Dishonor of Cheque: Scope, Justifiability And Punishment

This article talks about the offence of Dishonor of cheque and the civil as well as criminal liabilities attached with it. In order to provide a detailed analysis of the same, the scope and justifiability of the offence, along with its punishments, have been discussed.

Introduction

A negotiable instrument is used to effectively negotiate in an arrangement between the parties involved. It is nothing but a document that has been given a solemn character and which carries with it a representation to the holder. It is a promise which is made in the form of a document which will be honored for payment. A cheque is one such type of negotiable instrument. Mainly three parties exist in this type of arrangement.

  1. Drawer – a person who signs on the cheque. He/she is also known as the depositor or cheque marker.
  2. Drawee – a party on whom the cheque is drawn. The drawee is the bank.
  3. Payee – the party who presents the cheque for payment.

This concept has emerged from the practice prevalent between merchants. In 1659, Britain’s first cheque was issued. This practice of issuing documents with a promise to pay in future or present dates remained in vogue for many more centuries including the mid-16th century and late 17th century in Britain and other parts of the continent. In India, it was in 1881 when the Negotiable Instruments Act (NI Act) was enacted that formalized the usage and characteristics of instruments like the cheque, the bill of exchange, and promissory note. The Negotiable Instruments Act provides a legal framework for non-cash paper payment instruments in India.

Dishonour of Cheque as an Offence

The dishonor of cheque is made punishable under the Negotiable Instruments Act, 1881[1] which provides civil as well as criminal remedies to the person in whose favour it is issued. A payee, who has received a cheque in consideration of the duties rendered or other liabilities, will suffer monetarily if the very instrument that promises to honour such payment in form of the cheque is dishonoured. The law makes certain provisions which make sure that the payee in that very situation is not left without a remedy in terms of money that he is legally entitled to and mental agony that he has been put to when the cheque was dishonoured. He had to take certain steps that include sending valid demand notice to the drawer or moving the court in case of the drawer’s failure to honour the cheque after such notice. With this view, the dishonour of certain cheques has been made an offence punishable with imprisonment up to two years or with a monetary penalty or with both. To bring this into effect, an amendment to the Negotiable Instruments Act by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 was made. A new Chapter VII that consisted of Sections 138 to 147 was inserted in the Negotiable Instruments Act. The Negotiable Instruments (Amendment) Act, 2002 has further added Sections 143 to 147 to the same Chapter.

Justifiability

Sections 138 to 142 were inserted into the Negotiable Instruments Act, 1881 with a view to promote the efficiency of banking operations and to ensure credibility in transacting business through cheques. This view is justified to the extent that somebody has to take responsibility for the very document on which a person is relying and who has already performed his duty or obligation and now awaits payment. If the person who has issued the cheque and authorized it by putting his signatures on the solemn document called a cheque, is not honouring it then the law must make good for the loss of the aggrieved. These provisions under sections 138 to 142 of the Negotiable Instruments Act, 1881 are basically intended to discourage those who do not honour their commitments by making a payment through cheques and who ultimately try to escape their part of performance after making other party perform theirs.[2] The provisions provided under the NI Act, though seem very strict, are often construed liberally by the courts so that the provisions would not defeat the very purpose for which they are enacted. The purpose of the act is to enhance the acceptability of cheques by the people and it can only be done when they feel secure about the commitment of the drawer of cheques or in case of dishonour, they know they have remedies to compel the drawer to honour its commitment. The provisions regarding dishonour of cheque are made in such a way that they serve the purpose of protecting an innocent cheque holder and also making sure that the faith in this mode of payment remains. Whenever a cheque is dishonoured, it is the holder of such cheque that suffers from the acts of the drawer. In order to make sure that one does not suffer from the acts of another, law makes sure that whenever a cheque is dishonoured, it shall be presumed that the holder had received it in discharge of any legally enforceable debt or liability.[3] This presumption is a presumption of law and therefore ought to be raised in every case, although this presumption is open to rebuttal by cogent evidence. A mere plausible explanation that there was an absence of consideration or that the cheque was not issued for discharge is not enough, and sufficient proof, for such an explanation is necessary.[4]

https://lawaddiction.com/dna-profiling-and-right-to-privacy/

Dishonor is not justified

One of the important points to be noted is that the language used in Section 138 is restrictive, and it takes into its ambit only the cases of insufficiency of funds and other related matters. Other technical matters, including irregularity of endorsement or difference in amounts stated in words and figures may not attract the provision. In order to make the provision more effective, the Apex Court has held that if certain acts are done or omitted to be done with the purpose of preventing the honour of the cheque issued by the drawer, will fall within the ambit of Section 138 of the Negotiable Instruments Act, 1881, no matter whatever the reason may be.[5] These acts are:

  1. Stop Payment instructions by the drawer to the bank after issuance of the cheque will attract Section 138, no matter if the accounts were insufficient or not.[6]
  2. Closing of account after issuance of cheque will attract the presumption that the account is closed with mala fide intention and was lacking funds to honour the cheque.[7]
  3. Non-applicable funds where the funds are not applicable to the payment of cheque, are in themselves a sufficient ground to attract Section 138 of the NI Act, no matter who holds the rights of the money of applicable funds.
  4. When the cheque is returned with the instructions “Refer to Drawer,” it will be considered as an offence under Section 138. It automatically raises the assumption that funds are not sufficient to honour the cheque.[8]

Dishonor is Justified

Courts have been very liberal in interpreting the provisions under the Negotiable Instruments Act, 1881. The reason behind doing so is that the purpose of the act is to maintain the solemn character assigned to the document, which helps in smooth and effective transactions. Courts have provided punishments in certain cases where they abstain even from considering the reasons behind such dishonour. A person who innocently performs his task and accepts a cheque in consideration for his duties or liabilities should not be left without a remedy if the issuer of the cheque decides not to honour his commitments. If this is allowed then people will hesitate from accepting the cheques. Legislators not only wanted to provide remedies to the cheque holder who is harassed due to the acts of another, but also they wanted to make sure that the person who has caused great hardship to the cheque holder should be punished for his acts. The legal intent of the legislator behind doing so is evident from the fact that the person issuing the dishonoured cheque can be punished with imprisonment up to two years or with a fine, which may extend to twice the amount of the cheque or with both. Nevertheless, courts do take into consideration certain acts which cannot be considered as punishable if the cheque is dishonoured because such acts are based on basic common sense and technical reasons, which cannot be made punishable unless it will defeat the very object behind the enactments of the provisions under the act. These acts are:

  1. Whenever a cheque is returned with an endorsement ‘not a clearing member’, it means that the cheque is not presented to the bank on which it is drawn and cannot be held to attract Section 138. Similarly, if a bank is not a clearing member of RBI then its return will also not attract Section 138 due to obvious reasons that a drawer has not purposely stopped its payment.[9]
  2. When the cheque is presented to a branch of the bank where the customer does not hold an account will also not attract Section 138 since here also the drawer is not at fault.
  3. When for valid reasons, the banker believes that the cheque suffers from illegality, he can refuse the payment.
  4. Banker is also justified in refusing the payment where the drawer dies or is declared insolvent or insane.

Conclusion

The legislative intent behind the enactment of the Negotiable Instruments Act, 1881 was to inculcate faith of people in Negotiable instruments which was a necessity for effective commercial operations. It also inculcates faith regarding the credibility of banking transactions. It was important for the people to feel secure about this method of transaction and to make them feel secure, accountability was required to be fixed on someone. Nobody can be expected to accept a piece of paper in return for their hard work or in the discharge of some debt or liability if they do not know the remedies in case the cheque is not honoured. Legislative intent was to fix this accountability on the person who issues the cheque to the holder who receives it in discharge of legally enforceable debt and other liability. This accountability can be fixed by the holder on the drawer in the form of written demand wherein he can ask the drawer for the payment of the amount of money represented by cheque and if the drawer fails to make payment within 15 days of receipt of demand, then the holder can move the court for the same. Thus, the holder of the cheque has been provided with remedies under the Negotiable Instruments Act, 1881 in case the cheque is dishonoured.

REFERENCES

[1] Negotiable Instruments Act, 1881 (Act 26 of 1881).

[2] Goaplast (P) Ltd. v. Chico Ursula D’souza, AIR 2003 SC 2035.

[3] The Negotiable Instruments Act, 1881(Act 26 of 1881), s. 138.

[4] Hiten P. Dalal v. Bratindranath Banerjee, AIR 2001 SC 3897.

[5] Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375.

[6] Rangappa v. Sri Mohan, AIR 2010 SC 1898.

[7] NEPC Micon Ltd. v. Magma Leasing Ltd. (1999) 4 SCC 253.

[8] Lily Hire Purchase Ltd. v. Darshan Lal (1997) 89.

[9] Chairman, Jawahar Cooperative Urban Bank Ltd. v. Ramanjaneya Enterprises, Hyd. 2005 (5) CRJ 059.


BY DRISHTI YADAV | HIMACHAL PRADESH NATIONAL LAW UNIVERSITY SHIMLA

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top