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Legal remedies for dishonour of cheque PRICE DROP

By Sindhu A - March 26, 2020

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The Negotiable Instruments Act, 1881 is an Act to define the law relating to
promissory notes, bills of exchange and cheques. According to Section 6 ofthe

Negotiable Instruments Act, a “cheque” is a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand
and it includes the electronic image of a truncated cheque and cheque in the
electronic form.

Chapter XVII with sections 138- 142 of the Act deals with penalties in case of
Dishonour of certain Cheques for Insufficiency of funds in the accounts. These
provisions instil faith in the efficiency of banking operations and gives 
credibility to the use of negotiable instruments employed in business
transactions.

What constitutes dishonour of cheque?

There are two methods of dishonouring a cheque by the paying banker, i.e.,
rightful dishonour of cheque and wrongful dishonour of cheque[i].
Circumstances where a cheque is rightfully dishonoured doesn’t incur any
liability whereas if a cheque is wrongfully dishonoured then it attracts
consequences which shall be legally redressed.

Rightful dishonour of cheque

The following are some of the circumstances where the paying banker is
justified in dishonouring a cheque.

Insufficient funds– Where there are no sufficient funds to meet the

requirement in the cheque or when the amount to the customer’s credit is
insufficient to meet the whole amount of the cheque, such an instrument
may be dishonoured.
Particulars not duly filled in– A banker can dishonour a cheque if all the
required particulars of the cheque is not in order. The date, name of the
payee, the amount written in both words and numbers, signature of the
drawer, account number etc., is to be filled in properly, if not the banker can
refuse to dishonour the cheque.
Not properly presented– If the cheque is not properly presented, that is to say
that the cheque is presented at a branch where the customer doesn’t have an
account or is presented after banking hours or is not presented within a
reasonable time, the banker may refuse to honour the cheque.
Death of the customer– Upon the death of the customer, the balance in that
account is vested with their legal representatives and once the banker
receives notice of the customer’s death, he may refuse to honour any cheques
that were issued by the drawer before his death, because the amount in the
account now belongs to his legal representatives.

In the case of Tate vs. Hilbert[ii], it was held that if a banker honours the
cheque after the death of the drawer but before the notice of his death, he 
is
justified in doing so.

Insolvency of the customer- When a customer is declared an insolvent by a

competent court then all of his assets are vested with the assignee and hence
a banker may refuse to honour such cheques.
Forgery- if a cheque is forged then the Banker can dishonour it.
Court orders- In situations where a Court passes any attachment order,
judgements or garnishee orders against persons under section 39 of the Civil
Procedure Code, 1908 or under the Specific Relief Act, 1963, then the Banker
may refuse to honour a cheque.

There are several other grounds such as when the customer countermands
payment, closing of the drawer’s a/c, attachment under the Income Tax Act,
breach of trust, defective title, post-dated cheque, mutilation of the cheque etc.,
that may justify dishonouring of a cheque.

Wrongful dishonour of a cheque

In lieu of a healthy banker-customer relationship, a banker has a statutory

obligation to honour his customer’s cheques unless he has valid reasons to
dishonour it. If dishonouring of a cheque is due to the mistake or negligence of
the Banker or any of his employees, then he attracts liability. This is referred to
as wrongful dishonour of a cheque and the banker who dishonours the cheque
intentionally without any valid reason or by mistake or due to negligence is
liable to compensate for the loss suffered by the customer.

Section 31 of the Negotiable Instruments Act, 1881 states that when a customer
had sufficient balance in his account, the banker is bound to honour such a
cheque and if he fails to do so, he shall compensate the drawer for any loss or
damage caused by such default.

In Marzetti vs. Williams[iii], the customer Marzetti had an account with the
Williams bank and Marzetti had 69 pounds in his account, later on the same
day 40 pounds was paid into his account. A couple of hours later, Marzetti drew
a cheque for 87 pounds and the same was presented before the bank. However,
the bank didn’t take due notice of the additional 40 pounds that was credited

into Marzetti’s account and dishonoured the cheque for insufficient funds. The
Court held that the bank was liable for damages as a couple of hours was
sufficient for the banker to calculate the amount in the customer’s account and
it is injurious to the customer especially if he is a person in trade to have such a
small amount of payment having been refused for payment.

Consequences of dishonour of cheque:

Notice- According to section 93 of the Negotiable Instruments Act, 1881,

“when a promissory note, bill of exchange or cheque is dishonoured by non-
acceptance or non-payment, the holder thereof, or some party thereto who
remains liable thereon, must give notice that the instrument has been so
dishonoured to all other parties whom the holder seeks to make severally liable
thereon, and to some one of several parties whom he seeks to make jointly
liable thereon.”
Compensation- According to section 117 of the Negotiable Instruments Act,
1881, the compensation payable in case of dishonour of promissory note, bill
of exchange or cheque, by any party liable to the holder or any endorsee,
shall be determined by the following rules:
the holder is entitled to the amount due upon the instrument together with
the expense properly incurred in presenting, noting and protesting it;
when the person charged resides at a place different from that at which the
instrument was payable, the holder is entitled to receive such sum at the
current rate of exchange between the two places;
an endorser who, being liable, has paid the amount due on the same is
entitled to the amount so paid with interest at 31[eighteen per centum] per
annum from the date of payment until tender or realization thereof, together
with all expenses caused by the dishonour and payment;
when the person charged and such endorser reside at different places, the
endorser is entitled to receive such sum at the current rate of exchange
between the two places;
the party entitled to compensation may draw a bill upon the party liable to
compensate him, payable at sight or on demand, for the amount due to him,
together with all expenses properly incurred by him. Such bill must be
accompanied by the instrument dishonoured and the protest thereof (if any).
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 If such bill is dishonoured, the party dishonouring the same is liable to make
compensation thereof in the same manner as in the case of the original bill.
Liability of banker for negligently dealing with bills presented for payment-
According to section 77 of the Act when a bill of exchange, accepted payable
at a specified bank, has been duly presented there for payment and
dishonoured, if the banker so negligently or improperly keeps, deals with or
delivers back such bill as to cause loss to the holder, he must compensate the
holder for such loss.[iv]

Criminal liability of Drawer of a cheque on dishonour:

According to section 138 of Negotiable Instruments Act, 1881, where any

cheque that was duly presented to the bank is returned unpaid either because
of the amount of money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be paid from that
account by an agreement made with the bank, such person shall be deemed to
have committed an offence, and shall be imprisoned for a term which may be
extended up to two years, or with fine which may extend to twice the amount
of the cheque, or both.[v]

There are also three conditions specified in the section to attract the operation
of this section.

In the case of Kusum Ingots and Alloys Ltd. vs. Pennar Peterson
Securities[vi], the SC held that, “The object of bringing section 138 on statute is
to inculcate faith in the efficiency of banking operations and credibility in
transacting business on negotiable instruments.”

Edited by Pushpamrita Roy

Approved & Published – Sakshi Raje 

Reference

[i]Dr.S.R.Myneni, Law of Banking, 2ndEdn. 354.