Dishonour of Cheque : Legal Resort

Cheques in India are issued in various transactions, dominantly in business transactions, it is often a norm to issue post dated cheques by businessmen to their suppliers or service providers, however sometimes it happens that a cheque when deposited in the bank gets dishonoured due to insufficiency of funds, we will under this article understand the legal aspect of how shall a person or a businesses deal with such instances legally

Section 138 of the act provides that when a cheque is dishonoured due to insufficiency of funds in Drawer’s bank, such person shall be deemed to have committed an offence, and be punished with imprisonment or return which may extend to two years, or with fine which may extend to twice the amount to the cheque or with both.

When an offence under section 138 is constituted –

Essential ingredients :

• Cheque to be drawn by a person to Banker
• For the payment of some amount to other
• To discharge in part any debt or other liability
• Cheque returned by the bank unpaid
• Amount on the cheque is comparatively insufficient in as compared in the account
• Or that exceeds the amount arranged to be paid from that account by an agreement made with that bank.

To constitute an offence under section 138 following ingredients must exist –

● Legally enforceable debt or other liability –

The cheque should have been issued by the drawer to the pay in the discharge of, the whole or in part of any legally enforceable debt or other liability. As such, when a cheque is given purely by a way of gift to a private individual, or as a donation or charity to a charitable institution, or even by way of spontaneous price or reward, the consequences of dishonour of such cheque does not attract section 138 of the act, it was held by Supreme Court that even if the cheque is issued as a security or discharge of liability as a guarantor, Provisions of section 138 gets attracted as other liability is also covered under section 138.

● Presentment within three months –

The cheque should have been presented by the payee to the banker within the period of its validity. Usually the validity is 3 months from the date of issue of a cheque, but if some validity period ( less than 3 months) is specified on the cheque that is considered as validity period.

● Return of cheque should be for insufficiency of funds –

Read – Companies Act – Explained

What to do if cheque bounces/ dishonoured ?

I. 30 days notice to drawer –

When a payee or a  Holder in due course comes to know about the dishonour of the cheque because of insufficient funds in the account of the drawer, he is required to send a notice to the drawer demanding payment of the cheque amount within 30 days of receipt of the information of dishonour by the bank.

The notice under section 138 of the act has to be given in writing and cannot be given orally, The notice may be given in any form of writing including by way of fax, email, etc.

II. Failure of drawer to make payment within 15 days of receipt of notice

The drawer of the said cheque Should have failed to make payment within 15 days of the receipt of the said notice given by the payee. Note that the cause of action is not available to the Holder at the time when the cheque is dishonoured. it arises only when after getting the information of the dishonour, the Holder sends a notice demanding the payment of cheque amount within 30 days of getting information of their dishonour, the drawer fails to pay the same within 15 days of the receipt of the said notice.

III. Filing of complaint with magistrate (Section 142)

When a person presents a cheque or payment and it gets dishonoured the banker intimates him about the dishonour of the cheque. Thereafter, he sends a notice to the drawer demanding payment of the cheque amount within 30 days of getting the intimation of dishonour. After issue of notice payee Should wait for 15 days after the date of receipt of notice by the drawer, an offence under section 138 is committed when even after 15 days of the receipt of such notice, the drawer fails to make the payment. The cause of action on filing the complaint thereafter arises on the 16^th day after the receipt of notice by the drawer.

Read- POCSO Act – Explained

Liability on dishonour for cheque –

• Civil Liability – Section 138 of the act provides for a civil liability by imposing a fine twice the amount of dishonoured cheque.
  
• Criminal Liability – Section 138 also provides the punishment of imprisonment of two years or with fine or with both and also the drawer of the cheque will also be prosecuted under the sections of 417 and 420 of IPC.

Parties punishable for offence under Section 138 –

• If a person committing an offence under section 138 is a company, then it is liable to be punished accordingly. Moreover, every person who at the time when the offence was committed was in charge of and was responsible to the company conducting its business shall be deemed to be guilty as also the company itself of the offence and both of them shall be liable to be proceeded against and punished accordingly ( section 141(1)).
• Further Old director, managers or secretary or other office bearers of the company will also be liable for this offence, if it can be shown that the offence has been committed with his consent  or connivance.
• Employees of government’s auto financial institution who are nominee directors are not liable for prosecution it is described under second  provision of section 141 (1).

Amendments in the law –

Recently the Indian Ministry of Finance proposed a suggestion of decriminalising various minor offences “For improving business sentiment and unclogging court processes”, Fortunately this suggestion also included section 138 of negotiable instruments act, 1881.

The main reason of section 138 of negotiable instruments act is to promote the efficiency of banking operations and to ensure credibility in the business which includes transaction via cheques. The main reason behind this suggestion is to improve ease of doing business and attract the foreign investors. The plus point in decriminalising this section will decrease the burden on businessmen and will also attract the confidence among the investors and will also help in increasing the economic growth, public interest and national security. In the case of Makwana Mangaldas Tulsidas v State of Gujarat (2020) it was held to decriminalise the dishonour for small value cheques.

Case Laws –

• Sadnandan Bhadran v Madhvan Sunil Kumar (1998)
  In this case law it was held at a Holder can very well present the cheque again within the period of its validity, and when it gets dishonoured again, he can start the procedure for making a complaint by sending a notice to the drawer demanding payment on the cheque. At each presentation and it’s dishonour, A fresh right occurs in favour of the person to whom cheque is issued. However, once he gives notice to the drawer, he forfeits his rights to present cheque again. Thus, a holder can deposit cheque any number of times but can send notice only once.

• In the case of NEPC Micon ltd. V Magma Leasing Ltd. ( 1999) 4 SCC 253,
  The Supreme Court held that the return of cheque by the bank unpaid on the ground that the account of the drawer has been closed attracts section 138 of the act.

Refer – Negotiable Instruments Act, 1881