Dishonor of cheques

Dishonor of Cheques

Section- 138-142 of Part-VII of the Negotiable Instruments Act, 1881 deals with the concept of Dishonor of Cheques. This concept can be defined in simple terms as follow:

Whenever a cheque is drawn by a person in favor of another person and that cheque is returned by the bank unpaid due to insufficiency of funds in the bank account of the drawer, the cheque is said to be dishonored.

Section-138 of the NI Act clearly states that for the dishonored cheques the drawer shall be liable for conviction if the demand is not met within 15 days of the receipt of the notice but this is without prejudice to any other provision of the Act. If the cheque is paid within the above period or before the complaint is filed the legal liability under section 138 will cease and the recovery of other demand as compensation costs, interests, etc. to a civil proceeding will lie.

Notice in case of dishonors

In case, a cheque has been dishonoured, the information of the same is provided by a notice to the party. It is basically a warning given to the person who is liable for dishonouring the cheque. Such notice is basically given by the holder of the cheque who deposited the same in the bank account but was returned unpaid due to insufficient balance.

Essentials for liability under dishonor

Certain circumstances can be made out from the NI Act, 1881 which establishes the liability of a person when a cheque has been dishonored:

A cheque must have been dishonored

It can be due to many reasons among which the most common being the insufficiency of amount in the account of the drawer of the cheque. Along with cheques, the bills of exchange and the promissory notes can also be dishonored.

The cheque must be presented within the valid time period

The cheque must have been presented to the bank within the validated time i.e. 3 months from the date that is mentioned upon the cheque by the drawer.

A notice must be served to the drawer

The notice must be served in writing within 30 days of the receipt of information from the bank that a particular cheque has been returned unpaid. 

The person against whom the notice has been served is unable to pay the amount of the dishonored cheque.

Under the above-mentioned circumstances, a person can be prosecuted under the Negotiable Instruments Act, 1881.

Section 138-142

Section- 138 deals with the definition and the essentials of dishonoring of a cheque (as discussed earlier).

Section 139 deals with the presumption that until and unless it is proved contrary, it shall be presumed that the cheque received by the holder is of the nature as mentioned in section-138 for the discharge. It basically refers to the fact that in case, a cheque has been dishonored, it will be presumed that it fulfilled all the essentials of Section-138 of the NI Act, 1881.

Section- 140 talks about the defense which cannot be taken in case a cheque is dishonored under section-138. It states that the prosecution cannot take a defense saying that the drawer had no reason to believe that the cheque that was issued by him may be dishonored on presentment.

Further, Section- 141 deals with the offences by companies and rights and liabilities of the same in case a cheque has been dishonored. Here, Company means anybody corporate and includes a firm or other association of individuals.

The Cognizance of this offence is dealt with under Section -142 of the NI Act. It explicitly states that the court will take the cognizance of the offense only when a complaint has been filed for the same and such complaint must be made within the time period of 30 days from the origin of cause of action.

Landmark judgments

S.V. Manzumdar v. Gujarat State Fertilizers Corporation Ltd., AIR 2005 SC 2436In this case, the hon’ble Supreme Court held that taking a defense that at the time of offense, the person liable was not in charge of the company for its conduct does not establishes a valid ground for quashing the complaint.

Sivalingam v. A.V. Chandraiyar, 1996 86 Comp Cas 167In this case, the court held that if a cheque has been drawn on a post-date, then the valid time period of the cheque i.e. 3 months (Earlier 6 months) will be counted from the date that ids mentioned on the cheque for the purpose of Section-138.

M/S Chahal Engineering and Construction Ltd. V. M/S Verma Plywood Co., 1994 1 Crimes 845 (P&H)The court in this case explicitly held that once a cause of action has arisen, representing the cheque again in order to refresh the cause of action will be of no use and the limitation will continue.

Frequently asked questions

What is the procedure to establish the jurisdiction in case of offences under section-138 of the NI Act, 1881?

Certain things have to be kept in mind by the judicial officers to establish the jurisdiction which includes:

  • The place where the cheque was presented for encashing
  • The place where the cheque was drawn
  • The place where the notice was issued in writing and given to the drawer of the cheque.

What are the punishments under the NI Act for the offence of dishonor of the cheque?

If a person is found guilty of an offence under Section- 138 of the NI Act, he/she can be imprisoned for a period extending to 2 years. Also, penalty of up to twice the amount of the cheque can be imposed upon the accused.

What are the objects of Notice of a Dishonor?

A notice is sent to a party in order to make sure that the accused person is aware of the liabilities which arise against him. In case, the notice is not served within the prescribed time period, the parties liable are discharged. Therefore, it is essential to serve a notice at first hand as soon as a cheque is dishonored.

What is meant by Re-exchange?

It is a special circumstance which comes under the compensation scheme of the dishonored cheques. Whenever a cheque is issued in a different country which is payable in another country and such instrument, if dishonored, the holder of the same is entitled to receive compensation against the same on the basis of the current rate of exchange between the two countries on the date of dishonor. (Section-117)

Edited by Shikhar Shrivastava

Approved & Published – Sakshi Raje 

Reference

 

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My name is Aniket Vashisth and I am a student pursuing Bachelor's in Law from Indraprastha University (Maharaja Agrasen Institute of Management Studies). Being a student of law, I have a keen interest in Researching and exploring new ideas from the existing laws and establish a reasonable interpretation. Currently, I am in 3rd year of my 5-year integrated BALLB Program. My future target is to crack Delhi Judicial Services and become an important part of the Indian legal system in order to inculcate my ideas and serve the Nation. I am an active participant in various National Moot Court Competitions organized across the Country every year.