NATIONAL LAW UNIVERSITY ODISHA

BANKING LAW PROJECT

ON

DISHONOURING OF CHEQUES

SUBMITTED TO: DR. DOLLY JABBAL (ASSOCIATE PROFESSOR OF LAW) &

MS. TULIP SUMAN (RESEARCH ASSOCIATE)

SUBMITTED BY: CHINMAY PANDEY (2015/BA LLB/15)

ANURAG GUPTA (2015/BA LLB/61)

 TABLE OF CONTENTS

ABSTRACT .................................................................................................................................... 2

INTRODUCTION .......................................................................................................................... 3

RESEARCH METHODOLOGY.................................................................................................... 5

OBJECTIVE................................................................................................................................ 5

HYPOTHESIS ............................................................................................................................ 5

SCOPE AND LIMITATION ...................................................................................................... 5

RESEARCH QUESTIONS ......................................................................................................... 5

SOURCES ................................................................................................................................... 5

CHAPTER 1: INTERPRETATION OF SECTION 138 ................................................................ 6

EXCLUSION OF MENS REA ................................................................................................... 7

CHAPTER II: CONDITIONS NECESSARY UNDER SECTION 138 ........................................ 8

CHAPTER III: NATURE OF LIABILITY .................................................................................. 10

CIVIL LIABILITY ................................................................................................................... 10

CRIMINAL LIABILITY .......................................................................................................... 11

CONCLUSION ............................................................................................................................. 12

BIBILIOGRAPHY ....................................................................................................................... 13

STATUTES ............................................................................................................................... 13

OTHER AUTHORITIES .......................................................................................................... 13

ARTICLES ................................................................................................................................ 13

BOOKS ..................................................................................................................................... 13

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 ABSTRACT

We have seen that there that there was restriction put restraining the public from issuing any lind
of cheque when there is no sufficient balance in the account of holder. We see even such person
were not subjected to any form of punishment given by law and thus there was a situation of
rampant dishonour and many people were cheated because of the absence of such a legal
provision. There was only civil liability initially that was incorporated under the Negotiable
Instruments Act, 1882. But after subsequent amendments, we saw now criminal liability is also
added apart from civil liability option on activity like dishonoring of cheque. In this project, our
basic aim is to describe the penal provisions and criminal liability taking into consideration the
amendment made by the legislature and the judicial interpretations.

Many such issues has been dealt in this under this project like the circumstances that will happen
if the default takes place, people who will be liable and the procedure involved. The Negotiable
Instrument Act was amended and the Chapter pertaining to the penalties in case of dishonor was
added under the Section 138 to 147. The disadvantages attached were again ratified through the
amendment in the year 2002 and penalty has now been clear through various judicial
pronouncements. The recent judgment has been made by the Supreme Court that criminal
complaint for dishonor of cheque has to be filed in the place where drawer is residing has been a
major setback to the idea of legislation.

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 INTRODUCTION

Definition of negotiable instrument is that it is form of guarantee of paying particular amount of

money which can be given either on demand or at the set time accordingly. However the name of
the payer is mentioned on the document. It can be said to be a document which contain contract
in itself which promise to pay certain amount at future date. However the name of the document
is very subjective and depends on the law which is applied and according to the country it is used
it in.

. Section 6 of the Indian Negotiable Instruments Act, 18821defines „cheque‟ –

“It is kind of bill of exchange which is drawn on a specified banker not expressed to
payable otherwise than on demand.2It is an unconditional order condensed in writing
which is signed by the person giving it and requiring the bank to whom it has been
addressed to pay on demand, a certain amount to, or to the order of, a specified person
or to bearer.”3

“Dishonour means to refuse or neglect to accept or pay when duly presented for payment
of a bill of exchange or a promissory note or draft on a banker.4It also means to refuse to
accept or pay a draft or to pay a promissory note when duly presented.”5

When we talk about dishonoring of cheque, it mean when payment of certain amount is refused.
It also deal with such scenario, where the instrument is reasonably returned by the midnight
deadline if the payment was not made on time what is prescribed in cheque, or in the instance of
bank collections6

Section 91 and section 92 provides for two types of dishonor of cheques.

1
Negotiable Instruments Act, 1882, § 6.
2
Ibid.
3
M.L Tannan, Banking: Law and Practice in India, Ed. 22nd, 2010, LexisNexis Butterworths Wadhwa, Nagpur, at
pp. 20.
4
Vide Wharton‟s Law Lexicon, 1978 Ed. p. 335.
5
Bryan A. Garner, Black’s Law Dictionary, Ed. Eight, at pp. 357.
6
Vide Rakesh Porwal v. Narayan Joglekar, 1993 Cr LJ 680 p. (688) (Bom).

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 1. Section 91 talks about the dishonour by non- acceptance which says that –

“A bill of exchange is said to be dishonored when there is a non-acceptance by the

drawee, or one of several drawee not being partners, by making default in acceptance
when it is mandatory to accept the bill, or where presentment is excused and the bill is
not accepted.

The bill may also treated as dishonored in the scenario where the drawee is incompetent
to contract, or the acceptance is qualified”.7

2. Section 92 which talks about dishonour by non-payment where –

“A promissory note, bill of exchange or cheque is said to be dishonored by non-payment

when there is a default in payment by the maker of the note, acceptor of the bill or
drawee of the cheque when it is duly required to pay the same”.8

7
Negotiable Instruments Act, 1882, § 91.
8
Negotiable Instruments Act, 1882, § 92.

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 RESEARCH METHODOLOGY

Objective

The main aim of project is to deal with various aspects of dishonor of cheque and liability arising
therefrom.

Hypothesis

Mens rea is required in the dishonouring of cheques and the remedies available in this regard are
both of civil and criminal in nature.

Scope And Limitation

This project is limited in its scope as it only deals with laws applicable and procedures to be
followed. It is mainly conceptual and theoretical description of how dishonor of cheques are
treated under Negotiable Instrument Act.

Research Questions

1. What are the remedies available to the drawee in case of dishonour of cheques?

2. What are the necessary conditions provided under Section 138 of Negotiable Instrument
Act, 1882?
Sources
The method used in this research project is Doctrinal Method.

In preparing this research project, the author has referred to both primary as well as secondary
resources. Reference has been made various judicial decisions and interpretations of various
sections of Negotiable Instrument Act , various commentaries on the section and some internet
based resources to find out the scenario in dishonouring of cheque.

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 CHAPTER 1: INTERPRETATION OF SECTION 138

According to the section 138 of negotiable instrument act, dishonoring of cheque is seen as an
offence.9 However we see, the act become silent when it comes to jurisdiction with respect of
criminal complaint filling with regard to dishonoring of cheque which is committed as offence
under section 138. However we see chapter seventeen gives exclusive and punitive punishment
to drawer and he face consequences in case of dishonoring of cheque.

An amendment was made under Chapter XVII in the year 1988 by the name of the “Banking,
Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988.”10This
addition basically contains five sections, namely, sections 138 to 142 and was fused with a
definite object which says that a person should be made liable in all the cases related to cheque
and negotiable instrument. It is also seen that amendment is safeguarding interest of genuine
bank customers, by directing the court that “This is a non-cognizable offence hence the
complaint should be made in writing and no court inferior to that of a Metropolitan Magistrate
or a first class Judicial Magistrate shall try the offence.”11

It is now that negotiable instrument is able to deal strictly with the drawer by the help of
amendment as we now also have penal punishment for the offender who is a drawer. The
provision only punishes the person who has taken the loan and have liability to repay it by
issuing a cheque and cheque failed to honour due to low amount in the bank account.12

It is seen a large amount of public interest has been attached with these provisions. There are
inbuilt safeguards for the honest drawers such as:

1. “ within the time period of three month, the cheque need to be presented to bank in
relation to the date of its drawing or shall be presented within its validity period, which of
the two is earlier.

9
Negotiable Instruments Act, 1882, § 138.
10
http://pib.nic.in/archieve/lreleng/lyr2002/rjan2002/23012002/r230120022.html, (last visited on 5th April, 2018).
11
Negotiable Instruments Act, 1882, § 142.
12
Revised by Justice Ranganath Mishra, Bhashyam&Adiga’s: The Negotiable Instruments Act, Bharat Law House,
New Delhi, at pp. 117.

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 2. In the time-period of fifteen days of the receipt of the information of non-clearance of
cheque by the bank, the payee or holder of cheque need to make a notice regarding the
same to the drawer of the cheque for the payment of the amount ; and
3. In the period of fifteen days, the drawer of the cheque fails to make the payment to the
payee or holder of the cheque.”13

Coming to the essential objective which section 138 seeks to fulfill is to make the person who
drew the cheque liable for the dishonour. Two the condition which is well stated by section 138
which tells when can the drawer of the cheque be made liable. The first is in case of “insufficient
funds”. Insufficient funds mean thereby lack of funds in the account of the person from whose
account the cheque has to be honoured.14 Further, the second condition is related to the situation
when the amount which cheque demand for is too more than what amount actually present in the
account.

On no other reason, the person can be made liable. Further in the case of Om Prakash Maniyar v.
Swati Bhide15the submissions made from the side of the petitioners that the dishonour was
because of the closure of the account and the same should be held as penal, was not accepted by
the Hon‟ble court.16

Exclusion of Mens Rea

Now penal consequences have been provided to section 138, even when there is no mens rea for
dishonoring of cheque. Still the unique feature of this section is that though it being a criminal
offence, it excludes the element of mens rea to be the criteria to hold person liable.17 By the bare
reading of section 138 which says that,“such person shall be deemed to have committed an
offence”18, this part of the section makes the alleged offender strictly liable for his act if it falls
under the two categories mentioned under section138 of the NI Act.

13
Rajinder Steels Ltd. v. Union of India, 2000 CriLJ 625 (Del).
14
Anjana Dave &Dr R V Mehta, AN ANALYTICAL STUDY OF THE PROVISIONS RELATING TO DISHONOR OF CHEQUES
UNDER CHAPTER XVII OF NEGOTIABLE INSTRUMENTS ACT, 1881, Pacific Business Review International,
Vol 7, Issue 5, November 2014, p. 105.
15
Om Prakash Maniyar v. Swati Bhide 1992 Mah LJ 302 at 304.
16
Ibid.
17
MahendraA.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases 438 (Bom.).
18
Negotiable Instruments Act, 1882, § 138.

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 CHAPTER II: CONDITIONS NECESSARY UNDER SECTION 138

The section can be divided into many parts for a better understanding of it.

1. Cheque drawn through bank account – The language of the section is that “When an
account holder draws a cheque on the same account maintained by him with a banker for
payment of any amount of money to another person from out of that account…”19 implies that
the account which is held by the drawer presently should be working. It is necessary that he
maintains that account either on regular basis or for that matter, it should be presently working
20
when the amount has to be withdrawn. Further, “that account” indicates the account with
respect to which the cheque has been drawn and not any other account maintained by him.
2. discharging of Debt or Liability – The cheque must have been issued in connection to
any debt or liability which arose of a certain transaction.21 If the cheque is relating to any other
issue than this, than the drawee will not be penalised under this section and will not be held
liable as per the conditions of this section.
In K. Kumar vs. Bapsons Foot Wear22, a complaint filed for the dishonouring of a cheque, where
the allegations were made that in the course of business a cheque was issued. For quashing th
same, another complaint has been filed. A per the rules given under section 138 of the act for
being an offence, the court allowed the petition by uttering that it fulfills one of requirements of
the section that the cheque should have been drawn for “discharge in whole or in part of any
debt or other liability” and the same was not the situation in the present case as here the cheque
was issued by the alleged accused in the course of their business.23
3. Cheque should be presented within three months or the period of its validity
whichever is earlier– The section also mandates that the validity of the cheque which is drawn
in favourof the person to whom the payment is to be made. The section says that the payment
should be made or the cheque must be presented before the banker either on the period of

19
Ibid.
20
Bhashyam&Adiga, The Negotiable Instruments Act, Bharat Law House, New Delhi; p. 230.
21
S.N. Gupta, Dishonour of Cheques: Liability Civil & Criminal, Ed. Third, Universal Law Publishing Co. Pvt. Ltd,
at pp. 286.
22
K. Kumar vs. Bapsons Foot Wear , (1995) 83 Comp Cas 172 (Mad.).
23
Ibid.

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validity mentioned or three months from the date on which the cheque was drawn, whichever is
earlier of the two.24
4. Cheque returned by the banker unpaid for the reason of insufficiency of funds –
Another condition for this section to apply is that if the cheque issued by the drawer if returned
by the banker for the reason of insufficiency of funds.25 If the cheque is returned due to
insufficiency of the funds means that the account which the drawer holds does not contain funds
to make payment or also in the condition when such transaction cannot be completed because the
account has less funds than required for the payment.26
5. Issuing the notice of dishonor within thirty days demanding the payment of the
same – The information of dishonour of cheque should be given to the drawer of the cheque
within the period of thirty days demanding the payment of the same.27
6. Failure to pay the amount within fifteen days of receipt of the notice – Now, if the
notice has been served on the drawer and even after that, he commits a default in making the
payment, i.e. he does not make the payment within 15days of receiving the notice, then in that
case the drawee is entitled to acquire the due course of action against the drawer.28
A division bench of the High Court of Kerala in the case of N.C. Kumaresan v. Ameerappa29,
after considering the ambit and scope of Sections 138 and 142 of the Negotiable Instruments Act,
has held that the prosecution for such an offence would only be maintainable when the period of
15 days from the receipt of the notice by the drawer of the cheque has elapsed. The court
observed that the dishonour of the cheque by itself does not give rise to a cause of action because
payment can be made on receipt of the notice of demand contemplated in clause (b) of Section
138and in that event, there is no offence, nor any attempt to commit the offence nor even
a preparation to commit the offence. Failure to pay the amount within fifteen days of receipt of
notice alone is the cause of action that would permit a prosecution.30
Further, If the drawer fails to pay the amount of the dishonoured cheque within the time period
of fifteen days of serving of the notice, the complaint should have been filed before a

24
MSR Leathers v. S. Palaniappan& Anr, (2013) 10 SCC 568.
25
FaridulAlam v. The State and Anr., (2007) 27 BLD 140.
26
Bimal Kumar v. State of Uttar Pradesh, 2006 CriLJ 2611 (All).
27
Medical Chemicals and Pharma Pvt. Ltd. v. Biological E. Ltd. 2000 Cri.L.J.1487 (SC).
28
Mahesh Mehta Huf v state of Goa, 2006CrLJ 1142(Bom.)
29
N.C. Kumaresan v. Ameerappa 1991 (1) KLT 797.
30
Ibid.

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Metropolitan Magistrate or not below the rank of a Judicial Magistrate of the first class, within a
month from the grace time period of fifteen days.31

CHAPTER III: NATURE OF LIABILITY

Generally, the person drawee or the payee has two types of remedies available in the case of
dishonour of cheque –

1. Civil suit can be filed against him;

2. Criminal proceedings can be initiated against him

Civil liability

Civil liability includes making payment of money to the person aggrieved or the person to whom
the payment was to be made.32 As the dishonour of cheque takes place, the notice is served to the
drawer of the cheque in regard to the transaction and is also asked for the payment of the
money.33 The liability does not end if the cheque is dishonoured. He must make the payment of
the money in the span of fifteen days or else he will have to face penal consequences.

Further, it must be notices that though civil suit has been files but it does not bar the payee of the
cheque to file the complaint in the same matter. Civil suit for recovery of money as well as
complaint under section 138 are maintainable.34

The prosecution made under Section 138 or even conviction under Section 138 against the
drawer would not stop the complainant to taking a civil action for recovery of the amount or a
part of it. In such scenario, this would not construct the case of double jeopardy.35 According to
the Supreme Court, the pendency of the criminal matters would not be an impediment to the
proceedings with the civil suits.36 Both remedies may be simultaneously possible.

31
Mathias Packaging Limited and Ors.v. Hindalco Industries Limited, 2000 CriLJ 4836.
32
B M Prasad & Manish Mohan, Khergamvala on the Negotiable Instruments Act, 1882, p. 345.
33
Prem Chand Vijay Kumar v Yashpal Singh, 2005(3) PLJR(SC)115.
34
D. Purshotama Reddy v. Sateesh, (2008) 8 SCC 503.
35
Supra, 16.
36
State of Rajashthan v. KalyanSundaram Cement Industries, (1996) 86 Comp Cas 433.

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Criminal Liability

Prior to the introduction of chapter XVII, the cases of the conviction of a drawer in dishonoured
cheque would be dealt under section 420 of the IPC37. However, even today prosecution under
the general for the offence of „cheating‟38 is maintainable. The offence under section 138 of the
Act does not restrict the prosecution under section 420 of the IPC, as both are different in
nature.39

The full bench of the Andhra Pradesh High court has held that in case of issuance of a cheque by
a person it is impliedly meant that in the ordinary course of event, the cheque on its
representation to the bank would be met. In such a circumstance, irrespective of the provision of
section 138 of the Act, prosecution under section 420 IPC is maintainable if dishonest intention
at the time of the issuance of the cheque is established.

A criminal liability is provided under section 138 of the Act, which provides imprisonment for
two years or with fine which may extend to twice the amount of the cheque, or with both. 40 In
case of dishonour of cheque the prosecution can be made under sections 417 and 420 of the
Indian Penal Code, 1960 (IPC).41 However, every dishonouring of check is not cheating but it all
depends on the circumstances of the case.

In A Veerbhadra Rao v. Government of A.P.42, it has been held by the Andhra Pradesh High
Court that where a post dated cheque is being issued with the knowledge that the funds are not
sufficient in the account to make the payment and such cheque would be dishonoured; drawer is
guilty the offence of cheating under section 420 of IPC.43

37
Indian Penal Code, (45 of 1860), § 420.
38
Indian Penal Code, (45 of 1860), § 415.
39
M/s Indseam Services Ltd. vs. Bimal Kumar Kejriwal (HUF) AIR 2001 SC 3512.
40
Negotiable Instruments Act, 1882, § 138.
41
Smt. SosammaVs. Rajendran and Anr. 1993 Crl.L.J. 2196.
42
A Veerbhadra Rao vs. Government of A.P., 1994 Bank J 652.
43
Ibid.

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In case of dishonouring of cheque, the punishment of two years imprisonment has been provided
The imprisonment generally given only for criminal activity and dishonour of cheque
considering this as a criminal act punishment has been imposed.

CONCLUSION

Section 138 of the Negotiable Instruments Act, 1882 is a provision creating statutory offence on
account of dishonor of cheque. It construes both civil as well as criminal offence. 44 Even though
it has been made a criminal offence, mens rea in such a case is not an essential ingredient to
constitute an offence. If a cheque is drawn for discharging a legally enforceable debt and after
presentation of such a cheque, it gets dishonoured, then the offence under Section 138 comes
into picture.45 The law does not take into consideration the circumstances and only looks at the
fact that the cheque has been dishonoured and payment has not been done.46

However, it has to be noticed that complaint under Section 138 of the Negotiable Instrument Act
cannot be dismissed only on the ground of improper notice to the accused without taking into
consideration the circumstances that lead to non-serving of the notice.47 The burden of proof is
on the complainant to prove that drawer has given incorrect postal order.48

Moreover, dishonor of cheque on account of wrong signature does not fall under the ambit of
Section 138 of NI, Act, 1882.49 Therefore it is wrong to hold that Section 138 will not apply
through a closed bank account as it will narrow its interpretation. 50 Therefore the burden of proof
is always on the accused51 and the complainant is not bound to produce witnesses and
evidences.52

44
Mark Hapgood QC, Paget‟s Law of Banking, Indian Reprint, Ed. 12th, LexisNexis Butterworths, at pp. 261.
45
Abdul Gafoor v Abdulla(2005) 4 KLT 840.
46
Rakesh NemkumarPorwal v. Narayan DhonduJoglekar, 98 Crl.L.J. 4750 Bom.
47
V Satyanarayan v A.P. Travel& Tourism Development Corporation Ltd, 1997(2) ALT (Crl.01 A.P.
48
V. Raja Kumari v P. Subbarama Naidu, 2005(1) PLJR(SC)239.
49
D. Purshotama Reddy v. Sateesh, (2008) 8 SCC 503.
50
Joginder Singh v Amar Kaur,2005(1)PLJR(SC)181.
51
Joseph Jose v J. baby Puthval Pura VidomPoothoppuI(2003) BC 180.
52
Steel Tubes of India v Steel authority of India, 2006 CrLJ 1988.

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 BIBILIOGRAPHY

Statutes
Indian Penal Code, (45 of 1860)
Negotiable Instruments Act, 1882

Other Authorities
Bryan A. Garner, Black‟s Law Dictionary, Ed. Eight
http://pib.nic.in/archieve/lreleng/lyr2002/rjan2002/23012002/r230120022.html
http://www.investorwords.com/3226/negotiable_instrument.html
Wharton‟s Law Lexicon, 1978 Ed
Articles
Anjana Dave & Dr R V Mehta, AN ANALYTICAL STUDY OF THE PROVISIONS RELATING TO

DISHONOR OF CHEQUES UNDER CHAPTER XVII OF NEGOTIABLE INSTRUMENTS ACT, 1881,

Pacific Business Review International,
Vol 7, Issue 5, November 2014

Books
B M Prasad & Manish Mohan, Khergamvala on the Negotiable Instruments Act, 1882
Bhashyam & Adiga, The Negotiable Instruments Act, Bharat Law House, New Delhi
M.L Tannan, Banking: Law and Practice in India, Ed. 22nd, 2010, LexisNexis Butterworths
Wadhwa, Nagpur
Mark Hapgood QC, Paget‟s Law of Banking, Indian Reprint, Ed. 12th, LexisNexis Butterworths
Revised by Justice Ranganath Mishra, Bhashyam & Adiga‟s: The Negotiable Instruments
Act, Bharat Law House, New Delhi,
S.N. Gupta, Dishonour of Cheques: Liability Civil & Criminal, Ed. Third, Universal Law
Publishing Co. Pvt. Ltd

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