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INTRODUCTION

Advent of cheques in the market have given a new dimension to the commercial andcorporate world, its time when
people have preferred to carry and execute a small pieceof paper called cheque than carrying the currency worth the
value of cheque. Dealings incheques are vital and important not only for banking purposes but also for the
commerceand industry and the economy of the country. But pursuant to the rise in dealings withcheques, the
practice of giving cheques without any intention of honoring them has alsorisen. In case a cheque is issued by a
person in liquidation of his debt or liability, andsame is dishonoured, then it not only creates a bad taste, but can also
result in harassmentand can cause damages to the person to whom the cheque may have been issued.Since business
activities have increased, the attempt to commit crimes and indulge
inactivities for making easy money have also increased. Thus besides civil law, animportant development both in
internal and external trade is the growth of crimes and ithas been found that the banking transactions and banking
business is every day beingconfronted with criminal actions and this has led to an increase in the number of
criminalcases relating to or concerned with the banking transactions.In India, cheques are governed by the
Negotiable Instruments Act, 1881, which is largelya 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 beinghonoured by their
bankers and returned unpaid. Although, on dishonour of cheques thereis a civil liability accrued, however in reality
the processes to seek civil justice becomesnotoriously dilatory and recover by way of a civil suit takes an
inordinately long time. Toensure prompt remedy against defaulters and to ensure credibility of the holders of
thenegotiable instrument a criminal remedy of penalty was inserted in NegotiableInstruments Act, 1881 in form of t
he Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 which were
further modified bythe Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002[3].7

Of the ten sections comprising chapter XVII of the Act, section 138 creates statutoryoffence in the matter of
dishonour of cheques on the ground of insufficiency of funds inthe account maintained by a person with the banker.
Section 138 of the NegotiableInstruments Act, 1881 is a penal provision wherein if a person draws a cheque on
anaccount maintained by him with a banker for payment of any amount of money toanother person from out of that
account for the discharge, in whole or in part of any debtor other liability, is returned by the bank unpaid, on the
ground either because of theamount of money standing to the credit of that account is insufficient to honour
thecheque or that it exceeds the amount arranged to be paid from that account by anagreement made with that bank,
such person shall be deemed to have committed anoffence.Section 138 of the Act can be said to be falling in the acts
which are not criminal in realsense, but are acts which in public interest are prohibited under the penalty or
thosewhere although the proceeding may be in criminal form, they are in reality only asummary mode of enforcing a
civil right. Normally in criminal law existence of guiltyintent is an essential ingredient of a crime. However the
Legislature can always create anoffence of absolute liability or strict liability where ‘mens rea’ is not at all
necessary.This paper deals with the various aspects of dishonour of cheques and then, proceedstowards the liability
arising out of such dishonour.8

DISHONOUR OF CHEQUES – MEANING

Section 6 of the Negotiable Instruments Act, 1881 defines a cheque


as"a bill of exchange drawn on a specified banker and not expressed to be payableotherwise than on
demand"."Dishonour" means "to refuse or neglect to accept or pay when duly presented for payment of a bill of
exchange or a promissory note or draft on a banker .

Black’s Law Dictionary

defines the term "Dishonour" as"to refuse to accept or pay a draft or to pay a promissory note when duly presented.
Aninstrument is dishonored when a necessary or optional presentment is duly made and dueacceptance or payment
is refused, or cannot be obtained within the prescribed time, or incase of bank collections, the instrument is
reasonably returned by the midnight deadline;Reference to the term 'dishonour' has been made in Section 91 and
Section 92 of the Negotiable Instruments Act, 1881.Section 91 - Dishonor by non- acceptance"A bill of exchange is
said to be dishonored by non-acceptance when the drawee, or oneof several drawee not being partners, makes
default in acceptance upon being dulyrequired to accept the bill, or where presentment is excused and the bill is not
accepted.Where the drawee is incompetent to contract, or the acceptance is qualified the bill may be treated as
dishonored".Section 92- Dishonour by non-payment"A promissory note, bill of exchange or cheque is said to be
dishonored by non-paymentwhen the maker of the note, acceptor of the bill or drawee of the cheque makes default
in payment upon being duly required to pay the same"

Vide Wharton’s Law Lexicon, 1978 Ed. p. 335

Vide Rakesh Porwal v. Narayan Joglekar, 1993 Cr LJ 680 p. (688) (Bom).

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Thus if on presentation the banker does not pay, then dishonour takes place and theholder acquires at once the right
of recourse against the drawer and the other parties onthe cheque.Dishonour of cheque has been considered as a
criminal offence under Section 138 of the Negotiable Instruments Act, 1881. According to Section 138 whenever
any cheque for discharge of any legally enforceable debt or other liability is dishonoured by the bank for want of
funds and the payment is not made by the drawer despite a legal notice of demand, it shall be deemed to be criminal
offence.10

DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138Section 138 of the Negotiable Instruments


Act, 1881

Dishonour of cheques is considered as an offence under Section 138 of the NegotiableInstruments Act, 1881.
Section 138 deals with Dishonour of cheque for insufficiency of funds in the accounts. The Section reads as
follows:"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 thedischarge, 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 isinsufficient to honour the cheque or that it exceeds the amount arranged to be paid fromthat account by an
agreement made with that bank, such person shall be deemed to havecommitted 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
year, or with fine whichmay extend to twice the amount of the cheque, or with both.Provided that nothing contained
in this section shall apply unless-(a) The cheque has been presented to the bank within a period of six months from
thedate on which it is drawn or within the period of its validity, whichever is earlier.(b) 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, tothe drawer, of the cheque, within thirty days of the receipt of information by him from
the bank regarding the return of the cheques as unpaid, and(c) The drawer of such cheque fails to make the payment
of the said amount of money tothe payee or, as the case may be, to the holder in due course of the cheque, within
fifteendays of the receipt of the said notice

".

Object of Section 138

11

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The object of Section 138 is to make drawer of the cheque subject to penalty when thecheque bounces on the ground
of insufficient funds.The plain reading of Section 138 of the Negotiable Instruments Act makes it clear that,the
words, "either because of the amount of money standing to the credit of that accountis insufficient to honour the
cheque or that it exceeds the amount arranged to be paidfrom that account…" have been specifically used. It would,
therefore, mean that only twocontingencies are contemplated and as such, the words-"either-or" have been used. It
is,therefore, clear that the cheque should be dishonoured either for the insufficiency of theamount or, because it
exceeds the amount arranged to be paid from that account. No thirdcontingency or eventuality has been
contemplated and the specific clear wording of Section 138 eliminates any third contingency than mentioned in the
Section itself.The cheques can be dishonoured for many other reasons and there may be so manyeventualities in
which the payee is denied payment by the bank, the reasons such asmentioning the date incorrectly or some
corrections not initialed or the difference in between the amount mentioned in figures and words, are certain other
contingencies inwhich the cheques will be definitely dishonoured and would be returned as unpaid,however it is not
in respect of any of these contingencies that he dishonour of a chequeshas been made penal under Section 138 of the
said Act. In

Om Prakash Maniyar v. Swati Bhide

, the submissions on behalf of the petitioners to the effect that the dishonour because of the closure of the account
should be held as penal, was not accepted by thecourt.Section 138 was introduced with a laudable public policy
behind it. It is intended to prevent or curtail a mischief which is likely to affect financial transactions, and
therebytrade and business and ultimately, economy of the country.

Exclusion of Mens Rea

1992 Mah LJ 302 at 304

4
Mens Rea,

a guilty mind – Although

prima facie

and as a general rule there must be a mind at fault before there can be a crime, it isnot an inflexible rule, and a
statute may relate to such subject-matter and may be so framed as to make an act criminal, whether therehas been
any intention to break the law or otherwise to do wrong or not. There is a large body of Municipal law at the present
daywhich is so conceived – Wills R. v. Tolson, (1889) 23 Q.B.D 173 (vide Wharton’s Law Lexicon 14

th

Ed., Fifth Imp., 1992).

12

For committing an offence under Section 138 of the Act "mens rea" is not an essentialingredient

.Section 138 of the Negotiable Instruments Act, 1881, excludes

mens rea

by creating strictliability and this is explicit from the words 'such person shall be deemed to havecommitted an
offence'. The returning of the cheque by the bank either because he amountof money standing to the credit of the
drawer of the cheque is insufficient or the amountcovered by the cheque is in the excess of the amount arranged to
be paid from thataccount by an agreement with the bank are the two necessary conditions creating strictliability.

Ingredients and requirements of the penal provisions

Section 138 creates an offence for which the mental elements are not necessary. It isenough if a cheque is drawn by
the accused on an account maintained by him with a banker for payment of any amount of money to another person
from out of that accountfor discharge in whole or in part, of any debt or other liability due. Therefore, whenever the
cheques are on account of insufficiency of funds or reasons referable to the drawer’sliability to provide for funds,
the provisions of section 138 of the Act would be attracted, provided the following conditions are satisfied:

1. Cheque drawn on a bank account


Section 138 requires, that a cheque, to be caught by the section, should be 'drawn by a person on an account
maintained by him with the banker for payment of any amount of money'. Existence of a "live account" at the time
of issue of cheque is a condition precedent for attracting penal liability for the offence under this section. The
cheque isreturned by the bank unpaid either because of the insufficiency of the amount or, becauseit exceeds the
amount arranged to be paid from that account. The words "that account" inthe section denote to the account in
respect of which the cheque was drawn. No doubt if any person manages to issue a cheque without an account with
the bank concerned itsconsequences would not snowball into the offence described under section 138 of the

Mahendra A.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases 438 (Bom.)

13

Act. For the offence under section 138 of the Act there must have been an accountmaintained by the drawer at the
time of the cheque was drawn.

2. Issue of Cheque in discharge of a debt or liability

The cheque unpaid by the bank must have been issued in discharge of a debt or other liability wholly or in part.
Where a cheque is issued not for the purposes of discharge of any debt or other liability, the maker of the cheque is
not liable for prosecution under section 138 of the Act. A cheque given as a gift or for any other reasons and not for
thesatisfaction of any debt or other liability, partly or wholly, even if it is returned unpaidwill not meet the penal
consequences.If the above conditions are fulfilled, irrespective of the mental conditions of the drawer he shall
be deemed to have committed an offence, provided the other four requisites arefulfilled:

a) Presentation of the cheque within six months or within the period of its validity

The cheque must have been presented to the bank within a period of six months from thedate on which it is drawn or
its period of validity, whichever is earlier. Thus if a cheque isvalid for three months and is presented to the bank
within a period of six months the provisions of this section shall not be attracted. However if the period of validity
of thecheque is not specified or prescribed the cheque is presented within six months from thedate the cause of
action can arise. The six months are taken from the date the cheque wasdrawn.

b) Return of the cheque unpaid for reason of insufficiency of funds

The cheque must be returned either because the money standing to the credit of thataccount is insufficient to honour
the cheque or that it exceeds the arrangement made to be paid from that account by an agreement with the bank.
c) Issue of the notice of dishonour demanding payment within thirty days of receiptof information as to dishonour of
the cheque.

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The payee or the holder in due course of the cheque has to give a notice in writingmaking a demand for payment of
the said amount of money to the drawer of the cheque.Such notice must be given within 30 days of information from
the bank regarding thereturn of cheque as unpaid.

d) Failure of the drawer to make the payment within fifteen days of the receipt of the payment

After the receipt of the above notice the drawer of the cheque has to make payment of said amount of money to the
payee or to the holder in due course of the cheque within 15days of the receipt of the notice. If the payment is not
made after the receipt of the noticewithin stipulated time, a cause of action for initiating criminal proceedings under
thissection will arise.

Scope and applicability of Section 138

According to the Section 138 whenever any cheque for discharge of any legallyenforceable debt or other liability is
dishonoured by the bank for want of funds and the payment is not made by the drawer despite a legal notice of
demand, it shall be deemed to be a criminal offence.Where a cheque is issued not for the purpose of discharge of any
debt or other liability,the maker of the cheque is not liable for prosecution. For example, if the cheque is given by
way of a gift or present and if it is dishonoured by the bank, the maker of the cheque isnot liable for prosecution

Mohan Krishna (B) v Union of India 1996 Cri LJ 636 (AP)

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DISHONOUR OF CHEQUE – OFFENCE BY DRAWER

The word 'offence' is not defined in the Negotiable Instruments Act, 1881. According tosection 3(38) of the General
Clauses Act it means any act or omission made punishable by any law for the time being in force.As noticed in the
previous topic, what is made an offence is not the drawing of chequealone. It must have been drawn in discharge, in
whole or in part, of a legally enforceabledebt or other liability. It must have been duly presented in time and
dishonoured. Theremust be a written demand for the amount within a specified time, followed by failure tomake
payment within another specified time. It becomes an offence only on such failurewhich is an illegal omission

.It is the person who draws and issues a cheque that falls within the ambit of Section 138of the Negotiable
Instruments Act, 1881. The maker of cheque (who signs the cheque) iscalled the `drawer'.When a person is aware of
the fact that there are no funds in one's bank account if heissues 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
anoffence under Section 138 of the Negotiable Instruments Act.On the cheque being dishonoured, the payee in
terms of Section 138 of the Act can callupon the guilty to pay the money covered by the returned cheque within 30
days from thedate of return, only after serving a notice of dishonour to the drawer. If the drawer doesnot 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 theholder in due course to issue a notice in writing to the
drawer of the cheque within 15

Anto (K S) v Union of India (1993) 76 Comp Cas 105 (Ker).

16

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days of the receipt of the information by him from the bank regarding the return of thecheque as unpaid. The sub-
section further provides that the drawer has to comply withthe 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 thedrawer combined with a
demand on him to pay the amount of the dishonoured chequewithin the time allowed by the statute. It serves as a
warning to the person to whom thenotice is given that he could now be made liable. If the holder fails to give this
notice tothe drawer, except in cases when notice of dishonour may be excused, all prior partiesliable thereon are
discharged of their liability.

Cause of Action

Cause of action for prosecution under section 138 of the Negotiable Instruments Act doesnot arise by mere
presentation of the cheque in bank and by its dishonour.A division bench of the Kerala High Court

, 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 receiptof the notice
by the drawer of the cheque has elapsed. The court observed that thedishonour of he cheque by itself does not give
rise to a cause of action because paymentcan be made on receipt of the notice of demand contemplated in clause (b)
of Section 138and in that event, there is no offence, nor any attempt to commit the offence nor even a 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 nothingelse.

Written Complaint

A complaint is required to be filed by the payee or the holder in due course of thedishonoured cheque.

N.C. Kumaresan v. Ameerappa 1991 (1) KLT 797

17

Section 142 (a) of the Negotiable Instruments Act, makes it clear that only upon acomplaint in writing made by the
payee or the holder in due course of the cheque, thecourt can take cognizance of the offence. If the payee or the
holder in due course does notfile a complaint, the drawer cannot be prosecuted.

Cognizance of Offence
In terms of Section 142 of the Negotiable Instruments Act, 1881, no court shall takecognizance of any offence
punishable under section 138 except upon a written complaintmade by the payee or the holder in due course of the
dishonoured cheque and filed withinone month of the date on which the cause of action arose. No court inferior to
that of ametropolitan magistrate or a first-class judicial magistrate can try an offence under section 138.Section 142
states that the cognizance of an offence can be taken under Section 138 upona complaint in writing which must be
made within one month by the payee or holder indue course from the date on which the cause of action arises under
clause (c) of the proviso to section 138

. In substance we can say that when a drawer, served with a noticewithin 30 days from the date on which the payee
or the holder in due course has come toknow about the return of the cheque and the drawer does not make the
payment asdemanded, the complaint shall have to be filed within 30 days from the date on which the15 days time
expires.The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002 hasintroduced a proviso to Section 142 permitting the court to take cognizance of acomplaint after the
prescribed period if the complainant satisfies the court that he hadsufficient cause for not making a complaint within
such period. It would thus be
withinthe discretion of the court to condone the delay, depending upon the causativecircumstances.

Kody Elecot Ltd v. Down Town Hospital

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PROCEEDINGS AGAINST DISHONOUR OF CHEQUE

Prior to the incorporation of chapter XVII in the Negotiable Instruments Act in 1988, todeter and penalize the issue
of worthless cheques, it was only under the provisions of theIndian penal Code 1860 (IPC) that the drawer of a
cheque could be criminally prosecutedif it could be shown that he cheated someone by issuing the cheque. Even
after theintroduction of the specific provisions in the Negotiable Instruments Act, a drawer can be prosecuted under
IPC for cheating, but he cannot be prosecuted and punished for thesame offence under both the
enactments. Mens rea or dishonest intention must beestablished to prove cheating, but it is not an essential element
of an offence under section 138 of the Negotiable Instruments Act.

Criminal Proceeding – Chapter XVII of the Negotiable Instruments Act


Chapter XVII inserted by the Banking, Public Financial Institutions and NegotiableInstruments 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 theamount 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
which may extend totwo years, or fine which may extend to twice the amount of the cheque or both.

Summary Proceeding - Order 37 of the Code of Civil Procedure

When a cheque is dishonoured, the holder or payee of the cheque can sue the drawer or endorser for the recovery of
amount alongwith interest. Besides a civil suit for recoveryof the amount, proceeding in a summary manner can be
initiated under Order 37 of theCode of Civil Procedure. The advantage of suing under chapter
XXXVII of CivilProcedure Code is that the defendant is not allowed in such cases to defend the suitwithout leave
obtained from Court and it is provided further that a decree passed under the said Order, may be executed forthwith.
If no such leave is applied for or granted ,theallegations in the plaint shall be deemed to be admitted, and the
plaintiff is entitled to a19

decree for the principal sum and also the interest as calculated under Section 9 and 80 of the Negotiable Instruments
Act, 1881.Criminal prosecution under section 138 does not bar a civil action against the drawer onthe dishonoured
cheque. In

Medical Chemicals & Pharma P Ltd v. Biological E Ltd.

, theSupreme Court said:"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 co-extensive and essentially differ intheir content and
consequence".In addition to the remedies available under the Act the payee can also resort to
remediesavailable under Civil Procedure Code and Consumer Protection Act. In

Pankajbhai Nagjibhai Patel v. State

, it has been held that in view of the limit of fine as prescribed inSection 29(2), Code of Criminal Procedure, the
Magistrate who thinks it fit that thecomplainant must be compensated for loss can resort to section 357(3) of the
code andcan award compensation to the complainant for which no limit is prescribed in Section357(3). The power
of Courts to award compensation is not ancillary to other sentences but it is in addition thereto.20

OFFENCES - CHEATING AND FORGERY

Cheating being an offence is defined under Section 415 of the Indian Penal Code asfollows:"Whoever, by deceiving
any person, fraudulently or dishonestly induces the person sodeceived to deliver any property to any person, or to
consent that any person shall retainany property, or intentionally induces the person so deceived to do or omit to do
anythingwhich he would not do omit if he were not so deceived, and which act or omission causesor is likely to
cause damage or harm to that person in body, mind, reputation or property,is said to "cheat".Explanation. A
dishonest concealment of facts is deception within the meaning of thissection."In order

to bring the case within the definition of Cheating under section 415 of the IPC,it has to be shown by the prosecution
that there was some inducement on the part of theaccused persons and the said inducement was made fraudulently or
dishonestly with aview to deceive the complainant. It is further to be shown by the prosecution that due todeception
practiced by the accused persons, the person so deceived had delivered the property to the accused persons or had
given consent that the accused person shall retainthat property.To hold a person guilty of the offence of cheating it
has to be shown that his intentionwas dishonest at the time of making the promise.Whenever a

cheque

issued with dishonest intentions is dishonoured, the drawer of thecheque can be proceeded against under sections
417 & 420 of the IPC by the payee or holder in due course of the cheque.In

Keshavji Madhavji v. Emperor

[AIR 1930 Bom 179] it was observed that ‘it was for the prosecution to establish facts which point

prima facie

to the conclusion that thefailure to meet the cheque was not accidental but a consequence expected and
therefore,intended by the accused. It will then be for the accused to establish any facts that may be21

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in his favour which are specially within his knowledge and as to which the prosecutioncould not be expected to have
any information’. A mere allegation that a cheque issued by the accused to the complainant had been dishonoured is
not sufficient to establish theoffence of cheating under section 415 of the IPC.In

Baijnath Sahay v. Emperor

[AIR 1933 Pat 183] it was observed that the act of drawinga cheque implied at least three elements: (a) that the
drawer has an account with the bank in question; (b) that he has authority to draw on it for the amount shown on the
cheque;(c) that the cheque as drawn, is valid order for the payment of the amount, or that the present state of affairs
is such that in the ordinary course of events, the cheque will onfuture presentment be dishonoured. Drawing of a
cheque does not imply a representationthat the drawer already had the money in the bank to the amount shown on
the cheque,for he may either have authority to overdraw, or have an honest intention of paying in thenecessary
money for before cheque can be presented.Thus mere dishonour for lack of funds does not amount to cheating; for
cheating to beestablished a mental element to deceive is necessary.

Cheating by Personation

Section 416 of IPC defines cheating by personation as follows:"A person is said to cheat by personation if he cheats
by pretending to be some other person, or by knowingly substituting one person for another, or representing that he
or any other person is a person other than he or such other person really is.Explanation. -The offence is committed
whether the individual personated is a real or imaginary person

"The personation referred to in this section may be either by words or by conduct. Theoffence under section 416 of
IPC owes its gravity to the fact that it affects not only the person deceived but also the person personated.22

Offence of cheating by personation is punishable under section 419 of IPC whereasgeneral cheating is punishable
under section 417 and section 417 of IPC.

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 intoany express or implied contract, or with intent to commit fraud or that fraud may
becommitted, commits forgery."Section 464 of IPC deals with making a false document and provides as under:A
person is said to make a false document or false electronic record-Firstly -Who dishonestly or fraudulently makes,
signs, seals or executes a document or part of a document or makes or transmits any electronic record or part of
any electronicrecord, affixes any digital signature on any electronic record, or makes any mark denoting the
execution of a document or the authenticity of the digital signature, with theintention of causing it to be believed that
such document or part of document, electronicrecord or digital signature was made, signed, sealed, executed,
transmitted or affixed byor by the authority of a person by whom or by whose authority he knows that it was
notmade, signed, sealed, executed or affixed; or Secondly- Who, without lawful authority, dishonestly or
fraudulently, by cancellation or otherwise, alters a document or an electronic record in any material part thereof,
after ithas been made, executed or affixed with digital signature either by himself or by anyother person, whether
such person be living or dead at the time of such alteration; or Thirdly- Who dishonestly or fraudulently causes any
person to sign, seal, execute or alter a document or an electronic record or to affix his digital signature on any
electronicrecord knowing that such person by reason of unsoundness of mind or intoxication23

cannot, or that by reason of deception practised upon him, he does not know the contentsof the document or
electronic record or the nature of the alterations.Explanation 1 – A man’s signature of his own name may amount to
forgery.Explanation 1 – The making of a false document in the name of a fictitious person,intending it to be believed
that he document was made by a real person, or in the name of a deceased person, intending it to be believed that the
document was made by the personin his lifetime, may amount t forgery.

Punishment for Forgery

Whoever commits forgery shall be punished with the imprisonment of either for a termwhich may extend to
two years or with fie or with both.

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Banker’s liability for payment made on forged cheques

Relationship between a banker and his customer is that of a debtor and creditor. When
acheque with a forged signature is presented, the banker has no authority to make payments on it, and if he does
make such payment he would be acting contrary to the lawand would be liable to the customer for the said amount.
A bank in such cases can escapeliability only if it can show that the customer is not entitled to make a claim on
account of adoption, estoppel or ratification.The rule of law in this regard can be stated as follows:When a cheque
duly signed by a customer is presented before a bank with whom he hasan account there is a mandate on the bank to
pay the amount covered by the cheque.However, if the signature on the cheque is not genuine, there is no mandate
on the bank to pay. The bank when makes payment on such a cheque, cannot resist the claims of thecustomer with
the defence of negligence on its part, such as leaving the cheque book carelessly so that the third parties could easily
get hold of it. This is because a documentin cheque form, on which the customers name as drawer is forged, is a
mere nullity. The bank can succeed only when it establishes adoption or estoppel.
10

Section 465 of Indian Penal Code

24

LIABILITY FOR STOPPED PAYMENT

A stopped payment is usually requested if the cheque has been declared missing or lost.But many a times the
drawer, to escape his debt or liability has used it as an instrument of deception. The 1988 amendment in Section 138
of Negotiable Instruments Act is alsosilent about Stopped Payment.As discussed earlier, the contract between the
customer and the bank is defined as adebtor- creditor relationship. This contract requires the bank to honor all valid
and proper orders of the customer to pay amounts from his account with the bank, for as long asfunds remain
available in the customer's account. The customer's order, however, remainsexecutory and can be rescinded until the
bank makes payment. One of the reasons onaccount of which the banker can refuse to make the payment of a cheque
is that the payment has been stopped by the drawer. Upon receipt of a timely stop payment order,the bank ceases to
have authority to pay the item.A customer thus, has a right to give notice to his Bankers to stop payment of a
chequewhich he has issued. Generally a written notice, signed by the drawer is sufficient to stopthe payment. A
stopped payment is usually requested if the cheque has been declaredmissing or lost.In India, while there is as such
no express provision relating to stop payment of cheques.However there are various judgments regarding this aspect.
Indian Courts have coveredthis facet in Section 138 of Negotiable Instruments Act, which is related to dishonour
of cheques. The discussion relating to stop payment has assumed importance in view of theamendment to the
Negotiable Instruments law by the amendment in 1988. Prior to thisamendment, people issued cheques knowing
well that the cheque is not going to behonored on presentation, and they tried to create circumstances in which the
bank wouldreturn the cheque with such endorsements as "stopped payment", "refer to drawer" or "A/C closed".
These were some of the tricks used by the drawer to escape the penalliability, which was attached to Section 138 of
Negotiable Instruments Act.25

The question that arises is whether a drawer who stops the payment having insufficientfunds in his account can be
held liable under Section 138 of the Negotiable InstrumentsAct? In this regard various judgments of High Courts
and the Supreme Court have beenreviewed in order to find out a solution to the abovementioned issue.Views taken
by various High CourtsIn

Abdul Samod v. Satya Narayan Mahavir


High Court of Punjab and Haryanathoroughly analyzed section 138 of the Act. Hon’ble Mr. Justice A.P. Chowdhury
statedthat there are five ingredients, which must be fulfilled.These are as follows:1.The cheque is drawn on a bank
for the discharge of a legally enforceable debt or other liability.2.The cheque has returned by the bank unpaid.3.The
cheque is returned unpaid because the amount available in that account isinsufficient for making the payment of the
cheques.4.The payee gives a notice to the drawer claiming the amount within 15 days of thereceipt of the
information by the Bank and5.The drawer fails to make payment within 15 days of the receipt of notice.In this case
the respondent filed a complaint with the allegations that the accused had,

inter alia

, issued a cheque dated June 9, 1989, for Rs. 22,000 in connection with anamount which had become due on account
of purchase of some raw material by him. Thecheque was returned unpaid by the bank with the remarks "Payment
stopped by thedrawer". The complainant sent the requisite notice, but the accused failed to make the payment.It was
stated by the Hon’ble Justice B.M. Thulasidas that:26

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"The allegations in the complaints, in my view, do make out a prima facie case againstthe petitioners. Before filing
the complaints, the respondent had taken care to abide by therelevant legal provisions. Indeed, it is not the case of
the petitioners that no amount is dueto the respondent. The issuance of cheques and their dishonour, followed by
notices of demand and failure to pay are not matters which had been challenged. That the paymentwas
countermanded by a stop memo is of no consequence. That hardly affects the right of the respondent to initiate
proceedings under the Act. It has the same effect as closing theaccount as far as he is concerned. The object of the
provision cannot be allowed to bedefeated by such ingenuous action".Similarly, in

Mrs. R. Jayalaxmi v. Mrs. Rashida

and as per the Punjab and Haryana Courtin

Mrs. Rama Gupta v. Bakesman’s


Home Product Limited Patiala

, it has been held thatif a cheque was returned with an endorsement “refer to drawer” and "payment counter-manded
by the drawer" then it was not an offence.Thus relying on this it was held that when the respondent stopped the
payment of thecheques in question, there was no question of facts constituting an offence punishableunder section
138 of the Negotiable Instruments Act.However, it is significant to note, what is relevant for the purpose of
determining anoffence under section 138 of the Negotiable Instruments Act is whether the drawer of thecheque had
arranged for payment or had made the payment of the amount covered by thecheque within the period of 15 days
prescribed under said section and not the reason for which cheques were dishonored by the Bank.The above laid
proposition has been supported by various High Courts. Kerala HighCourt in the case of

Calcutta Sanitary Wares v. C. T. Jacob

, where the court wasconsidering a situation whereby the cheque was initially dishonoured on the basis of astop-
payment memo. The court held that "the object of the provision cannot be allowed to be defeated by such ingenious
action". The court took the view that dishonour pre-supposes non-payment as the funds in question were not
forthcoming and that in thesecircumstances also, the failure to pay the amount within 15 days of the notice of
demand27

would still constitute an offence as any other view would defeat the specific provisions of section 138.The Punjab
and Haryana High Court in the case of

M. M. Malik v. Prem Kumar Goyal

,analysed the aforesaid sections and held that the cause of action will be complete whenthe drawer of the cheque
fails to make payment within 15 days of the receipt of the noticecontemplated by proviso (b) and that the offence
shall be deemed to have been
committedonly from the date when the notice period expires. The court had construed theendorsement "refer to
drawer" as the bankers inability to honour the cheque for want of funds in the account of the drawer and further held
that as far as the jurisdiction wasconcerned, the principle that the ‘debtor has to find the creditor” would apply and
that thecourt within whose jurisdiction the creditor is located will have jurisdiction to entertainthe complaint.In the
Division Bench decision of Bombay High Court in

Rakesh Menkumar Porwal v. Narayan Dhondu Joglekar

, one of the issues was regarding the correct manner in whichthe time-frame as is prescribed in sections 138 and 142
of the Negotiable Instruments Actshould be computed. The Hon’ble Court held that"A clear reading of section
138.....If, for instance, the closure of an account or thestoppage of payment or any other of the commonplace reasons
for dishonour were to be justifiable, then, the Legislature would have set these out in the section as exceptions
notconstituting an offence. No such intention can be read into section 138, as none exists.The solitary exception
made by the Legislature is with regard to the drawer being offereda final opportunity of paying up the amount within
15 days from the receipt of noticewhich, in other-words, provides a last opportunity to prove one's bona fides. It is
obvious,that having regard to the widespread practice of issuing cheques which are dishonouredand the many
ingenious methods of avoiding payment that are practiced, the Legislaturehas opted for a non-nonsense situation.
The possibility has not been overlooked wherebyan account any inadvertently be overdrawn or a dishonour may be
for technical reasonsor where a genuine mistake has occurred and the grace period provided for by theLegislature
after service of notice on the drawer is in order to afford an opportunity to the28

drawer to rectify these. Undoubtedly, even when the dishonour has taken place due to thedishonesty of the
depositor, the drawer is still given a last chance to act otherwise.Consequently, the reasons for dishonour even if
they be very valid as was sought to be pointed out in this case, should not and cannot be taken into account by a
Magistratewhen such a complaint is presented"The above mentioned case-laws supports the preposition that while
holding any drawer liable under Section 138, the Court should first see that whether payment was made to thewithin
15 days of notice or not. The reason for dishonour is immaterial because if thedrawer is bonafide then he may make
the payment of the amount due under the chequewithin the grace period i.e 15 days.

Views of the Supreme Court

Hon’ble Supreme Court has narrated four key Judgments where the drawer was heldliable for Stop payment of
cheques. However there is only one judgment which dealswith the above laid preposition.In

M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s. Indian Technologists &
Engineers (Electronics) Pvt. Ltd. and another

, a cheque was presented by the complainant on 28-1-1990, through their bankers M/s. Hyderabad Bank for
realisation, with the promise by the accused, that the same will be honoured when presented. However, the said
cheque was dishonoured with the banker's endorsementdated 29-11-1990 which stated "(i) refer to drawer, (ii)
instructions for stopping paymentand (iii) stamped exceeds arrangements." Appellant filed complaints
under Section 138of the Negotiable Instruments Act, 1881 for dishonour of cheque for insufficiency of funds in the
accounts of the accused. It was held by the Hon’ble Supreme Court that:“It would thus be clear that when a cheque
is drawn by a person on an accountmaintained by him with the banker for payment of any amount of money to
another person out of the amount for the discharge of the debt in whole or in part or other liabilityis returned by the
bank with the endorsement like (1) in this case, "I refer to the
drawer"(2) "instructions for stoppage of payment" and (3) "stamp exceeds arrangement", it29
amounts to dishonour within the meaning of Section 138 of the Act. On issuance of thenotice by the payee or the
holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt
of such a notice, if he does not paythe same, the statutory presumption of dishonest intention, subject to any other
liability,stands satisfied".The position of Law in this regard has changed dramatically from the 1990’s till date,
dueto the amendment that has been brought into the section. A close look on the judgmentsof various High Courts
shows that the Courts relied on the presumption that the offencereferred to in Section 138 can be made out only on
bouncing of a cheque on the ground of inadequate balance in the account concerned. Where the cheque is returned
unpaid onother grounds, the same has not been made an offence or where the payment was counter-manded then it
was without an offence. Courts during that time seemed to be more infavour of the drawer. However, after the recent
judgments of the Supreme Court, the burden has now shifted to the drawer and a presumption has to be drawn in
favour of theholder of the cheque.As explained earlier, a plain reading of section 138 of the Negotiable Instruments
Actmakes it clear that the words "either because of the amount standing to the credit of thataccount is sufficient or
that it exceeds the amount ..." have been specifically used. Itwould, therefore, mean that only two contingencies are
contemplated and as such, thewords "... either .... or" have been used. It is, therefore, clear that the cheque should
bedishonoured either for the insufficiency of the amount or, because it exceeds the amountarranged to be paid from
that account. No third contingency or eventuality has
beencontemplated and the specific clear wording of section 138 eliminates any thirdcontingency other than what is
mentioned in the section itself. It need not be stated that acheque can be dishonoured for so many reasons and there
may be so many eventualitiesin which the payee is denied payment by the bank. For example, mentioning the
dateincorrectly or some corrections not initialled or the difference in between the amountmentioned in figures and
words are certain other contingencies in which the cheque will be certainly dishonoured and would be returned as
unpaid. It is not in respect of any of 30

these contingencies that the dishonour of a cheque has been made penal under section138 of the said Act.Section
138 of the Negotiable Instruments Act is a penal provision wherein if a persondraws a cheque on an account
maintained by him with a banker for payment of anyamount of money to another person from out of that account for
the discharge, in wholeor in part of any debt or other liability, is returned by the bank unpaid, on the
groundeither because of the amount of money standing to the credit of that account isinsufficient to honour the
cheque or that it exceeds the amount arranged to be paid fromthat account by an agreement made with that bank,
such person shall be deemed to havecommitted an offence. However with regard to "Payment stopped by the
drawer" thissection does not mention anything specifically.Whatever may be ground or reason on the basis of which
the cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or "signature differ" or any
other ground, an offence under the section is made out and the drawee has full right to initiate proceedings u/s 482
CrPC. It is also important that the time restriction given in Section138 (c) also get attracted in case of stop payment
when a notice as required by the provision is sent to the drawer.It is seen that there are manifold reasons for the
dishonor of cheques by banks but there isstatutory mandate upon the payee under Section 13 (b) of Negotiable
Instruments Act for giving a notice demanding the payment of the amount of said cheque, within 15 daysfrom the
date of the information as to bouncing of the said cheque from the drawer of thecheque and upon failure to make
payment of the amount by the drawer within 15 days,offence under section 138 is deemed to have been committed.
Moreover the decision of the Supreme Court in Electronics Trade & Technology Development Corporation Ltd
isexplicit and has decided all sorts of controversies in relation to bouncing of the chequedue to payment stopped by
the drawer. It has expressly held that if on issuance of thenotice by the payee or the holder in due course after
dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does
not pay31

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the same, the statutory presumption of dishonest intention, subject to any other liability,stands satisfied.It can be
concluded that whatever may be the ground or reason on the basis of which thecheque is dishonoured by a bank,
whether it may "stopped payment by drawer" or "signature differ" or any other ground the offence under the section
is made out and thedrawee has full right to initiate proceedings and while deciding the case the Court shouldsee that
whether payment has been made by the drawer within 15 days of notice issued bythe drawee after the dishonour of
cheque. 32

DRAWER’S LIABILITY FOR DISHONOUR OF CHEQUE

Section 30 of the Negotiable Instruments Act, 1881 reads as follows:"the drawer of a bill of exchange or a cheque is
bound, in case of dishonour by thedrawee or acceptor thereof, to compensate the holder, provided due notice of
dishonour has been given to, or received by, the drawer".Section 30 makes it imperative that the notice of dishonour
should of necessity be servedon to the drawer of such cheque. It is clear that the drawer shall be bound to
compensatethe payee or the holder, as the case may be, if only he has been served with the notice
of dishonour.Section 138 of the Negotiable Instruments Act requires that the payee or the holder in duecourse of the
cheque to issue a notice in writing to the drawer making a demand for payment of the cheque amount. Such notice
must be given within 30 days of informationfrom the bank regarding the return of cheque as unpaid.The requirement
of giving of notice is mandatory. There is no mode prescribed under section 138 for serving the notice. It is
sufficient that the notice in writing is served onaccused. Where no notice making demand for payment was served
upon the drawer ascontemplated under clause (b) and clause (c) of Section 138, which would mean that nodemand
has been made within the specified time from the date of dishonour of cheque inquestion, conviction will not
be sustainable

11

Consequence of part payment by drawer after issue of notice

Section 138 clearly shows that in the event of the drawer of the cheque failing to
makethe payment of the said amount of money, a prosecution can be maintained. Theexpression "said amount of
money" can only denote the amount for which the cheque isdrawn 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 quashed

12

11

Adhikari (B) v. Ponraj 1996 Cri LJ 180 (Mad)

12

Ruby Leather Exports v. Venu (K) (1995) 82 Comp Cas 776 (Mad).

33

Liability of drawer after deposit of entire amount during trial

As stated by the Supreme Court once the offence is committed, any payment madesubsequent 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 tryingthe offence. But by no stretch of imagination, a criminal proceeding could be quashed
onaccount 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 thedeposit of money in this court. The deposit of money by the
drawer, therefore, during thetrial is of no consequence

13
.

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 presentedfor realization by the complainant was returned on the
ground of insufficient funds. Thenotice sent was returned with postal endorsement 'party expired'. Wife
and daughters of the drawer of the cheque cannot be prosecuted for the offence under Section 138 of theAct for the
alleged failure of the drawer in meeting the liability to pay the amountcovered by the cheque which was dishonoured
in response to the notice sent by thecomplainant

14

Drawer declared insolvent

The drawer cannot escape from the criminal liability by putting forward he plea that he isnot bound to discharge the
liability mentioned in the complaint as he was alreadydeclared 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 madetowards the
discharge of the said liability.

13

Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)

14

Bhupinder Lima v. State (2000) 99 Comp Cas 424 (AP)

34

DRAWEE’S LIABILITY FOR DISHONOUR OF CHEQUERightful Dishonour - when bank may refuse to honour

When there is the relationship of banker and customer between the parties, the banker isunder an obligation to pay
cheques when a mandate to pay is received from the customer,or when a cheque is
issued.However, there may be a number of circumstances when the bank has no other alternative but to return the
cheque and in all such cases the bank is fully justified inreturning the cheque. These are the cases which may be
termed as a countermand fromthe customer which means an order to revoke the former instructions and annulling
theformer mandate given by the customer to the bank to honour the cheques and it alsomeans 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
Section226 (3) of the Income-Tax Act, 1961 and similarly it also means the situation when thereis a restrained order
from the court, notice of death of the customer, lunacy of thecustomer, notice of loss of cheque or forged signatures
on the cheque.

Wrongful dishonour of cheque – Drawee/ bank’s liability to pay damages

In case all the conditions which are necessary for the payment of a cheque are present andhave been fulfilled then if
the bank dishonours a cheque it will amount to a breach of contract for which the banker is liable to pay
damages.The liability of drawee of cheque in case of a wrongful dishonour has been dealt withunder Section 31 of
the Negotiable Instruments Act, 1881. Section 31 states as follows:"the drawee of a cheque having sufficient funds
of the drawer in his hands properlyapplicable to the payment of such cheque must pay the cheque when duly
required so todo, and, in default of such payment, must compensate the drawer for any loss or damagecaused by
such default".35

The position of law has also been made clear in a number of authorities. Reference may be made to the following:In

New Central Hall v United Commercial Bank Ltd.

the Madras High Court held thatwhere a banker having sufficient funds of a customer in his hands fails, even by
mistaketo honour cheque issued by the customer, the customer has a right to claim damages.In

Jogendra Nath Chakrawarti v. New Bengal Bank Limited

15

, it was held, "where the banker, being bound to honour his customer’s cheque, has failed to do so, he will beliable
in damages. If, special damage, naturally ensuing from the dishonour, is proved, itwill be properly taken into
account in assessing the amount of the damages. If thecustomer be a trader, the court may properly award substantial
damages, in the absence of proof of special damages. In other cases the customer will be entitled to such damages
aswill reasonably compensate him for the injury which, from the nature of the case, he hassustained. All loss
flowing naturally from the dishonour of a cheque may be taken intoaccount in estimating the damages.

Compensation for wrongful dishonour

Wrongful dishonour of a cheque exposes the drawee bank to statutory liability to thedrawer to compensate him for
'any loss or damage cause by such default'.The principle of awarding compensation to the drawer of a cheque is
reparation for theinjury sustained or likely to be sustained by reason of dishonour. In almost every case thedrawer
can recover substantial damages against the drawee on the basis of injury to hiscredit, although he may not be able
to prove that he had suffered actual pecuniary lossthrough the dishonouring of the cheque

16

. However, there appears to be a distinction between a trader and a non-trader in this respect, while a trader is always
entitled tosubstantial damages for dishonouring of his cheque, a non-trader will be entitled only tonominal damages
in the absence of an allegation and proof of substantial damages

17

15

AIR 1939 Cal. 63

16

Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 595

17

Gibbons v. Westminster Bank (1939) 3 All E.r. 577

36

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The General rule followed by the courts in awarding damages is that damages areawarded for foreseeable and actual
loss suffered and the quantum of damages is usually based on the principle of ‘

restitutio in intgegram
’ i.e. restoring the person to the positionhe would have been in if he had not suffered a damage. But in case of
trademan’s chequethe damages awarded are inversely proportional to the amount on the cheque. Thus,smaller the
amount of the dishonoured cheque, greater are the damages paid. The reason behind this rule is, businessman’s loss
of reputation or status or goodwill is once againinversely proportional to the amount of the cheque.37

DISHONOUR OF CHEQUE - LIABILITY OF A COMPANY

Since a company is an artificial person it is incapable of committing any crime personally. However,
if certain crimes are committed by its officials in the name of thecompany then in such circumstances a company is
said to have committed these crimes.So far as the punishment is concerned, its liability can be only in terms of fine.
Thecompany shall be responsible for the acts of commissions and omissions of the personsworking for the
company.Section 141 (1) of the Negotiable Instruments Act, 1881 reads as follows:"If the person committing an
offence under section 138 is a company, every person who,at the time the offence was committed, was in charge of,
and was responsible to thecompany for the conduct of the business of the company, as well as the company, shall
bedeemed to be guilty of the offence and shall be liable to be proceeded against and proceeded against and punished
accordingly;Provided that nothing contained in this sub-section shall render any person liable to punishment if he
proves that the offence was committed without his knowledge, or thathe had exercised all due diligence to prevent
the commission of such offence".Thus, Sub-section (1) of Section 141 (1) provides that if a person committing an
offenceunder the section is a company, every person who, at the time when the offence wascommitted, was in
charge of, and responsible to, the company for conduct of its business,as well as the company shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished accordingly. The offender in Section
138 is thedrawer of the cheque.However, if the person provides that the offence was committed without his
knowledge,or that he had exercised all due diligence to prevent the commission of such offence, heshall not be liable
to punishment under this Section.Sub-
section (2) further provides that where any offence under this Act has beencommitted by a company and it is proved
that the offence has been committed with the38

consent or connivance of, or is attributable to, any neglect on the part of, any director,Manager, secretary, or other
office of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that
offence and shall be liable to be proceeded against and punished accordingly.In case of a company the day to day
functions are not carried out by all the directors butthe board delegates the powers to one or two directors or officers
of the company like theManager, Secretary, etc. Besides the Manager there are a number of other officers
or persons who are liable for the affairs of the company. Similarly, all the partners in the partnership firm, Karta of
the HUF, a Secretary of the Trust, Club, Co-operative Societyfor the purpose of the present section are to be
considered as in charge of the companyand in case any cheque is drawn by these persons then the company is liable
irrespectiveof the fact that such a person may not be holding due powers of issuing a cheque. Wherethe cheques
were issued by the authorized signatory will not preclude prosecution of directors

18

.The Vicarious liability of a person for being prosecuted for commission of an offence bythe company arises if at the
time when the offence is alleged to have been committed, hewas in charge of and was responsible to the company
for the conduct of its business. It isnecessary that there have to be averments in the complaints that the petitioners
were incharge of and were also responsible to the company for the conduct of its business of thecompany

19

.Thus, we can conclude that three categories of persons can be discerned from the said provision who are brought
within the purview of the penal liability through the legalfiction envisaged in the section. They are: (1) The
company, the principal offender, whichcommitted the offence; (2) Every one who was in charge of and was
responsible for the business of the company; (3) Any other person who is a director or a manager or asecretary or
officer of the company, with whose connivance or due to whose neglect thecompany has committed the offence

20

18

Ashok Muthanna v. Wipro Finance Ltd. (2001) 105 Comp Cas 203 (Mad).

19

Gyan Chand Kotia v. Indian Renewable Energy Development Agency Ltd. (2000) 99 Comp Cas 517 (Del).

20

Anil Hada v. Indian Acrylic Ltd. (2000) 99 Comp Cas 36 (SC)

39

However, in case an employee of the company proves that the offence was committedwithout his knowledge or that
he had exercised all due diligence, then he may not be prosecuted under the Act. In case he proves that after due
diligence he could not preventthe commission of the offence, it may provide a valid defence. Only the person can be
setfree but not the company because the scope is limited to Section 141(1) only. This is because under Section 138
the company is a drawer

21

Winding up proceedings pending

A company cannot escape from a penal liability under section 138 of the Act on the premise that a petition for
winding up of the company has been presented and was pending during the relevant time. The Company cannot
avert its liability on the mereground that the winding petition was presented prior to the company being called upon
bya notice to pay the amount of the cheque.There is no provision in the Companies Act, 1956 which prohibits
enforcement of thedebt due from the company. When a company goes into liquidation, enforcement of debtdue from
the company is only made subject to the conditions prescribed therein. But thatdoes not mean that the debt has
become unenforceable altogether

22

21

Sivakami (M) v Bharat Ginning & Oil Mill Factory 2000 Cri LJ 1043 (Guj)

22

Pankaj Mehra v State 2000 Cri LJ 1781 (SC)

40

INTERNATIONAL LAW ON LIABILITY FOR DISHONOUR OF CHEQUES

A cheque may be drawn in one country and payable in another country and in such cases,Sections 134 to 137 of the
Negotiable Instruments Act provide the legal rules, which arediscussed below.

The Law governing the liability of the parties

According to Section 134 of the Negotiable Instruments Act,"in the absence of a contract to the contrary, the
liability of the maker of drawer of aforeign promissory note, bill of exchange or cheque is regulated in all
essential matters by the law of the place where he made the instrument, and the respective liabilities of theacceptor
and endorser by the law of the place where the instrument is made payable".The liability of the maker of a cheque
under the Indian law is governed by the law of the place of drawing, which is the place of payment so far the drawer
is concerned which isin accordance with the International Law. In case of an acceptor, his liability is governed by
the place of the payment, and in this respect Indian law follows the International law.The measure of damages and
the rate of interest are governed by the law of the placewhere the bill is payable in the case of the acceptor

23

, and by the law of the place wherethe drawing is made in the case of the drawer

24

Dishonour of Foreign Instrument

According to Section 135 of the Negotiable Instruments Act,"Where a promissory note, bill of exchange or cheque
is made -payable in a different place from that in which it is made or endorsed, the law of the place, where it is
made payable determines what constitutes dishonour and what notice of dishonour issufficient".

23

Cooper v. Waldegrave (1840) 2 Beav 282

24

Gibbs v Fremont (1853) 9 Ex 25and

41

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Section 135 is an application of the maxim of international law


locus regit actum,

Theobligation incurred by accepting a bill of exchange is measured by the law of the placewhere it is payable, that
is, the manner of enforcing the obligation and the mode of performance of the obligation are governed by the law
of the place of performance. Theduties of the holder too are determined by the law of the place of performance. The
timeor the date of the performance of the obligation and the allowance of the days of graceare determined by the law
of the place of payment. By English Law, days of grace areallowed on bills payable after date, but by French
law, they are not allowed. So, when a bill was drawn in England payable in Paris three months after date, and when
by the lawof France the maturity of all the bills was postponed for a month it was held that it will begoverned by the
law of France where it was payable.The proper time for payment and for the notice of dishonour is that fixed by the
law of the country where the payment is to have been made. Though the present section refersonly to dishonour and
notice of dishonour, demand at the proper time by the holder isnecessary in order to constitute dishonour. Thus, it is
to be inferred that the time when a bill becomes payable is to be determined by the law of the place of payment. The
law of the place where a bill is made payable determines what constitutes dishonour and whatnotice of dishonour
will be sufficient. The section applies only to a case where theinstrument is made payable at a place different from
that in which it is made, but the ruleis the same in the case of instrument payable in the same place where it is made,
becausethat place itself being the place of payment, the law of that place determines the incidentsrelating to
dishonour. Since the drawer of a bill of exchange are sureties for the due performance of the obligations incurred by
the acceptor or maker, the law of the placewhere the bill is payable indirectly affects their obligation also. This is
the reason why thenecessity and sufficiency of a demand or a notice of dishonour in order to charge anyother party
is to be determined by the law of the place of performance.

Instrument made out of India but according to Indian law

According to Section 136 of the Negotiable Instruments Act,42

"If a negotiable instrument is made, drawn accepted or endorsed outside India, but inaccordance with the law of
India the circumstance that any agreement evidenced by suchinstrument is invalid according to the law of the
country wherein it was entered into doesnot invalidate any subsequent acceptance or endorsement made thereon
within India".A negotiable instrument generally does not embody a single contract but contains a seriesof contracts.
Though prior agreements on it are invalid by the law of the country wherethey were entered into, any subsequent
agreement on it created by acceptance in India isvalid, and can be enforced against persons who become parties to it
in India. This sectionseems to have been taken from Article 85 of the German Bills of Exchange Act, which isalso
embodied in the English Bills of Exchange Act, section 72, clause (1). The invalidityof an instrument under foreign
law does not affect the liability between persons whosubsequently become parties to it in India. The section would
not apply to the caseswhere the person sought to be charged had become a party previous to the acceptance inIndia.

Presumption as to Foreign Law


According to Section 137 of the Negotiable Instruments Act,"The law of any
foreign country regarding promissory note, bills of exchange andcheques shall be presumed to be the same as that of
India, unless and until the contrary is proved".Courts of India do not take judicial notice of foreign law. Any person
relying on such lawmust prove it by evidence and in the absence of such evidence, the courts shall presumethe law
of any foreign country to be the same as that of our country.In India, proof of foreign law may be given in three
ways:(a)By means of law books, printed and published under the authority of thegovernment of the foreign country,
and the reports of rulings of the courts of suchcountry contained in a book purporting to be a report of such
rulings.43

(b)By oral testimony of expert. But the evidence given must be that of a personspecially skilled in such foreign law.
The evidence of a person who has merelystudied foreign law is not permissible, because the word 'skilled' shows
that hemust have had some practice in the application of the principles of that foreignlaw.(c)By the opinion of
foreign courts. By the Statute of 24 Vict, Ch II, Courts in HisMajesty’s dominions are empowered to state a special
case to a superior court of any country in order to ascertain the law of that country and the certified copy of the
opinion of the foreign court upon the case submitted to it shall be admitted to prove the foreign law.44

LAWS OF OTHER COUNTRIES ON LIABILITY FOR DISHONOUR OFCHEQUESLaws of Australia - Cheques


and Payment Orders Act 1986

Section 69 of Cheques and Payment Orders Act 1986 defines dishonour as"A cheque is dishonoured if the cheque is
duly presented for payment and payment isrefused by the drawee bank, being a refusal that is communicated by the
drawee bank tothe holder or the person who presented the cheque on the holder's behalf."Section 70 of Cheques and
Payment Orders Act 1986 provides for the liability of thedrawer or indorser for dishonour of cheque. "A person who
is the drawer or an indorser of a cheque that has been dishonoured is liable on the cheque whether or not the person
isgiven notice by any person of the dishonour."As per section 71, subject to sub-section 17(1), section 59 and sub-
section 60(1) of Cheques and Payment Orders Act 1986, the drawer of a cheque, by drawing the cheque,undertakes-
(a) that, on due presentment for payment, the cheque will be paid according to its tenor asdrawn; and(b) that- (i) if
the cheque is dishonoured when duly presented for payment; or (ii) if presentment of the cheque for payment is
dispensed with by virtue of paragraph 59(a) andthe cheque is unpaid after its date has arrived, the drawer will
compensate the holder or an indorser who is compelled to pay the cheque.45

Laws of United Kingdom – Bills of Exchange Act, 1882

The Bills of Exchange Act 1882 codifies for theUnited Kingdomthe law relating to billsof exchange, promissory
notes and cheques.A cheque"is a bill of exchange drawn on a banker payable on demand".
25

For the most part the rules of law applicable to bills payable on demand apply in their entirety tocheques. But there
are certain peculiar rules relating to the latter which arise from the factthat the relationship of banker and customer
subsists between the drawer and drawee of acheque. 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 rightsagainst the drawers and indorsers. They are not absolute duties; they are duties to
usereasonablediligence. When a bill is payable after sight, presentment for acceptance isnecessary in order to fix the
maturity of the bill. Accordingly the bill must be presentedfor 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
itmust be presented on the day that it is due.If the bill is dishonoured the holder must notify promptly the fact of
dishonour to anydrawer 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 isdishonoured the holder must cause it to be protested by anotary public.
The bill must benoted for protest on the day of its dishonour. If this be duly done, the protest, i.e. theformal notarial
certificate attesting the dishonour, can be drawn up at any time as of thedate of the noting. A dishonoured inland bill
may be noted, and the holder can recover theexpenses of noting, but no legal consequences attach thereto. In
practice, however, notingis usually accepted as showing that a bill has been duly presented and has
beendishonoured. Sometimes the drawer or indorser has reason to expect that the bill may bedishonoured by the
drawee. In that case he may insert the name of a "referee in case of

25

Section 73 of the Bills of Exchange Act 1882

46

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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 liableon 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 non-payment it may
be "paid supra protest". When a bill is thus paid and the proper formalities are complied with, the personwho 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.

26

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 Actand therefore it can be assumed that the provisions of dishonour of bills only
apply incase of dishonour of cheques.Section 42 of the Bills of Exchange Act 1908 deals with dishonoured by non-
acceptance -"Where a bill is duly presented for acceptance and is not accepted within the customarytime, the person
presenting it must treat it as dishonoured by non-acceptance. If he doesnot, 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 bythis Act is refused, or cannot be obtained; or (b) Where
presentment for acceptance is excused and the bill is not accepted.

26

Section 65 to 68 of the Bills of Exchange Act, 1882

47

(2) Subject to the provisions of this Act, when a bill is dishonoured by non-acceptance animmediate right of
recourse against the drawer and indorsers accrues to the holder. And,no presentment for payment is
necessary."Section 42 of the Bills of Exchange Act 1908 deals with dishonoured by non-payment, itreads as
follows"A bill is dishonoured by non-payment-(a) Where it is duly presented for payment and payment is refused, or
cannot be obtained;or (b) Where presentment is excused and the bill is overdue and unpaid.(2) Subject to the
provisions of this Act, where a bill is dishonoured by non-payment animmediate right of recourse against the
drawers or indorsers accrues to the holder."Section 48 of the Bills of Exchange Act 1908 deals with notice of
dishonour. The sectionreads as follows:Subject to the provisions
of this Act, where a bill has been dishonoured by non-acceptance or by non-payment, notice of dishonour must be
given to the drawer and eachindorser, and any drawer or indorser to whom such notice is not given is
discharged:Provided that-(a) Where a bill is dishonoured by non-acceptance and notice of dishonour is not given,the
rights of a holder in due course subsequent to the omission shall not be prejudiced bythe omission:(b) Where a bill is
dishonoured by non-acceptance and due notice of dishonour is given,it shall not be necessary to give notice of a
subsequent dishonour by non-payment unlessthe bill has in the meantime been accepted.Section 55 of the Bills of
Exchange Act 1908 deals with the liability of drawer or indorser-48

(1) The drawer of a bill, by drawing it,-(a) Engages that on due presentation it shall be accepted and paid according
to its tenor,and that if it is dishonoured he will compensate the holder or my indorser who iscompelled to pay it,
provided that the requisite proceedings on dishonour until dulytaken;(b) Is precluded from denying to a holder in
due course the existence of the payee and histhen capacity to indorse.(2) The indorser of a bill, by indorsing it;-(c)
Engages that on due presentment it shall be accepted and paid according to its tenor,and that if it is dishonoured he
will compensate the holder or a subsequent indorser whois compelled to pay it, provided that the requisite
proceedings on dishonour are dulytaken;(d) Is precluded from denying to a holder in due course the genuineness and
regularity inall respects of the drawer's signature and all previous indorsements:(e) Is precluded from denying to his
immediate or a subsequent indorsee that the bill wasat the time of his indorsement a valid and subsisting bill. and
that he had then a good titlethereto.

A comparative analysis of Indian laws and laws of the countries mentioned above,on liability for dishonour of
cheques.Australian Laws

As seen above, the laws of other countries relating to the dishonour of cheques and theliability arising therefrom are
more or less similar to the laws laid down in the NegotiableInstruments Act, 1881. However there are certain
variations in laws of these countriesrelating to dishonour of cheques and are discussed below.49

As per Australian laws Section 70 of Cheques and Payment Orders Act 1986, in case of dishonour of a cheque a
person who is the drawer or an indorser, of such cheque, is liableon the cheque whether or not the person is given
notice by any person of the dishonour.In India demand notice is mandatory. Sub-section (b) of Section 138 of the
NegotiableInstruments Act requires the payee or the holder in due course to issue a notice in writingto the drawer of
the cheque within 15 days of the receipt of the information by him fromthe bank regarding the return of the cheque
as unpaid.This implies that unlike required in the Negotiable Instruments Act, 1881 there is no needfor the issue of
demand notice to the drawer and the liability of the drawer or theindorser, as the case may be, shall arise as soon as
the cheque has been dishonoured bythe bank.

UK Laws
Indian Laws and the UK Laws are very similar with respect to the provisions relating
tothe dishonour of cheques and the liability arising therefrom. As required under the Negotiable Instruments Act, 18
81 for establishing the liability of the drawer for dishonour of cheque, the holder must notify the drawer, of that fact
of such dishonour of cheque. Similarly in UK Laws, under Bills of Exchange Act, 1882, if a cheque isdishonoured,
the holder is required to notify the fact of dishonour to the drawer.

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 non-acceptance.
However, if he does not, theholder 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 non-acceptance or by non- payment, notice of dishonour must be given to the drawer and each
indorser. However,50

any drawer or indorser to whom such notice is not given shall be discharged from hisliability.

CONCLUSION

The law relating to Negotiable instruments is the law of the commercial world which wasenacted to facilitate the
activities in trade and commerce, making provision of givingsanctity to the instrument of credit which would be
deemed convertible into money andeasily passable from one person to another. In the absence of such instruments,
the tradeand 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 thecommercial transactions especially in view of the emerging ways of payment through
theInternet and other electronic means. Section 138 also does not specifically cover theaspects such as where the
payment has been stopped by the drawer or where the accounthas been closed prior to the endorsement of
the cheque. These provisions no doubt haveserved their purpose but they could be more elaborate in solving the
dispute rather thanmerely relying on the Court judgments.Though insertion of the penal provisions have helped to
curtail the issue of chequelightheartedly or in a playful manner or with a dishonest intention and the
tradingcommunity now feels more secured in receiving the payment through cheques. However there being no
provision for recovery of the amount covered under the dishonouredcheque, in a case where accused is convicted
under section 138 and the accused hasserved the sentence but, unable to deposit amount of fine, the only option left
with thecomplainant is to file civil suit. The provisions of the Act do not permit any other 51

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alternative method of realization of the amount due to the complainant on the cheque being dishonored for the
reasons of "insufficient fund" in the drawer’s account.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
couldestablish a tribunal to deal with the dishonour of cheques and the liability arisingtherefrom, it could make the
process of recovery of damages faster for the
aggrieved party. For example, the Debts Recovery Tribunals have been established by theGovernment of India
under an Act of Parliament (Act 51 of 1993) for expeditiousadjudication and recovery of debts due to banks and
financial institutions. Establishmentof a similar tribunal to deal with the cases of dishonour of cheques could perhaps
providea faster relief to the aggrieved party.