DISHONOUR OF CHEQUES

APURVA AGRAWAL

GODREJ & BOYCE MFG. CO. LTD.

September 26, 2004

WHAT IS A BILL OF
EXCHANGE
A "Bill of Exchange" is a negotiable
instrument in writing containing an
instruction to a third party to pay a stated
sum of money at a designated future date or
on demand.

WHAT IS A CHEQUE
A "cheque" on the other hand is a bill of
exchange drawn on a bank by the holder of an
account payable on demand. Thus a "cheque"
under Section 6 of the NIA is also a bill of
exchange but it is drawn on a banker and is
payable on demand. It is thus obvious that a
bill of exchange even though drawn on a
banker, if it is not payable on demand, it is not
a cheque.

WHAT IS A POSTDATED
CHEQUE
A "postdated cheque" is only a bill of
exchange when it is written or drawn, it
becomes a "cheque" when it is payable on
demand.

The postdated cheque is not payable till

the date which is shown on the face of the
said document. It will only become cheque
on the date shown on it and prior to that it
remains a bill of exchange under Sec 5 of
the NIA.

WHAT IS A POSTDATED
CHEQUE Contd
As a bill of exchange a postdated cheque
remains negotiable but it will not become a
"cheque" till the date when it becomes
"payable on demand".
Refer: Anil Kumar Sawhney V. Gulshan Rai
1993-(004)-SCC -0424 SC

WHAT IS A CHEQUE?
SIMPLIFIED
You can order the Bank to pay someone, on
your behalf
You can do this by giving a cheque to the payee
A cheque is like an order to the bank

When the payee shows it to your bank, the bank

will pay the money
This is called honoring a cheque

DEPOSITING A CHEQUE
Godrej has received a cheque say from me
My bank account is in ABN Amro Bank, Sakhar
Bhawan, Nariman Point, Mumbai
Will Godrej send a peon to collect the money
from ABN Amro Bank, Sakhar Bhawan,
Nariman Point, Mumbai?

DEPOSITING A CHEQUE
Contd
Godrejs account is with ICICI Bank, Vikhroli
Godrej will request its bank ICICI Bank to
collect the money on its behalf
Godrej will do this by simply depositing the
cheque in their account with ICICI Bank, Vikhroli

ENDORSING A
CHEQUE
Godrej has received a cheque
Godrej will deposit this cheque into their bank i.e.
ICICI Bank, Vikhroli and receive the payment in 23 days if it is a local cheque or about 21 days if it
is an outstation cheque (cheques which cannot be
drawn on par).

ENDORSING A
CHEQUE Contd
What if Godrej needs the money urgently?
The cheque can be endorsed to a third party say
me Apurva Agarwal
I can give you cash against the cheque at a
discount
I will deposit the cheque into my account and my
bank will collect the money on my behalf

ENDORSING A
CHEQUE Contd
Endorsement is done on the reverse of the
cheque

Normally only bearer and simple crossed

cheques can be endorsed.

THE PAYEE
A cheque will mostly be paid to the person
named as payee
Making out a cheque in the name of Mr.
Singh is not a good idea. Say Mr. Satbir
Singh instead

Suppose a payment has to be made to

Godrej Soaps Limited. The full name has to
be written. Just saying Godrej is not enough.

DATING THE CHEQUE

A cheque can not be paid before the date
which is put on it
The cheque is valid only for six months from
the date its drawn
A cheque dated March 6, 1998 was deposited
in the bank on September 5, 1998

DATING THE CHEQUE

Contd

The cheque reached the paying bank on

September 7, 1998.

The six months had elapsed. Hence the

cheque was returned. Such cheques are
known as stale cheques.

What happens if you put an impossible date

on the cheque? For example, November 31,
2000? The bank will treat the date as 1st
December 2000.

AMOUNT IN WORDS

Why do you have to write the amount in

figures (numerals) and in words?
To make it difficult for people to alter the
amount

AMOUNT IN WORDS
Contd
In most cases, if the amount in words and
figures do not match, then the bank will return
the cheque.
However, if the bank does not suspect an
alteration, then the bank can pay the amount in
words.

STOP PAYMENT
If the cheque is not already paid, you can ask the
bank to stop payment.
For doing this, you should issue the instructions
in writing.
Take an acknowledgement. Some foreign banks
also accept the instructions on phone. Take the
instructions number.

STOP PAYMENT
Contd
The stop payment remains effective for six
months.
If the cheque is paid due to an oversight by
the bank, the bank will bear the loss.
For issuing the instructions, you must give
the correct cheque number, payees name,
amount and date.

DISHONOR OF
CHEQUES
Section 138 of the NIA provides that the
dishonor of a cheque for the reasons
a) "insufficiency of funds" or
b) the amount covered by the cheque was not
arranged for

DISHONOR OF
CHEQUES Contd
The said provision was incorporated
into the NIA to enhance the acceptability
of cheques.
The said section would apply only
when the cheque is presented for
payment within the period of its validity

WHEN DISHONOUR
OF CHEQUE IS AN
OFFENCE
Refer: K. Bhaskaran v. Sankaran
Vaidhyan Balan 1999 ALL MR (Cri) 1845
(SC)= 1999 (4) ALL MR452 (SC)
1. Ingredients of the offence under
s. 138
a) Drawing of the cheque
b) Presentation of the cheque to the bank

WHEN DISHONOUR
OF CHEQUE IS AN
OFFENCE Contd
c) Returning the cheque unpaid by the
drawee bank
d) Giving notice in writing to the drawer of
the cheque demanding payment of the
cheque amount
e) Failure of the drawer to make payment
within 15 days of the receipt of the notice

DRAWING OF A
CHEQUE
Cheque should have been drawn by the
drawer in payment of a legal liability to discharge
the existing debt.
The words any debt or any other liability
appearing in section 138 make it very clear that it
is not in respect of any particular debt or liability.
The presumption which the Court will have to
make in all such cases is that there was some debt
or liability once a cheque is issued

DRAWING OF A
CHEQUE Contd
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

PRESENTATION
OF CHEQUE
The presentation of cheque should be within
its validity period i.e. six months
The question arises as to which bank the
cheque should reach within the validity period,
is it that of drawers bank or it is enough if the
cheque is presented by the payee to his bank
before the validity periods.

PRESENTATION OF
CHEQUE Contd
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.

RETURNING OF THE
CHEQUE UNPAID

Lot of controversy had arisen on the issue

What reasons are relevant to hold the drawer of

the cheque criminally responsible for bouncing
of a cheque

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

Case Laws

J. Veeraraghavan v. Lalith Kumar 1995 CRI L J

1882
Any reason for dishonour is an offence. The
Marginal Note of S. 138 of the NIA states Dishonour
of cheque for insufficiency etc. of funds in accounts"
addition of word "etc." cannot be considered to be
an accident

Case Laws Contd

Modi Cements v. Shri Kunchil Kumar
Nandi (1998 2 JT SC 198)
Even if notice is issued stopping payment
before the payee deposited the cheque in his
bank, offence is complete.

Case Laws Contd

Nepc Micon Ltd. And Others, Appellants V.
Magma Leasing Ltd. Respondent. 1999-(086)AIR -1952 SC
When the cheque is returned by a bank with an
endorsement account closed", it would amount
to returning the cheque unpaid because "the
amount of money standing to the credit of that
account is insufficient to honour the cheque" as
envisaged in s. 138 of the Act"

Case Laws Contd

If the cheque is dishonoured because of stop
payment" instruction to the bank, Section 138
would get attracted. It also amounts to dishonour
of the cheque within the meaning of Section 138
when it is returned by the bank with the
endorsement like (i) in this case, "referred to the
drawer" (ii) "instructions for stoppage of payment"
and stamped (iii) "exceeds arrangement".

Case Laws Contd

Sasseriyil Joseph v. Devassia [2001 Cri. L. J
(Ker)]
A cheque issued for the time barred debt, if
dishonoured, the drawer cannot be convicted
under Section 138 of NIA as debt was not legally
recoverable

Case Laws Contd

Shri Sai Steel v. State [2002 Cri. L. J 3193
(AP)]
The cheques were issued by X in favour of Y.
Y discounted the cheques with a Bank. The
cheques when deposited were dishonoured.
The Bank, holder in due course cannot file
complaint against X.

NOTICE
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.
Any demand made after the dishonour of cheque
will constitute a notice.

NOTICE Contd
It is not necessary that the notice should be sent
by Registered Post alone, it could be sent even by
fax.
It is not necessary that the notice should be in
any particular form or style.
It is held by the Supreme Court that while the
cheque could be presented at any number of times
however there shall be only one Notice.

ISSUE
Whether dishonour of the cheque on each occasion of
its presentation gives rise to a fresh cause of action
within the meaning of Sec. 142 (b) of NIA?

No - A competent court can take cognizance of a

written complaint of an offence u/s138 if it is made within
1mth of the date on which the cause of action arises
u/s142 (c) gives it is a restrictive meaning. It is the failure
to make payment within 15 days from date of receipt of
notice which will give rise to cause of action u/s 142 (c)
cause of action can arise only once.

ISSUE Contd
Therefore it is essential that the notice should be
perfect and in conformity with law.
It is common mistake committed by most of the
payees that as soon as the cheque is returned
unpaid to write a letter to the drawer threatening
him that in case he does not pay against the
dishonoured cheque legal action will be taken etc.
Such letter will also be construed as a notice.

ISSUE Contd

As stated already that non-payment of

cheque amount within the grace period of
fifteen days from the date of receipt of the
notice constitutes an offence and therefore
liable to prosecuted for the criminal offence so
committed

LIMITATION
NIA is a special legislation hence the time
limits that have been laid down has to be
strictly followed.
Any lapse in adhering to the schedule,
shall take away a cause of action under Sec.
138.
The time limits placed cannot be
condoned by the Courts.

LIMITATION.. Contd

The time limits are

1. Cheque should be presented to the bank for
encashment within its validity period i.e. 6 mths
2. Within 30 days from the receipt of return memo
indicating reason of dishonour, a notice should be
sent demanding the amt of dishonoured cheque to
be paid within 15 days of the receipt of the notice

LIMITATION.. Contd
3.
If the drawer does not pay the amount of
dishonoured cheque within the grace period of
fifteen days, a complaint thereafter should be
filed within one month in the relevant court of
Metropolitan Magistrate/Judicial Magistrate as
the case may be, having jurisdiction.

Case Laws
Saketh India Ltd. v. India Securities Ltd.
1999 Cri LJ 1822 (SC)

Limitation for filing complaint limit

defined as from a particular day - first day to
be excluded. Period of 15 days from the date
of receipt of notice ending on 14-10-1995 30 days period begins on 15-10-1995
Complaint filed on 15-11-1995 - within time.

Case Laws Contd

Haru Das Gupta v. St. of West Bengal 1972
(1) SCC 639
Held on the facts, that the period of limitation of
15 days expired on 14-10-1995. So the cause of
action for filing the complaint would arise from
15-10-1995. That day (15 Oct) was to be
excluded for counting the period of one month The Complaint filed on 15-11-1995 was in time)

Case Laws Contd

Amit Desai v. Shine Enterprises [2000 Cri. L.
J. 2386 (AP)]
Legal proceedings under section 138 of NIA
filed by an unregistered Partnership firm is liable
to be quashed as and when there is a bar of
filing a suit by unregistered Partnership firm

JURISDICTION
Refer: K. Bhaskaran v. Sankaran Vaidhyan
Balan 1999 (6) SCALE 272 (Judgment dated
Sept.29,1999)
Complaint can be filed at any of the place: -

1.Where the cheque was drawn.

2.Where the cheque was presented for
encashment.

JURISDICTION Contd
3.
Where the cheque was returned unpaid
by drawee bank.

4.
Where notice in writing was given to
drawer of cheque demanding payment.
5. Where drawer of cheque failed to make
payment within 15 days of receipt of notice.

JURISDICTION Contd

Each of the five acts constituting offence could

be done at 5 different localities. Hence one of
the Courts exercising jurisdiction in one of the
five local areas can become the place of trial
for the offence under sec. 138 of the NIA.

PENALTY

The drawer may be punished with imprisonment

for a term which may extend to two years, or

Fine which may extend to twice the amount of

the cheque, or

With both

PENALTY Contd

The magistrate can make liberal use of Sec.

357(3) of the Code. A Magistrate can award any
sum as compensation to alleviate the grievance of
the complainant by making resort to Sec. 357(3) of
the Code.

ISSUE
Who is liable in case a cheque issued by a
company is dishonoured?

Every person who, was responsible to the

company, for the conduct of the business of
the company, as well as the company itself

ISSUE Contd

If the offence has been committed with the

consent or connivance of, or is attributable to
any neglect on the part of any director,
manager, secretary or other officer of the
company, such director, manager, secretary
or other officer shall also be deemed to be
guilty of that offence.

ISSUE Contd

The burden will lie on that person to

prove that the offence was committed
without his knowledge or that he had
exercised all due diligence to prevent
the commission of such offence.

CIVIL & CRIMINAL

CASES

Civil and criminal action is not mutually

exclusive but clearly co-extensive.

Therefore civil case is no bar for criminal

proceedings.

CIVIL & CRIMINAL

CASES Contd
Medchl Chemicals and Pharma Pvt. Ltd. v.
Biological E. Ltd. 2000 Cri.L.J. 1487 (SUPREME
COURT)
In fact, many a cheatings were committed in the
course of commercial and also money transactions;
--- the fact that there is a remedy provided for beach
of contract, that does not by itself clothe the Court to
come to a conclusion that civil remedy is the only
remedy available

CIVIL & CRIMINAL

CASES Contd
Both criminal law and civil law remedy can be
pursued in diverse situations. As a matter of fact
they are not mutually exclusive but clearly coextensive and essentially differ in their content
and consequence. The object of criminal law is to
punish an offender who commits an offence against a
person, property or the State for which the accused,
on proof of the offence, is deprived of his liberty and
in some cases even his life

CIVIL & CRIMINAL

CASES Contd
This does not, however, affect civil remedies at all
for suing the wrongdoer in case like arson,
accidents etc. It is anathema to suppose that
when a civil remedy is available, a criminal
prosecution is completely barred.

CONCLUSION
CONCLUSION
Recap
Recap
1

Time Period of
Presentation of
Cheque to banks for
encashment:

Number of times a
Cheque can be
presented for
encashment in bank
(in Case of
dishonour)

Six (6) English Calendar

Months from the date
mentioned on the Cheque
(includes post-dated
Cheques).
a) Any number of times till
NO Legal Notice of
Dishonour and Demand of
Cheque amount is made.

CONCLUSION
RecapContd
(b) Once a Legal Notice
about dishonour of cheque
& demand of cheque
amount is made, the cheque
cannot be presented again
(if you intent to file a case).

Time Period for

issuance of Legal
Notice of Dishonour
of Cheque and
Demand

Thirty (30) days from date of

intimation of dishonour of
Cheque by bank to the
customer.

CONCLUSION
RecapContd

Time Period for

Payment of
Dishonored Cheque
amount by Drawer

It would be in your interest

to engage Lawyer for
issuance of Notice A
large number of Cases fail
in Court because of
defects and mistakes in
legal Notice.
Fifteen (15) days from
Date of Receipt of Legal
Notice of Demand.

CONCLUSION
RecapContd
5

Time Period for

filing Criminal
Complaint before
Court:

Criminal Complaint can be

filed before Court After
Fifteen (15) days but within
forty-five (45) days [i.e.,
between 15th day to 45th
day] from Date of Receipt of
Legal Notice of Demand by
the Drawer if no payment of
Cheque amount is made by
him.

CONCLUSION
RecapContd
6

Time Period for

filing Suit before
Court:

Suit can be filed before

Court within Three (3) years
from the date mentioned on
the Cheque (includes postdated cheques).

CONCLUSION
RecapContd

It is not necessary to file both the Cases

(Criminal Complaint & Money Suit), however, it is
always advisable to file both the Cases together.

Further Criminal Complaint and Money Suit can

be filed on the same day/date or on different days/
dates, however, they have to be within their
limitation period.

Any questions
???

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