DR.

RAM MANOHAR LOHIYA

BANKING LAW
FINAL DRAFT
ON
DISHONOUR OF CHEQUES

SUBMITTED TO- SUBMITTED BY:

DR. SHASHANK SHEKHAR AKASH JAIN

ASSISTANT PROFESSOR 160101018

RMLNLU
 INDEX
1. ACKNOWLEDGEMENT

2. INTRODUCTION

3. REQUIRMENTS AND INGREDIENTS FOR DISHONOUR UNDER S.138

NEGOTIABLE INSTRUMENTS ACT

4. PENALTIES AND LIABILITIES UNDER S.138

5. POSITION OF COMPANIES

6. PROCEDURE TO FILE COMPLAINT

7. CONCLUSION

8. BIBLIOGRAPHY
 ACKNOWLEDGEMENT

I would like to extend a very genuine vote of thanks to my subject teacher, Ms. Shashank
shekhar, for being the infinite source of support and guidance for whatever was needed in the
completion of this assignment. Her active support and help has helped me a great deal in
gathering data, and understanding the topic in every manner.

I’d also like to thank my friends and family for the aid of gathering usable data for me
whenever I felt the dearth thereof.
INTRODUCTION

Advent of cheques in the market have given a new dimension to the commercial and
corporate world, its time when people have preferred to carry and execute a small piece of
paper called Cheque than carrying the currency worth the value of cheque. Dealings in
cheques are vital and important not only for banking purposes but also for the commerce and
industry and the economy of the country. But pursuant to the rise in dealings with cheques
also rises the practice of giving cheques without any intention of honouring them. Before
1988 there being no effective legal provision to restrain people from issuing cheques without
having sufficient funds in their account or any stringent provision of punish them in the vent
of such cheque not being honoured by their bankers and returned unpaid. Of course on
dishonour of cheques there is a civil liability accrued. However in reality the processes to
seek civil justice becomes notoriously dilatory and recover by way of a civil suit takes an
inordinately long time. To ensure promptitude and remedy against defaulters and to ensure
credibility of the holders of the negotiable instrument a criminal remedy of penalty was
inserted in Negotiable Instruments Act, 1881 in form of the Banking, Public Financial
Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 which were further
modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002. S.138 to 142 are incorporated in Negotiable Instruments Act, 1881 with a view to
encourage the culture of use of cheques and enhancing the credibility of the instrument.
REQUIREMENTS OF DISHONOUR UNDER S.138 NEGOTIABLE
INSTRUMENTS ACT

The ingredients which are to be satisfied for making out a case under S.138 of the Act are:

1. The cheque is drawn on a bank for the discharge of any legally enforceable debt or
other liability. This means that the cheque must have been drawn for payment of
money to a person other than the drawer for the full or partial discharge of any legally
enforceable debt or liability. Thus what we see here is that if a cheque was given
merely as a security, then a suit cannot be filed upon that and S.138 will not be
attracted. Also to bring it under the ambit of this section, a cheque should have
presumably been issued and not merely drawn for payment in discharge of a debt.

2. The cheque so dishonoured must have been presented to the drawee/ bank within a
period of six months from the date on which it is drawn or within the period of its
validity, whichever is earlier.1

3. The cheque is returned by the bank unpaid.

4. The cheque is returned unpaid because the amount available in the drawer’s account
is insufficient for paying the cheque.

5. The payee has given a notice to the drawer claiming the amount within 15 days of the
receipt of the information from the bank.

6. The drawer has failed to pay within 15 days from the date of the receipt of notice.

7. The offence under this section is not complete till a statutory opportunity is offered to
the drawer of the cheque for making the default good within 15 days of the receipt of
notice to that effect. It is only the failure of the drawer to avail of this opportunity and
meet the demand for the amount of the cheque that becomes the cause of action under
the S.138. This position was laid down in Mahalakshmi Enterprises v. Sri Vishnu

1
Rajesh Gupta, Dishonour of Cheques (Law &Practise), 1st ed ( New Delhi; Bharat Law House Pvt. Ltd, 1996) at
47.
 Trading Co.2 and has been deemed to be one of the essential ingredients of this
section.

8. The payee has a limitation period of 30 days, within which he can file a complaint.

PENALTIES AND LIABILITIES UNDER S.138

Dishonouring of cheques can be rightfully done or wrongfully done depending on the nature
of the action taken upon the cheque. Here we shall see the various entities which may fall
liable upon the dishonour of a cheque subject to it being a rightful dishonour or a wrongful
one:

Liability of the drawer to the payee:

S.30 of the Act lays down that the drawer is bound to compensate the payee/ holder in case of
dishonour by the acceptor/ drawee. Thus what we see here is that the liability of the drawee/
bank is the primary liability and only when the bank fails to honour the cheque, the holder
can then proceed against the drawer. The bank is under a legal obligation to honour the
cheque as long as the drawer has sufficient funds lying in his account in the bank. However it
must be noted that in the event of non-compliance by the bank, the payee cannot enforce any
obligation upon it, this is because there is no privity of contract between them, nor any trust
created so as to make the payee a beneficiary there under.

Liability of the banker to the drawer:

The drawee of a cheque is usually a banker and the legal relation between him and the
drawer, that is to say, between the banker and the customer is that of a creditor and a debtor.
The banker who is holding the money of his customer owes a debt to him to the extent lying
in the customer’s account and the drawee/banker is therefore under an obligation to honour
the cheques of the customer so long as he can meet them from such funds as exist in the
customer’s account. Thus what we see here is that the drawee’s liability is towards the drawer
and not the payee. This is simply because there is no privity of contract between the drawee
and the payee and The Act only provides for the liability of the drawee in favour of the

2
(1993) 77 Comp Cas 249
drawer of the cheque as he is an account holder of the drawer and thus there exists a
contract inter se.

The idea was laid down clearly in jagjivan Mavji v. Ranchhodas Maghaji3, which says
that there is no provision as such which makes the drawee liable on the instrument, with the
exception of S.31 of the Act where the drawee must pay if there is sufficient funds in the
account of the drawer. Such a liability arises out of breach of contract in between the banker
and the customer and in the case of wrongful dishonouring of the cheque, the party in breach
of the contract must pay damages which flow from such breach.

It must be noticed that the liability of the drawee however is conditional upon his having in
his hands funds of the drawer sufficient to pay the cheque amount. Apart from this there are
various other situations whereby the banker can rightfully dishonour the cheque and if he
dishonours the cheque for these reasons liability will not fall upon him.

In case of wrongful dishonor the customer can sue for damages. However quantification of
damages depends largely on the creditworthiness of the customer. This is important because
dishonour of a cheque impacts largely the reputation and integrity of a person, more so if the
customer is a well known trader. In almost every case the drawer can recover substantial
damages from the drawee on the basis of the above factors of loss of credit, etc., however it
maybe difficult to award pecuniary damages in such a situation. Thus we see the civil
remedies available in case of dishonouring of cheques, however such civil remedies do not
exclude criminal action as is laid down in the amended chapter of the Act.

Liability in case of forgery:

A banker/drawee has no obligation to pay if the signatures of the customer on the cheque are
forged and has a right to dishonour the cheque on this ground. The bank has the specimen
signature of his customer and it is the duty of the bank to compare the signatures, thus in
doing so if he finds that the signature is inconsistent , then the bank should not honour the
cheque.

There remains a possibility that the cheque presented for payment is not the customer’s
cheque at all but a forgery, or that this signature is forged, or signed without his
authorization. A banker paying a cheque under these circumstances is not entitled prima

3
AIR 1954 SC 544
facie, to debit the customer’s account. The law is that a cheque with the drawer’s signature
forged is a mere nullity. A landmark case which lays down the law in India is Canara
Bank v. Canara Sales Corporation and ors4, The court held that whenever a cheque
purporting to be by a customer is presented before a bank it carries a mandate to the bank to
pay. If the cheque is forged then there is no such mandate. The bank can escape liability only
if it can prove knowledge on the part of the customer. Thus keeping in view the fact that the
banker is bound to know his customer’s signature and compare the same, the paying banker
will thus have no statutory protection if he pays a cheque on which the customer’s signature
is forged.

POSITION OF COMPANIES

The drawer of a cheque, whether a natural person or a body corporate or even a firm, can be
prosecuted under S.141 of the Act.

In order that a company may be bound by a negotiable instrument purporting to have been
issued on its behalf two conditions must be satisfied: (i) the instrument must be drawn, made,
accepted or endorsed in the name of or by or on behalf of or account of the company, (ii) and
the person who makes, draws, endorses or accepts the instrument must have the authority
given to him by the company on their behalf.

Prosecution of the company is not sine qua non for the prosecution of the directors, and
merely because company is not made an accused in the proceedings is no ground to quash it.
Thus the in a decided case the Supreme Court held that officers of the company who may be
held liable falling under S.141 other than the directors, fall into the following categories:

(1) Those who are in charge of the company and responsible for the conduct of its business;
and

(2) Persons other that those falling in the above category, who is a mere director, manager
or secretary, etc of the company.

4
AIR 1987 SC 1603
(3) Any other person who is a director or a manager or a secretary or officer of the
company with whose connivance or due to whose neglect the company has committed the
offence.

However a person who proves that the offence was committed without his knowledge and
that he had exercised due diligence in the conduct of his business is exempted from
becoming liable by operation of the proviso to Sub-section (1). The burden in this regard will
have to be discharged by the accused.

The managing director may also be attached with liability and the essentials for such action
is:

(1) He has to be in-charge and responsible in case,

(2) There should be his consent and connivance for which there should be averments in
complaint or prima facie proof of it. The section being penal has to be strictly construed. In
the absence of basic facts being pleaded in the complaint, vicarious liability cannot be
imputed.

in case of an action under S.138, the MD of a company on behalf of whom the dishonoured
cheque has been issued, cannot plead that he did not participate in the day to day
administration of the company and therefore is not criminally liable because normally, by
definition the MD is supposed to be in-charge of managing the company. Neither can an MD
pass the blame onto the directors of the company, imputing liability onto the directors for a
dishonoured cheque issued by the MD is a matter of facts and evidence.5 Lastly, a managing
director can only be sued in his official capacity and not as an individual.6

Firm:

In the case of a firm, if the receipt of the notice is by one partner who is habitually acting for
the business of the firm, it shall be deemed to be notice to the firm.

Having understood the substantive aspects of dishounour of a cheque, the researcher will now
discuss the procedural aspects in the subsequent chapter. Once the drawee establishes to the
payee that there has occurred a dishonour to the cheque, then the payee goes through a series

5
Sharda Aggarwal v. Additional Chief Metropolitan Magistrate, (1993) 78 Comp Cas 123
6
D. Chandra Reddy v. Gowrisetty Prabhakar Rao, (1996) 6 Andh LD 281 (AP).
of procedural aspects so as to claim his money back and if all else fails then the payee will
finally file a complaint against the drawer.

PROCEDURE TO FILE COMPLAINT

The offence under S.138 is a non-cognizable offence by virtue of S.142 of the Act on account
of the non-obstante clause as comprised in section 142 of the Act, the magistrate must
proceed immediately on complaint. For a complaint however, first a statutory notice must be
sent to the drawer and if the drawer does not reply accordingly within 15 days, it opens itself
for prosecution.

Notice:

A notice is one of the essential characteristic of S.138. The period for cause of action is to be
counted from the date of receipt of notice by the accused. Notice has to be sent to the drawer
within 30 days of the receipt of information from the bank about the dishonour. As regards
liability of dishonour of cheques it is essential to prima facie show that after 15 days of
receipt of notice, the accused failed to pay the amount.

In the case of Padmini Polymers Ltd v. Unit Trust of India,7 it has been held that a notice is
must and mandatory. Unless and until the intention is clear on the part of the part of the
person giving notice that the payment by the drawer of the cheque should be made within 15
days of receipt thereof, any communication between the parties insisting for making the
payment cannot be termed as notice under S.138 of the Act. Otherwise the purpose of
presenting the cheque time and again during the period of validity would have no meaning.

So far as the question of giving notice is concerned, it is stated that every person who
becomes liable upon an action for dishonour of the instrument and only by such dishonour
either the holder thereof or some party thereto who remains liable thereon may give notice to
such parties as entitled to immediate notice. But the holder may give notice to such parties as
he desires to charge; but he cannot by giving notice make a person liable who is not
otherwise liable under law, e.g., drawee in the case of dishonour of cheques.

Serving the notice:

The problem that arises is that the section does not only say delivery of notice, but ‘receipt of
the notice’, such wordings in the section can be put to numerous interpretations. The question
is if ‘receipt of notice, postulates actually delivery, then the drawer can easily preempt action
against him by deliberately staying away from his premises and the likes. It would be
inequitable that such a person be let off the hook, while another drawer who stays on and
accepts the notice would subject himself to prosecution.

In the case of V.Raja Kumari v. P.Subbarama Naidu and Anr8 the question that came up was
what is meant by a proper notice and if there is no proper would the complaint be quashed.

“In Clause (c) of the proviso the drawer of the cheque is given fifteen days from the date of
receipt of said notice for making payment. This affords clear indication that ‘giving notice’ in
the context is not the same as receipt of notice. Giving is the process of which receipt is the
accomplishment. The payee has to perform the former process by sending the notice to the
drawer in his correct address, if receipt or even tender of notice is indispensable for giving
the notice in the context envisaged in Clause (b) an evader would successfully keep the postal
article at bay at least till the period of fifteen days expires. Law shall not help the wrong doer
to take advantage of his tactics. Hence the realistic interpretation for the expression ‘giving
notice’ in the present context is that, if the payee has dispatched notice in the correct address
of drawer reasonably ahead of the expiry of fifteen days, it can be regarded that he made the
demand by giving notice within the statutory period. Any other interpretation is likely to
frustrate the purpose for providing such a notice.”

Thus from here we see that there can be deemed notice even where actual notice has not been
given. However this is a rebuttable presumption and its for the complainant to prove that the
notice was served and that the person either refused to accept the notice or was unavailable.

Though this is the popular position yet, many courts differ in opinion and it has been held
that where the delivery is done by post, then reading S.138 with S.27 of the General Clauses
Act

Ingredients:

8
MANU/SC/0937/2004
Though no form of notice is prescribed, the requirement is that the notice shall be given in
writing within fifteen days (now thirty with the amendment).

Secondly when a notice is served, it must demand the “said amount” i.e. the cheque amount
in it. If no such demand is made the notice falls short of legal requirement. However if apart
from the “said amount” other amounts by way of interest, costs, etc is mentioned, such a
notice would be a valid notice under the Section. The legislative intent of the Section is quite
clear, the drawer of the cheque will be liable for conviction if the demand is not met within
15days of the receipt. Thus if the cheque amount is paid within the statutory period or before
a complaint is filed the legal liability under S.138 will cease and for recovery of additional
costs, a civil suit will lie.

Also the stating of the cheque number, though seems essential so that the drawer should
know of which cheque the notice relates to, yet it has been held that S.138 does not lay down
any such condition and if the cheque number is absent or wrong, depending on the facts and
circumstances, the notice will deemed good or bad in law.

Burden of proof:

Under this law all presumptions are made against the drawer of such cheques and thus the
onus of proof is left on the accused rather than the prosecutor.

CONCLUSION

Though insertion of the penal provisions have helped to curtail the issue of cheque arising out
of its dishonour either honestly or with dishonest intention and the trading community now
feels more secured in receiving the payment through cheques. However there being no
provision for recovery of the amount covered under the dishonoured cheque, in a case where
accused is convicted under section 138 and the accused has served the sentence but, unable to
deposit amount of fine, the only option left with the complainant is to file civil suit.

The provisions of the Act do not permit any other alternative method of realization of the
amount due to the complainant on the cheque being dishonored for the reasons of
“insufficient fund” in the drawer’s account. The proper course to be adopted by the
complainant in such a situation should be by filing a suit before the competent civil court, for
realization/ recovery of the amount due to him for the reason of dishonoured cheque which
the complainant is at liberty to avail of if so advised in accordance with law.

Thus what we see is that the section is not full proof, however there is no denying that this
provision has done away with the rigorous and time consuming methods of criminal law. In
support of this we can see that the section also provides for summary proceedings, making
the issue penalty a lot simpler, because if a cheque gets dishonoured today and proceedings
go on as usual, then the person may only get relief after say three or four years, this defeats
the purpose of a cheque which is meant for immediate acceptance and distribution of cheque
amount.

BIBILIOGRAPHY

 Avtar Singh, Negotiable Instruments, 4th ed ( Lucknow; Eastern Book Company,

 http://www.legalserviceindia.com

 http://www.pnbrscmbi.com/When%20dishonour%20of%20cheque%20constitutes%20an%2
0offence.pdf

 http://www.caclubindia.com/articles/critical-study-of-dishonour-of-cheques-under-
negotiable-instruments-act-1881-10283.asp