Legal Framework Governing Dishonour of Cheques in India and the Role of Police

Dishonour of a cheque is an important part of banking law. It affects trust in business and everyday money transactions.

In India, if a cheque bounces mainly because there is not enough money in the account, the person who wrote the cheque can face serious punishment under Section 138 of the Negotiable Instruments Act, 1881. This can include jail time or a fine.

However, not every cheque dishonour causes legal trouble. Banks are allowed to refuse payment in certain situations. These reasons come from laws, the agreement between the bank and the customer, and decisions made by courts over the years.

The key point is to understand the difference between:

• Rightful (justified) dishonour: The bank has a valid reason to refuse payment. The bank faces no blame.
• Wrongful (unjustified) dishonour: The bank refuses payment without a good reason. This can make the bank liable to pay damages to the customer.

Knowing this difference is very important for anyone dealing with cheques and banking issues.

Legal Framework in India

Under Indian law:

Section 138 — Dishonour of Cheques

A cheque is dishonoured when the bank (drawee) refuses to pay it when it is presented for payment.

Section 138 of the Negotiable Instruments Act

This section makes it a criminal offence if a cheque bounces because:

• There is not enough money in the account, or
• The cheque amount is more than the arranged limit with the bank.
• Punishment can be jail time (up to 2 years), a fine, or both.

When Does the Offence Become Complete?

For the drawer (person who wrote the cheque) to be guilty under Section 138, all these steps must happen:

• The cheque is presented to the bank within its validity period (usually 3 months from the date on the cheque).
• The bank returns the cheque unpaid because of insufficient funds or because the amount exceeds the bank’s arrangement with the customer.
• The payee (person who was supposed to get the money) sends a written notice to the drawer demanding payment.
• The drawer fails to pay the amount within 15 days from receiving the notice.

Only when all these conditions are met does the offence under Section 138 become complete, and the drawer can face legal action.

Justified Dishonour: When a Bank Can Legally Refuse to Pay a Cheque

A bank normally has to pay a cheque if there is enough money in the account. But there are many valid legal reasons why a bank can refuse to pay (dishonour) a cheque. In these cases, the refusal is rightful — the bank does nothing wrong and faces no liability.

Here are the main valid grounds:

• Not Enough Funds (Section 31, Negotiable Instruments Act): If the account has insufficient money or the cheque amount is more than the agreed overdraft limit, the bank can refuse payment.
• Stop Payment Instruction from Customer: If the person who wrote the cheque (drawer) tells the bank in time to stop payment, the bank must refuse. This is lawful, even if Section 138 later applies to the drawer.
• Account Closed: If the drawer has closed the account before the cheque is presented, the bank can refuse. Courts treat this the same as insufficient funds for Section 138 purposes.
• Post-Dated or Stale Cheques: A post-dated cheque (future date) presented too early. A stale cheque presented after its validity period (usually 3 months in India).  The bank can lawfully refuse both.
• Irregularities in the Cheque: The bank can refuse if: Signature is forged or does not match; There are material alterations (changes that affect the cheque’s meaning — Section 87); endorsements are improper; cheque is drawn on a different branch without permission; cheque is mutilated (badly damaged); amount in words and figures differs.
• Notice of Death, Insanity, or Insolvency: If the bank gets reliable information that the drawer has died, become insolvent, or mentally unfit (insane), it can refuse payment.
• Court or Legal Orders: Banks must obey court orders like Garnishee order (freezing the account); injunction (stopping payment); attachment order (seizing money). Refusal in these cases is fully protected.
• Funds Not Properly Available (Section 31): If the money in the account cannot legally be used for that cheque (e.g., held for a specific purpose), the bank can refuse.
• Forged Cheques: If the cheque itself (or key parts like signature) is forged, the bank can refuse.
• Specially Crossed Cheques Paid to Wrong Bank (Section 127) If a cheque is crossed to a specific bank but presented through another, payment can be refused.
• Improper Presentation: If the cheque is presented on a non-business day or outside banking hours, the bank can refuse.
• Blocked or Frozen Accounts: If the account is blocked (e.g., due to regulatory reasons), the bank can refuse payment.
• Truncated (Electronic) Cheques with Suspicion (Section 89(3)): For electronic cheque images, if the bank suspects something wrong and the presenting bank does not provide required information, the drawee bank can refuse payment.

In all these situations, the bank’s refusal is justified by law. The bank is protected and cannot be held liable.

Indian Court Cases on Rightful Dishonour

• NEPC Micon Ltd. v. Magma Leasing Ltd. (Supreme Court)

In this important case, the Supreme Court ruled that if a cheque bounces because the account is closed, it is treated the same as “not enough funds.” This means Section 138 of the Negotiable Instruments Act still applies — the person who wrote the cheque (drawer) can be punished if other conditions are met. The bank is allowed to refuse payment lawfully and faces no blame.

• Stop-Payment Instructions and Section 138

Indian courts have held that if the customer (drawer) tells the bank to stop payment on a cheque, the bank can dishonour it. The case of Electronics Trade & Technology Development Corp. Ltd. v. Indian Technologists & Engineers Pvt. Ltd. confirmed that even in such cases, Section 138 can still apply to punish the drawer (if conditions are met). However, the bank’s refusal to pay is completely lawful and correct.

• R. Muralidar v. Ashok G.Y.

This case explained the key requirements for Section 138 to apply. It reinforced that dishonour due to insufficient funds (or similar reasons, like account closure) can lead to punishment for the drawer. The bank’s role in refusing payment in these situations remains protected and justified.

These cases show that banks in India are safe when they dishonour cheques for valid reasons like account closure, stop-payment instructions, or low funds. The law mainly targets the person who issued the bad cheque, not the bank.

International Case Law and Principles

India’s rules under Section 138 of the Negotiable Instruments Act are unique, but similar ideas exist in other countries that follow common law, like the UK.

• Banker’s Rights in the UK

Under English law, banks can refuse to pay a cheque for good reasons, such as not enough money in the account or doubts about whether it is genuine. However, if the bank wrongly refuses to pay a valid cheque (when there are enough funds), the customer can sue the bank for damages.

• National Westminster Bank v. Barclays Bank International Ltd (1975)

This case was about a forged cheque. It shows that a bank does not owe a duty of care to people who are not its customers when dealing with forged cheques. Banks are not liable beyond their normal duties to their own customers, and they face limited responsibility if they pay or refuse payment in line with the law.

• Smith v. Lloyds TSB Group plc (2001)

This case dealt with cheques that were changed by fraud (for example, the payee’s name was altered). The court ruled that a materially altered cheque becomes invalid and worthless. Banks that collect or pay on such altered cheques may only face limited liability (often just nominal damages), because the cheque is no longer legally valid.

These cases from UK courts highlight that banks have protection when refusing to pay invalid or suspicious cheques, but they can be held responsible if they wrongly refuse a proper one. The same basic principles — justified refusal is allowed, but wrongful refusal can lead to liability — apply in many common law countries.

Rightful vs. Wrongful Dishonour of Cheques

Banks sometimes refuse to pay a cheque (called “dishonour”). This can be rightful (allowed and no problem for the bank) or wrongful (not allowed, and the bank can get in trouble).

In short: If the bank has a valid reason to refuse payment, it is protected. But if it refuses a good cheque without any proper reason, the customer can claim compensation from the bank.

Can a Police Investigating Officer in India Ask a Bank to Stop Payment on a Specific Cheque?

No, a police officer cannot directly write to a bank and order it to dishonour or stop payment on a particular cheque. Stop payment instructions are part of the private agreement between the bank and the account holder (the person who wrote the cheque, called the drawer). Under the Negotiable Instruments Act, 1881, only the drawer can give such instructions to the bank.

Banks decide to pay or refuse a cheque based on reasons like not enough funds, problems with the cheque itself, or valid instructions from their own customer—not because a third party like the police asks them to. For example, if a cheque is lost or stolen, it is the drawer (not the police) who must tell the bank to stop payment.

Even when the drawer stops payment, courts have ruled that this can still lead to punishment under Section 138 if the cheque was for a real debt. In the Supreme Court cases Electronics Trade & Technology Development Corp. Ltd. v. Indian Technologists & Engineers Pvt. Ltd. (1996) and Modi Cements Ltd. v. Kuchil Kumar Nandi* (1998), it was held that “payment stopped by drawer” is treated like insufficient funds, and the drawer can still be prosecuted if the debt is genuine.

Instead of targeting one cheque, police can freeze the whole bank account (or only the suspicious amount) under Section 102 of the CrPC (now Section 106 BNSS) if they believe the money is connected to a crime. The Supreme Court in State of Maharashtra v. Tapas D. Neogy (1999) confirmed that bank accounts are “property” that police can seize during investigation. A frozen account will automatically cause any cheque to bounce, but the freeze must be reasonable, reported quickly to a Magistrate, and not too harsh—otherwise, it can be challenged and removed by the court.

Conclusion

Banks do not always act wrongly when they refuse to pay a cheque. There are many valid reasons for this, based on laws, bank-customer agreements, and legal duties.

In Indian law, Section 138 of the Negotiable Instruments Act punishes the person who writes the cheque (the drawer) if it bounces due to not enough money in the account. This includes cases where the account is closed by the drawer. The bank is not punished for refusing to pay in these situations — it is just following the rules. The law targets the drawer, not the bank.

Around the world, banks must usually pay valid cheques if there is enough money, but their duty is not absolute. They can refuse payment for good reasons, like irregular signatures or other issues. If a bank wrongly refuses a valid cheque (when funds are available), it may have to pay damages to the customer. But if the refusal is justified, the bank faces no liability.

Lawyers and others handling cheques and banking cases need to understand these details, as shown in court decisions, to avoid mistakes.