A Step By Step Guide For Legal Recourse When Cheque Is Dishonoured.

As per Section 6 of the Negotiable Instruments Act 1881, “A cheque is a bill of exchange drawn on specific banker and not expressed to be payable otherwise than on demand and it includes electronic image of truncated cheque and a cheque in electronic from.”

What is dishonour of cheque?

A cheque is said to be honoured if the banks give the amount to the payee. While, if the bank refuses to pay the amount to the payee, the cheque is said to be dishonoured in banking law. In other words, dishonour of cheque in banking law  is a condition in which the bank refuses to pay the amount of cheque to the payee.

Reasons for dishonour of cheque in banking law

There are numerous reasons when the cheques are dishonoured or why cheques are refused, returned, bounced or dishonoured. Few of the reasons have been mentioned below :

1.When the cheque is overwritten.

2.When the signature is absent or the signature in the cheque does not match with the specimen signature kept by the bank.

3.When the name of the payee is absent or not clearly written.

4.When the amount written in words and figures does not match with each other.

5.When the account number is not mentioned clearly or is altogether absent.

6.When the drawer orders the bank to stop payment on the cheque.

7.When the court of law has given an order to the bank to stop payment on the cheque.

8.When the drawer has closed the account before presenting the cheque.

9.When the fund in the bank account is insufficient to meet the payment of the cheque.

10.When the bank receives the information regarding the death or lunacy or insolvency of the drawer.

11.When any alteration made on the cheque is not proved by the drawer by giving his/her signature.

12.When the date is not mentioned or written incorrectly or the date mentioned is of three months before.

LEGAL RECOURSE

In banking law, when a cheque is dishonoured, the drawee bank immediately issues a ‘Cheque Return Memo’ to the banker of the payee mentioning the reasons for the dishonour of cheque.

The payee’s banker then gives the dishonoured cheque after mentioning the reasons for the dishonour of the cheque along with the memo to the payee. The holder or payee can resubmit the cheque within three months of the date on it, if he believes it will be honoured the second time. 

However, if the cheque issuer fails to make a payment, then the payee has the right to prosecute the drawer legally. 

The payee may legally sue the defaulter/drawer for dishonour of cheque only if the amount mentioned in the cheque is towards discharge of a debt or any other liability of the defaulter towards payee. However, if the cheque was issued as a gift, towards lending a loan or for unlawful purposes, then the drawer cannot be prosecuted in such cases. 

In banking law, the reasons for dishonour of cheque along with the punishment are treated under the Negotiable Instruments Act,1881.

According to Section 138 of the said Act, the dishonour of cheque in banking law is a criminal offence and is punishable by imprisonment up to two years or with monetary penalty or with both. 

 If payee decides to proceed legally, then the drawer should be given a chance of repaying the cheque amount immediately. Such a chance has to be given only in the form of notice in writing.  

The payee has to send the notice to the drawer with 30 days from the date of receiving “Cheque Return Memo” from the bank. The notice should mention that the cheque amount has to be paid to the payee within 15 days from the date of receipt of the notice by the drawer. 

If the cheque issuer fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to file a criminal complaint under Section 138 of the Negotiable Instruments Act.  

However, the complaint should be registered in a magistrate’s court within a month of the expiry of the notice period. It is essential in this case to consult an advocate who is well versed and experienced in this area of practice to proceed further in the specified matter.

Legally, certain conditions have to be fulfilled in order to use the provisions of Section 138.The cheque should have been drawn by the drawer on an account maintained by him. 

The cheque should have been returned or dishonoured because of insufficient funds in the drawer’s account. The cheque is issued towards discharge of a debt or legal liability.  After receiving the notice, if the drawer doesn’t make the payment within 15 days from the day of receiving the notice, then he commits an offence punishable under this section.

Though the provision contained in Sec.143 of the N. I. Act provides that cases u/s.138 are to be tried in summary way, they should be tried as a regular summons cases. If it appears to the Magistrate that nature of case is such that sentence of imprisonment for a term exceeding one year may have to be passed, or that it is for any other reasons undesirable to try the case summarily, Magistrate shall after hearing the parties record and order to that effect and try the case as a regular summons case.

The Ministry of Finance vide its Statement of Reason dated 08.06.2020 has announced various steps to provide relief from the economic stress caused due to the Covid-19 pandemic. One such proposal was the amendment of 19 acts to decriminalize multiple minor economic offences, including the offence of dishonour of cheque case under Section 138 of the Negotiable Instruments Act, 1881.

SECTION 138 of NEGOTIABLE INSTRUMENTS ACT 1881

This Section deals with“Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds in the Accounts”

This Section was enacted and incorporated with a specified object of making a special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned.

The purpose of any proceeding, initiated under this Section is that the cheques should not be used by people as a tool of dishonesty. When a cheque is issued by a person, it must be honoured. In the cheque dishonoured case, the person is given an opportunity to pay the cheque amount by issuance of a notice and if he still does not pay, he must face the criminal trial and consequences along with the other cheque dishonour charges.

Thus, this Section casts a criminal liability punishable with imprisonment which may extend to 2 years or with fine which may extend to twice the amount of the cheque or both. The cheque must be issued to discharge a debt or liability as a whole or in part which is legally enforceable and  is dishonoured by the bank on presentation. The intent of the legislature to insert the punitive provisions were referred to by the Hon’ble Supreme Court of India in the matter of Modi Cements Ltd. Vs. K.K. Nandi³ wherein the court observed that the prime reason for insertion of such provision is to prevent unscrupulous use of cheques which results in dishonour of cheque case and to ensure credibility of the businesses.

Decriminalization of minor offences is one of the thrust areas of the Government. Decriminalization is also considered to be a significant step in the Government of India’s objective of achieving ‘SabkaSaath, SabkaVikas and SabkaVishwas’.

Reasons for Decriminalising the Dishonour of Cheques

In Meters and Instruments Private Limited and Another vs. Kanchan Mehta, the Court has observed the nature of offence under Section 138 which  primarily relates to a civil wrong, and that while criminalising of dishonour of cheques cases has taken place in the year 1988 taking into account the magnitude of economic transactions today.Decriminalisation of dishonour  of cheque charges of a small amount may also be considered, leaving it to be dealt with under civil jurisdiction.

1.Currently, the drawer of the negotiable instrument like cheque still has a fear of facing criminal punishment apart from the penalty of repayment of twice the amount. The proposed change in law will remove such fear. The instrument of cheque will lose its good faith and trust in the market, thereby lowering the number of transactions through cheques.

2. To find a balance so that malafide intent is punished while other less serious offences are compounded.

3. Actions taken for decriminalization of minor offences are expected to go a long way in improving ease of doing business and helping unclog the court system and prisons.

4.Criminalizing procedural lapses and minor non-compliances increases burden on businesses and it is essential that one should re-look at provisions which are merely procedural in nature and which do  not impact national security or public interest at large.

5.Another cheque dishonour charge includes the offence under Section 138, from the criminality point of view, which has been a petty offence due to its nature. Any such criminal complaint, if the aggrieved person requires, can be filed under Section 420 (Cheating) of the Indian Penal Code, 1860.

6.The number of cases that are pending in several courts in India under Section 138 has seriously cast a shadow on the credibility of our trade, commerce and business. Due to the huge backlog of cheque bouncing cases, the trial of other important and rather more serious cases are sidelined, resulting in the litigants and the public losing faith in the judicial system.
Further, its criminality has also been substantially decreased by inserting Section 147 in the Negotiable Instruments Act in 2002, making the offence punishable under Section 138 of the Act compoundable, which means that the parties on reaching a settlement can mutual agree and drop the cheque dishonour charges against the accused.

7. Decriminalising of section 138 NI Act will not only remove the assurance/ deterrent effect given at present but also effect the reliance placed on banking services creating doubt on the creditability of the negotiable instrument, thereby causing a shift towards cash transaction, which in turn would take us a step back from our Prime Minister’s vision of cashless economy.In another cheque dishonour case, the Supreme Court, recently, vide order dated 05.03.2020, in Makwana Mangaldas Tulsidas v. State of Gujarat & Ors opined on decriminalization of dishonour of cheques of smaller amounts and suggested various ways to deal with the over flooded situation of cheque dishonour cases pending for adjudication across the country.