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Dishonor Of Cheque And Its Repercussions: A Study Of Section 138 Of Negotiable Instruments Act

A cheque is a form of negotiable instrument used very commonly by people nowadays.

It is nothing but a bill of exchange drawn upon a specific bank. A cheque includes a total of 3 parties namely the drawer, drawee and the payee. The person who makes the cheque is the drawer, the bank who would facilitate in paying the amount written on the cheque is the drawee and the person in whose name it is drawn is the payee.

The detailed definition of what a cheque is and how disputes regarding it are to be governed is given under The Negotiable Instruments Act 1881. Sec 6 of the said Act gives the definition of a cheque and section 138 deals with the dishonor of cheques. We shall take a detailed look at the dishonor of cheques and its specific nuances in light of The Negotiable Instruments Act 1881.
Sec 138 of the Act says that a cheque would be called as dishonored when the bank doesn't pay the money enumerated on the cheque because of two reasons. Firstly, the said account doesn't have enough fund and secondly when there has already been an agreement between the bank and the drawer regarding a certain limit up to which money can be encashed from that account, and the cheque exceeds that amount.

In both these cases, the drawer would be held liable and the punishment that he might receive could be an imprisonment of 2 years or a fine whose maximum limit is up to 2 times the amount of the cheque or both. The three sub clauses of the section mention three important points in this regard.
The first sub clause says that the payee has to present the cheque to the bank for encashment within a period of 6 months or within the period of its validity, whichever is earlier. What this basically means is that if the payee presents the cheque for payment after the specified time period is over then it won't come under being dishonored.
The second sub clause says that once the payee receives the information from the bank that the cheque has been dishonored, he has to send a formal notice to the drawer within a period of 30. If this time period elapses then the drawer won't be liable.
The third sub clause says that after receiving the notice that the cheque has been dishonored, the drawer must pay the amount within a period of another 15 days.
Following is the procedure that is followed in matters with regards to Sec 138
Firstly, a Legal Notice has to be sent by registered post to the drawer within 15 days of the cheques dishonor (as per Act 55 of 2002, S.7 w.e.f 6-2-2003) after which the drawer is given a time of 15 days to make the payment. After the expiry of this period, a criminal case with the magistrate has to be filed within a period of 30 days from the expiry of that 15-day period.

Then the complainant has to appear before the court and if the judge is satisfied then summons will be issued to the drawer. He has to appear before the court and present his evidence, after which the complainant shall also place his evidence and witnesses. The court will then pronounce the judgement to which appeals in the higher court can be made.
Section 140 of the said Act states that the drawer will not be allowed to take up the defense that at the time of drawing the cheque he had no reason to believe that the cheque would get dishonored. This would not be admissible in the court of law.
An interesting thing to note with regards to Sec 138 is that offences under its purview have been made compoundable. The Delhi High Court took cognizance of this fact in the case of Dayawati v Yogesh Kumar Gosain where it said that such matters could be settled through mediation.  
In the case of M/S Meters and Instruments Private Limited & Anr v Kanchan Mehta, the Supreme Court made some key observations, one of them being than an offence under Sec 138 is primarily a civil wrong.
The amendment to the Act which was passed in the year 2018 and came into effect from 1st September 2018, allows the court trying an offence of cheque bouncing to direct the drawer to pay interim compensation not exceeding 20% of the cheque amount to the complainant within 60 days of the trial court's order to pay such compensation. The Amendment also gives power to the appellate court which is hearing an appeal against conviction under Sec 138 to deposit a minimum of 20% of the fine or compensation that was awarded, in addition to interim compensation.
Written By: Mr. Saikat Mukherjee, A 3rd year BA LLB student at Symbiosis Law School, Nagpur.
Email: [email protected]

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