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HIMACHAL PRADESH NATIONAL LAW UNIVERSITY

SUBJECT : ALTERNATE DISPUTE RESOLUTION

ASSIGNMENT ON CONSEQUENCES OF DISHONOURING OF

CHEQUE

SUBMITTED BY: SUBMITTED TO:

KUNAL MEHTO MR. ANIRUDH SOOD

1020161716 ASSISTANT PROFESSOR OF LAW

B.A.LL.B(HONS.)
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TABLE OF CASES AND STATUTES .......................................................................................3

INTRODUCTION ......................................................................................................................6

DISHONOUR OF CHEQUES – MEANING ..............................................................................7

DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138 .....................................9

Object of Section 138 ............................................................................................................ 10

Ingredients and requirements of the penal provisions ............................................................. 11

1. Cheque drawn on a bank account ...................................................................................... 11

2. Issue of Cheque in discharge of a debt or liability.......................................................... 12

a) Presentation of the Cheque within six months or within the period of its validity ...... 12

b) Return of the Cheque unpaid for reason of insufficiency of funds ............................. 12

c) Issue of the notice of dishonour demanding payment within thirty days of receipt of
information as to dishonour of the Cheque. ..................................................................... 13

d) Failure of the drawer to make the payment within fifteen days of the receipt of the
payment .......................................................................................................................... 13

Scope and applicability of Section 138 .................................................................................. 13

DISHONOUR OF CHEQUE – OFFENCE BY DRAWER........................................................ 13

Notice of Dishonour .............................................................................................................. 14

Cause of Action ..................................................................................................................... 15

Written Complaint ................................................................................................................. 15

Cognizance of Offence .......................................................................................................... 16

PROCEEDINGS AGAINST DISHONOUR OF CHEQUE ....................................................... 16

Criminal Proceeding – Chapter XVII of the Negotiable Instruments Act ................................ 17

Summary Proceeding - Order 37 of the Code of Civil Procedure ........................................... 17

OFFENCES - CHEATING AND FORGERY ........................................................................... 18

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Cheating by Personation ........................................................................................................ 20

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Forgery .................................................................................................................................. 20

DRAWER’S LIABILITY FOR DISHONOUR OF CHEQUE ................................................... 22

Consequence of part payment by drawer after issue of notice ................................................ 23

Liability of drawer after deposit of entire amount during trial ................................................ 23

Death of Drawer .................................................................................................................... 23

Drawer declared insolvent ..................................................................................................... 24

DRAWEE’S LIABILITY FOR DISHONOUR OF CHEQUE ................................................... 24

CONCLUSION ......................................................................................................................... 26

TABLE OF CASES AND STATUTES

Table of Cases

1. Om Prakash Maniyar v. Swati Bhide [1992 Mah LJ 302 at 304]

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

3. Pankajbhai Nagjibhai Patel v. State

4. Keshavji Madhavji v. Emperor [AIR 1930 Bom 179]

5. Baijnath Sahay v. Emperor [AIR 1933 Pat 183]

6. Abdul Samod v. Satya Narayan Mahavir

7. Mrs. R. Jayalaxmi v. Mrs. Rashida

8. Mrs. Rama Gupta v. Bakesman’s Home Product Limited Patiala

9. Calcutta Sanitary Wares v. C. T. Jacob

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10. M. M. Malik v. Prem Kumar Goyal

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11. Rakesh Menkumar Porwal v. Narayan Dhondu Joglekar

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

13. New Central Hall v United Commercial Bank Ltd.

14. Jogendra Nath Chakrawarti v. New Bengal Bank Limited [AIR 1939 Cal. 63]

Table of Statutes

1. Negotiable Instruments Act, 1881

2. Civil Procedure Code, 1908

3. Code of Criminal Procedure, 1973

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RESEARCH METHODOLOGY

Aims and objectives

The project aims at studying the various aspects related to dishonour of Cheques and liability
arising therefrom. It begins by defining the concept of dishonour of Cheques and then proceeds
to the liability arising out of such dishonour and the laws related thereto. The ultimate objective
is to understand the liability and the penal provisions for dishonour of Cheques and then to
understand its application in the Indian context.

Scope

The scope of the project has been restricted to the broad topics like the laws applicable and the
procedures followed. The author has limited the scope to a very conceptual and theoretical
understanding of dishonour of Cheques and liability arising therefrom.

Method of writing

The researcher has endeavored to use a combination of descriptive and analytical styles of
writing throughout this project and has cited various case laws for better understanding of the
topic. More emphasis has been placed on the descriptive style of writing.

Sources of Data

The main sources have been textbooks, articles and web-search.

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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.

Since business activities have increased, the attempt to commit crimes and indulge in activities
for making easy money have also increased. Thus besides civil law, an important development
both in internal and external trade is the growth of crimes and it has been found that the banking
transactions and banking business is every day being confronted with criminal actions and this
has led to an increase in the number of criminal cases relating to or concerned with the banking
transactions.

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 honored
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
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of penalty was inserted in Negotiable Instruments Act, 1881 in form of the Banking, Public
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Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 which were
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further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002.

Of the ten sections comprising chapter XVII of the Act, section 138 creates statutory offence in
the matter of dishonour of Cheques on the ground of insufficiency of funds in the account
maintained by a person with the banker. Section 138 of the Negotiable Instruments Act, 1881 is a
penal provision wherein if a person draws a Cheque on an account maintained by him with a
banker for payment of any amount of money to another person from out of that account for the
discharge, in whole or in part of any debt or other liability, is returned by the bank unpaid, on the
ground either because of the amount of money standing to the credit of that account is
insufficient to honour the Cheque or that it exceeds the amount arranged to be paid from that
account by an agreement made with that bank, such person shall be deemed to have committed
an offence.

Section 138 of the Act can be said to be falling in the acts which are not criminal in real sense,
but are acts which in public interest are prohibited under the penalty or those where although the
proceeding may be in criminal form, they are in reality only a summary mode of enforcing a civil
right. Normally in criminal law existence of guilty intent is an essential ingredient of a crime.
However the Legislature can always create an offence 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, proceeds towards
the liability arising out of such dishonour.

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 payable otherwise than
on demand".
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"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. 1

Black’s Law Dictionary2 defines the term "Dishonour" as

"to refuse to accept or pay a draft or to pay a promissory note when duly presented. An
instrument is dishonored when a necessary or optional presentment is duly made and due
acceptance or payment is refused, or cannot be obtained within the prescribed time, or in case 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 one of
several drawee not being partners, makes default in acceptance upon being duly required 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-payment when
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".

Thus if on presentation the banker does not pay, then dishonour takes place and the holder
acquires at once the right of recourse against the drawer and the other parties on the 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
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1
Vide Wharton’s Law Lexicon, 1978 Ed. p. 335
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2 Vide Rakesh Porwal v. Narayan Joglekar, 1993 Cr LJ 680 p. (688) (Bom).

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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.

DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138

Section 138 of the Negotiable Instruments Act, 1881

Dishonour of Cheques is considered as an offence under Section 138 of the Negotiable

Instruments 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 the discharge, in
whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of
the amount of money standing to the credit of that account is insufficient to honour the Cheque
or that it exceeds the amount arranged to be paid from that account by an agreement made with
that bank, such person shall be deemed to have committed an offence and shall without prejudice
to any other provisions of this Act, be punished with imprisonment for a term which may extend
to two year, or with fine which may extend to twice the amount of the Cheque, or with both.

Provided that nothing contained in this section shall apply unless-

(a) The Cheque has been presented to the bank within a period of six months from the date 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 a demand for
the payment of the said amount of money by giving a notice, in writing, to the 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
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(c) The drawer of such Cheque fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the Cheque, within fifteen days of the
receipt of the said notice".

Object of Section 138

The object of Section 138 is to make drawer of the Cheque subject to penalty when the Cheque
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 account is
insufficient to honour the Cheque or that it exceeds the amount arranged to be paid from that
account…" have been specifically used. It would, therefore, mean that only two contingencies
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 the amount or, because it exceeds
the amount arranged to be paid from that account. No third contingency 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 many eventualities
in which the payee is denied payment by the bank, the reasons such as mentioning the date
incorrectly or some corrections not initialed or the difference in between the amount mentioned
in figures and words, are certain other contingencies in which 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 Cheques has been made penal under Section 138 of the said
Act. In Om Prakash Maniyar v. Swati Bhide 3, 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 the court.
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1992 Mah LJ 302 at 304
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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 thereby trade and business
and ultimately, economy of the country.

Exclusion of Mens Rea4

For committing an offence under Section 138 of the Act "mens rea" is not an essential
ingredient5.

Section 138 of the Negotiable Instruments Act, 1881, excludes mens rea by creating strict
liability and this is explicit from the words 'such person shall be deemed to have committed an
offence'. The returning of the Cheque by the bank either because he amount of money standing
to the credit of the drawer of the Cheque is insufficient or the amount covered by the Cheque is
in the excess of the amount arranged to be paid from that account by an agreement with the bank
are the two necessary conditions creating strict liability.

Ingredients and requirements of the penal provisions

Section 138 creates an offence for which the mental elements are not necessary. It is enough 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 account for 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’s liability 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
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Wills R. v. Tolson, (1889) 23 Q.B.D 173 (vide Wharton’s Law Lexicon 14th Ed., Fifth Imp., 1992).
5 Mahendra A.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases 438 (Bom.)
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liability for the offence under this section. The Cheque is returned by the bank unpaid either
because of the insufficiency of the amount or, because it exceeds the amount arranged to be paid
from that account. The words "that account" in the 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 its consequences would not snowball into the offence described
under section 138 of the Act. For the offence under section 138 of the Act there must have been
an account maintained 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 the satisfaction of any debt or other liability, partly or wholly, even if
it is returned unpaid will 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 are fulfilled:

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 the date on
which it is drawn or its period of validity, whichever is earlier. Thus if a Cheque is valid 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 the Cheque is not specified or
prescribed the Cheque is presented within six months from the date the cause of action can arise.
The six months are taken from the date the Cheque was drawn.

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 that account 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.
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c) Issue of the notice of dishonour demanding payment within thirty days of receipt of
information as to dishonour of the Cheque.
The payee or the holder in due course of the Cheque has to give a notice in writing making 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 the return 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 15 days of the
receipt of the notice. If the payment is not made after the receipt of the notice within stipulated
time, a cause of action for initiating criminal proceedings under this section will arise.

Scope and applicability of Section 138

According to the 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 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 is not liable for
prosecution6.

DISHONOUR OF CHEQUE – OFFENCE BY DRAWER

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
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the time being in force.

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Mohan Krishna (B) v Union of India 1996 Cri LJ 636 (AP)
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As noticed in the previous topic, what is made an offence is not the drawing of Cheque alone. It
must have been drawn in discharge, in whole or in part, of a legally enforceable debt or other
liability. It must have been duly presented in time and dishonoured. There must be a written
demand for the amount within a specified time, followed by failure to make payment within
another specified time. It becomes an offence only on such failure which is an illegal omission 7.

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 sub-
section further provides that the drawer has to comply with the demand within 15 days of the
receipt of the said notice.
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Anto (K S) v Union of India (1993) 76 Comp Cas 105 (Ker).
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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 Court8, 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 the 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 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
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N.C. Kumaresan v. Ameerappa 1991 (1) KLT 797
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cognizance of the offence. If the payee or the holder in due course does not file a complaint, the
drawer cannot be prosecuted.

Cognizance of Offence

In terms of Section 142 of the Negotiable Instruments Act, 1881, no court shall take cognizance
of any offence punishable under section 138 except upon a written complaint made by the payee
or the holder in due course of the dishonoured Cheque and filed within one month of the date on
which the cause of action arose. No court inferior to that of a metropolitan 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 upon a
complaint in writing which must be made within one month by the payee or holder in due course
from the date on which the cause of action arises under clause (c) of the proviso to section 138 9.
In substance we can say that when a drawer, served with a notice within 30 days from the date on
which the payee or the holder in due course has come to know about the return of the Cheque
and the drawer does not make the payment as demanded, the complaint shall have to be filed
within 30 days from the date on which the 15 days’ time expires.

The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 has
introduced a proviso to Section 142 permitting the court to take cognizance of a complaint after
the prescribed period if the complainant satisfies the court that he had sufficient cause for not
making a complaint within such period. It would thus be within the discretion of the court to
condone the delay, depending upon the causative circumstances.

PROCEEDINGS AGAINST DISHONOUR OF CHEQUE

Prior to the incorporation of chapter XVII in the Negotiable Instruments Act in 1988, to deter
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and penalize the issue of worthless Cheques, it was only under the provisions of the Indian penal
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Kody Elecot Ltd v. Down Town Hospital
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Code 1860 (IPC) that the drawer of a Cheque could be criminally prosecuted if it could be shown
that he cheated someone by issuing the Cheque. Even after the introduction 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 the same offence under both the enactments. Mens
rea or dishonest intention must be established 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 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 which may extend to two 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 along with interest. Besides a civil suit for recovery of the
amount, proceeding in a summary manner can be initiated under Order 37 of the Code of Civil
Procedure. The advantage of suing under chapter XXXVII of Civil Procedure Code is that the
defendant is not allowed in such cases to defend the suit without 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 ,the allegations in the plaint shall be deemed to be admitted,
and the plaintiff is entitled to a decree for the principal sum and also the interest as calculated
under Section 9 and 80 of the Negotiable Instruments Act, 1881.
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Criminal prosecution under section 138 does not bar a civil action against the drawer on the
dishonoured Cheque. In Medical Chemicals & Pharma P Ltd v. Biological E Ltd10., the
Supreme 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 in their content
and consequence".

In addition to the remedies available under the Act the payee can also resort to remedies
available under Civil Procedure Code and Consumer Protection Act. In Pankaj Bhai Saibai
Patel v. State11, it has been held that in view of the limit of fine as prescribed in Section 29(2),
Code of Criminal Procedure, the Magistrate who thinks it fit that the complainant must be
compensated for loss can resort to section 357(3) of the code and can award compensation to the
complainant for which no limit is prescribed in Section 357(3). The power of Courts to award
compensation is not ancillary to other sentences but it is in addition thereto.

OFFENCES - CHEATING AND FORGERY

Cheating being an offence is defined under Section 415 of the Indian Penal Code as follows:

"Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived
to deliver any property to any person, or to consent that any person shall retain any property, or
intentionally induces the person so deceived to do or omit to do anything which he would not do
omit if he were not so deceived, and which act or omission causes or 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 this section."

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 the accused persons
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J.T. 2000(2) SC 426
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AIR 2001 SC 567
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and the said inducement was made fraudulently or dishonestly with a view to deceive the
complainant. It is further to be shown by the prosecution that due to deception 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 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.

In Keshavji Madhavji v. Emperor12 it was observed that ‘it was for the prosecution to establish
facts which point prima facie to the conclusion that the failure 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 be in his favour which are specially within his
knowledge and as to which the prosecution could 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 the offence of cheating under section 415 of the IPC.

In Baijnath Sahay v. Emperor13 it was observed that the act of drawing a 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 on future presentment be dishonoured. Drawing of a
Cheque does not imply a representation that 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 the necessary money for before Cheque can be presented.

Thus mere dishonour for lack of funds does not amount to cheating; for cheating to be
established a mental element to deceive is necessary.
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12
AIR 1930 Bom. 179
13
AIR 1933 Pat 183
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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. The offence
under section 416 of IPC owes its gravity to the fact that it affects not only the person deceived
but also the person personated.

Offence of cheating by personation is punishable under section 419 of IPC whereas general
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 into any express or implied
contract, or with intent to commit fraud or that fraud may be committed, 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-

20

Firstly -Who dishonestly or fraudulently makes, signs, seals or executes a document or part of a
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document or makes or transmits any electronic record or part of any electronic record, affixes
 P a g e | 21

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 the intention of causing it to be
believed that such document or part of document, electronic record or digital signature was
made, signed, sealed, executed, transmitted or affixed by or by the authority of a person by
whom or by whose authority he knows that it was not made, 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 it has been
made, executed or affixed with digital signature either by himself or by any other 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 electronic record
knowing that such person by reason of unsoundness of mind or intoxication cannot, or that by
reason of deception practiced upon him, he does not know the contents of 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 person in his lifetime, may amount
to forgery.

Banker’s liability for payment made on forged Cheques

Relationship between a banker and his customer is that of a debtor and creditor. When a Cheque
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 law and would be liable to the
customer for the said amount. A bank in such cases can escape liability only if it can show that
21

the customer is not entitled to make a claim on account of adoption, estoppel or ratification.
Page

The rule of law in this regard can be stated as follows:

 P a g e | 22

When a Cheque duly signed by a customer is presented before a bank with whom he has an
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 the customer 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 document in Cheque form, on which the
customer’s name as drawer is forged, is a mere nullity. The bank can succeed only when it
establishes adoption or estoppel.

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 the drawee 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 served on to
the drawer of such Cheque. It is clear that the drawer shall be bound to compensate the 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 due course
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 information from 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 on accused. Where no
notice making demand for payment was served upon the drawer as contemplated under clause
(b) and clause (c) of Section 138, which would mean that no demand has been made within the
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specified time from the date of dishonour of Cheque in question, conviction will not be
sustainable14.

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 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 cannot be quashed15.

Liability of drawer after deposit of entire amount during trial

As 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 consequence 16.

Death of Drawer
The criminal liability cannot 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 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 complainant 17.
23

14
Adhikari (B) v. Ponraj 1996 Cri LJ 180 (Mad)
15
Ruby Leather Exports v. Venu (K) (1995) 82 Comp Cas 776 (Mad).
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16
Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)
17
Bhupinder Lima v. State (2000) 99 Comp Cas 424 (AP)
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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.

DRAWEE’S LIABILITY FOR DISHONOUR OF CHEQUE

Rightful Dishonour - when bank may refuse to honour

When there is the relationship of banker and customer between the parties, the banker is under 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 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.

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 and have
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.
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The liability of drawee of Cheque in case of a wrongful dishonour has been dealt with under
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 properly applicable to
the payment of such Cheque must pay the Cheque when duly required so to do, and, in default of
such payment, must compensate the drawer for any loss or damage caused by such default".

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 Ltd18. the Madras High Court held that where a
banker having sufficient funds of a customer in his hands fails, even by mistake to honour
Cheque issued by the customer, the customer has a right to claim damages.

In Jogendra Nath Chakrawarti v. New Bengal Bank Limited19, it was held, "where the banker,
being bound to honour his customer’s Cheque, has failed to do so, he will be liable in damages.
If, special damage, naturally ensuing from the dishonour, is proved, it will be properly taken into
account in assessing the amount of the damages. If the customer 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 as will reasonably compensate him for the injury
which, from the nature of the case, he has sustained. All loss flowing naturally from the
dishonour of a Cheque may be taken into account in estimating the damages.

Compensation for wrongful dishonour

Wrongful dishonour of a Cheque exposes the drawee bank to statutory liability to the drawer 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 the injury
sustained or likely to be sustained by reason of dishonour. In almost every case the drawer can
recover substantial damages against the drawee on the basis of injury to his credit, although he
may not be able to prove that he had suffered actual pecuniary loss through the dishonouring of
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18
(2012) 13 SCC 788
Page

19
AIR 1939 Cal. 63
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the Cheque20. However, there appears to be a distinction between a trader and a non-trader in this
respect, while a trader is always entitled to substantial damages for dishonouring of his Cheque,
a non-trader will be entitled only to nominal damages in the absence of an allegation and proof
of substantial damages21.

The General rule followed by the courts in awarding damages is that damages are awarded for
foreseeable and actual loss suffered and the quantum of damages is usually based on the
principle of ‘restitution in integral’ i.e. restoring the person to the position he would have been in
if he had not suffered a damage. But in case of tradesman’s Cheque the damages awarded are
inversely proportional to the amount on the Cheque. Thus, smaller the amounts 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 again inversely proportional to the amount of the
Cheque.

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 legalize 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
26

20
Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 595
Page

21
Gibbons v. Westminster Bank (1939) 3 All E.r. 577
 P a g e | 27

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.

Though insertion of the penal provisions have helped to curtail the issue of Cheque
lightheartedly or in a playful manner or with a dishonest intention and the trading community
now feels more secured in receiving the payment through Cheques. However there being no
provision for recovery of the amount covered under the dishonoured Cheque, in a case where
accused is convicted under section 138 and the accused has served the sentence but, unable to
deposit amount of fine, the only option left with the complainant is to file civil suit. The
provisions of the Act do not permit any other 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 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.

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BIBLIOGRAPHY
1. R.K Suri; Dishonour of Cheques- Prosecution & Penalties, ALT 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;

5. S.K. Awasthi, Law of Dishonour of Cheques – Forgery and Cheating, CTJ Publications,
Pune;

6. R. Swaroop, Cases on Dishonour of Cheques (Under Section 138 to Section 142 of the
Negotiable Instruments Act), Law Aid Publications, Madras;

7. Bhashyam & Adiga, The Negotiable Instruments Act, Bharat Law House, New Delhi;

8. M.S. Parthasarthy, Cheques in Law and Practice, Universal Law Publishing Co. Pvt. Ltd.,
Delhi;

9. S. Chand, Business laws, S. Chand and Company Ltd., New Delhi;

10. Article by T.N Pandey, Dishonour of Cheques: whether all directors of a company can be
prosecuted in case of dishonour of Cheques.

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