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Legal implications of Dishonour of Cheques

Dishonour of cheques, commonly known as "Cheque Bouncing", in certain circumstances carry legal implications which can invite prison sentence of upto two years along with monetary penalty on the issuer of the cheque. This aspect is covered in section 138 of the Negotiable Instruments Act, 1881 (NI Act).

The intent of the legislation is to safeguard a creditor by securing his right to avail monies due and payable to him by the debtor. We shall first acquaint ourselves with the relevant terminology for our study and then understand as to what constitutes an offense within the scope of section 138 of the NI Act. Briefly enlisted further is the procedure to be followed by the aggrieved party for legal remedy.

Definition of Cheque:

A Cheque is amongst the three Negotiable Instruments - the other two being Promissory Notes and Bills of Exchange.

The NI Act defines a cheque as:

"A Cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form".

Drawer, Drawee & Payee:
The NI Act further defines the terms Drawer and Drawee as:
The maker of a bill of exchange or cheque is called the "drawer"; the person thereby directed to pay is called the "drawee".

A Payee defined in the act as:
The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "Payee".

Commission of offense under Sec 138 of the NI Act:

A cheque may not be honoured by a drawee bank due to various reasons. Some of them are:
  1. Signature Mismatch
  2. Overwriting
  3. Unclear name of the payee or the amount
  4. Stop payment instructions
  5. Torn or damaged cheque etc

However, to constitute an offense under section 138 of the NI Act, the following ingredients must be present:
  1. The cheque should have been drawn for the purpose of discharging a legally enforceable debt or liability.
  2. The cheque is returned unpaid by the drawee bank due to insufficient funds.

From the above points we may infer that if a cheques is dishonored due to reasons other than insufficient funds or that if the cheque was not drawn to discharge a legally enforceable debt or liability, then the provisions of Section 138 will not be attracted. (Examples of such cheques are those issued for payment towards donations, gifts, charity etc). Note that dishonor of cheques due to stop payment instructions will also invite provisions of section 138.

Legal Remedy available to the Payee:

The payee may re - present a cheque to the drawee bank if the same has been dishonored at the first instance when the payee feels that it might be honored by a second attempt. However, if the cheque is not honored at the second attempt then he may follow the below given procedure to recover monies due to him/her by the drawer
  1. Notice of dishonor of cheque:

    Once the payee receives knowledge of dishonour of the cheque by the Drawee bank through a "Cheque Return Memo", he must send a legal notice to the drawer within 30 days of such knowledge and demand therein that the payment should be made within 15 days of the receipt such legal notice by the drawer.
  2. Commission of offense under section 138:

    If the drawer does not make payment within 15 days of receipt of the above legal notice, then an offense is committed under section 138 of the Negotiable Instruments Act, 1881 and it gives cause of action to the payee to initiate appropriate legal action against the drawer.
  3. Filing of complaint:

    The payee can proceed with filing of complaint within 30 days from the expiry of the above mentioned 15 day time stipulation. Such complaint has to be filed in a Magistrate's court for legal remedy.
  4. Punishment & Penalty:

    If the court is satisfied that commission of offense has been made under section 138 and that all the ingredients are present to constitute such offense, then the court may award punishment of up to 2 years prison sentence and/or monetary penalty (which may extend to twice the amount of the cheque) against the drawer.

An offense under section 138 is not only a civil wrong but also a non-cognizable and bailable criminal offense. It is of utmost importance to ensure that while issuing a cheque to another, the drawer must maintain the amount so mentioned in the cheque to avoid inviting legal action by the aggrieved party and also to avoid penalty by the drawee bank. One must ensure that a cheque will be honoured by the drawee bank so that the concerned debt or liability is duly discharged.

Written By: Adv.Parikshit Somani
Email: [email protected]

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