PENALTIES IN CASE OF DISHONOUR OF CHEQUE

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PENALTIES IN CASE OF DISHONOUR OF CHEQUE

SYNOPSIS

  1. Introduction
  2. Cheque under Negotiable Instrument  Act , 1881
  3. Types of cheque
  4. Dishonour of cheque meaning
  5. Reasons of dishonour of cheque
  6. Dishonour of cheque in case of insufficient funds in account as an offence
  7. Penalty and procedure
  8. Case laws
  9. Conclusion

 

1. Introduction

Negotiable instruments play a vital role in today’s business world. Instruments like cheques, bank drafts, bill of exchange etc. are easy way of trade and commerce transactions.  Specifically the use of cheque, has given a new dimension to the business and corporate world. Cheque being a piece of paper is easy to carry and move anywhere thus people prefer it than carrying currency.

Because of the wide acceptance of cheques worldwide, it has become important to protect the credibility of this instrument and the protection of hard earned money as well faith in the cheque system. Hence the usage of cheques has been regulated in India through Negotiable Instrument Act, 1881.Under which dishonour of cheque is a punishable offence.

2. Cheque under Negotiable Instrument Act, 1881

Section 6 of Negotiable Instrument Act defines Cheque which says that a cheque, which is a bill of exchange, it carries a mandate of the drawer to his banker to pay a sum mentioned on the cheque to the bearer or to the person whose name is mentioned on the same, on demand or when the same is presented to the banker.

3. Types of Cheque

There are many types of cheques-

·       Bearer cheque-

In such case, as the name shows, the person who has the cheque and the cheque is signed can get the amount mentioned on the cheque by presenting to the bank. Such type of cheques, if misplaced can cause loss to the drawer.

·       Crossed Cheque

The bearer cheque becomes the crossed cheque if at the top on the left hand of cheque two parallel lines are drawn. After the lines cheque becomes safer as the person whose name is mentioned can only get the amount from bank.

·       Self Cheque

As the name suggests this kind of cheque has the name of the drawer only. It is used to get cash in physical form from the bank.

·       Post Dated Cheque

These are the cheques on which future date is written, such cheques are used for future payment in business within the permissible validity period of cheque i.e. three months.

·       Banker’s Cheque

Such kind of cheques is issued by banks themselves to guarantee payments.

·       Traveler’s Cheque

Such cheques are specifically used while traveling. These are safe to carry than carrying currency. While traveling across the border also such cheques can be used for withdrawing money as and when required.

4. Dishonour of cheque meaning

When the cheque signed by the drawer is presented for the payment to the drawee bank and such payment is not made as the maker, acceptor, or drawee make any default, it is called dishonour of cheque.

Dishonour of cheque may be of two kinds-

  • By non acceptance
  • By non payment

 

5. Reasons of dishonour of cheque

·       Stop payment

In Electronics Trade and technology development Corporation India Vs Indian Technologies and Engineers (Electronics) Pvt. Ltd.[i] The Supreme Court observed that if, before presentation of a cheque, notice is issued by the drawer to the payee or holder in due course not to present the cheque for payment, and it is still presented and, on the drawer’s instructions, dishonoured, Section 138 is not attracted.

But in  Modi cements Ltd. Vs Kuchil Kumar Nandi[ii] the Supreme Court disapproved its own observations in earlier case and held that even if a cheque is dishonoured because of “Stop Payment” it is an offence under section 138 Negotiable Instrument Act.

·       Bank Account Closed

If the bank account on which the cheque was drawn at the time of in operation but at the time when cheque was presented it was closed, bank can dishonour the cheque. The court will presume in such case that the intention was not of payment hence it will be a reason of offence under section 138 of Negotiable Instrument Act.

·       Refer to the Drawer

Bank may refuse to pay the amount on presented cheque to it and may say refer to the drawer. It means bank is showing inability to make the payment on such cheque.in such case as well it is dishonour of cheque.

6. Dishonour of cheque in case of insufficient funds in account as an offence

Section138 of Negotiable Instrument Act deals with dishonour of cheque in case of insufficient funds in the account of the holder. It says that where any cheque is drawn by one person on account maintained by him in some bank, in favor of another person regarding the payment of any whole or partial debt or any other liability, if such cheque is returned by the bank stating that the funds are not sufficient in the account of the holder to pay on such cheque OR

Such cheque is remains unpaid by the bank because the amount is higher than the amount agreed to be paid by the bank as per the agreement between the account holder and the bank. In both the cases the person (Drawer) has committed the offence under this Act, for which he will be punished with two years imprisonment or with fine which may be twice of the amount of the cheque.

Certain conditions are also attached with this law-

Presentment of the cheque within the period of its validity

The cheque should be presented before the bank within six months from the date it is drawn or within its validity whichever is earlier.

Notice and demand from the drawer for the payment

Notice is very important at this stage. Once the cheque is presented but remains unpaid by payee bank, notice in writing to be issued within thirty days of receiving information from bank regarding return of check by holder of to the drawer demanding the payment.

drawer’s failure to pay

if after receiving above mentioned notice drawer of cheque fails to make the payment within fifteen days the offence is said to be committed. For all above things it is important that a cheque should be drawn against enforceable debt or liability.

7. Penalty and procedure

Punishment for dishonour of cheque – two recourses are there for such offence-

In Civil- Payee may initiate recovery procedure in a jurisdictional court apart from criminal proceedings.

In Criminal- Dishonour of cheque attracts section 138 of Negotiable Instrument Act which provides imprisonment which may extend up to 2 years or fine which may extend up to twice of the cheque amount or both. This offence is bailable, compoundable and non cognizable.

Procedure-

  • Issuance of cheque for Discharge of any debt or any other liability
  • Presentation of Cheque
  • Dishonour of cheque
  • Notice to the drawer
  • Failure to pay by drawer
  • Filing of complaint
  • Jurisdiction –
  • The court where the bank in which the payee has his account is located.
  • Where more than one case against one drawer by different payees, all cases will be tried at one court
  • Filing of complaint
  • Punishment

 

Section 139 of Negotiable Instrument Act says that it will always be presumed that the holder must be bonafide person holding the check for any whole or partial payment of any debt or liability.

Section 140 of Negotiable Instrument Act says that a drawer cannot take the defence that he has no idea actually that the cheque drawn by him may get dishonoured for the reason given in section 138.

Section 141 of Negotiable Instrument Act says that in case that the offence is committed by some company, every person who was in-charge for the company’s conduct at the time of committing the offence will be liable to punished.

Provided if the person proves that he had no knowledge of such offence or he exercised all his due diligence to prevent the offence, he shall not be liable for punishment.

Provided further that a person who was nominated as the director of a company because he was associated with state or central government in the past he cannot be made liable under this section.

It further provides that if it is proved that the offence was committed with the consent, neglect or knowledge of high officials like manager, director, secretary or other officers, they also be deemed to be guilty and shall be liable to be punished under this section.

Company means anybody corporate and includes a firm or other association of individuals.

Director means a partner in a firm.

Section 142 of Negotiable Instrument Act says that for taking the cognizance by court under section 138 it is important that written complaint to be made by payee or the holder within one month from the date on which cause of action arise. No inferior court to that of magistrate or judicial magistrate first class can try the offence punishable under section 138 of this Act.

Section 142 of Negotiable Instrument Act talks about the power of courts to try cases summarily.

8. Case Laws

       i.          Pankaj Mehta vs. State of Maharashtra[iii]

In this case it was held by the Supreme Court of India that if the petition was presented for winding up of the company before the notice for payment by the payee to company cheque amount, company cannot take the defence and escape from the liability.

  1. TomyJacob Kattikaran  vs. Thomas Manjaly [iv]

In this case Supreme Court held that if the appellant did not serve the notice on drawer within the prescribed period as per the section 138 of Negotiable Instrument Act, 1881 acquittal of drawer in such case is justified.

   iii.          Kumaresan vs. Ammerappa[v]

It was held that due care and caution should be taken while sending the notice on dishonour of cheque. it is essential that the notice should be perfect and in conformity with law any mistake regarding this can bring a great loss.

  1. Saketh India Ltd. vs. India Securities Ltd[vi]

It was held by the Supreme Court that limitation period of the filing complaint should be calculated as given in section but first day should be excluded.

9. Conclusion

This provision is for protecting the right of a cheque holder who receives it from the person who is paying his whole or partial debt through the mode of cheque. It is important to protect the faith of the people in such type of transactions. Today almost everywhere cheques are being used and playing vital role in the economy. Hence, cases of bounce cheques are also increasing day by day.

To provide a smooth mechanism and regularize the system of bill of exchange such protection to cheque holder and genuine drawer to pay his debt this kind of law was required. Negotiable instrument Act was amended in year 2002 with the same object through which punishment has been increased from 1 year to 2 years, and notice period from payee to the drawer was also increased from 15 days to 30 days

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