The contract between the customer and the bank is defined as a debtor- creditor relationship. This contract requires the bank to honor all valid and proper orders of the customer to pay amounts from his account with the bank, for as long as funds remain available in the customer's account. The customer's order, however, remains executory and can be rescinded until the bank makes payment. One of the reasons on account of which the banker can refuse to make the payment of a cheque is that the payment has been stopped by the drawer. Upon receipt of a timely stop payment order, the bank ceases to have authority to pay the item.
A customer thus, has a right to give notice to his Bankers to stop payment of a cheque which he has issued. Generally a written notice, signed by the drawer is sufficient to stop the payment. A stopped payment is usually requested if the cheque has been declared missing or lost.
In India, while there is as such no express provision relating to stop payment of cheques. However there are however various judgments regarding this aspect. Indian Courts have covered this facet in Section 138 of Negotiable Instruments Act (hereinafter referred as Act), which is related to dishonour of cheques. The discussion relating to stop payment has assumed importance in view of the amendment to the Negotiable Instruments law by the amendment in 1988. Prior to this amendment, people issued cheques knowing well that the cheque is not going to be honored on presentation, and they tried to create circumstances in which the bank would return the cheque with such endorsements as "stopped payment", "refer to drawer" or "A/C closed". These were some of the tricks used by the drawer to escape the penal liability, which was attached to Section 138 of Negotiable Instruments Act.
Under the present theme, the sole question which will be scrutinized in the paper is whether a drawer who stops the payment having insufficient funds in his account can be held liable under Section 138 of the Negotiable Instruments Act? In this regard various judgments of High Courts and the Supreme Court have been reviewed in order to find out a solution to the abovementioned issue.
Views taken by various High Courts
In Abdul Samod v. Satya Narayan Mahavir High Court of Punjab and Haryana thoroughly analyzed section 138 of the Act. Hon'ble Mr. Justice A.P. Chowdhury stated that there are 5 ingredients, which must be fulfilled. These are as follows:
1. The cheque is drawn on a bank for the discharge of a legally enforceable debt or other liability.
2. The cheque has returned by the bank unpaid.
3. The cheque is returned unpaid because the amount available in that account is insufficient for making the payment of the cheques.
4. The payee gives a notice to the drawer claiming the amount within 15 days of the receipt of the information by the Bank and
5. The drawer fails to make payment within 15 days of the receipt of notice.
In this case the respondent filed a complaint with the allegations that the accused (petitioner herein) had, inter alia, issued a cheque dated June 9, 1989, for Rs. 22,000 in connection with an amount which had become due on account of purchase of some raw material by him. The cheque was returned unpaid by the bank with the remarks "Payment stopped by the drawer ". The complainant sent the requisite notice, but the accused failed to make the payment.
The contention of the accused in this case was that the cheque had been returned on account of stop payment instructions and not on insufficiency of funds and thus all the ingredients of the section were not available. It was held that “Parliament in its wisdom has confined the offence referred to in Section 138 only to bouncing of a cheque on the ground of inadequate balance in the account concerned. Where the cheque is returned unpaid on other grounds, the same has not been made an offence”.
Kerela High Court in this regard has held in Calcutta Sanitary waters v. Jacob that in case the payment was counter-manded, then it was without an offence. In the instant case, complaints were filed under Section 138 in respect of two cheques, which the second petitioner had issued as a partner of the first petitioner-firm, in favour of the respondent. The cheques were dishonoured upon presentation. As required, notices were issued to the petitioners. A reply was sent by the second petitioner but the payment was not made.
It was stated by the Hon'ble Justice B.M. Thulasidas that:
"The allegations in the complaints, in my view, do make out a prima facie case against the petitioners. Before filing the complaints, the respondent had taken care to abide by the relevant legal provisions. Indeed, it is not the case of the petitioners that no amount is due to the respondent. The issuance of cheques and their dishonour, followed by notices of demand and failure to pay are not matters which had been challenged. That the payment was countermanded by a stop memo is of no consequence. That hardly affects the right of the respondent to initiate proceedings under the Act. It has the same effect as closing the account as far as he is concerned. The object of the provision cannot be allowed to be defeated by such ingenuous action".
Similarly, in Mrs. R. Jayalaxmi v. Mrs. Rashida and as per the Punjab and Haryana Court in Mrs. Rama Gupta v. Bakesman's Home Product Limited Patiala it has been held that if a cheque was returned with an endorsement “refer to drawer” and "payment counter-manded by the drawer" then it was not an offence.
Thus relying on this it was held that when the respondent stopped the payment of the cheques in question, there was no question of facts constituting an offence punishable under section 138 of the Negotiable Instruments Act.
However, it is significant to note what is relevant for the purpose of determining an offence under section 138 of the Negotiable Instruments Act is whether the drawer of the cheque had arranged for payment or had made the payment of the amount covered by the cheque within the period of 15 days prescribed under said section and not the reason for which cheques were dishonored by the Bank.
The above laid proposition has been supported by various High Courts. Kerala High Court in the case of Calcutta Sanitary Wares v. C. T. Jacob, where the court was considering a situation whereby the cheque was initially dishonoured on the basis of a stop-payment memo. The court held that "the object of the provision cannot be allowed to be defeated by such ingenious action". The court took the view that dishonour pre-supposes non-payment as the funds in question were not forthcoming and that in these circumstances also, the failure to pay the amount within 15 days of the notice of demand would still constitute an offence as any other view would defeat the specific provisions of section 138.
The Punjab and Haryana High Court in the case of M. M. Malik v. Prem Kumar Goyal, has analysed the aforesaid sections and held that the cause of action will be complete when the drawer of the cheque fails to make payment within 15 days of the receipt of the notice contemplated by proviso (b) and that the offence shall be deemed to have been committed only from the date when the notice period expires. The court had construed the endorsement "refer to drawer" as the bankers inability to honour the cheque for want of funds in the account of the drawer and further held that as far as the jurisdiction was concerned, the principle that the ‘debtor has to find the creditor” would apply and that the court within whose jurisdiction the creditor is located will have jurisdiction to entertain the complaint. We are in agreement with these views.
In the Division Bench decision of Bombay High Court in Rakesh Menkumar Porwal v. Narayan Dhondu Joglekar. In the present case one of the issue was regarding the correct manner in which the time- frame as is prescribed in sections 138 and 142 of the Negotiable Instruments Act should be computed. The Hon'ble Court held that:
"A clear reading of section 138.....If, for instance, the closure of an account or the stoppage of payment or any other of the commonplace reasons for dishonour were to be justifiable, then, the Legislature would have set these out in the section as exceptions not constituting an offence. No such intention can be read into section 138, as none exists. The solitary exception made by the Legislature is with regard to the drawer being offered a final opportunity of paying up the amount within 15 days from the receipt of notice which, in other-words, provides a last opportunity to prove one's bona fides. It is obvious, that having regard to the widespread practice of issuing cheques which are dishonoured and the many ingenious methods of avoiding payment that are practiced, the Legislature has opted for a non-nonsense situation. The possibility has not been overlooked whereby an account any inadvertently be overdrawn or a dishonour may be for technical reasons or where a genuine mistake has occurred and the grace period provided for by the Legislature after service of notice on the drawer is in order to afford an opportunity to the drawer to rectify these. Undoubtedly, even when the dishonour has taken place due to the dishonesty of the depositor, the drawer is still given a last chance to act otherwise. Consequently, the reasons for dishonour even if they be very valid as was sought to be pointed out in this case, should not and cannot be taken into account by a Magistrate when such a complaint is presented"
The above mentioned case-laws supports the preposition that while holding any drawer liable under Section 138, the Court should first see that whether payment was made to the drawee within 15 days of notice or not. The reason for dishonour is immaterial because if the drawer is bonafide then he may within the grace period i.e 15 days.
Views of the Supreme Court
Hon'ble Supreme Court has narrated four key Judgments where the drawer was held liable for Stop payment of cheques. However there is only one judgment which deals with the above laid preposition. In M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s. Indian Technologists & Engineers (Electronics) Pvt. Ltd. and another. In this case, a cheque was presented by the complainant on 28-1-1990, through their bankers M/s. Hyderabad Bank for realisation, with the promise by the accused, that the same will be honoured when presented. However, the said cheque was dishonoured with the banker's endorsement dated 29-11-1990 which stated "(i). refer to drawer, (ii). instructions for stopping payment and (iii). stamped exceeds arrangements." Appellant filed complaints under Section 138 of the Negotiable Instruments Act, 1881 for dishonour of cheque for insufficiency of funds in the accounts of the accused. It was held by the Hon'ble Supreme Court that:
“It would thus be clear that when a cheque is drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person out of the amount for the discharge of the debt in whole or in part or other liability is returned by the bank with the endorsement like (1) in this case, "I refer to the drawer" (2) "instructions for stoppage of payment" and (3) "stamp exceeds arrangement", it amounts to dishonour within the meaning of Section 138 of the Act. On issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied".
The position of Law in this regard has changed dramatically from the 1990's till date, due to the amendment that has been brought into the section. A close look on the judgments of various High Courts shows that the Courts relied on the presumption that the offence referred to in Section 138 can be made out only on bouncing of a cheque on the ground of inadequate balance in the account concerned. Where the cheque is returned unpaid on other grounds, the same has not been made an offence or where the payment was counter-manded then it was without an offence. Courts during that time seemed to more in favour of the drawer. However, after the recent judgments of the Supreme Court, the burden has now shifted to the drawer and a presumption has to be drawn in favour of the holder of the cheque.
A plain reading of section 138 of the Negotiable Instruments Act makes it clear that the words "either because of the amount standing to the credit of that account is sufficient or that it exceeds the amount ..." have been specifically used. It would, therefore, mean that only two contingencies are contemplated and as such, the words "... either .... or" have been used. It is, therefore, clear that the cheque should be dishonoured either for the insufficiency of the amount or, because it exceeds the amount arranged to be paid from that account. No third contingency or eventuality has been contemplated and the specific clear wording of section 138 eliminates any third contingency other than what is mentioned in the section itself. It need not be stated that a cheque can be dishonoured for so many reasons and there may be so many eventualities in which the payee is denied payment by the bank. For example, mentioning the date incorrectly or some corrections not initialled or the difference in between the amount mentioned in figures and words are certain other contingencies in which the cheque will be certainly dishonoured and would be returned as unpaid. It is not in respect of any of these contingencies that the dishonour of a cheque has been made penal under section 138 of the said Act.
CHAPTER XVII was inserted in the Act 1988 with a view to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques. However the chapter is not comprehensive and lacks to cover the various aspects of the commercial transactions especially in view of the emerging ways of payment through the Internet and other electronic means. Section 138 also does not specifically cover the aspects such as where the payment has been stopped by the drawer or where the account has been closed prior to the endorsement of the cheque. These provisions no doubt have served their purpose but they could be more elaborate in solving the dispute rather than relying on the Court judgments which we have seen are quiet contrary at times.
Whatever may be ground or reason on the basis of which the cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or "signature differ" or any other ground, an offence under the section is made out and the drawee has full right to initiate proceedings u/s 482 CrPC. It is also important that the time restriction given in Section 138 (c) also get attracted in case of stop payment when a notice as required by the provision is sent to the drawer.
Section 138 of the Negotiable Instruments Act is a penal provision wherein if a person draws a cheque 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 in part of any debt or other liability, is returned by the bank unpaid, on the ground 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. However with regard to "Payment stopped by the drawer" this section does not mention anything specifically.
It is seen that there are manifold reasons for the dishonor of cheques by banks but there is statutory mandate upon the payee under Section 13 (b) of Negotiable Instruments Act for giving a notice demanding the payment of the amount of said cheque, within 15 days from the date of the information as to bouncing of the said cheque from the drawer of the cheque and upon failure to make payment of the amount by the drawer within 15 days, offence under section 138 is deemed to have been committed. Moreover the decision of the Supreme Court in Electronics Trade & Technology Development Corporation Ltd is explicit and has decided all sorts of controversies in relation to bouncing of the cheque due to payment stopped by the drawer. It has expressly held that if on issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied.
To conclude it can be stated that whatever may be the ground or reason on the basis of which the cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or "signature differ" or any other ground the offence under the section is made out and the drawee has full right to initiate proceedings and while deciding the case the Court should see that whether payment has been made by the drawer within 15 days of notice issued by the drawee after the dishonour of cheque.
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