that frequently issue cheques for various business operations (e.g., refunds, compensation, payments for land acquisition, construction materials, or contractor services), face direct legal liabilities if their cheques bounce. If a builder’s cheque is dishonoured due to insufficient funds, they incur criminal liability under Section 138 of the Negotiable Instruments Act. In addition to criminal proceedings, builders can also face civil suits for the recovery of the bounced cheque amount, along with interest and damages incurred by the payee.
While builders often receive large payments via cheques, making them potential payees, they also frequently issue cheques for refunds, vendor payments, or other liabilities. When their own cheques bounce, the legal and reputational consequences are severe. This creates a dual risk for builders: they can be victims of bounced cheques, but also perpetrators, facing criminal charges. This necessitates stringent internal financial controls for builders. They must not only ensure adequate funds for cheques issued but also conduct thorough due diligence on buyers’ payment methods. The focus shifts from merely receiving payments to ensuring the integrity of all financial transactions to protect their business and reputation.
Recourse for Builders Against Buyer Defaults
When faced with buyer defaults, builders have several legal avenues for recourse, such as:
- Forfeiture of Earnest Money: If a buyer backs out of a deal without a valid reason, the seller (builder) typically has the right to forfeit the advance or earnest money paid, provided this condition is clearly stated in the agreement (see here).
- Suit for Specific Performance: Builders can file a civil suit to compel the buyer to complete the purchase. This is applicable if the buyer delays payments or fails to fulfill their contractual obligations.
- Claiming Damages: Sellers can seek compensation for financial losses incurred due to the buyer’s failure to complete the transaction as per the agreement.
- Delaying Registration: If a dispute arises or the buyer fails to complete their obligations, the seller retains the right to delay the property registration until the buyer fulfills their part of the contract.
Preventive Measures and Best Practices for All Stakeholders
The complexities and severe consequences associated with cheque bounce cases in real estate transactions underscore the critical importance of preventive measures. For both homebuyers and builders, avoiding such incidents is always preferable to seeking legal recourse after the fact.
The following are some of the best practices:
For Homebuyers
- Secure Payment Methods: Homebuyers should prioritise electronic transfers such as RTGS (Real-Time Gross Settlement) or NEFT (National Electronic Funds Transfer) for large sums involved in property purchases. These methods ensure instant and irrevocable fund transfers, significantly reducing the risk of payment disputes. Demand Drafts (DDs) also offer a safer alternative compared to personal cheques, as they guarantee funds (see here).
- Understanding Positive Pay System (PPS): For cheques of ₹50,000 and above, the Reserve Bank of India (RBI) has mandated the Positive Pay System. Homebuyers issuing large cheques should proactively share key details (account number, cheque number, date, amount, payee’s name) with their bank. Failure to submit these details can result in the cheque not being honoured, even if funds are available, as the bank will return it with the reason “Advice not received”. This system acts as an additional layer of security against cheque-related fraud (see here).
- Due Diligence: Beyond legal checks, homebuyers must conduct thorough due diligence on the builder’s reputation, financial stability, and track record of project delivery.
- Documentation: Maintaining meticulous records of all transactions, agreements, communications (including emails and WhatsApp messages), and bank statements is paramount.
- Legal Consultation: Seeking expert legal advice before entering into any major property transaction is highly advisable.
For Builders
- Financial Prudence: Builders must maintain sufficient funds in their bank accounts to cover all issued cheques, including refunds, vendor payments, and compensation.
- Transparent Agreements: All terms and conditions related to payments, project timelines, forfeiture clauses, and compensation mechanisms must be clearly and unambiguously outlined in the sale agreement.
- Adherence to Regulatory Guidelines: Strict compliance with RERA provisions and RBI guidelines, particularly concerning loan disbursals and project timelines, is crucial. This not only ensures legal compliance but also builds trust with homebuyers and regulatory bodies (see here).
- Verify Cheque Details: Before depositing cheques received from homebuyers, builders should meticulously verify all details, including the signature, date, and amount (both in figures and words).
Implement Positive Pay System: For large value cheques received, builders should ensure that the drawer (homebuyer) has submitted the necessary PPS details to their bank.
YLCC would like to thank Nikunj Arora for his valuable insights into this article.
