Assignment: Banking Law

PAPER VI
Harish Keluskar-TYLLB

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Assignment 1 : “Dishonour of cheque for insufficient of funds is a criminal offence" explain

referring to the appropriate provisions of the Negotiable Instrument Act
The term Negotiable means transfer by endorsement or delivery & therefore the
term Instrument means any legal instrument in writing, which is made in favour of a person. As a
result, Negotiable Instruments are written statements implying cash payment, either on demand or
within a specific timeframe, and bearing the drawer's/payer's name Negotiable instruments plays an
very important role in the today's business world. And some of the Instruments like, cheques, bank
drafts, bill of exchange etc. are easy way of trade & commerce transactions.

Specifically the utilization of cheque has given a new dimension to both business & company world.
Cheque being a bit of paper is straightforward to hold &move anywhere, thus people prefer it than
carrying currency &due to the wide acceptance of cheques worldwide, it's become important to guard
the credibility of this instrument & therefore the protection of hard-earned money also faith in the
cheque system. Tthe usage of cheques has been regulated in India through ,Negotiable Instruments
Act 1881.Under which dishonour of cheque is considered a punishable offence.

There are various negotiable instruments; like cheques, promissory notes, bills of exchange, bank
notes, etc. However, for day to day transactions, cheque is that the most generally used legal
document in businesses today & due to the Active usage people often get into some trouble & they
find queries like What to try to to if cheque gets bounced, the way to file cheque bounce case,
Jurisdiction of cheque bounce case, cheque case jurisdiction etc. So, during this paper i will be dealing
with some of the important information about Cheque bounce or Dishonor of cheque and also about
jurisdiction to file complaint or Jurisdiction for cheque bounce case.
Section 92: Dishonor by Non-Payment
A bill or a cheque is said to be dishonored by non-acceptance only If maker of the'note' /the acceptor
of the bill/ the drawee of the cheque defaults on payment after duly required to pay the same.

Therefore, if at the presentation the banker does not pay, then there is dishonor and the bearer
immediately acquires the right of recourse against the drawer& against the other parts of the cheque.

Dishonor Of Cheque:
According to Section 6. of the Negotiable Instruments Act, the check is defined as the bill of
exchange issued on a particular banker & expressed to be payable other than on demand. Includes the
electronic image of the truncated check & a check in the electronic form.

In the banking scenario, the honored cheque indicates the successful transaction of the amt. cited on
the check to the beneficiary concerned i.e. payee. Conversely, if the Bank refuses to dispense the
cheque sum to the beneficiary, it will be treated as a dishonored cheque so, it refers to a scenario
where the Bank refuses to dispense the check amount to the payee.
Reference to the term 'dishonor' made in Section 91& 92 of the Negotiable Instruments Act, 1881.

S. 91. Dishonor by non-acceptance- A bill of exchange is stated or deemed to be dishonoured ,only if

the drawee or one of the multiple drawees .not being the partners refuses to accept it , defaults on an

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acceptance after being duly obliged to accept the bill, or when presentment is excused & bill isn't
accepted.
so in other words it can be said that the bill can said to be or considered as dishonored If the drawee is
unable to contract or when the acceptance is qualified.
The Negotiable Instruments (Amendment And Miscellaneous Provisions) Act, 2002, has made the
following changes to Section 138. of the Negotiable Instruments Act:

138. Cheque dishonour due to 'insufficient funds' in the account:

If a cheque drawn by a person on an account maintained by him with a banker is returned by the bank
unpaid for payment of any amount of money to another person from that account for the discharge, in
whole or in part, of any debt or other liability, Such person shall be deemed to have committed an
offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment
for a period of not less than one year if the amount of money standing to the credit of that account is
insufficient to honour the cheque or if it exceeds the amt. arranged to be paid from that account, by an
agreement made with that particular bank.

Provided provided in this section, nothing in this section shall apply unless:
a. the cheque has been handed to the bank within six months of the date on which it was drawn,
or during the validity term of the cheque, whichever comes first;
b. within thirty days after receiving information from the bank regarding the return of the
cheque as unpaid, the payee or holder of the cheque, as the case may be, makes a claim for
payment of the specified amount of money by giving a notice in writing to the drawer of the
cheque; and
c. within 'fifteen days' of receiving the said notice, the drawer of such cheque fails to make
payment of the said sum of money to the payee or to the holder, in due course.

Explanation: A legally enforceable debt or other liability is referred to as a debt or other liability in
this section.
cope of S.138 of NI act , 1881( Negotiable Instruments Act,1881):
Section 138 makes it as statutory offence dishonour cheques because there are insufficient funds in a
person's bank account with the banker, and the amount arranged to be paid from that account by an
agreement made with that bank is greater than the amount arranged to be paid from that account by an
agreement made with that bank as specified in the act.
However, there are a number of reasons for cheque dishonour, such as signature mismatch, payment
stopped by the drawer, account closed by the drawer, and so on.

Whenever a cheque for the discharge of any legally enforceable debt or other liability is dishonoured
by the bank for lack of funds and payment is not made by the drawer inspite of a legal notice of
demand, it shall be considered a criminal offence. The Act considers cheque dishonour to be a
criminal offence, but it is only enforcing a civil right in a summary manner.

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Ingredients of offence:
The essential ingredients of sec138 are:
1. Drawing a check by a person on an account of any debt or other liability.
2. Presentation of the check to the bank within a period of six months from the date of its
drawing or within the period of its validity.
3. Return of the unpaid check by the drawee bank.
4. Written notice to the cheque drawer within 30 days of receipt of information relating to the
return of the cheque as unpaid in the form of an advance debit or return memo.
5. Non-payment by the drawer within fifteen days of receipt of the notice.

The High Court of Maharashtra held in Vishnu S/O Amthalal Patel v. State of Maharashtra &
Anr.that the accused's cheque could not be regarded a legally enforceable debt or liability. The
evidence fell short of establishing that the applicant/accused owes a legally enforceable debt or
liability for which the cheque was given. As a result, the applicant/accused has met his or her burden
and refuted the presumption based on the aforementioned provisions of the Act
Notice:
Before taking any action, a legal notice for check dishonour is required. This Act stipulates that, if a
cheque has been dishonoured, the drawer must be notified (by registered A.D.) within 30 days of
receiptof the memo from the drawee bank that the cheque has been dishonoured.

The following points should be included in the legal notice for cheque dishonour:
• The issued check was presented to the bank for payment;
• The check was then dishonoured for the reason stated by the drawee bank.
• Requesting payment of a sum written on a cheque within 15 days of receipt of notice.
The next action should be conducted after sending the legal notice for cheque dishonour.

Filing of complaint:
When the drawer of the cheque fails to make the payment within fifteen days after receiving the
notification, the cause of action for beginning proceedings is complete, according to Section 138 of
the Act and its proviso.

Only from the moment the notice period expired would the offence be considered committed. A
section 138 complaint must be filed within one month of the occurrence of the cause of action. The
day on which the cause of action arises is excluded from the calculation of the limitation period for
filing a complaint under Section 138 of the Act.

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Jurisdiction:
In K Bhaskaran v. Sankaran Raidhyan Balan, reported in (1999) 7 SCC 510, the Apex court held
that a crime under section 138 of the Act can only be committed by concatenating several acts.
1. The Cheque Drawing
2. The presentation of cheque to the bank
3. The drawee bank's unpaid cheque is returned to the sender.
4. giving written notice to the cheque drawer requesting payment of the cheque amount
5. The drawer's failure to make within 15 days of receipt the notice
All of these elements combine to form the crime of cheque dishonour.

According to the Court, under the principles of law governing the administration of substantive
criminal law, the complainant can choose any of the courts with jurisdiction over any of the local
areas within the territorial limits of which any of the five acts were committed. The court went on to
say that the court with jurisdiction over the payer's and payee's places of residence can have territorial
jurisdiction to investigate and try the complaint.
Dashrath Rupsingh Rathod v State of Maharashtra & Anr:
The Supreme Court's recent landmark decision has altered the essential criteria for initiating criminal
complaints for cheque dishonour under Section 138 of the Negotiable Instruments Act. Previously, the
holder of the cheque could file a case under Section 138 at his place of business or residence.

However, the Hon'ble Supreme Court has ruled that the complaint must be filed in the location where
the bank branch on which the cheque was drawn is located, and that the judgement will apply
retrospectively, that is, lakhs of cases pending in various Courts across the country will see an
interstate transfer of cheque bouncing cases.

Amendment:
A court trying a case involving cheque bouncing must order the drawer to pay interim compensation
to the claimant of not more than 20% of the cheque sum within 60 days of the trial court's order,
according to the Negotiable Instruments (Amendment) Act, 2018, which came into effect on 1st sept.,
2018.

This interim fee can be levied in a summary trial or a summons case where the drawer pleads not
guilty to the lawsuit's accusations, or when a charge is framed in another case. In addition, the
Amendment permits the Appellate Court to order the claimant to deposit a minimum of 20% of the
fine/compensation imposed, in addition to temporary compensation, while hearing appeals against the
conviction.

Civil action:
Cognizance of Offences:
The Negotiable Instrument Act of 1881 section 142 that deals with the cognizance of offences.

In the case of Birendra Prasad Sah v. State of Bihar and Others, the appellant served a legal notice
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within 30 days of receipt the memo of dishonour. As a result, the proviso (b) to section 139's
requirement was met. The respondent claimed that he was not served with the legal notice. The
appellant specifically claimed in the complaint that despite numerous requests to the Postal
Department, no acknowledgement of notice was provided. As a result, the appellant had no choice but
to issue a second notice. The Court held that the first notice formed the cause of action for a complaint
under s.138 since it had to be issued within the time limit.

Essential conditions required for cognizance of offence:

The following conditions must be met before proceeding against the drawer of a dishonoured cheque:
1. In due course, the payee or holder must file a written complaint.
2. Under clause (c) of the proviso to Section 138, the complaint must be filed within one month
of the day on which the cause of action arose.
3. The offence stated under Section 138 can only be tried in a court of Metropolitan Magistrate
or a Judicial Magistrate of First Class.
Compoundable offence:
Section 147: Compoundable offences
Every offence punishable under this Act is compoundable, notwithstanding anything in the Code of
Criminal Procedure, 1973, (2 of 1974.)

The provisions of the Code of Criminal Procedure, 1973, are not applicable to the compounding of
offences under the NI Act, as evidenced by the non obstante clause.
Prior to the introduction of Section 147 of the NI Act, the provisions of Section 320 of the CrPC were
used to compound the offence under the NI Act. The legislature felt it appropriate to allow
compounding without the permission of the court in the case of an offence under Section 138 of the
NI Act, because normally, cheque dishonour occurs from commercial transactions between private
parties. As a result, only Section 147 begins with a non obstante clause, taking it beyond the scope of
section 320 of the CrPC.

The following guidelines were issued by hon'ble Supreme court in case of Damodar S. Prabhu v.
Sayed Babalal H. on cheque bounce cases are:
1. That the summons be appropriately modified to make it apparent to the accused that he may
apply for compounding of the offences at the first or second hearing of the case, and that if he
does, compounding may be granted by the court without imposing any costs on accused.

2. If the accused fails to make an application for compounding , compounding may be granted if
an application for compounding is made before the Magistrate at a later stage, is subject to the
condition that the accused pay 10% of the cheque amount to be deposited with the' Legal
Services Authority', or such other authority as the court deems appropriate.

3. Similarly, if the accused applies for compounding in a revision or appeal before the Sessions
Court or a High Court, the compounding may be granted on the condition that the accused
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pay 15% of the cheque amount in costs.

4. Finally, if a compounding application is filed with the Supreme Court, the figure rises to 20%
of the whole amount of the cheque.

Punishment:
A person guilty of an offence u/s. 138 of the Negotiable Instrument Act of 1881 faces a maximum
sentence of two years in prison and a fine of double the amount of the cheque, or both.

Case laws:
The Delhi High Court considered whether a criminally compoundable offence under Section 138
might be handled by mediation in the matter of Dayawati v. Yogesh Kumar Gosain, 2017. The
Court held that the Legislature had not explicitly established a legislative clause permitting the
criminal court to transfer the plaintiff and convicted parties to alternative resolving disputes
mechanisms.

Arbitration is permitted and recognised under the Code of Criminal Procedure (Cr.P.C), without
specifying or limiting the technique used to achieve it. As a result, there is no prohibition against
adopting alternative dispute resolution methods like as arbitration, mediation, or conciliation (as
defined in Section 89 of the Civil Procedure Code, 1908) to resolve disputes involving offences
covered by Section 320 of the Cr.P.C. It further stated that the proceedings under Section 138 of the
Act are different from other criminal cases, and similar to civil wrong with criminal overtones.
In the case of Dashrath Rupsingh Rathod versus State of Maharashtra and others,the hon'ble
Supreme Court held that the territorial jurisdiction for the dishonour of cheques is limited only to the
court whose local jurisdiction the offence was committed, which in this case is the court where the
cheque is dishonoured by the bank on which it is drawn. All other complaints (including those in
which the accused/respondent has not been properly served) will be returned to the complainant for
filing in the appropriate court, as determined by the Supreme Court, in accordance with an exposition
of the law.

The Court held in Apparel Export Promotion Council v. Collage Culture & Ors. that once the
Trial Court proceedings were revived, the appellant was required to follow the orders entered in those
proceedings unless they were stayed. The Court noted that the thirty-day period started on the date the
decision was delivered. The fact that the appellant had not physically collected the complaint did not
lengthen the time frame in which it had to re-file it.

Conclusion:
The law related to Negotiable Instruments is a law of commercial world that was enacted to facilitate
trade and commerce by providing for the sanctification of a credit instrument that would be deemed
convertible into money and easily transferable from one person to another. In absence such
instruments, trade and commerce activities were expected to affected, as it was not practical for the
trading community to continue using the bulk of the currency in force.

The Act's key objective is to legalize the manner by which the instruments covered by it can be passed
from hand to hand through negotiation, just like any other good. Though the penal provisions have

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served to reduce the issue of cheques in a lighthearted or playful manner, or with a dishonest
intention, the trading community today feels more comfortable in receiving payment by cheques.

However, because there is no provision for recovering the amount covered by the dishonoured
cheque, if an accused is convicted under section 138 and has served his or her sentence, but is unable
to deposit the fine then it is the complainant's sole choice is to file a civil suit.

However, the process of seeking civil justice is notoriously slow, and recovering damages through a
civil suit can take an inordinate amount of time. If the Government of India could establish a tribunal
to deal with cheque dishonour and the liability that arises from it, the process of recovering damages
for the aggrieved party could be accelerated.

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Assignment 2 : Write in detail about the form of business in which a banking company may
engage under the provision of Banking Regulation Act.

In addition to the business of banking, a banking company may engage in any one or more of the
following forms of business, namely,-
(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or
without security; and drawing, making, accepting, discounting, buying, selling, collecting and dealing
in bills of exchange, hundies, promissory notes, coupons, drafts, bill of lading, railway receipts,
warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or
negotiable or not; the granting and issuing of letters of credit, travelers' cheques and circular notes; the
buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange
including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing
in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of
all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of
constituents or others; the negotiating of loan and advances; the receiving of all kinds of bonds, scrips
or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the
collecting and transmitting of money and securities;
(b) acting as agents for any government or local authority or any other person or persons; the carrying
on of agency business of any description including the clearing and forwarding of goods, giving of
receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the
business of a 30[Managing Agent or Secretary and Treasurer] of a company;
(c) contracting for public and private loans and negotiating and issuing the same;
(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of
any issue, public or private, of State, municipal or other loans or of shares, stock, debentures or
debenture stock of any company, corporation or association and the lending of money for the purpose
of any such issue;
(e) carrying on and transacting every kind of guarantee and indemnity business;
(f) managing, selling and realizing any property which may come into the possession of the company
in satisfaction or part satisfaction of any of its claims;
(g) acquiring and holding and generally dealing with any property or any right, title or interest in any
such property which may form the security or part of the security for any loans or advances or which
may be connected with any such security;
(h) undertaking and executing trusts;
(i) undertaking the administration of estates as executor, trustee or otherwise;
(j) establishing and supporting or aiding in the establishment and support of associations, institutions,
funds, trusts, and conveniences calculated to benefit employees or ex-employees of the company or
the dependents or connections of such persons; granting pension and allowances and making
payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent
object or for any exhibition or for any public, general or useful object;
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(k) the acquisition, construction, maintenance and alteration of any building or works necessary or
convenient for the purpose of the company;
(l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or
turning into account or otherwise dealing with all or any part of the property and rights of the
company;
(m) doing all such other things as are incidental or conducive to the promotion or advancement of the
business of the company;
(o) any other form of business which the Central Government may, by notification in the Official
Gazette, specify as a form of business in which it is lawful for a banking company to engage.
(2) No banking company shall engage in any form of business other than those referred to in sub-
section (1).

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