Professional Documents
Culture Documents
Dishonour of Cheque
Dishonour of Cheque
Assignment
On
Contracts
Of
Dishonor Of cheque
BY:- Ankit Tiwari
BBA.LLB
1st year
Second Semester
(2013008316)
INTRODUCTION
Advent of cheques in the market have given a new dimension to the
commercial and corporate world, its time when people have preferred to carry
and execute a small piece of paper called cheque than carrying the currency
worth the value of cheque. Dealings in cheques are vital and important not
only for banking purposes but also for the commerce and industry and the
economy of the country. But pursuant to the rise in dealings with cheques,
the practice of giving cheques without any intention of honoring them has
also risen. In case a cheque is issued by a person in liquidation of his debt or
liability, and same is dishonoured, then it not only creates a bad taste, but
can also result in harassment and can cause damages to the person to whom
the cheque may have been issued.
In India, cheques are governed by the Negotiable Instruments Act, 1881,
which is largely a codification of the English Law on the subject. Before 1988
there was no effective legal provision to restrain people from issuing cheques
without having sufficient funds in their account or any stringent provision to
punish them in the event of such cheque not being honoured by their bankers
and returned unpaid. Although, on dishonour of cheques there is a civil
liability accrued, however in reality the processes to seek civil justice becomes
notoriously dilatory and recover by way of a civil suit takes an inordinately
long time. To ensure prompt remedy against defaulters and to ensure
credibility of the holders of the negotiable instrument a criminal remedy of
penalty was inserted in Negotiable Instruments Act, 1881 in form of the
liability, partly or wholly, even if it is returned unpaid will not meet the penal
consequences.
a)
The word 'offence' is not defined in the Negotiable Instruments Act, 1881.
According to section 3(38) of the General Clauses Act it means any act or
omission made punishable by any law for the time being in force.
It is the person who draws and issues a cheque that falls within the ambit of
Section 138 of the Negotiable Instruments Act, 1881. The maker of cheque
(who signs the cheque) is called the `drawer'.
When a person is aware of the fact that there are no funds in one's bank
account if he issues cheque to a trader for goods purchased, the bank will
return the cheque for insufficiency of funds. By issuing a cheque under such
circumstance, drawer commits an offence under Section 138 of the Negotiable
Instruments Act.
On the cheque being dishonoured, the payee in terms of Section 138 of the Act
can call upon the guilty to pay the money covered by the returned cheque
within 30 days from the date of return, only after serving a notice of
dishonour to the drawer. If the drawer does not pay the amount despite the
notice within 15 days from the receipt thereof, the drawer commits an offence
under Section 138 of the Negotiable Instruments Act, 1881.
Notice of Dishonour
Notice of Dishonour is a formal communication of the fact of dishonour of
cheque. Sub-section (b) of Section 138 of the Negotiable Instruments Act
requires the payee or the holder in due course to issue a notice in writing to
the drawer of the cheque within 15 days of the receipt of the information by
him from the bank regarding the return of the cheque as unpaid. The subsection further provides that the drawer has to comply with the demand
within 15 days of the receipt of the said notice.
The demand notice envisaged in section 138 is in effect a notice of dishonour
to the drawer combined with a demand on him to pay the amount of the
dishonoured cheque within the time allowed by the statute. It serves as a
warning to the person to whom the notice is given that he could now be made
liable. If the holder fails to give this notice to the drawer, except in cases when
notice of dishonour may be excused, all prior parties liable thereon are
discharged of their liability.
Cause of Action
Cause of action for prosecution under section 138 of the Negotiable
Instruments Act does not arise by mere presentation of the cheque in bank
and by its dishonour.
A division bench of the Kerala High Court 4, after considering the ambit and
scope of Sections 138 and 142 of the Negotiable Instruments Act, has held
that the prosecution for such an offence would only be maintainable when the
period of 15 days from the receipt of the notice by the drawer of the cheque
has elapsed. The court observed that the dishonour of he cheque by itself does
not give rise to a cause of action because payment can be made on receipt of
the notice of demand contemplated in clause (b) of Section 138 and in that
event, there is no offence, nor any attempt to commit the offence nor even a
4
10
preparation to commit the offence. Failure to pay the amount within fifteen
days of receipt of notice alone is the cause of action that would permit a
prosecution and nothing else.
Written Complaint
A complaint is required to be filed by the payee or the holder in due course of
the dishonoured cheque.
Section 142 (a) of the Negotiable Instruments Act, makes it clear that only
upon a complaint in writing made by the payee or the holder in due course of
the cheque, the court can take cognizance of the offence. If the payee or the
holder in due course does not file a complaint, the drawer cannot be
prosecuted.
Criminal Proceeding Chapter XVII of the Negotiable Instruments
Act
Chapter XVII inserted by the Banking, Public Financial Institutions and
Negotiable Instruments Laws (Amendment) Act, 1988 provides for penalties
in case of dishonour of certain cheques for insufficiency of funds in the
accounts or for the reason that the amount exceeds the arrangement made by
the drawer.
As per the penal provisions under the Act, the drawer, committing an offence
under Section 138, is liable to be punished with imprisonment for a term
11
which may extend to two years, or fine which may extend to twice the amount
of the cheque or both.
12
accused persons or had given consent that the accused person shall retain
that property.
To hold a person guilty of the offence of cheating it has to be shown that his
intention was dishonest at the time of making the promise.
Whenever a cheque issued with dishonest intentions is dishonoured, the
drawer of the cheque can be proceeded against under sections 417 & 420 of
the IPC by the payee or holder in due course of the cheque.
Forgery
Section 463 of IPC defines forgery as:
"Whoever makes any false documents or electronic record part of a document
or electronic record with, intent to cause damage or injury, to the public or to
any person, or to support any claim or title, or to cause any person to part
with property, or to enter into any express or implied contract, or with intent
to commit fraud or that fraud may be committed, commits forgery."
Punishment for Forgery
Whoever commits forgery shall be punished with the imprisonment of either
for a term which may extend to two years or with fie or with both.5
13
14
15
Section 138 clearly shows that in the event of the drawer of the cheque failing
to make the payment of the said amount of money, a prosecution can be
maintained. The expression "said amount of money" can only denote the
amount for which the cheque is drawn and cannot relate to a part of it. Even
where part payment is made by the drawer after issue of statutory notice, the
prosecution can not be quashed7.
Liability of drawer after deposit of entire amount during trialAs
stated by the Supreme Court once the offence is committed, any payment
made subsequent thereto will not absolve the accused of the liability of
criminal offence, though in the matter of awarding of sentence, it may have
some effect on the court trying the offence. But by no stretch of imagination, a
criminal proceeding could be quashed on account of deposit of money in the
court or that an order of quashing of criminal proceeding, which is otherwise
unsustainable in law, could be sustained because of the deposit of money in
this court. The deposit of money by the drawer, therefore, during the trial is of
no consequence8.
Death of Drawer
The criminal liability can not be fastened to the heirs and the legal
representatives of the person who is said to have been guilty of the offence in
question. The cheque presented for realization by the complainant was
returned on the ground of insufficient funds. The notice sent was returned
with postal endorsement 'party expired'. Wife and daughters of the drawer of
7
8
Ruby Leather Exports v. Venu (K) (1995) 82 Comp Cas 776 (Mad).
Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)
16
the cheque cannot be prosecuted for the offence under Section 138 of the Act
for the alleged failure of the drawer in meeting the liability to pay the amount
covered by the cheque which was dishonoured in response to the notice sent
by the complainant9.
Drawer declared insolvent
The drawer cannot escape from the criminal liability by putting forward he
plea that he is not bound to discharge the liability mentioned in the
complaint as he was already declared as an insolvent, especially when there
is section 139 permitting the court to presume that there is an existing
liability and the issuance of the cheque was made towards the discharge of
the said liability.
17
fully justified in returning the cheque. These are the cases which may be
termed as a countermand from the customer which means an order to revoke
the former instructions and annulling the former mandate given by the
customer to the bank to honour the cheques and it also means the situations
resulting from the closure of account by the customer, prohibitory 'garnishees'
orders having been received from the court or orders for payment having been
received from the court or orders for payment having been received under
Section 226 (3) of the Income-Tax Act, 1961 and similarly it also means the
situation when there is a restrained order from the court, notice of death of
the customer, lunacy of the customer, notice of loss of cheque or forged
signatures on the cheque.
18
duly required so to do, and, in default of such payment, must compensate the
drawer for any loss or damage caused by such default".
Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 595
Gibbons v. Westminster Bank (1939) 3 All E.r. 577
19
20
The Bills of Exchange Act 1882 codifies for the United Kingdom the law
relating to bills of exchange, promissory notes and cheques. A cheque "is a bill
of exchange drawn on a banker payable on demand". 12 For the most part the
rules of law applicable to bills payable on demand apply in their entirety to
cheques. But there are certain peculiar rules relating to the latter which
arise from the fact that the relationship of banker and customer subsists
between the drawer and drawee of a cheque. For example, when a person has
an account at a bank he is, as an inference of law, entitled to draw on it by
means of cheques.
The holder of a bill has special duties which he must fulfil in order to
preserve his rights against the drawers and indorsers. They are not absolute
duties; they are duties to use reasonable diligence. When a bill is payable
after sight, presentment for acceptance is necessary in order to fix the
maturity of the bill. Accordingly the bill must be presented for acceptance
within a reasonable time. When a bill is payable on demand it must be
presented for payment within a reasonable time. When it is payable at a
future time it must be presented on the day that it is due.
If the bill is dishonoured the holder must notify promptly the fact of
dishonour to any drawer and indorser he wishes to charge. If, for example, the
holder only gives notice of dishonour to the last indorser, he could not sue the
drawer unless the last indorser or some other party liable has duly sent notice
to the drawer. When a foreign bill is dishonoured the holder must cause it to
be protested by a notary public. The bill must be noted for protest on the day
12
21
of its dishonour. If this be duly done, the protest, i.e. the formal notarial
certificate attesting the dishonour, can be drawn up at any time as of the date
of the noting. A dishonoured inland bill may be noted, and the holder can
recover the expenses of noting, but no legal consequences attach thereto. In
practice, however, noting is usually accepted as showing that a bill has been
duly presented and has been dishonoured. Sometimes the drawer or indorser
has reason to expect that the bill may be dishonoured by the drawee. In that
case he may insert the name of a "referee in case of need." But whether he
does so or not, when a bill has been duly noted for protest, any person may,
with the consent of the holder, intervene for the honour of any party liable on
the bill. If the bill has been dishonoured by non-acceptance it may be
"accepted for honour supra protest". If it has been dishonoured by nonpayment it may be "paid supra protest". When a bill is thus paid and the
proper formalities are complied with, the person who pays becomes invested
with the rights and duties of the holder so far as regards the party for whose
honour he has paid the bill, and all parties antecedent to him. 13
Laws of New Zealand on Dishonour of Cheques
The Bills of Exchange Act 1908 codifies for the New Zealand laws relating to
bills of exchange, promissory notes and cheques. In this Act, the provisions
relating to dishonour of cheques are not separately dealt with under the
chapter related to cheques in the Act and therefore it can be assumed that the
provisions of dishonour of bills only apply in case of dishonour of cheques.
13
22
Section 42 of the Bills of Exchange Act 1908 deals with dishonoured by nonacceptance "Where a bill is duly presented for acceptance and is not accepted within the
customary time, the person presenting it must treat it as dishonoured by nonacceptance. If he does not, the holder shall lose his right of recourse against
the drawer and indorsers".
Section 43 of the Bills of Exchange Act 1908 further deals with the
consequences of dishonour by non-acceptance "A bill is dishonoured by non-acceptance(a) Where it is duly presented for acceptance, and such an acceptance as is
prescribed by this Act is refused, or cannot be obtained; or
(b) Where presentment for acceptance is excused and the bill is not accepted.
New Zealand Laws
Under the Bills of Exchange Act 1908 Section 42 requires that when a cheque
is duly presented for acceptance and is not accepted within the customary
time, the person presenting it must treat it as dishonoured by nonacceptance. However, if he does not, the holder will lose his right of recourse
against the drawer and indorsers.
Further, Section 48 of the Bills of Exchange Act 1908 deals with notice of
dishonour. The section states that if a cheque has been dishonoured by nonacceptance or by non-payment, notice of dishonour must be given to the
23
drawer and each indorser. However, any drawer or indorser to whom such
notice is not given shall be discharged from his liability.
CONCLUSION
The law relating to Negotiable instruments is the law of the commercial world
which was enacted to facilitate the activities in trade and commerce, making
provision of giving sanctity to the instrument of credit which would be
deemed convertible into money and easily passable from one person to
another. In the absence of such instruments, the trade and commerce
activities were likely to be adversely affected as it was not practical for the
trading community to carry on with it the bulk of currency in force.
The main object of the Act is to legalise the system by which instruments
contemplated by it could pass from hand to hand by negotiation like any other
goods.
Chapter XVII was inserted in the Act 1988 with a view to promote the
efficacy of banking operations and to ensure credibility in transacting
business through cheques. However the chapter is not comprehensive and
lacks to cover the various aspects of the commercial transactions especially in
view of the emerging ways of payment through the Internet and other
electronic means. Section 138 also does not specifically cover the aspects such
as where the payment has been stopped by the drawer or where the account
has been closed prior to the endorsement of the cheque. These provisions no
doubt have served their purpose but they could be more elaborate in solving
the dispute rather than merely relying on the Court judgments.
24
However, the processes to seek civil justice is notoriously dilatory and recover
by way of a civil suit may take inordinately long time therefore if the
Government of India could establish a tribunal to deal with the dishonour of
cheques and the liability arising therefrom, it could make the process of
recovery of damages faster for the aggrieved party. For example, the Debts
Recovery Tribunals have been established by the Government of India under
an Act of Parliament (Act 51 of 1993) for expeditious adjudication and
recovery of debts due to banks and financial institutions. Establishment of a
similar tribunal to deal with the cases of dishonour of cheques could perhaps
provide a faster relief to the aggrieved party.
BIBLIOGRAPHY
1. R.K Suri;
Publishers, Hyderabad;
2. S.N. Gupta, Dishonour of cheques-Liability Civil & Criminal,
Universal Book Traders, Delhi;
3. Rajesh Gupta, Dishonour of cheques Law and Practice, Bharat
Law House Pvt Ltd, New Delhi;
4. A.N Saha, Law of Dishonour of cheques, Orient Publishing
Company, New Delhi;
25
26