DISHONOUR OF CHEQUE

DISHONOUR OF CHEQUE

A person suffers a lot if a cheque issued in his favour is dishonoured due to the insufficiency of funds in the account of the drawer of the cheque. To discourage such dishonour, it has been made an offence by an amendment of the Negotiable Instrument Act by the Banking, Public Financial Institution and Negotiable Instrument Laws (Amendment ) Act, 1988.

A new Chapter VII consisting of Sections 138 to 142 has been inserted in the Negotiable Instrument Act.

Section 138 makes the dishonour of cheque an offence. The payee or holder in due course can have recourse against the drawer, who may be held liable for the offence.

Essentials for dishonoured cheques:

There should be dishonour of cheque

Section 138 makes dishonour of cheque in certain cases an offence. Cheque is the most common mode of making the payment. In order to duly protect the interest of its payee, holder in due course, there is an attempt to discourage dishonour of a cheque by making it an offence. These provisions do not cover the dishonour of other negotiable instruments.

• Payment in discharge of debtor liability: The cheque should have been drawn by a person on an account with a banker for payment of money to another person for the discharge, in whole or part, of any debt or other liability.The debt or other liability in such a case means a legally enforceable debt or other liability.If the payment by way of cheque is made as gift or charity, it is not the payment for legally enforceable debt or liability. The dishonour of such cheque does not attract the provisions of Section 138 of the Negotiable Instrument Act.

• Presentment of the cheque within the period of its validity:It is further necessary that the cheque has been presented before it became stale and invalid. It means that the cheque has been presented within a period of 6 months from the date on which it is drawn or within the period of validity, whichever is earlier.

• Dishonour due to insufficient fund:It is also necessary that the cheque should be returned by the bank unpaid.Dishonour may be because of 2 reasons:

1. Either the amount of money present in the account is insufficient
2. Or the amount to be paid has exceeded the amount to be paid from that account as in the agreement made with that bank.

It has been generally held in various cases that dishonour due to the insufficiency of funds has to be interpreted liberally. Dishonour due to the remarks like “Account closed”, “Refer to the drawer” or “Stop payment” of the cheque may be deemed to be covered by the provision contained in Section 138 of the Act.

• Notice and demand from the drawer and drawer’s failure to pay: Within 15 days of receipt of information from the bank about the dishonour of the cheque, the payee or holder in due course of the negotiable instrument, as the case may be, must make a demand of the said amount from the drawer by giving a notice in writing.

Inspite of such a notice the drawer of the cheque should fail to make the payment of the said amount of money to the payee or the holder in due course of the cheque, within 15 days of the receipt of the said notice.  

In the case of TomyJacob Kattikaran  v. Thomas Manjaly  A.I.R 1998   S.C. 366

The Supreme Court has held that if it was established that the appellant did not serve a notice on the drawer within the period prescribed under Section 138 of the Act, the acquittal of the drawer is justified.

Circumstances in Which a banker is justified in dishonourting customer’s cheque 

• Payment countermanded by the Drawer:When the cheque drawer of the cheque countermands the payment, that is it issues the instruction to the bank not to make the payment. On receipt of a valid stop payment order, the cheque must be returned unpaid with the remark “payment countermanded by drawer“

• Notice of Drawer’s Death: On receipt of the confirmed news of death of account holder, cheques signed by him should be returned unpaid with the remark “Drawer deceased”.

• Notice of Customer’s Insanity: Where the account holder is certified as insane by a recognised medical practitioner then the cheques signed by him should be signed by him should be returned unpaid.

• Notice of Customer’s Insolvency: Where a customer is adjudged insolvent, the banker must refuse to pay cheques drawn by the customer.

• Liquidation of Company: When a bank receives notice from the liquidator in accordance with the provisions of Companies Act, requiring to pay the balance to liquidator’s account , all the cheques by the companies should be returned unpaid.

Offence by Company

A juristic person like incorporated companies and partnership firms are also made liable for the offence of dishonour of cheque described under section 138.

Under Section 141 –

• 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 the company for the conduct of the business of the company ,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.

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 that he had exercised all due diligence to prevent the commission of such offence

Provided further that where a person is nominated as a Director of a Company by virtue of his holding any office or employment in the central Government or State Government or a financial corporation owned or controlled by the Central Government as the case may be, he shall not be liable for prosecution under this chapter.

• Not withstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed  with the consent or connivance of or is attributable to, any neglect on the part of, any director, manager, secretary, or other officer and shall also be deemed to be guilty  of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation- For the purpose of this section –

1. “Company” means any body corporate and includes a firm or other association of individuals; and
2. “Director”  in relation to a firm, means a partner in the firm

Section 141 covers 3 categories of person liable for offense under Section 138-

1. The company as principal offender
2. Persons who were in charge and were responsible for the business of company
3. Any other person who is director or a manager or secretary or officer of the company

There must be a specific accusation against each of the persons alleged as accused that such person was in charge of and responsible for the conduct of the business of the company or the firm at the relevant time when the alleged offense was committed by the company or the firm.

In the case SMS Pharmaceuticals  v.  Neeta Bhalla

The Supreme Court has categorically held that there has to be specific averment in the complaint to the effect that such a person was not only in charge of and responsible to the company for the conduct of its business but it was also required to be stated as to how and in what manner he was so responsible.