This article is written by Adv. Sarthak P. Shetty, practicing at the Sessions Court and High Court, Mumbai. This article analyses the legal steps involved in a 138 case i.e. a cheque bouncing matter and gives a brief overview of the same.
Undertaking business as well as personal transaction by way of a Cheque is a common practice. Transactions by way cheques are usually preferred as they are safe, convenient and avoid the hassle of handling cash. However, there may be instances when the cheque received as a consideration for ones services or supply of goods may not be cleared and the cheque may be dishonoured or as we normally call it “get bounced”. This may be due to unavoidable or unforeseen circumstances on the part of the issuer of the cheque or due to fraud. A pertinent question which arises in the mind of the holder of the cheque is how he can recover the cheque amount and get justice for the inconvenience and loss caused to him on account of the cheque being bounced.
The Negotiable Instruments Act, 1881 (NI Act) contains penal provisions in case of dishonour of certain cheques due to insufficiency of funds in the account with the goal to promote the effectiveness of banks and to ensure reliability in transacting business through cheques.
In this note, I shall discuss the basics of what constitutes a dishonour of cheque and steps to be taken to recover the said amount under the NI Act.
- The author of the cheque is called the ‘drawer’. The person in whose favour the cheque is drawn is called the ‘payee’. The bank who is directed to pay the amount is known as the ‘drawee’.
- A cheque may bounce due to various reasons like:
- Insufficient account balance;
- Expired validity of cheque;
- Signature mismatch;
- Mismatch of amounts or digits;
- Account was closed;
- Payment stopped by the account holder; etc
- When a cheque is dishonoured, the payee’s bank then gives the dishonoured cheque and a ‘Cheque Return Memo’, which mentions the reason for dishonor, to the payee. In case of dishonor of the cheque, the drawer of a cheque is bound to compensate the holder, provided due notice of dishonour has been given to, or received by, the drawer. However, if the cheque issuer fails to make a payment, then the payee has the right to prosecute the drawer legally subject to certain conditions.
Section 138 of the NI Act
Section 138 of the NI Act provides that the drawer of a cheque, on his failure to make the payment of the cheque amount after the cheque has dishonoured, shall be punished with fine which may be twice the amount of the cheque or imprisonment for a term which may be extended to two years or both. However, the applicability of the said provision is subject to the conditions discussed in paragraphs 5 to 8.
When can a criminal action be initiated
Criminal action can be initiated against the drawer of the cheque under the NI Act if the amount mentioned in the cheque is towards discharge of a debt or any other liability of the defaulter towards the payee and the same is legally enforceable.
It is pertinent to note that if the cheque was issued as a gift, towards lending a loan or for unlawful purposes, then the drawer cannot be prosecuted in such cases.
Reason for dishonour
Further on plain reading of the text of section 138 of the NI Act, for initiating prosecution, the reason for the dishonor of the cheque should be on account of the following:
- that account does not have sufficient money to honour the cheque; or
- the cheque amount exceeds the amount arranged to be paid from that account by an agreement made with that bank
The reason (b) above refers the overdraft facility extended by banks to its customers.
Further, due to liberal judicial interpretations, the cheques dishonoured on account of closure of account, stopped payment, etc. are treated at par with the cheques dishonoured due to insufficiency of the amount in the bank account of the drawer.
Further, the Apex Court has held that even if notice is issued to the payee or holder not to present the cheque then section 138 of the NI Act gets attracted. It is pertinent to note that these scenarios depend on the facts and circumstances of each case, and each case will have to be looked at in its own light.
Notice of dishonour
When a cheque, issued towards discharge of a debt or any other liability which is legally enforceable, is dishonoured due to the reasons mentioned in paragraph 6 above, the payee or the holder of the cheque, must give notice to the drawer that the instrument has been so dishonoured. This notice shall be given within thirty days of the receipt of information by the payee from the bank regarding the return of the cheque as unpaid. The payee shall also make a demand for the payment of the said amount of money within 15 days of the receipt of the notice.
It is pertinent to note that the notice should intimate the drawer of the dishonor of the cheque and call upon him to make the payment of the cheque amount within 15 days of the receipt of the notice. Unless, these requirements are fulfilled it cannot be termed as a notice under section 138 of the NI Act. Further, there is no provision for condonation of delay of the said period of thirty days for issue of notice to the drawer.
Complaint before the Magistrate
The cause of action for the filing of Complaint against the drawer shall arise as soon as the period of 15 days for payment of cheque amount expires.
The complaint should be filed in a Magistrate’s court within a month of the expiry of the 15 day period. The settled position of law is that the period of one month for filing of complaint will be reckoned from the day immediately following the day on which the 15 day period expires from the date of the receipt of the notice by the drawer. The payee or the holder of the cheque can file a case for cheque bounce after the period of 30 days if he can provide a reasonable justification for the delay to the satisfaction of the Court.
Jurisdiction of the Magistrate
The Complaint shall be filed in the Magistrate Court within whose local jurisdiction:
- In a case where the cheque has been deposited in the bank where the payee maintains his account, the payee’s Bank is situated; or
- In a case where the payee presents the cheque for payment otherwise through an account, e.g. in case of a bearer cheque, Bank where the drawer maintains his account is situated.
Further, no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try the offence.
On receiving the complaint, an affidavit and relevant documents, the court will issue summons and proceed with the matter. If found guilty, the defaulter can be punished with fine which may be twice the amount of the cheque or imprisonment for a term which may be extended to two years or both
Presumption in favour of Complainant
It is important to note that that until the contrary is proved, it is presumed that the holder of a cheque, received the cheque for the discharge, in whole or in part, of a legally enforceable debt or other liability and the burden would be on the Accused to prove the contrary.
The Court which is trying the offence may also direct Accused i.e. the defaulting drawer to pay interim compensation to the complainant where the interim compensation may not exceed 20% of the amount of the cheque.
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