A stopped payment is
usually requested if the cheque has been declared missing or lost. But many a
times the drawer, to escape his debt or liability has used it as an instrument
of deception. The 1988 amendment in Section 138 of Negotiable Instruments Act is
also silent about Stopped Payment. The present paper reviews various judgments
to see how this aspect is covered by the Courts and what tests have been laid
down to make a stopped payment order punishable under section 138 of Negotiable
Instruments Act and in that case Clause (c) should be interpreted.
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however, remains executory and can be rescinded until the bank makes payment.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
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
"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,
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
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.