Banking Law

Dishonour of Cheques, Sec. 138 of Negotiable Instruments Act, How to plead cases ?

Negotiable instruments are duly signed document by which a person promises payment of a sum to a specified person or the bearer. As per Section 6 of Negotiable Instruments Act, 1881, “Cheque” is also a  Negotiable Instrument along with  “Bills of Exchange” and “ Promissory Notes“.

If the bank refuses to pay the amount to the payee on production of Cheque, it is called dishonour of cheque. When the cheque is dishonored, the Bank returns the cheque with endorsement/ Memo mentioning the reason thereof. The Cheque can be resubmitted second time for payment believing that the same will be honored.

By the Banking, Public Financial institutions and Negotiable Instruments Laws (Amendment) Act, 1988, The Negotiable Instruments Act, 1881 was amended, and a new Chapter XVII  was incorporated for penalties in case of dishonour of cheque.

As per the provision of Sec. 138 of The Negotiable Instruments Act, if any cheque is drawn by a person against discharge of his legal liabilities, is returns by the bank unpaid due to insufficiency of funds or that it exceeds the amount arranged to be paid from that account, such person shall be deemed to have committed an offence and shall without prejudice to any other provision of this act, be punished with imprisonment for a term which may be extended to two years, or with fine which may be extended to twice the amount of the cheque, or with both.

Section 138 of The Negotiable Instruments Act provides conditions under which a case for dishonour of cheque is maintainable, which is as follows-

a person must have drawn a cheque for payment of money to another for the discharge of any debts or other legal liability (Here Debts or other liabilities means a legally enforceable debts or liability);

that cheque was presented to the bank within the prescribed period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier;

the cheque returned unpaid/un-cleared  by the bank because of insufficient fundsor that it exceeds the amount arranged to be paid from that account;

the payee makes a demand for the payment of cheque amount by giving a Legal notice in writing to the drawer within the period of 30 days from the date when he receives information from the bank, regarding the return of the cheque as unpaid.

The drawer fails to make payment of cheque amount to the payee within 15 days from the date of receipt of the notice.

Complaint must have to be filed within the period of 30 days from the expiry of 15 days’ notice.(Sec. 142 (b) of The Negotiable Instruments Act.

Procedure followed in the matters under Section 138 of the Act is as follows:

  1. A legal notice is to be issued to the drawer within 30 days of dishonor of cheque by registered post with all relevant facts giving time for 15 days to make the payment of cheque amount. If the payment is not made within the time after Legal Notice, the complainant is entitled to file a criminal case under Section 138 of the Act, against the drawer within 30 days, before the concerned court having jurisdiction. Refusal to receive notice shall be assumed as service of notice. Cause of action to file complaint arises once. Hence, where on failure of drawer of cheque to make payment within 15 days of receipt of first notice the complaint was filed beyond the period of one month thereafter, the same is barred by limitation. The contention that the period of one month should be reckoned with reference to the expiry of the period of 15 days after the second notice was issued, not sustainable.
  2. The complainant or his authorized agent have to  appear before the court and provide relevant details for filing the case. If the court is satisfied and finds substance in the complaint, The court will issue summon to the accused to appear before the Court.
  3. If the accused do not appear on the date fixed, the court may issue a bailable warrant. If the accused do not appear at this stage,  a non-bailable warrant may be issued by the court.
  4. On appearance of the drawer/accused, he may furnish a bail bond to ensure his appearance during trial(It will be relevant to mention here that the offence under Section 138 of the Act, is compoundable).If the accused pleads guilty, the case will be fixed by the court for Judgment. Whereas on denial of the charge by the accused, the copy of complaint will be served to him.
  5. The Complainant may present his evidence by way of affidavit and produce all documents including the original in support of his complaint. The accused has right to   cross examine the witness.
  6. The accused will get an opportunity to produce evidence and to submit  documents in support of his case. Here the complainant shall have right  to cross examine the witnesses produced by the accused.
  7. Now the case will be fixed for arguments. After hearing the parties, the Court will pass judgment.
  8. The parties shall have right to file appeal against the Judgment in Higher Court.

Important points-

  1. There are two other causes of dishonour of cheque, first is “Stop Payment” and the other is “Account Closed”. “Account closed” means there was insufficient fund. Whereas “stop Payment” is the circumstances, wherein it may  be possible that there was sufficient amount in the account of the drawer of the cheque and the drawer made “stop Payment” due to other reasonable causes. In these circumstances Bouncing/ dishonour of Cheque does not come under the ambit of Sec. 138 of The Negotiable Instruments  Act. Whereas if there was no sufficient fund in the account of the drawer, the victim can file case under Sec. 138 of The Negotiable Instruments Act.
  2. Settlement of disputes outside the Court:– If the matter is likely to be settled and acceptable to the parties,  the court shall proceed under the provisions of Sec. 89 of Code of Civil Procedure.
  3. Power to stop proceedings in certain cases: the court has power to stop proceedings under Sec. 258 of The Code of Criminal Procedure.
  4. Order to pay compensation:- under provisions of Sec.- 357 of The Code of Criminal Procedure.