The consequences of a dishonoured cheque are grave. For example, if a cheque issued towards payment due on a credit card is dishonoured, the card company will not only levy a penalty for such dishonour, but also impose a hefty interest on the amount due. In addition, the bank may well send a report to the Credit Information Bureau about the dishonouring of the cheque, thereby adversely affecting the consumer’s credit rating.

Similarly, if it is a cheque issued towards renewal of an insurance policy, it may well result in the lapsing of the policy. In certain circumstances, bouncing of a cheque may even lead to a case being filed against the person having issued the cheque, under the Negotiable Instruments Act. Given these factors, a bank that fails to honour a customer’s cheque without any valid reason is guilty of the highest degree of negligence.

Consumer courts have said as much to banks. But in one particular case decided in 2006, the apex consumer court used the provision in the Consumer Protection Act to award punitive damages. The case goes back to 1997, when the Bihar State Sugar Corporation issued a cheque towards an insurance policy to cover the assets of a sugar factory against risks. Within a month, following an explosion in one of the molasses tanks of the factory, when the corporation asked for indemnification of the loss, the insurance company said the policy was not in existence because the cheque was not cleared by the bank.

Subsequently, in response to the corporation’s complaint before the apex consumer court, the bank conceded that it had made a mistake and dishonoured the cheque on grounds of insufficient funds, despite sufficient balance in the account of the corporation. However, it argued that even if the policy had been in force, it would not have covered the explosion in the molasses tank and the consequential loss as that was outside the scope of the insurance cover. Conceding this point, the apex consumer court said the bank was not liable to indemnify the loss.

However, considering the gravity of the mistake committed by the bank, it said the bank should not go unpunished and imposed punitive damages to the tune of Rs 5 lakh (Bihar State Sugar Corporation Ltd vs State Bank of India, OP No. 284 of 1997). So, if you happen to be a victim of such negligence by a bank, quote this case and ensure that punitive damages are imposed on the erring bank.