The dishonour of a cheque is a significant event in the realm of banking and commerce, often resulting in legal consequences for the drawer. The dishonouring of a cheque under the Negotiable Instruments Act, 1881 (hereinafter referred to as “the Act”) is addressed in Sections 138 to 142, which deal with the criminal liability arising from dishonoured cheques. In particular, Section 139 of the Act presumes that a cheque was issued for the discharge of a legally enforceable debt or liability. This article delves into the legal provisions surrounding cheque dishonour, including its key features, punishment provisions, interim payment options, and notable case laws.
Meaning of Cheque Dishonour
Cheque dishonour refers to the situation in which a bank refuses to pay the amount mentioned on a cheque due to insufficient funds, closure of the drawer’s account, or any other reason like signature mismatch. A dishonoured cheque can severely affect the credibility of the drawer and result in legal action.
Illustration:
Let’s say Mr. A issues a cheque of ₹50,000 to Mr. B for repayment of a loan. Mr. B deposits the cheque in his bank, but the cheque is returned unpaid because Mr. A’s bank account has insufficient funds to cover the amount. As a result, the cheque is dishonoured.
- Impact on Mr. A: The dishonour of the cheque tarnishes Mr. A’s reputation and credibility. Mr. B, the payee, may then send a legal notice demanding the ₹50,000, and if Mr. A fails to pay within the stipulated time, Mr. B could file a criminal complaint under Section 138 of the Negotiable Instruments Act.
Section 138 of the Negotiable Instruments Act defines the offence of dishonour of cheque. The essential elements for an offence under Section 138 are:
- A dishonoured cheque that is returned by the bank due to insufficient funds or because it exceeds the amount in the drawer’s account.
- The cheque must have been issued in discharge of a legal debt or liability.
The drawer must have received notice from the payee demanding payment of the dishonoured cheque amount. - The drawer fails to make the payment within 15 days from the receipt of notice.
Relevant sections under Cheque Dishonour
Section | Title | Explanation |
|---|---|---|
Section 3 | Definition of a Negotiable Instrument | Defines “Negotiable Instrument” as any instrument that is transferable by delivery or endorsement (such as cheques, promissory notes, bills of exchange). |
Section 6 | Promissory Note, Bill of Exchange, and Cheque | Defines the terms “promissory note,” “bill of exchange,” and “cheque” under the Act. A cheque is a bill of exchange drawn on a bank and payable on demand. |
Section 118 | Presumption as to Negotiable Instruments | Presumes that all negotiable instruments, including cheques, are issued for consideration and that they are executed in good faith unless proven otherwise. |
Section 138 | Dishonor of Cheque for Insufficient Funds | Deals with the offense of dishonor of a cheque due to insufficient funds or if the amount exceeds the arrangement. It mandates criminal liability for the drawer. |
Section 139 | Presumption in favor of holder | This section provides a presumption in favor of the holder of the cheque, meaning that a holder can presume the cheque was issued for a legally enforceable debt. |
Section 142 | Cognizance of Offense | Provides the rules for filing a complaint under Section 138. It specifies that the complaint must be filed within one month from the receipt of the notice of dishonor. |
Section 143 | Power to try cases summarily | Enables a Magistrate to try cases under Section 138 summarily, providing a quicker process for prosecuting cheque dishonor cases. |
Section 144 | Power to call for records | Empowers a Magistrate to summon bank records or documents when required in a case involving dishonor of cheques. |
Section 147 | Offense to be compounded | Allows for the compounding (settling) of offenses under Section 138 (cheque dishonor) if the complainant and the accused mutually agree, and the court permits. |
Section 145 | Evidence on affidavit | Allows for evidence in cheque dishonor cases to be submitted on affidavit, making the legal process more efficient and less time-consuming. |
Section 143A | Interim Compensation | Introduced through an amendment in 2018, this section allows the court to order the drawer of a dishonored cheque to pay interim compensation to the complainant. This compensation can be up to 20% of the cheque amount, which the drawer must pay within 60 days of the order. |
Summary of Key Sections Related to Cheque Dishonour (with Interim Payment)
- Section 138: The core provision that criminalizes the dishonor of a cheque due to insufficient funds or if the amount exceeds the arrangement.
- Section 139: Presumes that a cheque issued was for a lawful debt or liability.
- Section 142: Lays down the procedure for filing a complaint and the time limits involved.
- Section 143: Enables summary trials for cheque dishonor cases to speed up the legal process.
- Section 147: Provides for the possibility of compounding the offense, meaning the case can be settled between the parties without continuing criminal prosecution.
- Section 143A: Allows for interim compensation to the complainant, up to 20% of the cheque amount, during the pendency of the trial.
Key Features of Cheque Dishonour under the Act
Cheque must be issued for a debt or liability
For Section 138 to apply, the cheque must be issued for the repayment of a debt or for a liability that the drawer owes to the payee. A cheque issued as a gift, for a non-legal purpose, or for an unlawful transaction is not covered under Section 138.
Demand Notice
After the cheque is dishonoured, the payee or holder must send a demand notice to the drawer within 30 days of receiving information about the dishonour. The drawer must then make the payment within 15 days of receiving the notice. If the drawer fails to make payment during this period, a criminal complaint under Section 138 can be filed.
Time Limit for Filing a Complaint
The complaint under Section 138 must be filed within one month from the expiration of the 15-day notice period.
Reasons for Cheque Dishonour
A cheque can be dishonoured for various reasons, each of which has distinct implications for both the drawer and the payee. When a cheque is dishonoured, the payee can initiate legal action under Section 138 of the Negotiable Instruments Act, 1881, if the cheque is issued for the discharge of a legally enforceable debt or liability. Below are some of the common reasons for cheque dishonour:
- Insufficient Funds in the Account
One of the most common reasons for a cheque being dishonoured is when there are insufficient funds in the drawer’s account. If the amount in the account is less than the amount written on the cheque, the bank will return the cheque unpaid, and it will be considered dishonoured.Section 138 of the Negotiable Instruments Act specifically deals with dishonour due to insufficient funds and provides a mechanism for legal recourse in such cases.
- Account Closed
If the drawer closes the account on which the cheque is drawn before the cheque is presented to the bank, the cheque will be dishonoured. The bank will not be able to process the payment as the account no longer exists. - Signature Mismatch
A cheque can be dishonoured if the drawer’s signature on the cheque does not match the signature on file with the bank. The bank will reject the cheque due to this discrepancy, as it raises concerns about the authenticity of the cheque. - Alterations on the Cheque
If there are any alterations on the cheque (such as changes to the amount, date, or payee name) that are not properly authenticated (e.g., no countersignature), the cheque may be dishonoured. The bank may consider such cheques invalid due to concerns about fraud or forgery. - Post-Dated Cheque
A post-dated cheque, which is a cheque dated for a future date, may be dishonoured if presented before the date written on the cheque. The bank will not process it until the specified date. - Stale Cheque
A cheque that is presented after a period of six months from the date of issuance is considered “stale.” According to banking rules, stale cheques are not processed, and they are returned dishonoured. - Incorrect or Missing Date
A cheque that does not contain a valid date or contains an incorrect date may be dishonoured. An incomplete or incorrect date can make it unclear when the cheque was issued or when it should be honored. - Technical Errors
In some cases, a cheque may be dishonoured due to technical errors such as an incorrect MICR code, which is a unique code that identifies the bank branch, or issues with the cheque being improperly printed or formatted. - Cheque Crossed Incorrectly
If a cheque is crossed incorrectly (or not crossed at all when it should be), the bank may refuse to honour it. A crossed cheque can only be deposited into a bank account, not cashed directly, and improper crossing can lead to dishonour. - Non-Compliance with Bank’s Policies
Banks may have specific policies regarding cheque payments, and failure to adhere to these policies may result in dishonour. For example, a bank might refuse to honor cheques drawn on accounts that are subject to certain restrictions, such as being dormant or frozen due to legal orders. - Insufficient Endorsements
If a cheque is issued to a third party or requires endorsement by a person other than the payee, and the endorsement is missing, the bank will not process the cheque, resulting in dishonour. - Cheque Involves Fraud or Forgery
A cheque may also be dishonoured if the bank suspects fraud, such as forged signatures, tampering with cheque details, or fraudulent alterations. Banks are obligated to reject cheques they deem suspicious of fraudulent activities. - Stop Payment Request
If the drawer has issued a “stop payment” request to the bank before the cheque is presented for payment, the bank will dishonour the cheque. The drawer may stop payment due to various reasons, such as disputes with the payee or changes in payment conditions. - Inability to Process Cheque Due to Legal Restrictions
In some instances, a bank may dishonour a cheque if there are legal restrictions on the account, such as a court order freezing the account or any restrictions imposed by regulatory authorities.
Presumption under Section 138 and 139 of the Negotiable Instruments Act, 1881
Section 139 creates a rebuttable presumption in favor of the holder of the dishonoured cheque. This means that once the cheque is dishonoured, the law assumes that the cheque was issued to discharge a legal debt or liability. The burden of proof then shifts to the drawer, who must prove that no debt or liability existed.
Jurisdiction Under Section 138
Section 138 of the Negotiable Instruments Act prescribes that a criminal case for cheque dishonor can be filed in any one of the following places:
- Where the Cheque Was Presented for Payment:
A complaint under Section 138 can be filed at the place where the cheque was presented for payment. This is often the bank where the cheque is presented, or the place where the cheque is deposited for clearance. - Where the Cheque Was Dishonored:
The complaint can also be filed at the place where the cheque was dishonored (i.e., the bank where the cheque is returned unpaid). - Where the Drawer Resides or Carries on Business:
The complaint can be filed in the jurisdiction where the drawer of the cheque resides, works, or conducts business.
Punishment Provisions
Criminal Liability
As per Section 138, dishonouring a cheque leads to criminal liability, which is punishable with:
- Imprisonment for a term that may extend to two years, or
- Fine which may extend to twice the amount of the cheque, or
- Both imprisonment and fine.
The purpose of these provisions is to ensure that individuals do not engage in the practice of issuing cheques without adequate funds in their accounts, and to promote trust in the negotiability of instruments in financial transactions.
Application of Section 139
Section 139 of the Negotiable Instruments Act provides a presumption in favour of the holder of the dishonoured cheque. The holder is presumed to have received the cheque in good faith, and for the discharge of a legally enforceable debt. The burden of proof lies on the drawer to prove otherwise.
Interim Payment Options
In some cases, the complainant may apply for interim relief, including an interim payment order, especially under Section 143-A of the Negotiable Instruments Act. This provision was introduced by the Negotiable Instruments (Amendment) Act, 2018, and it allows the court to direct the drawer to pay an amount equivalent to 20% of the cheque amount as an interim payment at the time of the filing of the complaint, pending the outcome of the trial.
This mechanism helps the complainant recover part of the loss quickly, even before the conclusion of the legal proceedings.
Appeal Provisions
The aggrieved party has the right to appeal in case of a conviction or acquittal. The appeal process is provided under Section 374 of the Criminal Procedure Code (CrPC). The appeal must be filed before the Sessions Court within 30 days from the date of judgment. However, there are no provisions for stay or suspension of the sentence unless the higher court specifically orders it.
Important Case Laws Related to Cheque Dishonour
Cheques are one of the most commonly used instruments for payments in India. However, dishonor of cheques has become a significant issue, often leading to legal disputes. Under the Negotiable Instruments Act, 1881, Section 138 provides for penal consequences in case of cheque dishonor due to insufficient funds or when the amount exceeds the arrangement. Several landmark judgments and recent case laws have clarified and expanded the interpretation of provisions related to cheque dishonor.
HDFC Bank Ltd. v. M/s. Preet Ranjan and Ors. (2023)
- Court: Supreme Court of India
- Issue: Whether the complainant can initiate proceedings under Section 138 of the Negotiable Instruments Act even when the cheque is issued by a company and the drawer is not personally liable.
- Judgment: The Supreme Court ruled that the person who signed the cheque on behalf of the company is personally liable under Section 138 of the Negotiable Instruments Act. The judgment reinforced the importance of identifying the person who holds the direct responsibility for the cheque’s dishonor.
- Significance: This case clarified that the legal consequences of cheque dishonor apply not just to the company but also to the authorized signatory who issued the cheque, thus holding them liable for the dishonor in personal capacity.
Rajesh Agarwal v. State of NCT of Delhi (2022)
- Court: Delhi High Court
- Issue: Whether the criminal complaint for cheque dishonor under Section 138 can be filed in any jurisdiction or is limited to where the cheque was presented for payment.
- Judgment: The Delhi High Court ruled that the jurisdiction for filing a complaint under Section 138 of the Negotiable Instruments Act is the place where the cheque is dishonored or the place where the cheque is presented for clearance.
- Significance: This judgment is crucial for determining the proper jurisdiction where a complainant can file a case for dishonor of a cheque, making it easier for complainants to choose a convenient forum.
M. S. Narayana Menon v. State of Kerala (2022)
- Court: Supreme Court of India
- Issue: Whether a cheque that is presented for payment but is not honored within three months of issuance falls under Section 138.
- Judgment: The Supreme Court clarified that the dishonored cheque must be presented for payment within three months from the date of issue. If a cheque is dishonored after three months, a complaint under Section 138 cannot be filed.
- Significance: The case emphasized that a cheque must be presented for payment within the prescribed time frame of three months, failing which the provision under Section 138 does not apply. This reinforced the time limits for prosecuting dishonored cheques.
I.C.D.S. Ltd. v. Beena Shabeer (2021)
- Court: Supreme Court of India
- Issue: The effect of failure to issue a statutory notice within 30 days of receiving information about the cheque dishonor.
- Judgment: The Supreme Court ruled that failure to issue a statutory notice within 30 days after receiving the information of dishonor will result in the dismissal of the complaint, even if the complaint is filed under Section 138.
- Significance: The court reiterated that the statutory notice is a crucial step in the process of filing a complaint under Section 138. The notice must be sent within the time frame prescribed under the law, and failure to do so may lead to dismissal of the case.
Sunil Sethi v. M/s. N.C.T. Corporation (2021)
- Court: Bombay High Court
- Issue: Whether a cheque issued by an agent can be attributed to the principal for dishonor under Section 138.
- Judgment: The court held that a cheque issued by an agent on behalf of the principal can attract liability under Section 138, provided the principal was aware and consented to the transaction. The agent’s actions are deemed to be actions of the principal in such cases.
- Significance: This judgment is important as it established the principle that cheques issued by agents, when authorized by the principal, carry legal liability for the dishonor just as if the principal issued the cheque themselves.
N. S. N. Ramaswamy v. State of Tamil Nadu (2020)
- Court: Madras High Court
- Issue: Whether an accused can be discharged from a case of cheque dishonor if the cheque was dishonored due to reasons other than insufficient funds (like signature mismatch).
- Judgment: The court ruled that the accused could not be discharged merely because the cheque was dishonored due to a technical defect like a signature mismatch, as it still falls under the definition of “dishonor” in the context of the law.
- Significance: The case clarifies that any dishonor of a cheque, whether due to insufficient funds or technicalities like signature mismatch, would still be subject to legal consequences under Section 138. This decision extends the ambit of what constitutes a dishonored cheque under the law.
K. K. Verma v. Union of India (2020)
- Court: Supreme Court of India
- Issue: Whether the drawer of a dishonored cheque should be personally liable even if the cheque was issued under a contractual agreement where the payee was bound to return goods.
- Judgment: The Court held that the drawer remains liable for the dishonor under Section 138 of the Negotiable Instruments Act, even if the payee is bound to return goods under a separate contract.
- Significance: This case clarified that personal liability under Section 138 is independent of any other contractual disputes between the parties involved.
Key Legal Principles Reinforced in Recent Case Laws:
- Personal Liability of Authorized Signatories: Individuals signing cheques on behalf of companies or other entities are personally liable for cheque dishonor, as demonstrated by the HDFC Bank Ltd. v. M/s. Preet Ranjan case.
- Importance of Issuing Statutory Notice: Failure to issue a statutory notice within 30 days of receiving information about the dishonor of the cheque will render the complaint under Section 138 inadmissible, as emphasized in I.C.D.S. Ltd. v. Beena Shabeer.
- Jurisdiction for Filing Complaints: The jurisdiction to file a case for dishonored cheques is either where the cheque was presented for payment or dishonored, as per Rajesh Agarwal v. State of NCT of Delhi.
- Time Limitation: The requirement to present the cheque within three months from the date of issue for the case to fall under Section 138 was clarified in M. S. Narayana Menon v. State of Kerala.
- Cheque Dishonor Despite Other Agreements: The K. K. Verma v. Union of India case reaffirms that dishonor of a cheque due to insufficient funds remains actionable even if other contractual issues exist between the parties.
Conclusion
Cheque dishonour under the Negotiable Instruments Act has far-reaching legal implications, emphasizing the need for individuals to ensure that cheques are issued only when there are sufficient funds. The provisions under Section 138, 139, and 142 of the Act provide a comprehensive mechanism for the enforcement of the payee’s rights and punishment for those who dishonour cheques. The presumption of liability under Section 139 and the scope of interim relief under Section 143-A provide valuable protection to holders of dishonoured cheques, ensuring that justice is delivered promptly.
The law surrounding cheque dishonour not only seeks to maintain integrity in financial transactions but also reinforces trust in negotiable instruments as a mode of payment.
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