DR.
RAM MANOHAR LOHIYA
NATIONAL LAW UNIVERSITY,
LUCKNOW
BANKING AND INSURANCE LAW
FINAL DRAFT
ON
“DISHONOUR OF CHEQUES AND ITS
CONSEQUECES UNDER NEGOTIABLE
INSTRUMENTS ACT, 1881”
Under The Guidance of: Project By:
Dr. Aparna Singh Antriksh Yadav
Asst. Professor (Law) Enrol: 200101029
VI Semester.
ACKNOWLEDGEMENT
This project would not have been possible without the kind support and help of many
individuals and organizations. I would like to extend my sincere thanks to all of them.
I am highly indebted to Dr.Aparna Singh for her able guidance and constant supervision and
also for providing necessary information regarding the project.
I would like to express my gratitude towards my parents for their kind co-operation and
encouragement which helped me in completion of this project.
My thanks and appreciations also go to my colleagues in developing the project and to all
people who have willingly helped me out with their abilities.
INTRODUCTION
A cheque, is a document that orders a bank to pay a specific amount of money from a
person’s account to the person in whose name the cheque has been issued. The person writing
the cheque, known as the drawer, has a transaction banking account where their money is
held. The drawer writes the various details including the monetary amount, date, and a payee
on the cheque, and signs it, ordering their bank, known as the drawee , to pay that person or
company the amount of money stated.
A cheque is a type of bill of exchange and is a negotiable instrument. It is used for making
payments without any need to carry cash. Paper money evolved from promissory notes,
another form of negotiable instrument similar to cheques in that they were originally a written
order to pay the given amount to whoever had it in their possession .Both the drawer and
payee may be natural persons or legal entities. According to Section 6 of NI Act, amended in
2002, cheque is defined as-
A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a
cheque in the electronic form.
Explanation 1 - For the purposes of this section, the expressions--
a) "a cheque in the electronic form" means a cheque which contains the exact mirror
image of a paper cheque, and is generated, written and signed in a secure system
ensuring the minimum safety standards with the use of digital signature (with or
without biometrics signature) and asymmetric crypto system;
b) "a truncated cheque' means a cheque which is truncated during the course of a
clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.
Explanation II.-- For the purposes of this section, the expression "clearing house" means the
clearing house managed by the Reserve Bank of India or a clearing house recognised as such
by the Reserve Bank of India.]1
1
1881 Complete Act - Bare Act Negotiable Instruments Act and Central Government, 'Negotiable Instruments
Act 1881 Complete Act - Citation 50934 - Bare Act | Legalcrystal' (Legalcrystal.com, 2019).
A Dishonoured Cheque is a Cheque that is not credited by the Bank for numerous reasons
including: The signature does not match; the account on which the cheque is drawn has
insufficient funds, the date is invalid – i.e. the presentation of the cheque 6 months from the
date on the cheque.
The dishonouring of a cheque u/s 138 of NI Act, 1881 is considered a criminal offence, if
anyone draws a cheque on an account, maintained by him with a banker, to pay someone else
money and the cheque bounces, that person is guilty of having committed an offence.
VALIDITY OF A CHEQUE
There are certain requisites for a cheque to be valid. They are:
Instrument in writing: Any instrument which is not in writing cannot be considered a cheque.
1. Unconditional Order: The modern day cheque instrument has to be an unconditional
order. “As regards the order, it is not necessary that the word ‘order’ or its equivalent
must be used to make the document a cheque.
2. Specified Banker Only: This requirement leads to two conclusions: Firstly, the
cheque can only be drawn on a banker and secondly, the banker should be clearly
specified in name and if possible also in address.
3. Specified Sum Of Money: The cheque should make an order only for the payment of
a sum of money which is clearly specified in the instrument.
4. Payee Should Be Clearly Identified: For any instrument to be considered a valid
cheque, the person to whom it should be paid i.e. the payee should be clearly
identified.
5. Payable On Demand: A cheque cannot be expressed to be made payable otherwise
than on demand.2
2
'The Law On Account Payee Cheques' (Lawteacher.net, 2019) <https://www.lawteacher.net/free-law-
essays/administrative-law/the-law-on-account-payee-cheques-constitutional-administrative-law-essay.php>
accessed 21 March 2019.
OBJECT AND SCOPE OF SECTION 138
The Parliament in its wisdom had chosen to bring Section 138 on the Statute book in order
tointroduce financial discipline in business dealings. Prior to insertion of section 138 of
theNegotiable Instruments Act, a dishonoured cheque left the person aggrieved with the
onlyremedy of filing a claim. The object and purpose of bringing new provisions in the Act
was tomake the persons dealing in commercial transactions work with a sense of
responsibility and for that reason, under the amended provisions of law, lapse on their part to
honour their commitment renders the person liable for criminal prosecution. 3
In our country, in a large number of commercial transactions, it was noted that the cheques
were issued even merely as a device not only to stall but even to defraud the creditors. The
sanctity and credibility of issuance of cheques in commercial transactions was eroded to a
large extent.
The Parliament, in order to restore the credibility of cheques as a trustworthy substitute for
cash payment, enacted the aforesaid provisions. The remedy available in Civil Court is a long
drawnmatter and an unscrupulous drawer normally takes various pleas to defeat the genuine
claim of the payee.4
Section 138 reads as:
Where any cheque drawn by a person on an account maintained by him with a banker for
payment of any amount of money to another person from out of that account for the
discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid,
either because of the amount of money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be paid from that account by an
agreement made with the bank, such person shall be deemed to have committed an offence
and shall, without prejudice to any other provisions of this Act, be punished with
imprisonment for a term which may extend to two years, or with fine which may extend to
twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless –
1. The cheque has been presented to the bank within a period of six months from the
dateon which it is drawn or within the period of its validity, whichever is earlier.
2. the payee or the holder in due course of the cheque, as the case may be, makes
ademand for the payment of the said amount of money by giving a notice in writing, to
3
SantLal Bhatia v. City Credit and Leasing Company, III (2002) BC 210 (P&H).
4
Goa Plast (P) Ltd. v. Chico UrrsulaD’souza, I (2004) BC 246: (2004) 2 SCC 235 (SC).
thedrawer of the cheque, within thirty days of the receipt of information by him from
thebank regarding the return of the cheque as unpaid; and
3. The drawer of such cheque fails to make the payment of the said amount of money to
thepayee or, as the case may be, to the holder in due course of the cheque within
fifteen daysof the receipt of the said notice.
Explanation – For the purposes of this section, “debt or other liability” means a
legallyenforceable debt or other liability.
The essential requirements to attract Section 138, Negotiable Instruments Act are:
a) The cheque for an amount is issued by the drawer to the payee / complainant on a
bank account maintained by him.
b) The said cheque is issued for the discharge, in whole or in part of any debt or other
liability.
c) The cheque is returned by the bank unpaid on account of insufficient amount to
honour the cheque or it exceeds the amount arranged to be paid from that account by
an agreement made with the bank.
d) The cheque is presented within 6 months from the date on which it is drawn or within
the period of its validity.
e) 30 days demand notice is issued by the payee or the holder in due course on receipt
Ofinformation by him from the bank regarding the dishonour of the cheque.
f) The drawer of said cheque fails to make payment of the said amount of the money to
the payee or the holder on due course within 15 days of the said notice.
g) The debt or liability against which the cheque was issued is legally enforceable.
COMPONENTS OF THE OFFENCE
Section 138 of the Act makes it an offence where a cheque drawn by a person on any
accountmaintained by him in a bank for payment of any amount to other person is returned
unpaid by thebank for insufficiency of the deposit or for the amount payable exceeding such
deposit. 5The components of offence under this provision are -
1. drawing of the cheque for some amount;
2. presentation of the cheque to the banker;
5
Harman Electronics (P) Ltd., v. National Panasonic India Ltd., (2008) 16 SCALE 317.
3. return of the cheque unpaid by the drawee bank;
4. giving of notice by the holder of the cheque or payee to drawer of the cheque
demandingpayment of cheque amount;
5. failure of drawer to make payment within 15 days of receipt of such notice.6
Drawing of a Cheque
The drawer in payment of a legal liability to discharge the existing debt should have
drawncheque.Therefore, any cheque given say by way of gift would not come within the
purview of the section. It should be a legally enforceable debt; therefore, time barred debt and
money-lending activities are beyond its scope. The words any debt or any other liability
appearing insection 138 make it very clear that it is not in respect of any particular debt or
liability Thepresumption which the Court will have to make in all such cases is that there was
some debt or liability once a cheque is issued. It will be for the accused to prove the contrary.
i.e., there is no debt or any other liability. The Court shall statutorily make a presumption that
the cheques were issued for the liability indicated by the prosecution unless contrary is to be
proved.7
Where the Complaint lacks necessary ingredients of the offence under Section 138, Supreme
Court in JugeshSehgal v. Shamsher Singh Gogi,8noted that the cheque alleged to have
beenissued by the petitioners to the complainant was issued from an account pertaining to
some other person. The Court also noted that one of the essential ingredients of the offence
punishable under Section 138 of Negotiable Instruments Act is that the cheque must have
been drawn on an account maintained by the accused.
Presentation of Cheque
The presentation of cheque should be within its validity period. Generally, a cheque is valid
for six months, but there are cheques whose validity period is restricted to three months etc.
The question arises as to which bank the cheque should reach within the validity period, is it
the payee to his bank presents that of drawer’s bank or it is enough if the cheque before six
months.
6
Prakash Jewellers v. A.K. Jewellers, III (2002) BC 404 (Del) (DB).
7
Shivakumar v. Natarajan (2009) 27 CLA -BL Supp 62 (SC).
8
2009(3) CC Cases (SC) 2004.
The courts are divided on the issue. But common sense demands that the cheque should reach
the drawer bank within the period of validity as it is that bank that either pays or rejects
payment as per the situation existing on that day.9
Supreme Court inSadanandanBhadran v. MadhavanSunil Kumar10, held that while the payee
was free to present the cheque repeatedly within its validity period, once notice had been
issued and payments not received within 15 days of the receipt of the notice, the payee has to
avail the very cause of action arising thereupon and file the complaint.11 Dishonour of the
cheque on each re-presentation does not give rise to a fresh cause of action.
Returning of the Cheque unpaid
Reasons are relevant to hold the drawer of the cheque criminally responsible for bouncing of
a cheque. The case laws on the subject have now made the position clear. It is not what the
bank says in its return memo that is relevant but the actual position as on the date when the
cheque reaches the drawer bank whether there were enough funds in the drawer account to
honour the cheque.
Any reason for dishonour is an offence. S. 138 of the N.I. Act. Marginal Note stating
"Dishonour of cheque for insufficiency etc. of funds in accounts" addition of word "etc."
cannot be considered to be an accident.12
NOTICE
Notice is a very important stage. It is the non-payment of dishonoured cheque within fifteen
days from the receipt of the notice that constitutes an offence. Issuing of a cheque and its
dishonour is not an offence. The offence is when the drawer receives a notice from the payee
and he fails to pay the dishonoured cheque amount within the grace period of 15 days that
constitute an offence.
Any demand made after the dishonour of cheque will constitute a notice. It is not necessary
that the notice should be sent by Registered Post alone, it could be sent even by fax. It is
notnecessary that the notice should be in any particular form or style. What is essential is that
there should be a demand to pay the dishonoured cheque amount. It is held by the Supreme
9
Central Bank of India and Anr. Vs. M/s. Saxons Farms &Ors, 1999 Crl.L.J. 4571.
10
JT 1998 (6) SC 48)
11
Prem Chand Vijay Kumar vs. Yashpal Singh &Anr. [(2005) 4 SCC 417
12
Veeraraghavan v. Lalith Kumar, (1995) Cri. LJ 1882 (Mad) (DB).
Court that while the cheque could be presented at any number of times however there shall be
only one Notice.
MISMATCH OF SIGNATURE
Supreme Court has opined in its latest judgment in M/s LaxmiDyechem v. State of Gujarat
&Ors13 that the ambit of Section 138 of Negotiable Instruments Act, 1881 extends to the
dishonour of cheques due to mismatch of signature of the drawer of the cheque when the
specimen signature is available with the bank. The Supreme Court overruled the judgment of
the Gujarat High Court which gave a strict interpretation to Section 138 stating that dishonour
of cheques due to mismatch of signature will not attract the provisions of Section 138 as
envisaged under the Negotiable Instruments Act, as in order to attract provisions of this
Section, insufficiency of funds or the credit arrangement so extended to the drawer being
insufficient is the only ground.
Fact of the case
In the instant case, the appellant company is a proprietorship firm engaged in the sale
ofchemicals and had an amount of approximately Rs 5 crore outstanding against the
respondent- company. Certain post-dated cheques signed by the authorised signatories of the
company were issued to the appellants in discharge of the debts as were remaining to be
satisfied. However, out of the 117 cheques issued to the appellants, some were dishonoured
with an endorsement stating “mismatch of signature” to be the reason of such dishonour. On
receiving such endorsement, the appellant, in compliance with the statutory provisions as
provided under the section, sent a notice to the respondent company to issue fresh cheques in
their favour. The respondent company cited the “change in the mandate” to be the reason of
such dishonour and undertook to issue fresh cheques on return of the dishonoured cheques
and further on the precondition of settlement of the account. Nevertheless, the same remained
unpaid by the respondent company thus compelling the appellants to take recourse to legal
action as a last and final resort under Section 138\142 of the Act.
13
See SC Judgment dated 27-11-2012 available at http://indiankanoon.org/doc/17256619/.
Principle laid down in the case
It was held by the apex court that the expression “amount of money is insufficient” appearing
in Section 138 of the Act is the genus of which all other reasons of dishonour, for instance,
“account closed”, “payment stopped” and like are only the „species‟. Similarly, reasons such
as “signature mismatch”, “illegible signature”, “image not found” are also species of the
genus and hence liable to action under Section 138 of the Act.
The Supreme Court, in the instant case, opined on the principles that a deliberate mismatch in
the signature may be caused with adishonest and fraudulent intention which would
undoubtedly result in the dishonour of cheque signed by the previous signatories or as the
case may be. The apex court held that, if a certain act is done or omitted to be done with a
purpose of preventing the honour of a cheque issued by the drawer, it will necessarily fall
within the scope of Section 138 of the Act.
In view of the observations made above, the apex court disregarded the contentions of
therespondent company that the section being a penal provision should be strictly construed
and that dishonour on ground of mismatch of signature does not fall within the scope of
Section 138 of the Act.
CAUSES OF DISHONOUR OF CHEQUE
The most common reasons for dishonour of a cheque are enumerated below: -
Refer to Drawer
In the Dictionary of Banking by Perry and Ryder,14 “Refer to drawer” is described as under:
“The answer put upon a cheque by the drawer banker when dishonouring a cheque in certain
circumstances”. The most usual circumstance is where the drawer has no available funds for
payment or has exceeded any arrangement for accommodation.
In Flach v. London & South Western Bank Ltd.15Justice Scrutoon said that the words
“Refer to Drawer” in their ordinary meaning amounted to a statement by the bank: “We are
not paying; go back to the drawer and ask why” or else “go back to the drawer and ask him to
pay”.
14
11th Edn., at 211 (2008).
15
(1915) 31 TLR 334.
Exceeds Arrangement
This term is commonly meant to convey that the drawer has credit limit but the amount
exceeds the drawing power. Not arranged means no overdraft facility exceeding the limit
already sanctioned is existing or overdraft facility not sanctioned.
Full Cover not Received
It is generally meant to show that adequate funds to honour the cheque do not exist or that the
customer has not given adequate security to cover the overdraft which might be created by
paying the cheque.
Effects not Cleared
It is meant to convey that the drawer has paid the cheques or bills, which are in course of
collection but their proceeds are not available for meeting the cheque. If there is an agreement
express or implied such as would arise out of a course of business to pay against uncleared
effects, a banker would be bound to honour cheques drawn against such effects and he cannot
arbitrarily and without notice withdraw or undo such facilities.
Not Sufficient or Funds Insufficient
When the funds in a customer’s account are insufficient to meet a cheque, which has been
presented to the banker through the clearing or otherwise, the cheque, on being returned
unpaid, is usually marked with the words “not sufficient”, “insufficient funds” or “not
sufficient funds”.
Not Provided for
An answer sometimes written by a banker on an instrument, which is being returned unpaid
for the reason that the drawer has failed to provide funds to meet the cheque amount . A
better answer in these circumstances is “Refer to Drawer”.
Present Again
These words are sometimes written by a banker upon a cheque, which is returned unpaid
because of insufficient funds in the customer’s account to meet it. It is not, however, by itself
a correct answer to give, as it does not afford any reasonable explanation why the cheque has
been returned.
Payment Stopped by Drawer
One of the reasons on account of which the Banker can refuse to make the payment of a
cheque is that the drawer has stopped the payment.
In London Provincial South Western Bank Ltd. v. Buszard16,it was held by the Court that
notice to one branch was not notice to the other branch.
Account Closed
This term essentially means that on the day of the presentment of the cheque, the account of
the drawer has been closed, thereby the cheque drawn on the said cheque cannot be encashed.
Hon’ble Kerala High Court observed that the contention for attracting penal liability for the
offence under Section 138 of the Act the account must have been alive at the time of
presentation of the cheque is unsound. If the contention gains acceptance it could open a safe
escape route for those who fraudulently issue cheques and close the account immediately
thereafter to deprive the payees of the cheque proceeds.
CONSTITUTIONAL VALIDITY OF SECTION 138
The validity of section of 138 of the Negotiable Instruments was challenged before the
Maharashtra High Court in NarayanadasBhagwandasPartani v. Union of India,17 contending
therein that the provisions of this section are violative of Article of 14 of the
Constitution of India. The Court examined the matter in detail taking into consideration the
facts of the case and various articles of the Indian Constitution and observed that the
importance of banking section in the developing economy could not be under-rated. The issue
16
(1918) 35 TLR 142: 63 SJ 246: 3 LDB 204
17
1993 Mah LJ 1229
of a cheque carries with it assumptions which could regulate the normal functioning of an
honest citizen. At a period of time when multitudinous persons and institutions press into
services, devices and facilities available under the Negotiable Instruments Act, it may be
necessary to ensure that those who issue such vital documents, do not adopt a casual or
careless attitude which could block the free flow of trade.
Court is unable to see any provision in arbitrariness or infraction of Article 14 of the
Constitution.
The offence is not the drawing of the cheque. The offence takes places when a cheque is
returned unpaid on the grounds as contained in Section 138 of the Negotiable Instruments
Act, 1881. Thus, there is a retrospective operation. The Madras High Court has held that laws
made justly and for the benefit of individuals and for the community as a whole may relate to
time antecedent to their commencement.
PUNISHMENT
Bouncing of a cheque invites criminal prosecution under section 138 of the Negotiable
Instruments Act, 1881. Punishment for the offence under Section 138 of NI Act is
imprisonment up to two years or fine which may extend to twice the cheque amount or both.
The offence is bailable, compoundable and non-cognizable.
CIVIL ACTION
The payee may also initiate money recovery procedure in a jurisdictional civil court apart
from prosecuting the drawer for criminal offence.
CONCLUSION
Chapter XVII of the Negotiable Instruments Act, 1881 (the Act), was enacted to give effect
to the legislative intent of the statute which it sought to achieve and to inculcate faith in the
efficacy of banking operations and maintaining the credibility of the banking transactions.
Bounced cheques are one of the most common offences plaguing the financing world.
According to the Supreme Court, there are over 40 lakhs such pending cases in the country.
Although, there have been a few amendments in the Act which has made the Act, a self-
contained statute, wherein provisions have been made to check the delays and to ensure
speedy justice with more deterrent cheque bouncing is not decreasing. Moreover, the law is
unnecessarily complicated and there is lack of provisions for forcing the appearance of the
accused in the court. Though the amendments to the Negotiable Instruments Act, 1881 are
helpful in dealing with the offence of bouncing of cheque, they are not fully proved
successful in stopping the offence, yet the problem of cheque bouncing is not decreasing.
Giving effect to the intention of the Act and the provisions therein, the wrongdoers should not
beallowed to escape the consequences by reason of adopting a strict interpretation to
suchprovisions under the garb that it is a penal provision.
BIBLIOGRAPHY
Web sources-
http://www.legalserviceindia.com/article/l277-Dishonour-Of-Cheque.html
https://www.legalcrystal.com/act/50934/negotiable-instruments-act-1881-complete-
act
https://www.lawteacher.net/free-law-essays/administrative-law/the-law-on-account-
payee-cheques-constitutional-administrative-law-essay.php
Statute referred-
Negotiable Instruments Act, 1881
