Meaning of dishonour of cheques

A dishonoured cheque, also known as a bounced cheque or a returned cheque, is a cheque that a bank refuses to honour and return to the payee (the person who received the cheque) due to various reasons. When a cheque is dishonoured, it means that the payment specified on the cheque cannot be processed, and the recipient will not receive the funds. The legal framework governing dishonour of cheques in Indian law is provided under Section 138 of the Negotiable Instruments Act, 1881. This section specifically deals with the offence related to dishonour of cheques for insufficiency of funds or if the cheque exceeds the amount arranged to be paid by the drawer’s account.

Primary reasons for dishonour of cheques in India

1. Insufficient Funds: One of the most common reasons for dishonour is the lack of sufficient funds in the drawer’s bank account to cover the amount mentioned on the cheque.
2. Account Closed: If the drawer’s bank account has been closed by the time the cheque is presented for clearance, it will be dishonoured.
3. Signature Mismatch: If the signature on the cheque does not match the specimen signature available with the bank, the cheque may be considered invalid.
4. Stale or Post-Dated Cheque: A cheque becomes stale if it is presented for payment after its validity period, which is usually three months from the date of issuance. Similarly, if the date on the cheque is a future date (post-dated), it will be dishonoured if presented before the specified date.
5. Payment Stopped: The drawer may have issued a stop payment instruction to the bank, preventing the payment of the cheque.
6. Alterations or Overwriting: Any unauthorized changes or alterations on the cheque without proper authentication can lead to its dishonour.
7. Account Freeze: If the drawer’s bank account is frozen or under legal restrictions, the cheque will not be honoured.
8. Account Dormancy: In some cases, if the bank account is in a dormant state (inactive for an extended period), the bank may dishonour the cheque.
9. Refer to Drawer (RTD): When the bank is unable to determine the drawer’s account status or faces technical issues while processing the cheque, it may be returned with the remark “Refer to Drawer.”

Section 138 of the Negotiable Instruments Act

It makes the dishonour of cheques a criminal offence in India. The payee can take legal action against the drawer by issuing a legal notice within 30 days of the dishonour. If the drawer fails to make the payment within 15 days of receiving the notice, the payee can file a criminal complaint, leading to the drawer facing penalties, including imprisonment or a fine, or both. It reads as follows:

“Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both”

Nature of offence of dishonour of cheques

• Strict Liability: Section 138 imposes strict liability on the drawer of the dishonoured cheque. It means that once the essential ingredients of the offence are established, the drawer’s intention or motive behind the dishonour is generally not relevant. The offence is deemed to have been committed when the cheque is dishonoured and the specified conditions are met, irrespective of the drawer’s knowledge or intent.
• Criminal Proceedings: Section 138 prescribes criminal proceedings to address the offence. If a complaint is filed by the payee (holder of the dishonoured cheque) against the drawer (issuer of the cheque), the case is heard before a magistrate in a criminal court. The purpose is to provide a legal remedy to the holder and deter the practice of issuing cheques without sufficient funds.
• Cognizable Offence: Dishonour of a cheque under Section 138 is a cognizable offence, which means that the police can arrest the drawer without a warrant if there is sufficient evidence of the offence.
• Compoundable offence: Section 147 of the Negotiable Instruments Act, 1881, allows for the compoundable nature of offences related to dishonouring of cheques. If the complainant and the accused mutually agree to settle the matter and reach a compromise, they can file an application in the court seeking permission to compound the offence.

Ingredients of offence of dishonour of cheques

• Issuance of Cheque: The first essential ingredient is that the accused (drawer) must have issued a cheque to the complainant (payee). The cheque must be drawn on a specified bank and must be payable on demand.
• Presentation for Payment: The complainant must have presented the cheque to the bank for payment within the validity period of the cheque (usually three months).
• Dishonour of Cheque: The cheque must have been dishonoured by the bank for reasons such as insufficient funds, account closed, mismatched signature, or any other reason specified under Section 138.
• Written Notice: Upon receiving information about the dishonoured cheque from the bank, the complainant must have sent a written notice to the drawer within 30 days of the dishonour, demanding payment of the cheque amount.
• Failure to Pay: The drawer must have failed to make the payment of the cheque amount within 15 days of receiving the written notice from the complainant.
• Cognizance of Offence: The complaint regarding the dishonoured cheque must be filed in the appropriate court within one month of the expiry of the 15-day period given to the drawer to make the payment.

Guidelines on cheque bounce cases

Damodar S. Prabhu v. Sayed Babalal H is a significant judgment delivered by the Supreme Court of India that provides important guidelines on dealing with cheque bounce cases under Section 138 of the Negotiable Instruments Act. The judgment lays down several key points, some of which are:

• the Hon’ble Supreme Court observed that Section 147 and the provisions of Section 320 of the CRPC do not provide clear guidance on how to proceed with compounding of offences. Therefore, the Supreme Court, exercising its power under Article 142 of the constitution, established guidelines to encourage compounding at the earliest stage.
• The court clarified that the scale mentioned in the guidelines is only indicative, and the court dealing with each case has the discretion to consider the specific facts before imposing costs, which will be deposited with the appropriate Legal Services Authority.
• The judgment emphasizes that dishonest drawers should be held accountable not only for the cheque amount but also for compensation for prolonged litigation. The Supreme Court’s decision aims to reduce litigation in Section 138 cases and promote swift resolution of such cases.

Penalty for dishonour of cheques in India

The dishonour of a cheque is treated as a criminal offence, and the payee can initiate legal proceedings against the drawer under Section 138 of the Negotiable Instruments Act. If the drawer is found guilty, they can face imprisonment for a term that may extend to two years. However, it’s important to note that imprisonment is not mandatory, and the court has the discretion to decide the appropriate punishment based on the facts of the case. In addition to or instead of imprisonment, the court may impose a fine on the drawer. The amount of the fine may extend to twice the amount of the dishonoured cheque. Apart from the penalties mentioned above, the court may also direct the drawer to pay compensation to the payee for any financial loss or damages caused due to the dishonour of the cheque. Additionally, the Negotiable Instruments Act was amended in 2018 to introduce Section 142A, which provides for a summary trial for offences related to dishonour of cheques, expediting the legal process in such cases.

Landmark cases on dishonour of cheques in india

• Sunitha vs. State of Telangana (2018): In this case, the Supreme Court held that a complaint under Section 138 can be filed only in a court within whose territorial jurisdiction the drawee bank is situated, where the cheque is presented for payment by the payee.
• Electronics Trade & Technology Development Corporation Ltd. vs. Indian Bank & Anr. (2011): The Supreme Court clarified that the offence under Section 138 is complete only when the drawer fails to pay the cheque amount within 15 days of receiving the legal notice. Until then, the drawer has the opportunity to make the payment and avoid criminal liability.
• Sadanandan Bhadran vs. Madhavan Sunil Kumar (1998): In this case, the Supreme Court ruled that criminal proceedings under Section 138 are not barred if the civil suit for the same cause of action (e.g., recovery of the cheque amount) has been filed earlier. The remedy under Section 138 is in addition to civil remedies available to the payee.
• MMTC Limited vs. Medchl Chemicals & Pharma Pvt. Ltd. (2002): The Supreme Court emphasized that the drawer’s liability under Section 138 is strict, and the court should not impose a higher standard of proof than what is required under the law.
• Bhaskaran vs. Sankaran Vaidhyan Balan (1999): In this landmark judgment, the Supreme Court held that criminal liability under Section 138 can be attracted even in cases where the cheque is issued as a gift or for discharge of a debt, as long as other elements of the offence are satisfied.
• Dashrath Rupsingh Rathod vs. State of Maharashtra (2014): The Supreme Court clarified that the territorial jurisdiction for filing a complaint under Section 138 is determined based on the place where the cheque is dishonoured, i.e., the place where the drawee bank is situated.

Conclusion

Dishonour of cheques can cause inconvenience, financial loss, and potential legal consequences for both the issuer and the recipient. It is essential for individuals and businesses to be vigilant and ensure they have sufficient funds and accurate information before issuing or accepting cheques to avoid the dishonour of the cheque.