LIABILITY FOR DISHONOR OF CHEQUES

PROJECT ASSIGNMENT

BANKING LAW

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CERTIFICATE

Certified that the project report on liability for dishonour of cheques is my original work

and that it complies with all the formalities prescribed in the regulations.

ID No.

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TABLE OF CONTENTS

1. Research Methodology

2. Introduction

3. Dishonour of Cheques – Meaning

4. Dishonour of Cheque - Interpretation of Section 138

5. Dishonour of Cheque – Offence By Drawer

6. Proceedings against Dishonour of Cheque

7. Offences - Cheating and Forgery

8. Liability for Stopped Payment

9. Drawer’s Liability for Dishonour of Cheque

10. Drawee’s Liability for Dishonour of Cheque

11. Dishonour of Cheque - Liability of a Company

12. International Law on Liability for Dishonour of Cheques

13. Laws of other Countries on Liability for Dishonour of Cheques

14. Conclusion

15. Bibliography

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TABLE OF CASES AND STATUTES

Table of Cases

1. Om Prakash Maniyar v. Swati Bhide [1992 Mah LJ 302 at 304]

2. Medical Chemicals & Pharma P Ltd v. Biological E Ltd

3. Pankajbhai Nagjibhai Patel v. State

4. Keshavji Madhavji v. Emperor [AIR 1930 Bom 179]

5. Baijnath Sahay v. Emperor [AIR 1933 Pat 183]

6. Abdul Samod v. Satya Narayan Mahavir

7. Mrs. R. Jayalaxmi v. Mrs. Rashida

8. Mrs. Rama Gupta v. Bakesman’s Home Product Limited Patiala

9. Calcutta Sanitary Wares v. C. T. Jacob

10. M. M. Malik v. Prem Kumar Goyal

11. Rakesh Menkumar Porwal v. Narayan Dhondu Joglekar

12. M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v.

M/s. Indian Technologists & Engineers (Electronics) Pvt. Ltd. and another

13. New Central Hall v United Commercial Bank Ltd.

14. Jogendra Nath Chakrawarti v. New Bengal Bank Limited [AIR 1939 Cal. 63]

Table of Statutes

1. Negotiable Instruments Act, 1881

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2. Civil Procedure Code, 1908

3. Code of Criminal Procedure, 1973

4. Indian Penal Code, 1860

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RESEARCH METHODOLOGY

Aims and objectives

The project aims at studying the various aspects related to dishonour of cheques and

liability arising therefrom. It begins by defining the concept of dishonour of cheques and

then proceeds to the liability arising out of such dishonour and the laws related thereto.

The ultimate objective is to understand the liability and the penal provisions for

dishonour of cheques and then to understand its application in the Indian context.

Scope

The scope of the project has been restricted to the broad topics like the laws applicable

and the procedures followed. The author has limited the scope to a very conceptual and

theoretical understanding of dishonour of cheques and liability arising therefrom.

Method of writing

The researcher has endeavored to use a combination of descriptive and analytical styles

of writing throughout this project and has cited various case laws for better understanding

of the topic. More emphasis has been placed on the descriptive style of writing.

Sources of Data

The main sources have been textbooks, articles and web-search.

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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, the practice of giving cheques without any intention of honoring them has also

risen. In case a cheque is issued by a person in liquidation of his debt or liability, and

same is dishonoured, then it not only creates a bad taste, but can also result in harassment

and can cause damages to the person to whom the cheque may have been issued.

Since business activities have increased, the attempt to commit crimes and indulge in

activities for making easy money have also increased. Thus besides civil law, an

important development both in internal and external trade is the growth of crimes and it

has been found that the banking transactions and banking business is every day being

confronted with criminal actions and this has led to an increase in the number of criminal

cases relating to or concerned with the banking transactions.

In India, cheques are governed by the Negotiable Instruments Act, 1881, which is largely

a codification of the English Law on the subject. Before 1988 there was no effective legal

provision to restrain people from issuing cheques without having sufficient funds in their

account or any stringent provision to punish them in the event of such cheque not being

honoured by their bankers and returned unpaid. Although, 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 prompt 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[3].

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Of the ten sections comprising chapter XVII of the Act, section 138 creates statutory

offence in the matter of dishonour of cheques on the ground of insufficiency of funds in

the account maintained by a person with the banker. Section 138 of the Negotiable

Instruments Act, 1881 is a penal provision wherein if a person draws a cheque 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, on the ground 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.

Section 138 of the Act can be said to be falling in the acts which are not criminal in real

sense, but are acts which in public interest are prohibited under the penalty or those

where although the proceeding may be in criminal form, they are in reality only a

summary mode of enforcing a civil right. Normally in criminal law existence of guilty

intent is an essential ingredient of a crime. However the Legislature can always create an

offence of absolute liability or strict liability where ‘mens rea’ is not at all necessary.

This paper deals with the various aspects of dishonour of cheques and then, proceeds

towards the liability arising out of such dishonour.

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DISHONOUR OF CHEQUES – MEANING

Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as

"a bill of exchange drawn on a specified banker and not expressed to be payable

otherwise than on demand".

"Dishonour" means "to refuse or neglect to accept or pay when duly presented for

payment of a bill of exchange or a promissory note or draft on a banker.1

Black’s Law Dictionary2 defines the term "Dishonour" as

"to refuse to accept or pay a draft or to pay a promissory note when duly presented. An

instrument is dishonored when a necessary or optional presentment is duly made and due

acceptance or payment is refused, or cannot be obtained within the prescribed time, or in

case of bank collections, the instrument is reasonably returned by the midnight deadline;

Reference to the term 'dishonour' has been made in Section 91 and Section 92 of the

Negotiable Instruments Act, 1881.

Section 91 - Dishonor by non- acceptance

"A bill of exchange is said to be dishonored by non-acceptance when the drawee, or one

of several drawee not being partners, makes default in acceptance upon being duly

required to accept the bill, or where presentment is excused and the bill is not accepted.

Where the drawee is incompetent to contract, or the acceptance is qualified the bill may

be treated as dishonored".

Section 92- Dishonour by non-payment

"A promissory note, bill of exchange or cheque is said to be dishonored by non-payment

when the maker of the note, acceptor of the bill or drawee of the cheque makes default in

payment upon being duly required to pay the same".

1 Vide Wharton’s Law Lexicon, 1978 Ed. p. 3352 Vide Rakesh Porwal v. Narayan Joglekar, 1993 Cr LJ 680 p. (688) (Bom).

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Thus if on presentation the banker does not pay, then dishonour takes place and the

holder acquires at once the right of recourse against the drawer and the other parties on

the cheque.

Dishonour of cheque has been considered as a criminal offence under Section 138 of the

Negotiable Instruments Act, 1881. According to Section 138 whenever any cheque for

discharge of any legally enforceable debt or other liability is dishonoured by the bank for

want of funds and the payment is not made by the drawer despite a legal notice of

demand, it shall be deemed to be criminal offence.

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DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138

Section 138 of the Negotiable Instruments Act, 1881

Dishonour of cheques is considered as an offence under Section 138 of the Negotiable

Instruments Act, 1881. Section 138 deals with Dishonour of cheque for insufficiency of

funds in the accounts. The Section 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 extend to two year, or with fine which

may extend to twice the amount of the cheque, or with both.

Provided that nothing contained in this section shall apply unless-

(a) The cheque has been presented to the 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.

(b) The payee or the holder in due course of the cheque, as the case may be, makes a

demand for the payment of the said amount of money by giving a notice, in writing, to

the drawer, of the cheque, within thirty days of the receipt of information by him from the

bank regarding the return of the cheques as unpaid, and

(c) The drawer of such cheque fails to make the payment of the said amount of money to

the payee or, as the case may be, to the holder in due course of the cheque, within fifteen

days of the receipt of the said notice".

Object of Section 138

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The object of Section 138 is to make drawer of the cheque subject to penalty when the

cheque bounces on the ground of insufficient funds.

The plain reading of Section 138 of the Negotiable Instruments Act makes it clear that,

the words, "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…" have been specifically used. It would, therefore, mean that only two

contingencies are contemplated and as such, the words-"either-or" have been used. It is,

therefore, clear that the cheque should be dishonoured either for the insufficiency of the

amount or, because it exceeds the amount arranged to be paid from that account. No third

contingency or eventuality has been contemplated and the specific clear wording of

Section 138 eliminates any third contingency than mentioned in the Section itself.

The cheques can be dishonoured for many other reasons and there may be so many

eventualities in which the payee is denied payment by the bank, the reasons such as

mentioning the date incorrectly or some corrections not initialed or the difference in

between the amount mentioned in figures and words, are certain other contingencies in

which the cheques will be definitely dishonoured and would be returned as unpaid,

however it is not in respect of any of these contingencies that he dishonour of a cheques

has been made penal under Section 138 of the said Act. In Om Prakash Maniyar v. Swati

Bhide3, the submissions on behalf of the petitioners to the effect that the dishonour

because of the closure of the account should be held as penal, was not accepted by the

court.

Section 138 was introduced with a laudable public policy behind it. It is intended to

prevent or curtail a mischief which is likely to affect financial transactions, and thereby

trade and business and ultimately, economy of the country.

Exclusion of Mens Rea4

3 1992 Mah LJ 302 at 304 4 Mens Rea, a guilty mind – Although prima facie and as a general rule there must be a mind at fault before there can be a crime, it is not an inflexible rule, and a statute may relate to such subject-matter and may be so framed as to make an act criminal, whether there has been any intention to break the law or otherwise to do wrong or not. There is a large body of Municipal law at the present day which is so conceived – Wills R. v. Tolson, (1889) 23 Q.B.D 173 (vide Wharton’s Law Lexicon 14th Ed., Fifth Imp., 1992).

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For committing an offence under Section 138 of the Act "mens rea" is not an essential

ingredient5.

Section 138 of the Negotiable Instruments Act, 1881, excludes mens rea by creating strict

liability and this is explicit from the words 'such person shall be deemed to have

committed an offence'. The returning of the cheque by the bank either because he amount

of money standing to the credit of the drawer of the cheque is insufficient or the amount

covered by the cheque is in the excess of the amount arranged to be paid from that

account by an agreement with the bank are the two necessary conditions creating strict

liability.

Ingredients and requirements of the penal provisions

Section 138 creates an offence for which the mental elements are not necessary. It is

enough if a cheque is drawn by the accused 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 discharge in whole or in part, of any debt or other liability due. Therefore, whenever

the cheques are on account of insufficiency of funds or reasons referable to the drawer’s

liability to provide for funds, the provisions of section 138 of the Act would be attracted,

provided the following conditions are satisfied:

1. Cheque drawn on a bank account

Section 138 requires, that a cheque, to be caught by the section, should be 'drawn by a

person on an account maintained by him with the banker for payment of any amount of

money'. Existence of a "live account" at the time of issue of cheque is a condition

precedent for attracting penal liability for the offence under this section. The cheque is

returned by the bank unpaid either because of the insufficiency of the amount or, because

it exceeds the amount arranged to be paid from that account. The words "that account" in

the section denote to the account in respect of which the cheque was drawn. No doubt if

any person manages to issue a cheque without an account with the bank concerned its

consequences would not snowball into the offence described under section 138 of the

5 Mahendra A.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases 438 (Bom.)

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Act. For the offence under section 138 of the Act there must have been an account

maintained by the drawer at the time of the cheque was drawn.

2.  Issue of Cheque in discharge of a debt or liability

The cheque unpaid by the bank must have been issued in discharge of a debt or other

liability wholly or in part. Where a cheque is issued not for the purposes of discharge of

any debt or other liability, the maker of the cheque is not liable for prosecution under

section 138 of the Act. A cheque given as a gift or for any other reasons and not for the

satisfaction of any debt or other liability, partly or wholly, even if it is returned unpaid

will not meet the penal consequences.

If the above conditions are fulfilled, irrespective of the mental conditions of the drawer

he shall be deemed to have committed an offence, provided the other four requisites are

fulfilled:

a)   Presentation of the cheque within six months or within the period of its validity

The cheque must have been presented to the bank within a period of six months from the

date on which it is drawn or its period of validity, whichever is earlier. Thus if a cheque is

valid for three months and is presented to the bank within a period of six months the

provisions of this section shall not be attracted. However if the period of validity of the

cheque is not specified or prescribed the cheque is presented within six months from the

date the cause of action can arise. The six months are taken from the date the cheque was

drawn.

b)   Return of the cheque unpaid for reason of insufficiency of funds

The cheque must be returned either because the money standing to the credit of that

account is insufficient to honour the cheque or that it exceeds the arrangement made to be

paid from that account by an agreement with the bank.

c) Issue of the notice of dishonour demanding payment within thirty days of receipt

of information as to dishonour of the cheque.

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The payee or the holder in due course of the cheque has to give a notice in writing

making a demand for payment of the said amount of money to the drawer of the cheque.

Such notice must be given within 30 days of information from the bank regarding the

return of cheque as unpaid.

d)   Failure of the drawer to make the payment within fifteen days of the receipt of

the payment

After the receipt of the above notice the drawer of the cheque has to make payment of

said amount of money to the payee or to the holder in due course of the cheque within 15

days of the receipt of the notice. If the payment is not made after the receipt of the notice

within stipulated time, a cause of action for initiating criminal proceedings under this

section will arise.

Scope and applicability of Section 138

According to the Section 138 whenever any cheque for discharge of any legally

enforceable debt or other liability is dishonoured by the bank for want of funds and the

payment is not made by the drawer despite a legal notice of demand, it shall be deemed to

be a criminal offence.

Where a cheque is issued not for the purpose of discharge of any debt or other liability,

the maker of the cheque is not liable for prosecution. For example, if the cheque is given

by way of a gift or present and if it is dishonoured by the bank, the maker of the cheque is

not liable for prosecution6.

6 Mohan Krishna (B) v Union of India 1996 Cri LJ 636 (AP)

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DISHONOUR OF CHEQUE – OFFENCE BY DRAWER

The word 'offence' is not defined in the Negotiable Instruments Act, 1881. According to

section 3(38) of the General Clauses Act it means any act or omission made punishable

by any law for the time being in force.

As noticed in the previous topic, what is made an offence is not the drawing of cheque

alone. It must have been drawn in discharge, in whole or in part, of a legally enforceable

debt or other liability. It must have been duly presented in time and dishonoured. There

must be a written demand for the amount within a specified time, followed by failure to

make payment within another specified time. It becomes an offence only on such failure

which is an illegal omission7.

It is the person who draws and issues a cheque that falls within the ambit of Section 138

of the Negotiable Instruments Act, 1881. The maker of cheque (who signs the cheque) is

called the `drawer'.

When a person is aware of the fact that there are no funds in one's bank account if he

issues cheque to a trader for goods purchased, the bank will return the cheque for

insufficiency of funds. By issuing a cheque under such circumstance, drawer commits an

offence under Section 138 of the Negotiable Instruments Act.

On the cheque being dishonoured, the payee in terms of Section 138 of the Act can call

upon the guilty to pay the money covered by the returned cheque within 30 days from the

date of return, only after serving a notice of dishonour to the drawer. If the drawer does

not pay the amount despite the notice within 15 days from the receipt thereof, the drawer

commits an offence under Section 138 of the Negotiable Instruments Act, 1881.

Notice of Dishonour

Notice of Dishonour is a formal communication of the fact of dishonour of cheque. Sub-

section (b) of Section 138 of the Negotiable Instruments Act requires the payee or the

holder in due course to issue a notice in writing to the drawer of the cheque within 15

7 Anto (K S) v Union of India (1993) 76 Comp Cas 105 (Ker).

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days of the receipt of the information by him from the bank regarding the return of the

cheque as unpaid. The sub-section further provides that the drawer has to comply with

the demand within 15 days of the receipt of the said notice.

The demand notice envisaged in section 138 is in effect a notice of dishonour to the

drawer combined with a demand on him to pay the amount of the dishonoured cheque

within the time allowed by the statute. It serves as a warning to the person to whom the

notice is given that he could now be made liable. If the holder fails to give this notice to

the drawer, except in cases when notice of dishonour may be excused, all prior parties

liable thereon are discharged of their liability.

Cause of Action

Cause of action for prosecution under section 138 of the Negotiable Instruments Act does

not arise by mere presentation of the cheque in bank and by its dishonour.

A division bench of the Kerala High Court8, after considering the ambit and scope of

Sections 138 and 142 of the Negotiable Instruments Act, has held that the prosecution for

such an offence would only be maintainable when the period of 15 days from the receipt

of the notice by the drawer of the cheque has elapsed. The court observed that the

dishonour of he cheque by itself does not give rise to a cause of action because payment

can be made on receipt of the notice of demand contemplated in clause (b) of Section 138

and in that event, there is no offence, nor any attempt to commit the offence nor even a

preparation to commit the offence. Failure to pay the amount within fifteen days of

receipt of notice alone is the cause of action that would permit a prosecution and nothing

else.

Written Complaint

A complaint is required to be filed by the payee or the holder in due course of the

dishonoured cheque.

8 N.C. Kumaresan v. Ameerappa 1991 (1) KLT 797

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Section 142 (a) of the Negotiable Instruments Act, makes it clear that only upon a

complaint in writing made by the payee or the holder in due course of the cheque, the

court can take cognizance of the offence. If the payee or the holder in due course does not

file a complaint, the drawer cannot be prosecuted.

Cognizance of Offence

In terms of Section 142 of the Negotiable Instruments Act, 1881, no court shall take

cognizance of any offence punishable under section 138 except upon a written complaint

made by the payee or the holder in due course of the dishonoured cheque and filed within

one month of the date on which the cause of action arose. No court inferior to that of a

metropolitan magistrate or a first-class judicial magistrate can try an offence under

section 138.

Section 142 states that the cognizance of an offence can be taken under Section 138 upon

a complaint in writing which must be made within one month by the payee or holder in

due course from the date on which the cause of action arises under clause (c) of the

proviso to section 1389. In substance we can say that when a drawer, served with a notice

within 30 days from the date on which the payee or the holder in due course has come to

know about the return of the cheque and the drawer does not make the payment as

demanded, the complaint shall have to be filed within 30 days from the date on which the

15 days time expires.

The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 has

introduced a proviso to Section 142 permitting the court to take cognizance of a

complaint after the prescribed period if the complainant satisfies the court that he had

sufficient cause for not making a complaint within such period. It would thus be within

the discretion of the court to condone the delay, depending upon the causative

circumstances.

9 Kody Elecot Ltd v. Down Town Hospital

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PROCEEDINGS AGAINST DISHONOUR OF CHEQUE

Prior to the incorporation of chapter XVII in the Negotiable Instruments Act in 1988, to

deter and penalize the issue of worthless cheques, it was only under the provisions of the

Indian penal Code 1860 (IPC) that the drawer of a cheque could be criminally prosecuted

if it could be shown that he cheated someone by issuing the cheque. Even after the

introduction of the specific provisions in the Negotiable Instruments Act, a drawer can be

prosecuted under IPC for cheating, but he cannot be prosecuted and punished for the

same offence under both the enactments. Mens rea or dishonest intention must be

established to prove cheating, but it is not an essential element of an offence under

section 138 of the Negotiable Instruments Act.

Criminal Proceeding – Chapter XVII of the Negotiable Instruments Act

Chapter XVII inserted by the Banking, Public Financial Institutions and Negotiable

Instruments Laws (Amendment) Act, 1988 provides for penalties in case of dishonour of

certain cheques for insufficiency of funds in the accounts or for the reason that the

amount exceeds the arrangement made by the drawer.

As per the penal provisions under the Act, the drawer, committing an offence under

Section 138, is liable to be punished with imprisonment for a term which may extend to

two years, or fine which may extend to twice the amount of the cheque or both.

Summary Proceeding - Order 37 of the Code of Civil Procedure

When a cheque is dishonoured, the holder or payee of the cheque can sue the drawer or

endorser for the recovery of amount alongwith interest. Besides a civil suit for recovery

of the amount, proceeding in a summary manner can be initiated under Order 37 of the

Code of Civil Procedure. The advantage of suing under chapter XXXVII of Civil

Procedure Code is that the defendant is not allowed in such cases to defend the suit

without leave obtained from Court and it is provided further that a decree passed under

the said Order, may be executed forthwith. If no such leave is applied for or granted ,the

allegations in the plaint shall be deemed to be admitted, and the plaintiff is entitled to a

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decree for the principal sum and also the interest as calculated under Section 9 and 80 of

the Negotiable Instruments Act, 1881.

Criminal prosecution under section 138 does not bar a civil action against the drawer on

the dishonoured cheque. In Medical Chemicals & Pharma P Ltd v. Biological E Ltd., the

Supreme Court said:

"Both criminal law and civil law remedy can be pursued in diverse situations. As a matter

of fact, "they are not mutually exclusive but clearly co-extensive and essentially differ in

their content and consequence".

In addition to the remedies available under the Act the payee can also resort to remedies

available under Civil Procedure Code and Consumer Protection Act. In Pankajbhai

Nagjibhai Patel v. State, it has been held that in view of the limit of fine as prescribed in

Section 29(2), Code of Criminal Procedure, the Magistrate who thinks it fit that the

complainant must be compensated for loss can resort to section 357(3) of the code and

can award compensation to the complainant for which no limit is prescribed in Section

357(3). The power of Courts to award compensation is not ancillary to other sentences

but it is in addition thereto.

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OFFENCES - CHEATING AND FORGERY

Cheating being an offence is defined under Section 415 of the Indian Penal Code as

follows:

"Whoever, by deceiving any person, fraudulently or dishonestly induces the person so

deceived to deliver any property to any person, or to consent that any person shall retain

any property, or intentionally induces the person so deceived to do or omit to do anything

which he would not do omit if he were not so deceived, and which act or omission causes

or is likely to cause damage or harm to that person in body, mind, reputation or property,

is said to "cheat".

Explanation. A dishonest concealment of facts is deception within the meaning of this

section."

In order to bring the case within the definition of Cheating under section 415 of the IPC,

it has to be shown by the prosecution that there was some inducement on the part of the

accused persons and the said inducement was made fraudulently or dishonestly with a

view to deceive the complainant. It is further to be shown by the prosecution that due to

deception practiced by the accused persons, the person so deceived had delivered the

property to the accused persons or had given consent that the accused person shall retain

that property.

To hold a person guilty of the offence of cheating it has to be shown that his intention

was dishonest at the time of making the promise.

Whenever a cheque issued with dishonest intentions is dishonoured, the drawer of the

cheque can be proceeded against under sections 417 & 420 of the IPC by the payee or

holder in due course of the cheque.

In Keshavji Madhavji v. Emperor [AIR 1930 Bom 179] it was observed that ‘it was for

the prosecution to establish facts which point prima facie to the conclusion that the

failure to meet the cheque was not accidental but a consequence expected and therefore,

intended by the accused. It will then be for the accused to establish any facts that may be

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in his favour which are specially within his knowledge and as to which the prosecution

could not be expected to have any information’. A mere allegation that a cheque issued

by the accused to the complainant had been dishonoured is not sufficient to establish the

offence of cheating under section 415 of the IPC.

In Baijnath Sahay v. Emperor [AIR 1933 Pat 183] it was observed that the act of drawing

a cheque implied at least three elements: (a) that the drawer has an account with the bank

in question; (b) that he has authority to draw on it for the amount shown on the cheque;

(c) that the cheque as drawn, is valid order for the payment of the amount, or that the

present state of affairs is such that in the ordinary course of events, the cheque will on

future presentment be dishonoured. Drawing of a cheque does not imply a representation

that the drawer already had the money in the bank to the amount shown on the cheque,

for he may either have authority to overdraw, or have an honest intention of paying in the

necessary money for before cheque can be presented.

Thus mere dishonour for lack of funds does not amount to cheating; for cheating to be

established a mental element to deceive is necessary.

Cheating by Personation

Section 416 of IPC defines cheating by personation as follows:

"A person is said to cheat by personation if he cheats by pretending to be some other

person, or by knowingly substituting one person for another, or representing that he or

any other person is a person other than he or such other person really is.

Explanation. -The offence is committed whether the individual personated is a real or

imaginary person."

The personation referred to in this section may be either by words or by conduct. The

offence under section 416 of IPC owes its gravity to the fact that it affects not only the

person deceived but also the person personated.

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Offence of cheating by personation is punishable under section 419 of IPC whereas

general cheating is punishable under section 417 and section 417 of IPC.

Forgery

Section 463 of IPC defines forgery as:

"Whoever makes any false documents or electronic record part of a document or

electronic record with, intent to cause damage or injury, to the public or to any person, or

to support any claim or title, or to cause any person to part with property, or to enter into

any express or implied contract, or with intent to commit fraud or that fraud may be

committed, commits forgery."

Section 464 of IPC deals with making a false document and provides as under:

A person is said to make a false document or false electronic record-

Firstly -Who dishonestly or fraudulently makes, signs, seals or executes a document or

part of a document or makes or transmits any electronic record or part of any electronic

record, affixes any digital signature on any electronic record, or makes any mark

denoting the execution of a document or the authenticity of the digital signature, with the

intention of causing it to be believed that such document or part of document, electronic

record or digital signature was made, signed, sealed, executed, transmitted or affixed by

or by the authority of a person by whom or by whose authority he knows that it was not

made, signed, sealed, executed or affixed; or

Secondly- Who, without lawful authority, dishonestly or fraudulently, by cancellation or

otherwise, alters a document or an electronic record in any material part thereof, after it

has been made, executed or affixed with digital signature either by himself or by any

other person, whether such person be living or dead at the time of such alteration; or

Thirdly- Who dishonestly or fraudulently causes any person to sign, seal, execute or alter

a document or an electronic record or to affix his digital signature on any electronic

record knowing that such person by reason of unsoundness of mind or intoxication

23

cannot, or that by reason of deception practised upon him, he does not know the contents

of the document or electronic record or the nature of the alterations.

Explanation 1 – A man’s signature of his own name may amount to forgery.

Explanation 1 – The making of a false document in the name of a fictitious person,

intending it to be believed that he document was made by a real person, or in the name of

a deceased person, intending it to be believed that the document was made by the person

in his lifetime, may amount t forgery.

Punishment for Forgery

Whoever commits forgery shall be punished with the imprisonment of either for a term

which may extend to two years or with fie or with both.10

Banker’s liability for payment made on forged cheques

Relationship between a banker and his customer is that of a debtor and creditor. When a

cheque with a forged signature is presented, the banker has no authority to make

payments on it, and if he does make such payment he would be acting contrary to the law

and would be liable to the customer for the said amount. A bank in such cases can escape

liability only if it can show that the customer is not entitled to make a claim on account of

adoption, estoppel or ratification.

The rule of law in this regard can be stated as follows:

When a cheque duly signed by a customer is presented before a bank with whom he has

an account there is a mandate on the bank to pay the amount covered by the cheque.

However, if the signature on the cheque is not genuine, there is no mandate on the bank

to pay. The bank when makes payment on such a cheque, cannot resist the claims of the

customer with the defence of negligence on its part, such as leaving the cheque book

carelessly so that the third parties could easily get hold of it. This is because a document

in cheque form, on which the customers name as drawer is forged, is a mere nullity. The

bank can succeed only when it establishes adoption or estoppel.

10 Section 465 of Indian Penal Code

24

LIABILITY FOR STOPPED PAYMENT

A stopped payment is usually requested if the cheque has been declared missing or lost.

But many a times the drawer, to escape his debt or liability has used it as an instrument of

deception. The 1988 amendment in Section 138 of Negotiable Instruments Act is also

silent about Stopped Payment.

As discussed earlier, the contract between the customer and the bank is defined as a

debtor- creditor relationship. This contract requires the bank to honor all valid and proper

orders of the customer to pay amounts from his account with the bank, for as long as

funds remain available in the customer's account. The customer's order, however, remains

executory and can be rescinded until the bank makes payment. One of the reasons on

account of which the banker can refuse to make the payment of a cheque is that the

payment has been stopped by the drawer. Upon receipt of a timely stop payment order,

the bank ceases to have authority to pay the item.

A customer thus, has a right to give notice to his Bankers to stop payment of a cheque

which he has issued. Generally a written notice, signed by the drawer is sufficient to stop

the payment. A stopped payment is usually requested if the cheque has been declared

missing or lost.

In India, while there is as such no express provision relating to stop payment of cheques.

However there are various judgments regarding this aspect. Indian Courts have covered

this facet in Section 138 of Negotiable Instruments Act, which is related to dishonour of

cheques. The discussion relating to stop payment has assumed importance in view of the

amendment to the Negotiable Instruments law by the amendment in 1988. Prior to this

amendment, people issued cheques knowing well that the cheque is not going to be

honored on presentation, and they tried to create circumstances in which the bank would

return the cheque with such endorsements as "stopped payment", "refer to drawer" or

"A/C closed". These were some of the tricks used by the drawer to escape the penal

liability, which was attached to Section 138 of Negotiable Instruments Act.

25

The question that arises is whether a drawer who stops the payment having insufficient

funds in his account can be held liable under Section 138 of the Negotiable Instruments

Act? In this regard various judgments of High Courts and the Supreme Court have been

reviewed in order to find out a solution to the abovementioned issue.

Views taken by various High Courts

In Abdul Samod v. Satya Narayan Mahavir High Court of Punjab and Haryana

thoroughly analyzed section 138 of the Act. Hon’ble Mr. Justice A.P. Chowdhury stated

that there are five ingredients, which must be fulfilled.

These are as follows:

1. The cheque is drawn on a bank for the discharge of a legally enforceable debt or

other liability.

2. The cheque has returned by the bank unpaid.

3. The cheque is returned unpaid because the amount available in that account is

insufficient for making the payment of the cheques.

4. The payee gives a notice to the drawer claiming the amount within 15 days of the

receipt of the information by the Bank and

5. The drawer fails to make payment within 15 days of the receipt of notice.

In this case the respondent filed a complaint with the allegations that the accused had,

inter alia, issued a cheque dated June 9, 1989, for Rs. 22,000 in connection with an

amount which had become due on account of purchase of some raw material by him. The

cheque was returned unpaid by the bank with the remarks "Payment stopped by the

drawer". The complainant sent the requisite notice, but the accused failed to make the

payment.

It was stated by the Hon’ble Justice B.M. Thulasidas that:

26

"The allegations in the complaints, in my view, do make out a prima facie case against

the petitioners. Before filing the complaints, the respondent had taken care to abide by the

relevant legal provisions. Indeed, it is not the case of the petitioners that no amount is due

to the respondent. The issuance of cheques and their dishonour, followed by notices of

demand and failure to pay are not matters which had been challenged. That the payment

was countermanded by a stop memo is of no consequence. That hardly affects the right of

the respondent to initiate proceedings under the Act. It has the same effect as closing the

account as far as he is concerned. The object of the provision cannot be allowed to be

defeated by such ingenuous action".

Similarly, in Mrs. R. Jayalaxmi v. Mrs. Rashida and as per the Punjab and Haryana Court

in Mrs. Rama Gupta v. Bakesman’s Home Product Limited Patiala, it has been held that

if a cheque was returned with an endorsement “refer to drawer” and "payment counter-

manded by the drawer" then it was not an offence.

Thus relying on this it was held that when the respondent stopped the payment of the

cheques in question, there was no question of facts constituting an offence punishable

under section 138 of the Negotiable Instruments Act.

However, it is significant to note, what is relevant for the purpose of determining an

offence under section 138 of the Negotiable Instruments Act is whether the drawer of the

cheque had arranged for payment or had made the payment of the amount covered by the

cheque within the period of 15 days prescribed under said section and not the reason for

which cheques were dishonored by the Bank.

The above laid proposition has been supported by various High Courts. Kerala High

Court in the case of Calcutta Sanitary Wares v. C. T. Jacob, where the court was

considering a situation whereby the cheque was initially dishonoured on the basis of a

stop-payment memo. The court held that "the object of the provision cannot be allowed to

be defeated by such ingenious action". The court took the view that dishonour pre-

supposes non-payment as the funds in question were not forthcoming and that in these

circumstances also, the failure to pay the amount within 15 days of the notice of demand

27

would still constitute an offence as any other view would defeat the specific provisions of

section 138.

The Punjab and Haryana High Court in the case of M. M. Malik v. Prem Kumar Goyal,

analysed the aforesaid sections and held that the cause of action will be complete when

the drawer of the cheque fails to make payment within 15 days of the receipt of the notice

contemplated by proviso (b) and that the offence shall be deemed to have been committed

only from the date when the notice period expires. The court had construed the

endorsement "refer to drawer" as the bankers inability to honour the cheque for want of

funds in the account of the drawer and further held that as far as the jurisdiction was

concerned, the principle that the ‘debtor has to find the creditor” would apply and that the

court within whose jurisdiction the creditor is located will have jurisdiction to entertain

the complaint.

In the Division Bench decision of Bombay High Court in Rakesh Menkumar Porwal v.

Narayan Dhondu Joglekar, one of the issues was regarding the correct manner in which

the time-frame as is prescribed in sections 138 and 142 of the Negotiable Instruments Act

should be computed. The Hon’ble Court held that

"A clear reading of section 138.....If, for instance, the closure of an account or the

stoppage of payment or any other of the commonplace reasons for dishonour were to be

justifiable, then, the Legislature would have set these out in the section as exceptions not

constituting an offence. No such intention can be read into section 138, as none exists.

The solitary exception made by the Legislature is with regard to the drawer being offered

a final opportunity of paying up the amount within 15 days from the receipt of notice

which, in other-words, provides a last opportunity to prove one's bona fides. It is obvious,

that having regard to the widespread practice of issuing cheques which are dishonoured

and the many ingenious methods of avoiding payment that are practiced, the Legislature

has opted for a non-nonsense situation. The possibility has not been overlooked whereby

an account any inadvertently be overdrawn or a dishonour may be for technical reasons

or where a genuine mistake has occurred and the grace period provided for by the

Legislature after service of notice on the drawer is in order to afford an opportunity to the

28

drawer to rectify these. Undoubtedly, even when the dishonour has taken place due to the

dishonesty of the depositor, the drawer is still given a last chance to act otherwise.

Consequently, the reasons for dishonour even if they be very valid as was sought to be

pointed out in this case, should not and cannot be taken into account by a Magistrate

when such a complaint is presented"

The above mentioned case-laws supports the preposition that while holding any drawer

liable under Section 138, the Court should first see that whether payment was made to the

within 15 days of notice or not. The reason for dishonour is immaterial because if the

drawer is bonafide then he may make the payment of the amount due under the cheque

within the grace period i.e 15 days.

Views of the Supreme Court

Hon’ble Supreme Court has narrated four key Judgments where the drawer was held

liable for Stop payment of cheques. However there is only one judgment which deals

with the above laid preposition.

In M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s.

Indian Technologists & Engineers (Electronics) Pvt. Ltd. and another, a cheque was

presented by the complainant on 28-1-1990, through their bankers M/s. Hyderabad Bank

for realisation, with the promise by the accused, that the same will be honoured when

presented. However, the said cheque was dishonoured with the banker's endorsement

dated 29-11-1990 which stated "(i) refer to drawer, (ii) instructions for stopping payment

and (iii) stamped exceeds arrangements." Appellant filed complaints under Section 138

of the Negotiable Instruments Act, 1881 for dishonour of cheque for insufficiency of

funds in the accounts of the accused. It was held by the Hon’ble Supreme Court that:

“It would thus be clear that when a cheque is drawn by a person on an account

maintained by him with the banker for payment of any amount of money to another

person out of the amount for the discharge of the debt in whole or in part or other liability

is returned by the bank with the endorsement like (1) in this case, "I refer to the drawer"

(2) "instructions for stoppage of payment" and (3) "stamp exceeds arrangement", it

29

amounts to dishonour within the meaning of Section 138 of the Act. On issuance of the

notice by the payee or the holder in due course after dishonour, to the drawer demanding

payment within 15 days from the date of the receipt of such a notice, if he does not pay

the same, the statutory presumption of dishonest intention, subject to any other liability,

stands satisfied".

The position of Law in this regard has changed dramatically from the 1990’s till date, due

to the amendment that has been brought into the section. A close look on the judgments

of various High Courts shows that the Courts relied on the presumption that the offence

referred to in Section 138 can be made out only on bouncing of a cheque on the ground of

inadequate balance in the account concerned. Where the cheque is returned unpaid on

other grounds, the same has not been made an offence or where the payment was counter-

manded then it was without an offence. Courts during that time seemed to be more in

favour of the drawer. However, after the recent judgments of the Supreme Court, the

burden has now shifted to the drawer and a presumption has to be drawn in favour of the

holder of the cheque.

As explained earlier, a plain reading of section 138 of the Negotiable Instruments Act

makes it clear that the words "either because of the amount standing to the credit of that

account is sufficient or that it exceeds the amount ..." have been specifically used. It

would, therefore, mean that only two contingencies are contemplated and as such, the

words "... either .... or" have been used. It is, therefore, clear that the cheque should be

dishonoured either for the insufficiency of the amount or, because it exceeds the amount

arranged to be paid from that account. No third contingency or eventuality has been

contemplated and the specific clear wording of section 138 eliminates any third

contingency other than what is mentioned in the section itself. It need not be stated that a

cheque can be dishonoured for so many reasons and there may be so many eventualities

in which the payee is denied payment by the bank. For example, mentioning the date

incorrectly or some corrections not initialled or the difference in between the amount

mentioned in figures and words are certain other contingencies in which the cheque will

be certainly dishonoured and would be returned as unpaid. It is not in respect of any of

30

these contingencies that the dishonour of a cheque has been made penal under section

138 of the said Act.

Section 138 of the Negotiable Instruments Act is a penal provision wherein if a person

draws a cheque 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, on the ground

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. However with regard to "Payment stopped by the drawer" this

section does not mention anything specifically.

Whatever may be ground or reason on the basis of which the cheque is dishonoured by a

bank, whether it may "stopped payment by drawer" or "signature differ" or any other

ground, an offence under the section is made out and the drawee has full right to initiate

proceedings u/s 482 CrPC. It is also important that the time restriction given in Section

138 (c) also get attracted in case of stop payment when a notice as required by the

provision is sent to the drawer.

It is seen that there are manifold reasons for the dishonor of cheques by banks but there is

statutory mandate upon the payee under Section 13 (b) of Negotiable Instruments Act for

giving a notice demanding the payment of the amount of said cheque, within 15 days

from the date of the information as to bouncing of the said cheque from the drawer of the

cheque and upon failure to make payment of the amount by the drawer within 15 days,

offence under section 138 is deemed to have been committed. Moreover the decision of

the Supreme Court in Electronics Trade & Technology Development Corporation Ltd is

explicit and has decided all sorts of controversies in relation to bouncing of the cheque

due to payment stopped by the drawer. It has expressly held that if on issuance of the

notice by the payee or the holder in due course after dishonour, to the drawer demanding

payment within 15 days from the date of the receipt of such a notice, if he does not pay

31

the same, the statutory presumption of dishonest intention, subject to any other liability,

stands satisfied.

It can be concluded that whatever may be the ground or reason on the basis of which the

cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or

"signature differ" or any other ground the offence under the section is made out and the

drawee has full right to initiate proceedings and while deciding the case the Court should

see that whether payment has been made by the drawer within 15 days of notice issued by

the drawee after the dishonour of cheque.

32

DRAWER’S LIABILITY FOR DISHONOUR OF CHEQUE

Section 30 of the Negotiable Instruments Act, 1881 reads as follows:

"the drawer of a bill of exchange or a cheque is bound, in case of dishonour by the

drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour

has been given to, or received by, the drawer".

Section 30 makes it imperative that the notice of dishonour should of necessity be served

on to the drawer of such cheque. It is clear that the drawer shall be bound to compensate

the payee or the holder, as the case may be, if only he has been served with the notice of

dishonour.

Section 138 of the Negotiable Instruments Act requires that the payee or the holder in due

course of the cheque to issue a notice in writing to the drawer making a demand for

payment of the cheque amount. Such notice must be given within 30 days of information

from the bank regarding the return of cheque as unpaid.

The requirement of giving of notice is mandatory. There is no mode prescribed under

section 138 for serving the notice. It is sufficient that the notice in writing is served on

accused. Where no notice making demand for payment was served upon the drawer as

contemplated under clause (b) and clause (c) of Section 138, which would mean that no

demand has been made within the specified time from the date of dishonour of cheque in

question, conviction will not be sustainable11.

Consequence of part payment by drawer after issue of notice

Section 138 clearly shows that in the event of the drawer of the cheque failing to make

the payment of the said amount of money, a prosecution can be maintained. The

expression "said amount of money" can only denote the amount for which the cheque is

drawn and cannot relate to a part of it. Even where part payment is made by the drawer

after issue of statutory notice, the prosecution can not be quashed12.

11 Adhikari (B) v. Ponraj 1996 Cri LJ 180 (Mad)12 Ruby Leather Exports v. Venu (K) (1995) 82 Comp Cas 776 (Mad).

33

Liability of drawer after deposit of entire amount during trial

As stated by the Supreme Court once the offence is committed, any payment made

subsequent thereto will not absolve the accused of the liability of criminal offence,

though in the matter of awarding of sentence, it may have some effect on the court trying

the offence. But by no stretch of imagination, a criminal proceeding could be quashed on

account of deposit of money in the court or that an order of quashing of criminal

proceeding, which is otherwise unsustainable in law, could be sustained because of the

deposit of money in this court. The deposit of money by the drawer, therefore, during the

trial is of no consequence13.

Death of Drawer

The criminal liability can not be fastened to the heirs and the legal representatives of the

person who is said to have been guilty of the offence in question. The cheque presented

for realization by the complainant was returned on the ground of insufficient funds. The

notice sent was returned with postal endorsement 'party expired'. Wife and daughters of

the drawer of the cheque cannot be prosecuted for the offence under Section 138 of the

Act for the alleged failure of the drawer in meeting the liability to pay the amount

covered by the cheque which was dishonoured in response to the notice sent by the

complainant14.

Drawer declared insolvent

The drawer cannot escape from the criminal liability by putting forward he plea that he is

not bound to discharge the liability mentioned in the complaint as he was already

declared as an insolvent, especially when there is section 139 permitting the court to

presume that there is an existing liability and the issuance of the cheque was made

towards the discharge of the said liability.

13 Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)14 Bhupinder Lima v. State (2000) 99 Comp Cas 424 (AP)

34

DRAWEE’S LIABILITY FOR DISHONOUR OF CHEQUE

Rightful Dishonour - when bank may refuse to honour

When there is the relationship of banker and customer between the parties, the banker is

under an obligation to pay cheques when a mandate to pay is received from the customer,

or when a cheque is issued.

However, there may be a number of circumstances when the bank has no other

alternative but to return the cheque and in all such cases the bank is fully justified in

returning the cheque. These are the cases which may be termed as a countermand from

the customer which means an order to revoke the former instructions and annulling the

former mandate given by the customer to the bank to honour the cheques and it also

means the situations resulting from the closure of account by the customer, prohibitory

'garnishees' orders having been received from the court or orders for payment having

been received from the court or orders for payment having been received under Section

226 (3) of the Income-Tax Act, 1961 and similarly it also means the situation when there

is a restrained order from the court, notice of death of the customer, lunacy of the

customer, notice of loss of cheque or forged signatures on the cheque.

Wrongful dishonour of cheque – Drawee/ bank’s liability to pay damages

In case all the conditions which are necessary for the payment of a cheque are present and

have been fulfilled then if the bank dishonours a cheque it will amount to a breach of

contract for which the banker is liable to pay damages.

The liability of drawee of cheque in case of a wrongful dishonour has been dealt with

under Section 31 of the Negotiable Instruments Act, 1881. Section 31 states as follows:

"the drawee of a cheque having sufficient funds of the drawer in his hands properly

applicable to the payment of such cheque must pay the cheque when duly required so to

do, and, in default of such payment, must compensate the drawer for any loss or damage

caused by such default".

35

The position of law has also been made clear in a number of authorities. Reference may

be made to the following:

In New Central Hall v United Commercial Bank Ltd. the Madras High Court held that

where a banker having sufficient funds of a customer in his hands fails, even by mistake

to honour cheque issued by the customer, the customer has a right to claim damages.

In Jogendra Nath Chakrawarti v. New Bengal Bank Limited15, it was held, "where the

banker, being bound to honour his customer’s cheque, has failed to do so, he will be

liable in damages. If, special damage, naturally ensuing from the dishonour, is proved, it

will be properly taken into account in assessing the amount of the damages. If the

customer be a trader, the court may properly award substantial damages, in the absence of

proof of special damages. In other cases the customer will be entitled to such damages as

will reasonably compensate him for the injury which, from the nature of the case, he has

sustained. All loss flowing naturally from the dishonour of a cheque may be taken into

account in estimating the damages.

Compensation for wrongful dishonour

Wrongful dishonour of a cheque exposes the drawee bank to statutory liability to the

drawer to compensate him for 'any loss or damage cause by such default'.

The principle of awarding compensation to the drawer of a cheque is reparation for the

injury sustained or likely to be sustained by reason of dishonour. In almost every case the

drawer can recover substantial damages against the drawee on the basis of injury to his

credit, although he may not be able to prove that he had suffered actual pecuniary loss

through the dishonouring of the cheque16. However, there appears to be a distinction

between a trader and a non-trader in this respect, while a trader is always entitled to

substantial damages for dishonouring of his cheque, a non-trader will be entitled only to

nominal damages in the absence of an allegation and proof of substantial damages17.

15 AIR 1939 Cal. 6316Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 59517 Gibbons v. Westminster Bank (1939) 3 All E.r. 577

36

The General rule followed by the courts in awarding damages is that damages are

awarded for foreseeable and actual loss suffered and the quantum of damages is usually

based on the principle of ‘restitutio in intgegram’ i.e. restoring the person to the position

he would have been in if he had not suffered a damage. But in case of trademan’s cheque

the damages awarded are inversely proportional to the amount on the cheque. Thus,

smaller the amount of the dishonoured cheque, greater are the damages paid. The reason

behind this rule is, businessman’s loss of reputation or status or goodwill is once again

inversely proportional to the amount of the cheque.

37

DISHONOUR OF CHEQUE - LIABILITY OF A COMPANY

Since a company is an artificial person it is incapable of committing any crime

personally. However, if certain crimes are committed by its officials in the name of the

company then in such circumstances a company is said to have committed these crimes.

So far as the punishment is concerned, its liability can be only in terms of fine. The

company shall be responsible for the acts of commissions and omissions of the persons

working for the company.

Section 141 (1) of the Negotiable Instruments Act, 1881 reads as follows:

"If the person committing an offence under section 138 is a company, every person who,

at the time the offence was committed, was in charge of, and was responsible to the

company for the conduct of the business of the company, as well as the company, shall be

deemed to be guilty of the offence and shall be liable to be proceeded against and

proceeded against and punished accordingly;

Provided that nothing contained in this sub-section shall render any person liable to

punishment if he proves that the offence was committed without his knowledge, or that

he had exercised all due diligence to prevent the commission of such offence".

Thus, Sub-section (1) of Section 141 (1) provides that if a person committing an offence

under the section is a company, every person who, at the time when the offence was

committed, was in charge of, and responsible to, the company for conduct of its business,

as well as the company shall be deemed to be guilty of the offence and shall be liable to

be proceeded against and punished accordingly. The offender in Section 138 is the

drawer of the cheque.

However, if the person provides that the offence was committed without his knowledge,

or that he had exercised all due diligence to prevent the commission of such offence, he

shall not be liable to punishment under this Section.

Sub-section (2) further provides that where any offence under this Act has been

committed by a company and it is proved that the offence has been committed with the

38

consent or connivance of, or is attributable to, any neglect on the part of, any director,

Manager, secretary, or other office of the company, such director, manager, secretary or

other officer shall also be deemed to be guilty of that offence and shall be liable to be

proceeded against and punished accordingly.

In case of a company the day to day functions are not carried out by all the directors but

the board delegates the powers to one or two directors or officers of the company like the

Manager, Secretary, etc. Besides the Manager there are a number of other officers or

persons who are liable for the affairs of the company. Similarly, all the partners in the

partnership firm, Karta of the HUF, a Secretary of the Trust, Club, Co-operative Society

for the purpose of the present section are to be considered as in charge of the company

and in case any cheque is drawn by these persons then the company is liable irrespective

of the fact that such a person may not be holding due powers of issuing a cheque. Where

the cheques were issued by the authorized signatory will not preclude prosecution of

directors18.

The Vicarious liability of a person for being prosecuted for commission of an offence by

the company arises if at the time when the offence is alleged to have been committed, he

was in charge of and was responsible to the company for the conduct of its business. It is

necessary that there have to be averments in the complaints that the petitioners were in

charge of and were also responsible to the company for the conduct of its business of the

company19.

Thus, we can conclude that three categories of persons can be discerned from the said

provision who are brought within the purview of the penal liability through the legal

fiction envisaged in the section. They are: (1) The company, the principal offender, which

committed the offence; (2) Every one who was in charge of and was responsible for the

business of the company; (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 offence20.

18 Ashok Muthanna v. Wipro Finance Ltd. (2001) 105 Comp Cas 203 (Mad). 19 Gyan Chand Kotia v. Indian Renewable Energy Development Agency Ltd. (2000) 99 Comp Cas 517 (Del). 20 Anil Hada v. Indian Acrylic Ltd. (2000) 99 Comp Cas 36 (SC)

39

However, in case an employee of the company proves that the offence was committed

without his knowledge or that he had exercised all due diligence, then he may not be

prosecuted under the Act. In case he proves that after due diligence he could not prevent

the commission of the offence, it may provide a valid defence. Only the person can be set

free but not the company because the scope is limited to Section 141(1) only. This is

because under Section 138 the company is a drawer21.

Winding up proceedings pending

A company cannot escape from a penal liability under section 138 of the Act on the

premise that a petition for winding up of the company has been presented and was

pending during the relevant time. The Company cannot avert its liability on the mere

ground that the winding petition was presented prior to the company being called upon by

a notice to pay the amount of the cheque.

There is no provision in the Companies Act, 1956 which prohibits enforcement of the

debt due from the company. When a company goes into liquidation, enforcement of debt

due from the company is only made subject to the conditions prescribed therein. But that

does not mean that the debt has become unenforceable altogether22.

21 Sivakami (M) v Bharat Ginning & Oil Mill Factory 2000 Cri LJ 1043 (Guj)22 Pankaj Mehra v State 2000 Cri LJ 1781 (SC)

40

INTERNATIONAL LAW ON LIABILITY FOR DISHONOUR OF CHEQUES

A cheque may be drawn in one country and payable in another country and in such cases,

Sections 134 to 137 of the Negotiable Instruments Act provide the legal rules, which are

discussed below.

The Law governing the liability of the parties

According to Section 134 of the Negotiable Instruments Act,

"in the absence of a contract to the contrary, the liability of the maker of drawer of a

foreign promissory note, bill of exchange or cheque is regulated in all essential matters

by the law of the place where he made the instrument, and the respective liabilities of the

acceptor and endorser by the law of the place where the instrument is made payable".

The liability of the maker of a cheque under the Indian law is governed by the law of the

place of drawing, which is the place of payment so far the drawer is concerned which is

in accordance with the International Law. In case of an acceptor, his liability is governed

by the place of the payment, and in this respect Indian law follows the International law.

The measure of damages and the rate of interest are governed by the law of the place

where the bill is payable in the case of the acceptor23, and by the law of the place where

the drawing is made in the case of the drawer24.

Dishonour of Foreign Instrument

According to Section 135 of the Negotiable Instruments Act,

"Where a promissory note, bill of exchange or cheque is made -payable in a different

place from that in which it is made or endorsed, the law of the place, where it is made

payable determines what constitutes dishonour and what notice of dishonour is

sufficient".

23 Cooper v. Waldegrave (1840) 2 Beav 28224 Gibbs v Fremont (1853) 9 Ex 25and

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Section 135 is an application of the maxim of international law locus regit actum, The

obligation incurred by accepting a bill of exchange is measured by the law of the place

where it is payable, that is, the manner of enforcing the obligation and the mode of

performance of the obligation are governed by the law of the place of performance. The

duties of the holder too are determined by the law of the place of performance. The time

or the date of the performance of the obligation and the allowance of the days of grace

are determined by the law of the place of payment. By English Law, days of grace are

allowed on bills payable after date, but by French law, they are not allowed. So, when a

bill was drawn in England payable in Paris three months after date, and when by the law

of France the maturity of all the bills was postponed for a month it was held that it will be

governed by the law of France where it was payable.

The proper time for payment and for the notice of dishonour is that fixed by the law of

the country where the payment is to have been made. Though the present section refers

only to dishonour and notice of dishonour, demand at the proper time by the holder is

necessary in order to constitute dishonour. Thus, it is to be inferred that the time when a

bill becomes payable is to be determined by the law of the place of payment. The law of

the place where a bill is made payable determines what constitutes dishonour and what

notice of dishonour will be sufficient. The section applies only to a case where the

instrument is made payable at a place different from that in which it is made, but the rule

is the same in the case of instrument payable in the same place where it is made, because

that place itself being the place of payment, the law of that place determines the incidents

relating to dishonour. Since the drawer of a bill of exchange are sureties for the due

performance of the obligations incurred by the acceptor or maker, the law of the place

where the bill is payable indirectly affects their obligation also. This is the reason why the

necessity and sufficiency of a demand or a notice of dishonour in order to charge any

other party is to be determined by the law of the place of performance.

Instrument made out of India but according to Indian law

According to Section 136 of the Negotiable Instruments Act,

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"If a negotiable instrument is made, drawn accepted or endorsed outside India, but in

accordance with the law of India the circumstance that any agreement evidenced by such

instrument is invalid according to the law of the country wherein it was entered into does

not invalidate any subsequent acceptance or endorsement made thereon within India".

A negotiable instrument generally does not embody a single contract but contains a series

of contracts. Though prior agreements on it are invalid by the law of the country where

they were entered into, any subsequent agreement on it created by acceptance in India is

valid, and can be enforced against persons who become parties to it in India. This section

seems to have been taken from Article 85 of the German Bills of Exchange Act, which is

also embodied in the English Bills of Exchange Act, section 72, clause (1). The invalidity

of an instrument under foreign law does not affect the liability between persons who

subsequently become parties to it in India. The section would not apply to the cases

where the person sought to be charged had become a party previous to the acceptance in

India.

Presumption as to Foreign Law

According to Section 137 of the Negotiable Instruments Act,

"The law of any foreign country regarding promissory note, bills of exchange and

cheques shall be presumed to be the same as that of India, unless and until the contrary is

proved".

Courts of India do not take judicial notice of foreign law. Any person relying on such law

must prove it by evidence and in the absence of such evidence, the courts shall presume

the law of any foreign country to be the same as that of our country.

In India, proof of foreign law may be given in three ways:

(a) By means of law books, printed and published under the authority of the

government of the foreign country, and the reports of rulings of the courts of such

country contained in a book purporting to be a report of such rulings.

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(b) By oral testimony of expert. But the evidence given must be that of a person

specially skilled in such foreign law. The evidence of a person who has merely

studied foreign law is not permissible, because the word 'skilled' shows that he

must have had some practice in the application of the principles of that foreign

law.

(c) By the opinion of foreign courts. By the Statute of 24 Vict, Ch II, Courts in His

Majesty’s dominions are empowered to state a special case to a superior court of

any country in order to ascertain the law of that country and the certified copy of

the opinion of the foreign court upon the case submitted to it shall be admitted to

prove the foreign law.

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LAWS OF OTHER COUNTRIES ON LIABILITY FOR DISHONOUR OF

CHEQUES

Laws of Australia - Cheques and Payment Orders Act 1986

Section 69 of Cheques and Payment Orders Act 1986 defines dishonour as

"A cheque is dishonoured if the cheque is duly presented for payment and payment is

refused by the drawee bank, being a refusal that is communicated by the drawee bank to

the holder or the person who presented the cheque on the holder's behalf."

Section 70 of Cheques and Payment Orders Act 1986 provides for the liability of the

drawer or indorser for dishonour of cheque. "A person who is the drawer or an indorser

of a cheque that has been dishonoured is liable on the cheque whether or not the person is

given notice by any person of the dishonour."

As per section 71, subject to sub-section 17(1), section 59 and sub-section 60(1) of

Cheques and Payment Orders Act 1986, the drawer of a cheque, by drawing the cheque,

undertakes-

(a) that, on due presentment for payment, the cheque will be paid according to its tenor as

drawn; and

(b) that- (i) if the cheque is dishonoured when duly presented for payment; or (ii) if

presentment of the cheque for payment is dispensed with by virtue of paragraph 59(a) and

the cheque is unpaid after its date has arrived, the drawer will compensate the holder or

an indorser who is compelled to pay the cheque.

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Laws of United Kingdom – Bills of Exchange Act, 1882

The Bills of Exchange Act 1882 codifies for the United Kingdom the law relating to bills

of exchange, promissory notes and cheques.

A cheque "is a bill of exchange drawn on a banker payable on demand".25 For the most

part the rules of law applicable to bills payable on demand apply in their entirety to

cheques. But there are certain peculiar rules relating to the latter which arise from the fact

that the relationship of banker and customer subsists between the drawer and drawee of a

cheque. For example, when a person has an account at a bank he is, as an inference of

law, entitled to draw on it by means of cheques.

The holder of a bill has special duties which he must fulfil in order to preserve his rights

against the drawers and indorsers. They are not absolute duties; they are duties to use

reasonable diligence. When a bill is payable after sight, presentment for acceptance is

necessary in order to fix the maturity of the bill. Accordingly the bill must be presented

for acceptance within a reasonable time. When a bill is payable on demand it must be

presented for payment within a reasonable time. When it is payable at a future time it

must be presented on the day that it is due.

If the bill is dishonoured the holder must notify promptly the fact of dishonour to any

drawer and indorser he wishes to charge. If, for example, the holder only gives notice of

dishonour to the last indorser, he could not sue the drawer unless the last indorser or

some other party liable has duly sent notice to the drawer. When a foreign bill is

dishonoured the holder must cause it to be protested by a notary public. The bill must be

noted for protest on the day of its dishonour. If this be duly done, the protest, i.e. the

formal notarial certificate attesting the dishonour, can be drawn up at any time as of the

date of the noting. A dishonoured inland bill may be noted, and the holder can recover the

expenses of noting, but no legal consequences attach thereto. In practice, however, noting

is usually accepted as showing that a bill has been duly presented and has been

dishonoured. Sometimes the drawer or indorser has reason to expect that the bill may be

dishonoured by the drawee. In that case he may insert the name of a "referee in case of

25 Section 73 of the Bills of Exchange Act 1882

46

need." But whether he does so or not, when a bill has been duly noted for protest, any

person may, with the consent of the holder, intervene for the honour of any party liable

on the bill. If the bill has been dishonoured by non-acceptance it may be "accepted for

honour supra protest". If it has been dishonoured by non-payment it may be "paid supra

protest". When a bill is thus paid and the proper formalities are complied with, the person

who pays becomes invested with the rights and duties of the holder so far as regards the

party for whose honour he has paid the bill, and all parties antecedent to him.26

Laws of New Zealand on Dishonour of Cheques

The Bills of Exchange Act 1908 codifies for the New Zealand laws relating to bills of

exchange, promissory notes and cheques. In this Act, the provisions relating to dishonour

of cheques are not separately dealt with under the chapter related to cheques in the Act

and therefore it can be assumed that the provisions of dishonour of bills only apply in

case of dishonour of cheques.

Section 42 of the Bills of Exchange Act 1908 deals with dishonoured by non-acceptance -

"Where a bill is duly presented for acceptance and is not accepted within the customary

time, the person presenting it must treat it as dishonoured by non-acceptance. If he does

not, the holder shall lose his right of recourse against the drawer and indorsers".

Section 43 of the Bills of Exchange Act 1908 further deals with the consequences of

dishonour by non-acceptance -

"A bill is dishonoured by non-acceptance-

(a) Where it is duly presented for acceptance, and such an acceptance as is prescribed by

this Act is refused, or cannot be obtained; or

(b) Where presentment for acceptance is excused and the bill is not accepted.

26 Section 65 to 68 of the Bills of Exchange Act, 1882

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(2) Subject to the provisions of this Act, when a bill is dishonoured by non-acceptance an

immediate right of recourse against the drawer and indorsers accrues to the holder. And,

no presentment for payment is necessary."

Section 42 of the Bills of Exchange Act 1908 deals with dishonoured by non-payment, it

reads as follows

"A bill is dishonoured by non-payment-

(a) Where it is duly presented for payment and payment is refused, or cannot be obtained;

or

(b) Where presentment is excused and the bill is overdue and unpaid.

(2) Subject to the provisions of this Act, where a bill is dishonoured by non-payment an

immediate right of recourse against the drawers or indorsers accrues to the holder."

Section 48 of the Bills of Exchange Act 1908 deals with notice of dishonour. The section

reads as follows:

Subject to the provisions of this Act, where a bill has been dishonoured by non-

acceptance or by non-payment, notice of dishonour must be given to the drawer and each

indorser, and any drawer or indorser to whom such notice is not given is discharged:

Provided that-

(a) Where a bill is dishonoured by non-acceptance and notice of dishonour is not given,

the rights of a holder in due course subsequent to the omission shall not be prejudiced by

the omission:

(b) Where a bill is dishonoured by non-acceptance and due notice of dishonour is given,

it shall not be necessary to give notice of a subsequent dishonour by non-payment unless

the bill has in the meantime been accepted.

Section 55 of the Bills of Exchange Act 1908 deals with the liability of drawer or

indorser-

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(1) The drawer of a bill, by drawing it,-

(a) Engages that on due presentation it shall be accepted and paid according to its tenor,

and that if it is dishonoured he will compensate the holder or my indorser who is

compelled to pay it, provided that the requisite proceedings on dishonour until duly

taken;

(b) Is precluded from denying to a holder in due course the existence of the payee and his

then capacity to indorse.

(2) The indorser of a bill, by indorsing it;-

(c) Engages that on due presentment it shall be accepted and paid according to its tenor,

and that if it is dishonoured he will compensate the holder or a subsequent indorser who

is compelled to pay it, provided that the requisite proceedings on dishonour are duly

taken;

(d) Is precluded from denying to a holder in due course the genuineness and regularity in

all respects of the drawer's signature and all previous indorsements:

(e) Is precluded from denying to his immediate or a subsequent indorsee that the bill was

at the time of his indorsement a valid and subsisting bill. and that he had then a good title

thereto.

A comparative analysis of Indian laws and laws of the countries mentioned above,

on liability for dishonour of cheques.

Australian Laws

As seen above, the laws of other countries relating to the dishonour of cheques and the

liability arising therefrom are more or less similar to the laws laid down in the Negotiable

Instruments Act, 1881. However there are certain variations in laws of these countries

relating to dishonour of cheques and are discussed below.

49

As per Australian laws Section 70 of Cheques and Payment Orders Act 1986, in case of

dishonour of a cheque a person who is the drawer or an indorser, of such cheque, is liable

on the cheque whether or not the person is given notice by any person of the dishonour.

In India demand notice is mandatory. Sub-section (b) of Section 138 of the Negotiable

Instruments Act requires the payee or the holder in due course to issue a notice in writing

to the drawer of the cheque within 15 days of the receipt of the information by him from

the bank regarding the return of the cheque as unpaid.

This implies that unlike required in the Negotiable Instruments Act, 1881 there is no need

for the issue of demand notice to the drawer and the liability of the drawer or the

indorser, as the case may be, shall arise as soon as the cheque has been dishonoured by

the bank.

UK Laws

Indian Laws and the UK Laws are very similar with respect to the provisions relating to

the dishonour of cheques and the liability arising therefrom. As required under the

Negotiable Instruments Act, 1881 for establishing the liability of the drawer for

dishonour of cheque, the holder must notify the drawer, of that fact of such dishonour of

cheque. Similarly in UK Laws, under Bills of Exchange Act, 1882, if a cheque is

dishonoured, the holder is required to notify the fact of dishonour to the drawer.

New Zealand Laws

Under the Bills of Exchange Act 1908 Section 42 requires that when a cheque is duly

presented for acceptance and is not accepted within the customary time, the person

presenting it must treat it as dishonoured by non-acceptance. However, if he does not, the

holder will lose his right of recourse against the drawer and indorsers.

Further, Section 48 of the Bills of Exchange Act 1908 deals with notice of dishonour.

The section states that if a cheque has been dishonoured by non-acceptance or by non-

payment, notice of dishonour must be given to the drawer and each indorser. However,

50

any drawer or indorser to whom such notice is not given shall be discharged from his

liability.

CONCLUSION

The law relating to Negotiable instruments is the law of the commercial world which was

enacted to facilitate the activities in trade and commerce, making provision of giving

sanctity to the instrument of credit which would be deemed convertible into money and

easily passable from one person to another. In the absence of such instruments, the trade

and commerce activities were likely to be adversely affected as it was not practical for

the trading community to carry on with it the bulk of currency in force.

The main object of the Act is to legalise the system by which instruments contemplated

by it could pass from hand to hand by negotiation like any other goods.

Chapter XVII was inserted in the Act 1988 with a view to promote the efficacy of

banking operations and to ensure credibility in transacting business through cheques.

However the chapter is not comprehensive and lacks to cover the various aspects of the

commercial transactions especially in view of the emerging ways of payment through the

Internet and other electronic means. Section 138 also does not specifically cover the

aspects such as where the payment has been stopped by the drawer or where the account

has been closed prior to the endorsement of the cheque. These provisions no doubt have

served their purpose but they could be more elaborate in solving the dispute rather than

merely relying on the Court judgments.

Though insertion of the penal provisions have helped to curtail the issue of cheque

lightheartedly or in a playful manner or with a 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

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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.

However, the processes to seek civil justice is notoriously dilatory and recover by way of

a civil suit may take inordinately long time therefore if the Government of India could

establish a tribunal to deal with the dishonour of cheques and the liability arising

therefrom, it could make the process of recovery of damages faster for the aggrieved

party. For example, the Debts Recovery Tribunals have been established by the

Government of India under an Act of Parliament (Act 51 of 1993) for expeditious

adjudication and recovery of debts due to banks and financial institutions. Establishment

of a similar tribunal to deal with the cases of dishonour of cheques could perhaps provide

a faster relief to the aggrieved party.

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BIBLIOGRAPHY

1. R.K Suri; Dishonour of Cheques- Prosecution & Penalties, ALT Publishers,

Hyderabad;

2. S.N. Gupta, Dishonour of cheques-Liability Civil & Criminal, Universal Book

Traders, Delhi;

3. Rajesh Gupta, Dishonour of cheques – Law and Practice, Bharat Law House

Pvt Ltd, New Delhi;

4. A.N Saha, Law of Dishonour of cheques, Orient Publishing Company, New

Delhi;

5. S.K. Awasthi, Law of Dishonour of cheques – Forgery and Cheating, CTJ

Publications, Pune;

6. R. Swaroop, Cases on Dishonour of cheques (Under Section 138 to Section

142 of the Negotiable Instruments Act), Law Aid Publications, Madras;

7. Bhashyam & Adiga, The Negotiable Instruments Act, Bharat Law House,

New Delhi;

8. M.S. Parthasarthy, Cheques in Law and Practice, Universal Law Publishing

Co. Pvt. Ltd., Delhi;

9. S. Chand, Business laws, S. Chand and Company Ltd., New Delhi;

10. Article by T.N Pandey, Dishonour of cheques: whether all directors of a

company can be prosecuted in case of dishonour of cheques.

53