DISHONOUR OF CHEQUE

INTRODUCTION

IN THE 1960s and thereafter, bankers' acquaintance with the Negotiable Instruments Act, 1881 (the Act) was limited to finding out towards the end of each year, the list of holidays for the next year declared by the Government under the Act. Multinational companies operating in India and along with them, leading Indian firms, used to scrupulously follow this list.

With the growth of the economy cheques have given the new dimensions to the commercial and corporate world. Now people prefer to carry a small piece of paper know as “cheque” rather than carrying the currency worth the value of the cheque. Before 1988 there being no provision to restrain the person issuing the cheque without having sufficient funds in his account. Of course on dishonour of cheque there is a civil liability accrued. However in reality it takes a long time to recover the money.

In order to ensure promptitude and remedy against the defaulters of the Negotiable Instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 by amending it with Negotiable Instruments Act, 1988, which was further modified by the Negotiable Instruments Act, 2002

SCOPE

Prior to the amendment of the Negotiable Instruments Act, 1881, in the year 1988, whereby Sections 138 to 142 were inserted, the act of dishonour of cheque was treated as an offence under the Indian Penal Code. Since the penal law is based upon the principle of proof beyond doubt, the drawer of a dishonoured cheque was able to easily evade the rigors of punishment by raising flimsy doubts and the drawer of the cheque was left scot-free.

Having regard to the working of these penal provisions on dishonour of cheques and the bottlenecks that have surfaced in strictly implementing these provisions, Parliament enacted the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (55 of 2002), which is intended to plug the loopholes. This amendment Act inserts five new sections from 143 to 147 touching various limbs of the parent Act and the amendment Act has been recently brought into force on Feb. 6, 2003.

Besides this Sections 138, 141 and 142 have also been amended by doubling the imprisonment term from one year to two years and the period of time to issue demand notice to the drawer from 15 days to 30 days and by providing immunity from prosecution for nominee director. It has also been provided that the Magistrate can condone the delay in filing the complaint in special and peculiar circumstances.

What can I do when a cheque is dishonoured? What legal action I can take to get the amount cleared?

One can file a suit for recovery of the cheque amount along with the cost & interest under Civil Procedure Code, 1908, Order 37 and can also file a Criminal Complaint u/s.138 of Negotiable Instruments Act, 1881, for punishment to the signatory of the cheque for haring committed an offence.

Conditions to initiate Criminal action u/s.138 of NI Act

a) A cheque must have been drawn by a person on an account maintained by him for payment of any sum of money to another person from out of the account;
b) The cheque must have been issued for the discharge, either in whole or in part, of any debt or other liability, though, in the absence of proof to the contrary, it shall be presumed that it was issued for the same;

c) The cheque shall be returned by the bank unpaid :

i) either because of the reason insufficient funds to honour the cheque; or
ii) because it exceeds the amount arranged to be paid from the account by an agreement with that bank

Thus, the dishonour of the cheque by the bank under the above mentioned circumstances shall constitute an offence and the offender is liable to be punished u/s.138 of N.I. Act with imprisonment, which may extend to 2 years or with fine, which may extend to twice the amount of cheque, or with both.

Various reasons for dishonour of cheque

Account Closed :

The Bombay High Court has held that it would not attract the Penal provisions of S.138 as under:

Cheque returned as account closed by drawer. The strict construction of the specific wording of Section 138 of the said Act makes the dishonour of a cheque penal only in two contingencies that is, insufficiency of funds and exceed arrangements; and as such in no other case the dishonour of a cheque can be held to be penal under the said Section. The maxim "expressum facit cessare tacitum" enunciates the principle that the express mention of one thing implies the exclusion of another. Held, that the provisions of S.138 of the Act cannot be attracted and the dishonour of a cheque on the ground of the closure of the account cannot afford ground for taking penal action under the said section. (Om Prakash Bhojraj Maniyar Vs Swati Girish Bhide and others) 1992 CIVIL COURT CASES 436 (BOMBAY)

But the Kerala High Court has a different view and held that the Penal provisions of the S.138 are attracted:

If the drawer of the cheque closes his account after the cheque was issued and before the cheque reaches the bank, the cheque is bound to be returned unpaid on the ground of want of sufficient amount in the account of the drawer. Even in such cases, offence under S.138 of the Act must be deemed to have been committed or else it will give premium to those unscrupulous persons who issue cheques and immediately thereafter, before the cheque is presented for collection, close their account and plead that they did not commit offence punishable under S.138 of the Act. The purpose of introducing S.138 of the act in the statute book will be defeated. S.138 of the Act is intended to prevent dishonestly on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account maintained by him in a bank and induce the payee or holder in due course to act upon it and it was held that provisions of S.138 are attracted. (Krishnan Nair Vs Jaseentha) 1998(3) CIVIL COURT CASES 206 (KERALA)

The controversy is resolved by the Apex Court and laid down that:

When the cheque is returned by a bank with an endorsement 'account closed', it would amount to returning the cheque unpaid because "the amount of money standing to the credit of that account is insufficient to honour the cheque" as envisaged in Section 138 of the Act. (NEPC Micon Ltd. & Ors. Vs Magma Leasing Ltd.) 1999(2) CIVIL COURT CASES 471 (S.C.)

Stop Payment:

Whether the Stop payment constitute an offence under S.138 or not?

There are two view of the situation some High Court said it constitutes an offence and other said not.

The Punjab & Haryana High Court held that the provisions are not attracted.

The cheque in question was only returned to drawee because the payment had been stopped by the drawer under the instruction of account holder. The Court had held that not an offence as envisaged by S.138. Offence only when cheque bounces due to insufficient balance in the account. (Rama Gupta & others Vs M/s.Bakeman's Home Products Ltd., 1992 CIVIL COURT CASES 381 (P&H) See also (M/S.Embee Textiles Limited & Anr. Vs Sadhu Ram & Co.), 1993 (SUPPL.) CIVIL COURT CASES 106 (P&H) Bhagat Ram Vs State of Punjab & Anr., 1995(1) CIVIL COURT CASES 610 (P&H)

The Orissa High Court is also of the same view of P&H High Court

Whenever there would be direction to the bank to stop payment there would be no criminal liability under Section 138 of the Act. (Ranjit Ray & Anr. Vs Pukharaj Jain) 1996(2) CIVIL COURT CASES 572 (ORISSA)

Kerala High Court has held that:

The accused had no amount in this account with the bank for honouring the cheque and that he mischievously and maliciously issued a direction to the banker to stop payment. The complaint makes out all the ingredients of the offence under Section 138 of the Act. (Thomas Varghese Vs Jerome, 1992 CIVIL COURT CASES 782 (KERALA)

The controversy was resolved by Apex Court as:

After issuance of a cheque, subsequent notice by drawer to the drawee or the Bank for stoppage of payment does not preclude action under Section 138 by the drawee or holder in due course. (M/s Modi Cements Ltd. Vs Kuchil Kumar) 1998(2) CIVIL COURT CASES 1 (S.C.)

However, an accused can prove that 'stop payment' was not due to insufficiency or paucity of funds but payment was stopped because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque then offence u/s 138 is not made out. (M/s M.M.T.C.Ltd. Vs M/s Medchl Chemicals & Pharma P.Ltd.) 2002(1) CIVIL COURT CASES 13 (S.C.)

Mrely because the drawer issued notice to the drawee or to the bank for stoppage of payment it will not preclude an action under Section 138 of the Act by the drawee or the holder of the cheque in due course. (Goa Plast (P) Ltd. Vs Chico Ursula D'Souza) 2004(1) CIVIL COURT CASES 577 (S.C.)