When is a cheque dishonored?
A cheque is said to have bounced, or been dishonored, by non-payment when the drawee (banker) commits defaults in payment upon being asked to pay the same.
Law regarding dishonour of cheque
The Negotiable instruments Act, 1881 was amended, by the Banking, Public Financial institutions, and Negotiable Instruments Laws (Amendment) Act, 1988 with a view to ensure better discipline as regards circulation and payment of cheques. The above amendment came into force with effect from 1 April 1989. Besides minor amendments, this amendment inserted a new chapter (Chapter XVII — Penalties in Case of Dishonor of Certain Cheques for Insufficiency of Funds in the Accounts) to the Act. This chapter contains provisions intended to prevent the issue of cheques with the knowledge that they will not be paid by the bank.
In the light of the above amendment, the drawer shall be liable for bouncing of cheques when a cheque is not paid, due to insufficiency of funds in the drawer’s bank account. In such cases the drawer is deemed to have committed an offense and may be held criminally liable for the same. The punishment for this offense may extend up to imprisonment of one year, or fine up to double the amount of the cheque, or both. However, before making the drawer criminally liable on account of bouncing of cheque, the following requirements should be satisfied.
Circumstances when a drawer is criminally liable for dishonor of cheque
1. The cheque is dishonored for want of amount of money at credit of the account on which the cheque was drawn, or for the reason that the amount payable on the cheque drawn exceeds the sanctioned limit of overdraft facility, if any.
2. The cheque must have been issued by the drawer for the payment of any legally enforceable debt or other liability, in whole or in part. This follows that where any cheque is drawn in favor of the payee by way of a gift, present, charity, or on account of any other social obligation and the said cheque is dishonored subsequently for insufficiency of funds, no offense would be deemed to have been committed on the part of the drawer.
3. The cheque has to be presented to the bank within six months period from the date of drawing or within the validity period, whichever is earlier.
In the case of non-payment of a post-dated cheque, the aforesaid period of six months shall be counted from the date stated on the cheque since a post-dated cheque becomes a regular cheque only after it becomes payable on demand.
4. The payee or the holder-in-due-course must have made a demand for the payment of money by giving a prior notice in writing to the one who draws the cheque, within15 days of the receipt of information about the return of the cheque as unpaid.
5. The drawer of such a cheque must have failed to make the amount payable to the payee or the holder-in-due-course within fifteen days of the receipt of the said notice. The cause of action commence from the 16th day onward.
6. The plaintiff (i.e., the payee or the holder-in-due-course of the dishonored cheque, as the case may be) must have filed a complaint of the offense in writing to a court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First class. Such complaint should have been made within one month of the date on which the course of action arose.
Section 139 provides that it shall be presumed that the holder received the cheque in the discharge of a debt or liability unless the contrary is proved. It has also been provided under Section 140 that the drawer shall not be allowed the defense that he had no reason to believe while issuing cheque that it would be dishonored subsequently.
It is worth noting that unless the dishonored cheque is returned by the banker as unpaid, no offense can be enforced against the drawer under Section 138. Further the dishonor of a cheque by itself does not hold the drawer criminally liable. It is only the subsequent failure on part of the drawer to pay the amount due on the dishonored cheque within 15 days of the receipt of demand notice, which renders a cause of action against the drawer. Moreover, the payee cannot lodge a complaint after the expiry of one month from the date on which cause of action arose under the said provisions.
Supreme Court of India verdict on dishonor of cheque
The Supreme Court of India in a landmark decision held that merely because the drawer issued a ‘stop payment‘ notice to his banker immediately after issuing a cheque against a debt or liability, it would not preclude an action under Section 138 by the drawee or holder-in-due-course. In simple words, a drawer who gives a stop payment instruction to the banker cannot escape prosecution under Section 138. However, if a stop payment instruction is issued by the drawer not on account of insufficiency of funds but for other reasons between the parties, the drawer cannot be prosecuted under Section 138.
In case an offense under the aforesaid provisions is committed by a company, it shall be liable to be punished accordingly. In this regard Section 141 (1) provides that,
‘If the person committing-an offense under Section 138 is a company, every person, who, at the time the offense was committed, was in charge, and is 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 offense and shall be liable to be proceeded against and punished accordingly’.
But this section does not render any person liable to the punishment if he could prove that the offense was committed without his knowledge, or that he had exercised all due diligence to deter the commission of such offense.