Dishonour of Cheques

Introduction:

Even as rumors regarding the government withdrawing the bank cheque book facility do the rounds time and again, cheques continue to remain intrinsic to the payments landscape in the Indian context. An RBI Report reveals that the usage of cheques showed a slow decline in the years 2016-2017, however, following demonetization in November, 2016 the usage increased. As cheques continue being integral to the country’s payment system, it is pertinent to have a preliminary understanding and a basic know how, should a cheque go bad. This article provides an insight into dishonor of cheques, the remedies available and the penalties against offenders.

What are Cheques?

Black’s Law Dictionary 9th Edition defines a cheque as:

“…draft document signed by the maker or drawer, drawn on a bank, payable on demand and unlimited in negotiability…”

Further, Section 6 of the Negotiable Instruments Act,1881 defines “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 Bank of Baroda Ltd v Punjab National Bank Ltd, AIR 1944 PC 58, the Privy Council noted that although cheques resembled bills of exchange in many ways, “…In the ordinary course it is never accepted, it is not intended for circulation, it is given for immediate payment, it is not entitled to the days of grace.”

Who are parties to a Cheque?

Below mentioned are three basic terms one is bound to come across while dealing in cheques:

1. Drawer

Section 7 of the Act defines ‘drawer’ as the maker of a bill of exchange or cheque.

2. Drawee

Drawee is the person who is directed to pay the amount specified on the cheque. In this case the drawee is always a Bank.

3. Payee

A person named in the instrument, to whom or to whose order the money is directed to be paid, is called the ‘payee’.  

Is cheque money?

According to RBI, cheque is not cash as it does not assume the finality of payments. Payment instruments like demand drafts guarantee the sum of money payable to the payee, cheques, on the other hand are instructions to the bank to pay the specified amount from the drawer’s account. This is subject to sufficient funds in the drawer’s bank account. They are tokens that are used as money, also called representative or fiduciary money, owing to the trust that exists between the payer and the payee. In India, cheques are not declared legal tender by the government, that is, people are not required by law to accept is as a mode of payment.

What are the commonly used types of cheques?

Based on who the issuer and drawee are, cheques can be of the following types:

• Bearer cheque:

Also known as open cheque or an uncrossed cheque. This cheque is payable to the presenter over the counter by the drawee bank. This cheque can be transferred by mere delivery. It is negotiable from the date of issue up to three months.

• Order cheque:

It is a cheque where only the person or party in whose name the cheque has been drawn can withdraw the cash. In such cheques, the words ‘or bearer’ need to be struck out and the person to whom the cheque is written has to be specified.

• Crossed cheque:

A crossed cheque means that it cannot be transferred to anyone else. Two parallel lines need to be drawn on the top left corner of the cheque.

• Open cheque:

An open cheque does not have crossed lines; hence it is often called an uncrossed cheque. It can be encashed at either the payer’s bank or the payee’s bank.

• Postdated cheque:

It is a cheque written by the drawer for a date in the future. The date that appears on the cheque is a date after the cheque was written.

• Stale cheque:

A cheque when presented post the lapsing of a period of six months from the date on which it is drawn, it becomes stale.

• Self cheque:

This cheque is issued by a drawer to his or herself. It is drawn when the drawer wishes to withdraw money from the bank, in cash, for his own usage.

• Banker’s cheque:

This cheque is payable by the bank itself. A bank issues a banker’s cheque on behalf of an account holder to issue payment to another person in the same city.

What are Bad cheques and reasons for a cheque to be dishonored?

A negotiable instrument may be said to be dishonored in two ways:

1. By non-acceptance

2. By non-payment

A dishonour by non-acceptance could only be of a bill of exchange but a dishonor by owing to non-payment may be of any negotiable instrument including a bill of exchange. A cheque is said to be dishonored when the bank refuses to pay the amount to the payee. A cheque maybe dishonored for various reasons, some of which have been enumerated below:

• Insufficiency of Funds

• Funds available but only for other purposes

• Improper Presentation

• Insolvency

• Lunacy or Insanity

• Court’s order prohibiting payment among others.

What are the remedies and penalties available under Negotiable Instruments Act, 1881?

Sections 138 to Section 142 under Chapter XVII of the Negotiable Instruments Act, 1881 provide for penalties in the event of dishonor of cheques owing to insufficient funds in the accounts. The Hon’ble Supreme Court of India in Modi Cements Case noted that these sections promote the efficacy of banking operations and to ensure credibility in transacting business through cheques. Prior to the penalization of such instances, the aggrieved was to resort to lengthy proceedings by way of civil suits. Post 1988, the aggrieved can also initiate criminal proceedings in accordance with Section 138 of the NI Act.

Requisites to constitute an offence under Section 138:

-  The drawer must have presented the cheque to the drawee in discharge of a legal liability or a legally enforceable debt

-  The cheque should have been presented to the bank by the holder within 3 months from its date or within the period mentioned on the cheque, whichever is earlier

-  Within a period of 30 days from the day on which the bank has returned the cheque as unpaid, the payee or the holder, in due course of the cheque, must make a demand for the payment of the said amount by giving a notice in writing to the drawer of the cheque

-  The drawer should have failed to make a payment of the said amount to the payee or the holder in due course within a span of 15 days from the date of receipt of such a demand  

- The holder must file a criminal complaint in writing within 1 month from the period of expiry of fifteen days, as mentioned herein above.

Penalties:

Section 138 prescribes a sentence of up to two years or with fine which may extend to twice the amount of the cheque, or with both.

What alternate remedies are available to an aggrieved?

Although under Section 138 the bouncing of cheque is a criminal offence, a civil may be filed for recovery of the money.

Civil Action as Summary Suit:

Under Order XXXVII of the Code of Civil Procedure, 1908 a summary suit may  be filed for recovery of the amount of money due to the aggrieved. In Meters and Instruments Pvt Ltd v Kanchan, the Hon’ble Supreme Court laid down some guidelines regarding applicability of Section 143 of the NI Act. The court held that the offence under Section 138 of the Act is primarily of civil nature. The court on being satisfied that the complainant has been duly compensated, at its discretion close the proceedings and discharge the accused.

Cheating under Section 420 of the Indian Penal Code,1860:

Initiation of proceedings under sections 415 to 420 of the Indian Penal Code, 1860 against the drawer is one of the most sought-after remedies. The aggrieved must seek this remedy within three years from the date of the issue of cheque. For a remedy under IPC, 1860 mere dishonor of cheque is not sufficient to establish the offence, but the prosecution must also establish “mens rea” on the part of the issuer of the cheque from the inception of the issuance of the cheque.

Recent Developments:

In April 2021, a five judge Constitution Bench led by then Chief Justice S.A. Bobde rolled out a number of directions to tackle over 35 Lakh cheque bounce cases pending before various courts across the nation. It was recommended that the NI Act be amended to provide for one trial against a person for multiple offences under Section 138 committed within a span of 12 months.

Since 1st September, 2018, the Central Government has incorporated Sections 143-A and 148 vide Negotiable Instruments (Amendment) Act, 2018. Section 143-A empowers any court trying an offence for dishonor of cheque, to direct the issuer of the cheque to pay interim compensation to the complainant. The amount of interim compensation cannot exceed 20 percent of the amount for which the cheque was drawn. A period of 60 days from the date of the order passed by the court has been stipulated. Further, Section 148 of the Amended Act states in the event the drawer of the cheque is convicted and he proceeds to appeal against the conviction, the appellant court is vested with the power to order the drawer of the cheque to deposit an amount which must be a minimum of 20% of the fine or compensation awarded in the appeal preferred against his/her conviction. In the instance of the acquittal of the appellant, the court is also vested with the power to direct the complainant to refund such amount to the appellant with interest. This amendment is to have a retrospective effect (applicable to complaints filed prior to 1st September, 2018).

The Negotiable Instruments (Amendment) Act, 2015 which came into effect on 15th June, 2015, modified Section 6(a) of the Principal Act to include ‘electronic signature’ and ‘computer resource’. Further, Section 142 was altered which now includes sub section (2). Section 142 (2) specifies the court under whose local jurisdiction matters of section 138 shall be inquired into, in instances where the cheque is delivered for collection through an account and where the cheque is presented for payment by the payee or holder in due course. The 2015 Amendment also introduced Section 142-A which pertains to provisos regarding validation for transfer of pending cases.

How serious is a cheque bounce offence?

Is cheque bounce a crime?

Yes, in the instance that a cheque is dishonoured due to insufficient funds the same amounts to a criminal offence. When a criminal complaint is filed the issuer of such a cheque can be imprisoned.

As has been elucidated in this post, an instance of cheque being dishonoured due to insufficiency of funds attracts penalties. Further, dishonor of cheque causes financial loss, injury and inconvenience to the payee.

Penalty imposed by Bank:

Penalties maybe imposed by banks by way of non-sufficient fee in case of a dishonour of cheque due to insufficient funds in the account. Cheque bounce penalty charges vary from one bank to another.

Impact on CIBIL score:

A dishonored cheque can have an adverse effect on credit score. The impact of a bounced cheque may only be indirect considering CIBIL scores are concerned with timely payments. However, when your cheque bounces and you are unable to pay within the stipulated period not only does your CIBIL score plunge but you may also be prosecuted, as elaborated above. The offence of cheque bounce is graver than it may appear. One must seek appropriate legal guidance in such matters at the earliest to resolve issues arising out of dishonor of cheque owing to insufficiency of funds.