Dishonour of Cheque: What a Litigant Needs to Know

Dishonour of Cheque: What a Litigant Needs to Know

Date : 30 Jun, 2021

Post By Advocate Utkarsha Kohli Agarwal

The following is brief overview of what a litigant should keep in mind at the time of instituting a complaint against a dishonoured cheque. It is not an academic discussion or debate and has been written to simplify the law, for its better understanding.  

What is a cheque? 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 and it includes the electronic image of a truncated cheque and a cheque in the electronic form. In simple terms, a cheque is an instrument in writing, signed by the maker, directing a certain person, on an unconditional order, to pay a certain sum of money only to a specific person.

Who issues the cheque? Section 7 of the Negotiable Instruments Act, 1881, defines the term “Drawer”. The individual/ organization issuing the cheque is known as the ‘Drawer’. As the term suggests, said individual/organisation is the one “drawing/taking out the money” from his/her/its bank account and giving it to another person/organisation.  

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Who gets the consideration/promised money? Section 7 of the Negotiable Instruments Act, 1881, also defines the term “Drawee”. The individual/ organization, receiving the money is the “Drawee”. It is essential to point out that a person/organisation becomes a drawee only when a cheque is presented. 

What is drawing a cheque? A cheque is always drawn on a bank. When the Drawer draws/signs a cheque to a specific individual/ organisation (drawee), with the direction to the drawer’s bank to pay a certain amount to the drawee. 

What are the essential characteristics of a valid cheque? A cheque should be duly signed and given in writing; should be drawn on a bank; should have a valid date; name of the drawee; should not have over-writing on it; should not be written in pencil; and should be crossed when it is for the remittance to directly be transferred to the drawee.

What is dishonour of a cheque? (known as “bouncing” of a cheque in common parlance)

Section 138 of the Negotiable Instruments Act, 1881, defines dishonour of a cheque. When a cheque is issued by a drawer, drawn on a bank account having insufficient funds or the absence of an arrangement to make the payment to the drawee, it shall be considered “dishonoured”. As per Indian law, when a cheque dishonours, it is deemed to create a criminal liability for the Drawer, as it is a penal offence, punishable with a term which may be extend up to two (2) years, or with fine which may extend to twice (2x) the amount of the cheque, or with both.

For a cheque to dishonour in the aforementioned circumstances it is necessary:

  1. that the cheque was presented at the bank by the Drawee within 6 months from the date of its issuance; 

  2. a Legal Notice of demand is sent by the Drawee to the drawer within 30 days of the receipt of information by him/her from the bank regarding the return of the cheque as unpaid; 

  3. and the drawer failing to make good on the promise of paying the due consideration to the drawee, within 15 days of receipt of the Legal Notice of demand sent by the Drawee.

What happens once a cheque is deemed dishonoured ?

Penal Remedy/ Criminal case: If the Drawer fails to pay the Drawee, after the expiry of 15 days from receipt of the Legal Notice of demand, the Drawee can file a Complaint case under Section 142 of the Negotiable Instruments Act, 1881, before a Magistrate within one month/30 days, from the expiry of the grace period. After examining the relevant bank documents, cheque, bank receipt specifying dishonour, a written agreement (if any), etc., the Magistrate takes cognizance of the offence and issues summons to the Drawer, following the procedure laid down under the Code of Criminal Procedure, 1973.

Civil Remedy/Civil case: The drawee may also file a civil case as a Suit for Recovery, as per the appropriate pecuniary and territorial jurisdiction, before a Civil Judge/District Judge, seeking recovery of the principal amount of the cheque and any interest due on the same. As per Limitation Act, 1963, a Recovery Suit may be filed within 3 years from the date the cause of action arises.

The two remedies can co-exist, as very often cheque amounts are large and the interest accruable against the same can be very high. Therefore, the legal system in India permits a civil case to subsist alongside criminal proceedings, to safeguard the monetary interests of the Drawee-Plaintiff. 

Jurisdiction (Section 142 of NI Act): The territorial jurisdiction for filing a complaint before the Magistrate will be as per the location of the Drawee’s bank account if the cheque is delivered through an account. 

In case, the Drawee presents the cheque otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated. 

What happens when a cheque issued by a Company is dishonoured?

As per Section 141 of the Negotiable Instruments Act, 1881, “a Company” can be held liable for the offence of dishonour of a cheque, whereby every person, who at the time of signing the cheque was involved in the executive decision for the amount which is being disseminated by the said Cheque. However, if an employee/Director can prove that he/she did not have any involvement, such a person shall be excluded from the liability of “dishonour of a cheque”. The term Company, for the purpose of this Section, included a firm/ any association of individuals.   

As a general rule, it is important to understand that there is no vicarious liability in criminal law i.e. a person must have committed a crime out of his/her own intention and action, not out of the intention and action of another. The Hon’ble Supreme Court of India in the landmark judgment of SMS Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. (2007)4SCC70  has explained this principle by analyzing the intention and contents of Section 141 of the Negotiable Instruments Act, 1881, laying down that,

“A liability under Section 141 of the Act is sought to be fastened vicariously on a person connected with a company, the principal accused being the company itself. It is a departure from the rule in criminal law against vicarious liability. A clear case should be spelled out in the complaint against the person sought to be made liable. Section 141 of the Act contains the requirements for making a person liable under the said provision.”

This judgment has been subsequently upheld in several cases.

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What happens when the bounced cheque is from a Joint Account?

When a dishonoured cheque is issued by a person holding a joint account, drawn on said account, the co-holder of the account will only be liable to the extent that the obligation of paying the said amount was jointly held. This principle has been explained in detail by the Hon’ble Supreme Court of India in the case of Aparna A. Shah v. M/s. Sheth Developers P. Ltd.  & Anr. AIR2013SC3210  wherein context of a joint account held by a husband and wife, it has been held that:

“In the light of the above discussion, we hold that under  Section 138 of the Act, it is only the drawer of the cheque who can be prosecuted. In the case on hand, admittedly, the appellant is not a drawer of the cheque and she has not signed the same. A copy of the cheque was brought to our notice, though it contains name of the appellant and her husband, the fact remains that her husband alone put his signature. In addition to the same, a bare reading of the complaint as also the affidavit of examination-in- chief of the complainant and a bare look at the cheque would show that the appellant has not signed the cheque.”

In a recent decision given on 8 March, 2021, in the case of Alka Khandu Avhad vs Amar Syamprasad Mishra AIR2021SC1616 the Hon’ble Supreme Court of India held that, a person who is the signatory to the cheque and the cheque is drawn by that person on an account maintained by him and the cheque has been issued for the discharge, in whole or in part, of any debt or other liability and the said cheque has been returned by the bank unpaid, such person can be said to have committed an offence.

Conclusion: To summarise dishonour of a cheque, the following points have been enumerated: 

  1. A person must have drawn a cheque on an account maintained by him in a bank, for payment of a certain amount of money to another person from that account;

  2. The cheque should have been issued for the discharge, in whole or in part, of any debt or other liability;

  3. That cheque has been presented to the bank within a period of 3 months from the date on which it is drawn or within the period of its validity whichever is earlier;

  4. That cheque is returned by the bank unpaid, either because the amount of money in the account is insufficient to honour the cheque; or that it exceeds the amount arranged to be paid from that account by an agreement made between the Drawer and the bank;

  5. The drawee or the holder in due course of the cheque 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 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;

  6. The drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice.

  7. Complaint to be filed within the appropriate jurisdiction of the Drawee’s bank;

  8. In the case of joint liability, the obligation must be proven for the offence to extend beyond the signatories.

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