The dishonor of checks, commonly known as check bounce, has remained a persistent and serious issue in Nepal. It typically occurs when a check cannot be processed due to insufficient funds, signature mismatch, expiry, or other discrepancies. Recognizing its adverse impact on business trust and financial discipline, the government recently amended key legislations governing check-related offenses exclusively through criminal prosecution.

Historically, Nepal had two legal frameworks to deal with bounced checks. The Negotiable Instrument Act, 1977 classified check bounce as a civil offense, with penalties including up to three months of imprisonment, fines up to Rs 3,000, or both. The aggrieved party had up to five years to file a complaint in the district court. Similarly, the Banking Offense and Punishment Act, 2008 classified check bounce as a criminal offense, prescribing stricter penalties and a shorter statute of limitations—only one year from the date of dishonor.

With the Second Amendment to the Banking Offense and Punishment Act, the civil remedy under Section 107A of the Negotiable Instrument Act has been repealed. As a result, check bounce is now solely a criminal offense, requiring police action and judicial prosecution.

Key Legal Changes

The amendment introduces several significant changes that businesses and individuals must be aware of. Some of these include:

a) Clearer Definitions: The revised Act provides precise definitions for terms such as "check", "check bounce", and "payee". A check is considered bounced when the bank verifies that the drawer’s account lacks sufficient funds to honor it.

b) Mandatory Notice and 45-Day Grace Period: Under Section 3A, it is now a criminal offense to issue a check without adequate funds. If a check is dishonored, the bank must return it to the payee. The payee can then request the bank to serve a notice to the drawer, granting a 45-day period to deposit the due amount. If the drawer clears the payment within this period, they can retrieve the check and avoid prosecution.

c) Strict Penalties: According to Section 15(1A) of the amended Act, if a court confirms the check bounce, the drawer will be liable for full payment of the check amount, interest from the date of issuance until payment, a fine amounting to 5% of the check value, and imprisonment, the duration of which depends on the value of the check.

d) Limitation Period: A First Information Report (FIR) must be filed within one year of the check’s dishonor. Following this, the case must be registered in district court within six months of the filing of FIR.

e) Scope for Mediation: Section 26A of the amended Act allows for mediation if the drawer deposits the full check amount and both parties agree to the process. Mediation can be initiated either during police investigation or at the court stage.

f) Mandatory Police Investigation: With the repeal of Section 107A of the Negotiable Instrument Act, check bounce cases can no longer be filed directly as civil suits in district courts. All such cases must now undergo a police Investigation before proceeding to prosecution.

g) Treatment of Pending Civil Cases: Civil cases already filed under the previous legal provision will not be dismissed or converted into criminal cases. They will continue to be adjudicated under the original legal framework.

The Shift to Criminal Liability

The recent amendment marks a paradigm shift in Nepal’s legal treatment to check dishonor, now classifying it exclusively as a criminal offense. This change reflects the growing government concern over increasing misuse of post-dated and security checks, and aims to strengthen financial accountability. However, the broader legal and practical implications of criminalizing all check bounce cases merit closer scrutiny.

With the repeal of Section 107A of the Negotiable Instrument Act, civil litigation is no longer an option for recovering dishonored checks—leaving criminal prosecution as the sole recourse. While this may appear to signal a strict "zero-tolerance" policy, it raises concerns about proportionality and judicial efficiency. Previously, payees could opt for civil proceedings, avoiding criminal charges against the drawer. This flexibility is now gone. As a result even small or unintentional defaults are now treated as criminal misconduct. Police resources must now be deployed to investigate financial disputes that could have been resolved privately or through civil litigation. Likewise, this change may discourage amicable settlement, especially among businesses hesitant to criminalize commercial relationships.

In many developed jurisdictions, check dishonor is primarily a civil issue, with criminal penalties reserved for cases involving clear intent to defraud. By contrast, Nepal’s new approach presumes criminal liability in all cases, potentially increasing litigation, deterring legitimate commercial risk-taking and burdening the criminal justice system.

Before the amendment, convicted drawers could face fines of up to 100% of the check amount, an often disproportionate burden, particularly in high-value transactions. The reduction of the fine to 5% under the new Section 15(1A) reflects a more rational and proportionate approach, likely aimed at aligning penalties with the principle of fairness and equity. The 5% fine, when combined with mandatory repayment of the check amount and applicable interest, ensures that the payee is made whole, and the drawer suffers a reasonable punitive cost without facing crippling financial consequences. This change aligns with the broader shift in legal philosophy from punishment for punishment’s sake to restorative justice and incentivized compliance.

However, while fines have decreased, imprisonment terms have significantly increased, particularly for high-value transactions. The new penalty structure ranges from one month to four years, depending on the check amount. This creates a graduated penalty system, aligning punishment with the severity of the offense, which is consistent with modern sentencing principles. Likewise, it also creates increased criminal exposure for business-related defaults, caused by liquidity issues or timing mismatches which were traditionally resolved through civil litigation, which could now result in imprisonment.

The punitive intent behind these changes suggests that lawmakers want to deter habitual defaulters and protect the integrity of financial instruments, especially given the widespread reliance on post-dated checks as informal credit.

Enhancing Transaction Security

Given that check bounce is now criminalized, parties must adopt preventive legal strategies to secure their transactions. Some of them are outlined below:

a) Collateral Arrangements: Businesses can secure payments by creating a charge over the drawer’s movable or immovable assets. For immovable property, the charge should be registered with the Inland Revenue Office. For movable assets, registration must be done with the Secured Transaction Registry Office (STRO). These measures enable recovery in the event of default.

b) Promissory Notes: A promissory note, recognized under the Negotiable Instrument Act, is a written promise to pay a specified amount either on demand or at a future date. It serves as an enforceable alternative or complement to checks, offering an additional layer of legal assurance.

c) Robust Service Agreements: Parties should always formalize their transactions through a written agreement. This should clearly outline payment terms, delivery timelines, penalties for delay, and the purpose of any post-dated checks.

d) Guarantor Arrangement: Appointing a personal or corporate guarantor provides added security. In the event of a check bounce, the payee can initiate legal action directly against the guarantor, ensuring a higher likelihood of recovery.

Conclusion

With the repeal of civil remedies, check bounce is now a criminal offense that must be investigated by the police. Banks are required to provide a 45-day notice before a check is formally deemed dishonored. FIRs must be filed within a year of dishonor, and prosecution must begin within six months of the filing of FIR.

To minimize risk, parties must adopt strong documentation and security practices. Key measures include a well-drafted agreement, the use of promissory notes, registration of collateral and appointing a guarantor. These tools can provide critical safeguards in the event of non-payment. Issuers must avoid issuing checks without available funds, particularly post-dated ones, as this now carries criminal consequences.

Under this new legal regime, due diligence is not optional—it is essential. Businesses must thoroughly assess the credibility of counterparties and monitor account balances ahead of check encashment. These steps are vital not only for ensuring recovery, but also for protecting reputations and avoiding unintended legal exposure.

(Both the Authors are the founding partners of Synergy Law and Chambers, a law-firm based in Kathmandu specializing in corporate law.)

(This opinion article was originally published in  June 2025 issue  of New Business Age Magazine.)