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Overview: Dishonour of cheques in India as per Negotiable Instruments Act 1881

Published on : 16 Nov 2019

Dishonour of cheques in India as per Negotiable Instruments Act 1881


The whole concept of using cheques, even at this day and age where other progressive modes of transactions are available, is to keep proper record and use it as proof of payment. There are more security and surety amongst individuals using cheques in comparison to those using other modes. Needless to say, cheque giving and receiving is routine of the society we will in. However, there are some implications surrounding the issuing, bouncing and clearing of cheques. This article is designed to discuss in depth the dishonour of cheques in India with reference to section 138 of the Negotiable Instruments Act.

Negotiable Instruments Act 1881

Economic globalization has brought India a significant boost. When commerce and exchange rapidly increased, the use of the cheque often expanded. This lead to concepts such as post-dated cheques which again brought about the need to protect people from potential abuse. The Negotiable Instruments Act 1881 (the Act) was passed with this objective which has proved to encourage the efficiency of banking activities and to guarantee that business transactions are legitimate by checks.

Objective of the Act

The Act discusses negotiable instruments such as promissory notes, trade bills, certificates, etc. The object of Chapter XVII, comprising sections 138 to 142, was to instil confidence in the effectiveness of banking operations and to give credibility to negotiable instruments used in business transactions. If a party issues a cheque as a deferred payment option and the payee acknowledges the same confidence that he will collect his fee on the due date, then he should not suffer as a result of failure to pay.

Compliance with Section 138 of the Act

Section 138 imposes a criminal liability punishable by imprisonment or penalty or both on an individual who issues a cheque for the discharge of a debt or liability in its entirety (or in part), and that cheque is dishonoured upon presentation. Section 138 has been imposed to prosecute unscrupulous cheque drawers who, while they wish to discharge their liability by issuing a check, have no intention of discharging their liability. In contrast to civil liability, the said clause seeks to impose criminal liability on such malice. However, in order to prevent unfair prosecution of an innocent man with a dishonoured cheque and to give him the opportunity to make amendments, the prosecution pursuant to Section 138 of the Act was rendered subject to certain provisions. The requirements needed to comply with Section 138 are as follows:

  • an individual must have drawn a check for payment of money to another party for discharge of any debt or other liability;
  • the check has been submitted to the bank within three months;
  • that the bank returns the check unpaid, either because the funds are inadequate or because it exceeds the sum agreed for payment;
  • The register fails to pay the payee within 15 days of receiving the notice.

Certain actions set out in this provision are distinct from the components of the crime enacted by the clause. However, action against the dishonour of a cheque under section 138 by any tribunal is forbidden so long as the claimant has no cause of action to lodge a complaint under clause (c) Section 142 as held in Dashrath Rupsingh Rathod v. Maharashtra State.

Grounds of Cheque Dishonour

Insufficient Funds

Section 138 explains the ground for insufficient funds in the check drawer's account by stating that if: -

  1. the amount of money in the drawer's account on which the cheque is paid is insufficient to satisfy the check; or
  2. the value of the cheque equals the sum that the bank may charge under an agreement between the bank and the drawee.

Then such a situation can be reviewed and prosecuted according to section 138 of the Act. If there are insufficient funds available, then it will amount to grounds of dishonouring the cheque as seen in Lily Hire Purchase Ltd. Vs. Darshan Lal.

Closed Account

It was held by the Hon’ble Supreme Court of India in- Neps Micon Ltd. And Others Vs.  Magma Leasing LTD. It is a crime under section 138 of the Act – Account closing would be an eventuality after the full amount in the credit has been deducted – this indicates that there was no sum in the ' other fund ' credit on the specific date when the request is made to uphold the same number.

Stopping payment instructions

As held in Mahendr S. Dadia vs. State Of Maharashtra I (1999) BANKING CASES (BC) 133 (17/03/1998) that once the receipt is drawn and given to the payee and the payee has sent the request, the orders to ' stop paying ' would lead to the dishonour of the cheque.

Clearing member requirement

In order to attract the provisions of section 138 of the Act, the cheque should be presented to the bank on which it is drawn-If the check is not presented to the bank on which it is drawn, then sec 138 will not be attracted. If the bank on which the test is based is not a Reserve Bank of India clearing participant, section 138 would not invite unpaid return of the check. This principle was laid down in Chairman, Jawahar Cooperative Urban Bank Ltd. And Others  Vs.  Ramanjaneya Enterprises, Hyd. And Another.

Other grounds

Courts have repeatedly held that manifesting the drawer's dishonourable intention resulting in cheque dishonour would result in prosecution under section 138 Negotiable Instruments Act regardless of the actual ground of dishonour.

How do we proceed if a cheque is dishonoured?

The procedure followed in respect of Section 138 of the Act is as follows: -

Firstly, within 15 days of cheque dishonour, a legal notice (by registered post with all relevant facts) shall be issued to the drawer. The drawer will be given 15 days to make the payment if the payment is made, then the matter will be served, and the matter will be settled. On the other hand, if the payment is not made, the complainant must file a criminal case proceeding under Section 138 of the Act against the drawer within 30 days of the 15-day expiry date specified in the notice, with the court in question within the jurisdiction.

With regards to the latter, the defendant and his authorized agent must testify in the witness box and provide relevant details for the complaint to be brought. If the judge is pleased and considers validity in the complaint, the defendant will be given summons to appear before the jury. If the defendant refrains from appearing after being served with the subpoena, then the court may issue a bailable warrant. Even after this, if he does not appear, a non-bailable warrant will be given by the cabinet. He can supply a bail bond on the presence of the drawer or accused to guarantee his compliance during the case. After which the accused's complaint is registered. The court must submit the matter of sentencing in which he pleads guilty. If the defendant refuses the allegations, then the petition version will be delivered.

In support of his case, the Defendant can submit his proof by affidavit and produce all documentation, including the original. The defendant and his lawyer must cross-examine the claimant. There will be an incentive for the defendant to lead his evidence. The defendant will also be given the opportunity to show his records and testimony in favour of his claim. The plaintiff must cross-examine the suspect and his evidence.

The final stage of the trial is that of the proceedings after which the jury must issue a verdict. If the defendant is acquitted, then the case concludes, but the plaintiff may continue to further appeal in the High Court, likewise, if the accused is convicted, he may appeal to the Court of Sessions. It should be remembered that the crime is made compoundable under Section 138 of the Act.

Recent case law with regards to section 138

Dayawati v. Yogesh Kumar Gosain

In 2017, the Delhi High Court in Dayawati v. Yogesh Kumar Gosain took into account the issue of whether arbitration can resolve an offence under Section 138, which is a criminal case. The Court held that although there was no clear legal clause requiring the criminal court to refer the claimant and the defendant to alternate conflict resolution structures, the Code of Criminal Procedure ("Cr. P.C.") requires or accepts arbitration without the mechanism through which it can be achieved being stipulated or prohibited.

There is, therefore, no restriction to the use of alternate conflict procedures, like negotiation, consultation, conciliation (recognized in compliance with Section 89 of the Civil Procedure Code, 19083) for the purposes of settling disputes that are the result of offences protected by Section 320 of the Cr.P.C. It also claimed that the prosecutions pursuant to Section 138 of the Act are different from other criminal cases and are in essence in the form of a civil error granted with criminal overtones.


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