In this article, Sahali Manna of KIIT Law School discusses Dishonouring of a bank cheque and its legal recourses.
Introduction
As money has its own exchange value and is transferable, it has become the most common medium of exchange. The Negotiable Instrument serves as a substitute for money. We can say that Negotiable instrument is a piece of paper which entitles a person to a sum of money mentioned in it, that is freely transferable.
Promissory Notes, Cheques, Bills of Exchange, bearer bonds, bank notes etc are some examples of such negotiable instruments.
In India, the law regarding negotiable instrument is governed by the Negotiable Instruments Act of 1881.The most important section in this act is section 138 that deals with “Dishonouring of a cheque”.
There are few important questions regarding Dishonouring of a cheque, which the article will answer.
What a cheque is, and how a cheque is dishonoured?
It is the most common medium of payment through banks.
Sec 6 of NI Act defines “cheque” as, “a bill of exchange that is to be drawn on a banker and which cannot be issued without a demand.”
There are three parties to a cheque –
- The Drawer: The person who is issuing the cheque.
- The Drawee: in case of cheque it is always the banker on whom the cheque is drawn.
- The payee: the person to whom the cheque is to be paid.
Reasons why a cheque may be dishonoured
- One of the essential of a valid cheque is that it should be signed by the drawer but in case there is an over writing or if the signature does not match then it may lead to cheque bounce.
- If there is any doubt of the cheque being genuine.
- If an account is closed or there is insufficiency of fund.
- Mismatch in account number may even lead to cheque bounce.
- Death, insolvency and insanity of the customer presenting a cheque at a wrong branch.
What is the limitation for complaint on a cheque that is dishonoured?
The complaint should be filed with the appropriate court within 30 days of such grievance.But, due to conflicting opinions, the Supreme Court of India has considered the principle of limitation explained in Saketh India ltd and ors.v. India Securities ltd and held that the day on which such cause of action arises should be excluded.
Where is a case of cheque bounce initiated?
There was an amendment in 2015 regarding the jurisdiction of filing the case of dishonoured cheque.According to the new amendments of 2015 of the NI Act the jurisdiction of filing such complaint is the place where the drawee bank is situated. But an aggrieved person can always seek remedies under IPC and CrPC. In the case of Dashrath Roopsingh Rathod Vs. State of Maharashtra & Anr, the bench said: “In this analysis, we hold that the place, site or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank is located”
What is the court process for filing a case?
Step 1
If a cheque bounces the payee is required to send a letter (Demand notice) within 30 days of such bouncing to the drawer stating that proceeding under NI Act will be initiated against against him if he does not pay the amount within 15 days. There is no prescribed format of this notice, its purpose is to inform the drawer, that a case can be filed against him in case he is unable to pay the said amount. A demand notice should contain statement that the cheque was presented within its period of validity, statement of debt, the information regarding dishonour of cheque and finally stating that the amount needs to be paid within the next 15 days of receiving such notice.
Step 2
Even after receiving such demand notice, the drawer does not pay the money, a complaint can be filed to the magistrate where the drawee bank is situated.
Requirements
A complaint, oath letter and photocopy of all the documents (cheque, memo, notice copy and acknowledgement are required to file the suit.
Court fees
If the amount of the cheque is under Rs. 50000 then Rs. 200 is to be paid, if it is Rs. 50000 to Rs. 200000, then Rs. 500 and, if it is above Rs. 200000 then Rs. 1000 is required to be paid.
THINGS TO REMEMBER
- Delay in filing a complaint after the lapse of 30 days can only be excused by the magistrate in exceptional circumstances.
- The cheque for gift or donation is not covered under sec. 138 of N.I Act.
What is the liability of the joint account holder in a cheque bounce case?
“No one can be held criminally liable for the act of another” – said by the Supreme court of India. Only the drawer of the cheque can be held liable for the offence under section 138 of the NI Act as held by the S.C in the case of Mrs.Aparna A. Shah v. Sheth Developers pvt.ltd and Anr.
According to the ingredients for an offence U/S 138 which was laid down in the case of Jugesh Shegal v. Shamsher Singh Gogi, it is legally impermissible to hold someone criminally liable because of the action of a third person. The principle of vicarious liability will not apply in the context of criminal liability unless it is an exceptional situation.
Who is liable for an offence U/S 138 if the offence is committed by the company itself?
There is no ambiguity if a drawer of a cheque is an individual, but if the drawer of a disputed cheque is a company or a firm or a corporate body, it is difficult to find out who can be charged for the offence.
A company includes a partnership firm or any other corporate body.
If a company is committing an offence u/s 138 then the person who at the time when the offence was committed was in charge and was responsible to the company for conducting the business shall be deemed to be deemed to be guilty and punished accordingly – this has been explained in the case of N.Rangachary v. Bharat Sanchar Nigam Ltd.
The responsibility lies with the accused to prove that
- the offence was committed by the company without his knowledge.
- Or he has exercised due diligence to prevent the cheque dishonour.
Exception
If the central government or the state government or a financial corporation owned or controlled by the owned or controlled by the central or the state government has nominated a director he is immuned from the prosecution for offence of the company.
The word “in charge of the company” has been explained the caase of Giridhari Lal v. D.N. Mehta AIR 1971 SC 2162. It has been held that in overall control of the day-to-day business of the company or the firm.
The company, and the person in charge of or officer of the company may be prosecuted independently or jointly- Sheoram Agarwal v. St. of MP AIR 1984 4 SCC 352.
Vicarious Liability- Exception to the general rule of criminal Law
There lies no vicarious liability in criminal law but s.141 of the said act creates a vicarious liability. It makes a person criminally liable for someone else’s action.
What the holder of a bounced cheque issued by a company is supposed to do?
The director of an accused company may take the defense that the cheque related to a particular project or division of the company has been issued by the director without authorization from the board of the directors of a company.
The S.C clarified in the case of N.Rangachary that it is not possible for the holder of a cheque to be aware of the matters related to the “arrangements within the company in regard to its daily management, daily rountine etc.”
According to this judgement the directors of a company are prima facie in the position of being “in charge of affairs”.
Hence, it will be resonable for a holder of a bounced cheque issued by a company to name all the directors (excluding the independent directors) of the company as accused (in addition to the company) in the complaint.
If the holder of the cheque does not know the names of all the directors he must ask a company secretary to conduct a search on the website of Ministry of Company Affairs.
Is it necessary to issue a notice to directors of a company regarding the offence U/S 138 of the N.I Act?
No. It has been decided in Krishna Texport and capital Market Ltd v. Ila.A. Agarwal and others that it is no longer required to issue notices to the directors of a company. After determining the names of the persons who are in charge and are responsible for the conduct of the business of that company shall be included an accused in the complaint even if though he has’nt recieved any notice.
Points to remember regarding the prosecution of directors
- Specific statements shall be made alleging you of the directors is neccessery in the complaint.
- It shall be stated that the directors concerned was in charge of and responsible to the company for conduct of the business of the company.
Liability of the independent directors
The N.I Act does not specify anything about the liability of the independent directors. Independent directors are never in charge of the conduct of the business in a company, hence, they are not responsible to the company for the conduct of the business of the company unless there are strong facts which is contrary to the usual nature of the independent directors.
Sec 149(12) of Companies Act 2013 states
Notwithstanding anything contained in this Act,—
(i) an independent director;
(ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
Important note
It is necessary to accuse the company otherwise it can’t proceed against the directors of that company. So, in case a cheque issued by a company is bounced, it is important to send notice to the company and file the proceeding against it.
Can a power of attorney holder file a complaint of dishonour of cheque?
In case of G. Kamalakar v. M/s Surana Securities Ltd. & Anr the Supreme court of India held that the power of attorney holder can initiate a case of cheque bounce under certain conditions :
A power of attorney holder can initiate a complaint on behalf of a principal and may also depose it on behalf of him provided that the principal had personal knowledge of such complaint. It is not necessary for the principal to be present in person, the attorney holder can testify on his behalf. And the principal should specifically empower him where the power is to be sub delegated for initiating the action U/S 138 of NI.Act.
Conclusion
From the above discussion it is clear that the NI Act plays a major role in modern day transaction. And sec 138, 141 plays a very important role in understanding who can be prosecuted and when and in which circumstances vicariously liability can be applied.
REFERENCES
1.Rohini Aggarawal,Mercantile & Commercial Laws, Reprint 2014, TAXMANN’S Publication
- A Quick Guide to Action On Bouncing of Cheque, Anil Chawla Law Associates LLP
3.http://www.mondaq.com/india/x/433334/trials+appeals+compensation/Section+138+Negotiable+Instruments+Act+1881+An+In+Depth+Analysis
4.http://www.vakilno1.com/legalviews/landmark-supreme-court-judgment-sec-138-negotiable-instruments-act.html
