Dishonour of Cheques

Need Legal Expert to assist you with Dishonour of Cheques matters? click here


The Negotiable Instruments Act, 1881 is an Act to define the law relating to promissory notes, bills of exchange and cheques.
This Act has been amended several times commencing from 1885 till 2002.
The most important amendment is by Act 66 of 1988 and by virtue of chapter XVII was introduced by the Banking, Public Financial Institutions and Negotiable Instruments laws (amendment) Act, which came into force from 01-04-1989. The introduction of Chapter XVII i.e., sections 138 to 142 of the Negotiable Instruments Act, for the prosecutions relating to the offences of dishonour of cheques.

The dishonour of cheques became popular and frequent in courts of law and the law relating to the same developed in such a rapid pace covering almost several aspects which may arise in the day to day disposal of such cases by the courts.

Chapter XVII of Negotiable Instruments Act has been lastly amended by Negotiable Instruments (Amendment and Miscellaneous provisions) Act 55 of 2002 and the same has been came into force w.e.f., 06-02-2003.

As per the latest amendments the imprisonment has been extended to 2 years. The issuing of notice within 30 days after the receipt from the bank regarding return of cheque as unpaid and further after amendment to Sec.142 of N.I. Act, the cognizance of complaint may be taken by the court after the prescribed period i.e., beyond 30 days after receipt of notice by drawer, that the complainants to satisfy the court that he had sufficient cause for not making a complaint within such period.

Sec.138 to 142 of N.I. Act deals with:-

  • Sec.138 deals with the offence of dishonour of cheque and the punishment there for.
  • Sec.139, deals with presumption that the holder of a cheque in discharge in whole or in part of any debt or liability;
  • Sec. 140, the defence which may not be allowed in any prosecution under Sec.138. The drawer that he had no reason to believe when he issued the cheque that it may be dishonoured on its presentation;
  • Sec.141, deals with offence by a company prescribing different burden and onus of proof between persons in-charge of and responsible to the company for the conduct of its business and persons, with whose consent or connivance or due to neglect on his part, the offence had been committed, may be stated to fall under ‘evidence aspect’.
  • Sec.142, deals with the cognizance of an offence prescribing the method or mode of preferring a complaint and the forum before which the complaint has to be preferred, besides prescribing the period, with in which the complaint is to be preferred from the time of accrual of the cause of action, not withstanding anything contained in the code may be stated to fall under ‘procedural’ and ‘limitation’ aspects.

The amendments made to N.I. Act in 2002 also includes the insertion of new sections 143 to 147. The new sections deals with power of court to try cases summarily, mode of service of summons, evidence of affidavit, bank slip as prima-facie evidence and offences to be compoundable under N.I. Act.

I. CHEQUE:

Under the N.I. Act, a cheque is an instrument which is negotiable by delivery. The drawer is discharged when payment is made in due course. In simple terms, this means that when cheque is tendered there is a presumption that payment would be realised in due course, and hence the date of payment is considered to be the date on which the cheque is delivered, regardless of when the cheque is actually presented for payment.

The origin of cheques can be traced even from 17th century onwards in England. In the case of Stedman Vs. Gooch, it is observed that payment by negotiable instrument is a conditional payment, which means that if the negotiable instrument is dishonoured on presentation the creditor may consider it as wastepaper and resort to its original demand. It has been observed in “Benjamen on Sale”, 8th edition, it was stated that payment takes effect from the delivery of the bill, but might get defeated by the happening of the condition of non payment at maturity. In “Byles on Bills”, 20th edition the position was summerised as ‘A cheque, unless dishonoured is payment’. Under the Common Law of England, the rule is to the effect that the sending of a cheque in payment of debt is subject to the condition subsequent that the cheque must be met on presentation.

In the High Authority of Royal Bank of Scotland Vs. Tottenham, 1894 LXXI Law Times Report 168, it was held that a cheque is contract between the parties, and it is for a judge at the trial to construe that contract by reading what is written upon it.

II. POST-DATED CHEQUE :

The post-dated cheque becomes a cheque under the Act on the date written on it and the six months period has to be reckoned for the purpose of sec.138 of N.I. Act from the said date. A post-dated cheque cannot be presented before the bank and as such the question of its return could not arise. It is only when the post-dated cheque become a cheque with effect from date shown on the date of cheque. A post-dated cheque carries with it an implied notice to the effect that for the present there are no deposits, but at the same time assuring that the funds will be available by the date it becomes due (1956 (1) Madras Law Journal 471).

Post-dating of bills of exchange is allowed both in English and American Law. There is no prohibition in the Indian Acts against post-dating and promissory not which is post-dated is thus an effective negotiable instrument through it cannot be sued upon till after that date passes.

III. STOP PAYMENT OF A CHEQUE :

In spite of the civil remedy, Sec.138 is primarily meant to prevent dishonesty on the part of a drawer. Sec.138 draws presumption that one commits the offence if he issues the cheque dishonestly and cheque has been drawn and issued to the payee and the payee as the presenter of cheque and thereafter , if any instructions are issued to the bank for non-payment and the cheque is return to payee with an endorsement ‘payment stopped by drawer’, it amounts to dishnour of cheque (1996 (2) SCC 739) =AIR 1996 SC 2339. Even if a cheque is dishonoured because of ‘stop payment’ instruction to the bank, Sec. 138 would get attracted (1998 (3) SCC 249). The luxury of “stop payment” instructions by the drawer to cover-up real insufficiency funds would no longer be available to drawer as per the law of the land.

IV. RE-VALIDATION OF A CHEQUE :

There is no provision in the Negotiable Instruments Act or in any other law which stipulates that a drawer of a negotiable instrument cannot re-validate it. It is always open to a drawer to voluntarily re-validate a negotiable Instrument, including a cheque (AIR 2002 SC 38).

V. LEGALLY ENFORCEABLE DEBT :

It is clear from the explanation to Sec.138 of the Act, that the cheque covered by the said section must be relatable to enforceable or debt which must be existing as on the date of issuing of the cheque. For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability. In 1997 Crl. Law Journal 1942 A.P., it was held that on the date of issuing of cheque material was not supplied by complainant and the goods was found not of agreed quality. The cheque was presented third time after accused intimated about rejection of material. It was held that there was no infirmity in the reasoning of trial court that on the date of cheque there was no existing debt or liability and as such no offence was constituted u/s. 138 of N.I Act.

Where cheques issued as security, on dishonour of such cheque, not offence under Sec.138 of the Act (2001 (2) RCR (Crl.) 75 MP) also see 2002 (3) Crimes 145 ( Raj) .

CONDITIONS TO INITIATE CRIMINAL. ACTION U/S.138 OF N.I. ACT :

  • 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;
  • 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;
  • The cheque shall be returned by the bank unpaid –
    • either because of the reason insufficient funds to honour the cheque; or

    • 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.

Legal Experts India & Dishonour of Cheque

Legal Experts India has a specific and Specialized Spectrum of Attorneys that Practice only In Negotiable Instruments Act matters across the Country and State.

On referring your Section 138 matters to Legal Experts India we assure you specific, specialized Attorney through our chain across, so that we help you bring the true Justice and result whatsoever.