Introduction
Negotiable instrument in practice means a piece of paper containing in writing a right
entitling the holder to claim usually money but sometimes good. For the purpose of the
Negotiable Instrument Act a “negotiable instrument” means a promissory note, bill of
exchange or cheque.
According to Section 6 of the Negotiable Instruments Act, 1881. A “cheque” is a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise than on
demand and it includes the electronic image of a truncated cheque and cheque in the
electronic form.
In other words, a cheque contains a mandate of the drawer to his banker to pay a specified
sum of money to the bearer or the person mentioned therein or to his order.
Types of Cheque
BEARER CHEQUE - A person holding the cheque can withdraw the amount (only if it is
signed). Such type of cheques are very risky and in case misplaced can lead to loss of the
amount mentioned on the cheque.
CROSSED CHEQUE - A bearer cheque becomes a crossed cheque by crossing it twice with
two parallel lines on the left-hand top corner. Only person name written on it can get the
amount transferred to his account.
SELF CHEQUE - As the name suggests the account holders name is written on it to encash
money in physical form from the branch where he holds his account.
POST DATED CHEQUE - Post-dated Cheques are cheques issued with a future date on it.
Once a cheque is issued it will be valid for three months. It is used for business purposes or
the making of payment in a future date.
BANKER’S CHEQUE - Such cheques are issued by the bank itself and guarantees a
payment.
TRAVELER’S CHEQUE - Such cheques can be used for withdrawal of money while
travelling. It is equal to carrying cash but one can travel safely without carrying huge amount.
They can be encashed abroad where foreign currency is normally acceptable.
Kinds of Dishonour
1. Dishonour of bill of exchange by non-acceptance
2. Dishonour of promissory note, bill of exchange or cheque by non-payment
When presentment for payment is made and the maker, acceptor or drawee, as the case may
be, makes default in making the payment, there is dishonour of the instrument. And also if
there are certain circumstances when presentment for payment is excused and the instrument
is deemed to be dishonoured even without presentment. Thus when the maker, acceptor or
drawee intentionally prevents the presentment of the instrument is deemed to be dishonoured
even without presentment.
NOTICE OF DISHONOUR
Notice of dishonour means information about the fact that the instrument has been
dishonoured.
Notice of dishonour is given to the party sought to be made liable and, therefore it serves as a
warning to the person to whom the notice is given that he could now be made liable.
Enormous delay in giving notice of dishonour may put an end to the plaintiff’s right in
respect of the dishonoured instrument.
Notice of dishonour is to be given by a person who wants to make some prior party of his
liable on the instrument. Therefore, such a notice may be given:
1. Either by the holder
2. A party to the instrument who remain liable for it
DISHONOUR OF CHEQUE
A person suffers a lot if a cheque issued in his favour is dishonoured due to the insufficiency
of funds in the account of the drawer of the cheque. To discourage such dishonour, it has been
made an offence by an amendment of the Negotiable Instrument Act by the Banking, Public
Financial Institution and Negotiable Instrument Laws (Amendment ) Act, 1988.
A new Chapter VII consisting of Sections 138 to 142 has been inserted in the Negotiable
Instrument Act.
Section 138 makes the dishonour of cheque an offence. The payee or holder in due course can
have recourse against the drawer, who may be held liable for the offence.
Under Section 138 - Where any cheque drawn by a person on an account maintained by him
with a banker for payment of any amount of money to another person from out of that
account for the discharge, in whole or part, of any debt or other liability, is returned by the
bank unpaid, either because of the amount of money standing to the credit of that account is
insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that
account by an agreement made with that bank, 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 [a term may be extended to 2 years], or with fine which may
extend to twice the amount of the cheque, or with both.
ESSENTIAL FOR AN ACTION UNDER SECTION 138
1. There should be dishonour of cheque
Section 138 makes dishonour of cheque in certain cases an offence. Cheque is the most
common mode of making the payment. In order to duly protect the interest of its payee,
holder in due course, there is an attempt to discourage dishonour of a cheque by making it an
offence. These provisions do not cover the dishonour of other negotiable instruments.
2. Payment in discharge of debtor liability
The cheque should have been drawn by a person on an account with a banker for payment of
money to another person for the discharge, in whole or part, of any debt or other liability.
The debt or other liability in such a case means a legally enforceable debt or other liability.
If the payment by way of cheque is made as gift or charity, it is not the payment for legally
enforceable debt or liability. The dishonour of such cheque does not attract the provisions of
Section 138 of the Negotiable Instrument Act.
3. Presentment of the cheque within the period of its validity
It is further necessary that the cheque has been presented before it became stale and invalid. It
means that the cheque has been presented within a period of 6 months from the date on which
it is drawn or within the period of validity, whichever is earlier.
4. Dishonour due to insufficient fund
It is also necessary that the cheque should be returned by the bank unpaid.
Dishonour may be because of 2 reasons:
Either the amount of money present in the account is insufficient or the amount to be paid has
exceeded the amount to be paid from that account as in the agreement made with that bank.
It has been generally held in various cases that dishonour due to the insufficiency of funds
has to be interpreted liberally. Dishonour due to the remarks like “Account closed”, “Refer to
the drawer” or “Stop payment” of the cheque may be deemed to be covered by the provision
contained in Section 138 of the Act.
5. Notice and demand from the drawer and drawer’s failure to pay
Within 15 days of receipt of information from the bank about the dishonour of the cheque, the
payee or holder in due course of the negotiable instrument, as the case may be, must make a
demand of the said amount from the drawer by giving a notice in writing.
Inspite of such a notice the drawer of the cheque should fail to make the payment of the said
amount of money to the payee or the holder in due course of the cheque, within 15 days of
the receipt of the said notice.
In the case of TomyJacob Kattikaran v. Thomas Manjaly A.I.R 1998 S.C. 366, The
Supreme Court has held that if it was established that the appellant did not serve a notice on
the drawer within the period prescribed under Section 138 of the Act, the acquittal of the
drawer is justified.
CIRCUMSTANCES IN WHICH A BANKER IS JUSTIFIED IN
DISHONOURING CUSTOMER’S CHEQUE
PAYMENT COUNTERMANDED BY THE DRAWER
When the cheque drawer of the cheque countermands the payment, that is it issues the
instruction to the bank not to make the payment. On receipt of a valid stop payment order, the
cheque must be returned unpaid with the remark “payment countermanded by drawer“.
NOTICE OF DRAWER’S DEATH
On receipt of the confirmed news of death of account holder, cheques signed by him should
be returned unpaid with the remark “Drawer deceased”.
NOTICE OF CUSTOMER’S INSANITY
Where the account holder is certified as insane by a recognised medical practitioner then the
cheques signed by him should be signed by him should be returned unpaid.
NOTICE OF CUSTOMER’S INSOLVENCY
Where a customer is adjudged insolvent, the banker must refuse to pay cheques drawn by the
customer.
LIQUIDATION OF COMPANY
When a bank receives notice from the liquidator in accordance with the provisions of
Companies Act, requiring to pay the balance to liquidator’s account , all the cheques by the
companies should be returned unpaid.
COGNIZANCE OF OFFENCES
Section 142 of Negotiable Instrument Act of 1881 deals with cognizance of offences.
For initiating proceedings against the drawer of dishonoured cheque drawee has to fulfil
following conditions –
The payee or the holder in due course has to file a written complaint.
The complaint is to be made within one month of the date on which the cause of
action arose under clause (c) of the proviso to Section 138
Only the court of Metropolitan Magistrate or a Judicial Magistrate of First Class is
empowered to try the offence defined under the provision of Section 138.
LIABILITY OF A DRAWER OF A DISHONOURED CHEQUE
Civil liability
Where a cheque is dishonoured, the legal position of the drawer of the cheque becomes that
of a principal debtor to the holder. The holder can bring civil suit just like any creditor to
recover the amount from the drawer making him liable as principal debtor.
Criminal liability
A drawer of a cheque is deemed to have committed a criminal offence when the cheque
drawn by him is dishonoured by the drawee on account of insufficiency of funds.
The criminal liability of a drawer in case of dishonour of cheque is dealt in section 138 to
Section 142 of Negotiable Instrument Act 1881.
The maximum punishment for such an offence is imprisonment up to 2 years or fine up to
twice the amount of cheque or both.
Where the cheque is drawn by a company, a firm, or association of individuals, the
punishment can be awarded to every person who was in-charge of and was responsible for its
conduct of business and also to the company.
CONCLUSION
After the amendment of 2002 and insertion of such penal provision has given relief to the
drawee. It has also helped in curtailing the dishonest intention of doing fraud. The steps can
be taken as remarkable steps in the banking sector.