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TABLE OF CONTENTS
Sl. No.
Contents
Page
Acknowledgement
ii
Preface
iii
Declaration
iv
Guide Certificate
Introduction
vi
Legislative Provisions
19
vii
Judicial analysis
20
viii
Conclusion
22
ix
Bibliography
23
ACKNOWLEDGEMENT
Apart from the efforts of me, the success of any Assigned work depends largely on
the encouragement and guidelines of many others. I take this opportunity to express my
gratitude to the people who have been instrumental in the successful completion of this
Assignment work.
I would like to show my greatest appreciation to Prof. (Dr) Jayadev Pati, Dean,
SNIL. I cant say thank you enough for his tremendous help and support. I feel motivated
and encouraged every time I attend his lectures. Without his encouragement and guidance
this assignment would not have materialized.
My special thanks to Mrs. (Dr.) Madhubrata Mohanty, the Faculty-in-charge; for
extending her support and guidance without whom the completion of this Assigned Work
would have been a more difficult task. She has taken pain to go through the assignment and
make necessary correction as and when needed.
Thanks and appreciation to the helpful people at SOA National Institute of Law, for
their support. I would also like to thank my friends without whom this assigned work would
have been a distant reality. I also extend my heartfelt thanks to my family and well wishers.
I hope that this research project will prove to be a breeding ground for the next
generation of students and will guide them in every possible way. My special thanks go to
the Almighty without whom anything is next to impossible.
ABHISHEK CHOUDHARY
5 years Integrated B Sc LLB (VIIth Semester)
Reg. No. 1141844003
SOA National Institute of Law (SNIL)
SOA University, Odisha, India
PREFACE
ABHISHEK CHOUDHARY
5 years Integrated B Sc LLB (VIIth Semester)
Reg. No. 1141844003
SOA National Institute of Law (SNIL)
SOA University, Odisha, India
DECLARATION
ABHISHEK CHOUDHARY
5 years Integrated B Sc LLB (VIIth Semester)
Reg. No. 1141844003
SOA National Institute of Law (SNIL)
SOA University, Odisha, India
GUIDE CERTIFICATE
This is to certify that Mr. Abhishek Choudhary of B.Sc. LLB course has
successfully completed his Law Relating to Banking and Negotiable Instruments
assignment on the topic LEGAL PROTECTION FOR DISHONOR OF CHEQUES as
provided by the institution for the session 2014-15.
FACULTY-IN-CHARGE
DEANS SIGNATURE
CHAPTER 1
INTRODUCTION
Advent of cheques in the market have given a new dimension to the commercial and
corporate world, its time when people have preferred to carry and execute a small piece of
paper called cheque than carrying the currency worth the value of cheque. Dealings in
cheques are vital and important not only for banking purposes but also for the commerce and
industry and the economy of the country. But pursuant to the rise in dealings with cheques,
the practice of giving cheques without any intention of honoring them has also risen. In case
a cheque is issued by a person in liquidation of his debt or liability, and same is dishonored,
then it not only creates a bad taste, but can also result in harassment and can cause damages
to the person to whom the cheque may have been issued.
Since business activities have increased, the attempt to commit crimes and indulge in
activities for making easy money have also increased. Thus besides civil law, an important
development both in internal and external trade is the growth of crimes and it has been found
that the banking transactions and banking business is every day being confronted with
criminal actions and this has led to an increase in the number of criminal cases relating to or
concerned with the banking transactions.
In India, cheques are governed by the Negotiable Instruments Act, 1881, which is largely
codification of the English Law on the subject. Before 1988 there was no effective legal
provision to restrain people from issuing cheques without having sufficient funds in their
account or any stringent provision to punish them in the event of such cheque not being
honored by their bankers and returned unpaid. Although, on dishonor of cheques there is a
civil liability accrued, however in reality the processes to seek civil justice becomes
notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To
ensure prompt remedy against defaulters and to ensure credibility of the holders of the
negotiable instrument a criminal remedy of penalty was inserted in Negotiable Instruments
Act, 1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments
Laws (Amendment) Act, 1988 which were further modified by the Negotiable Instruments
(Amendment and Miscellaneous Provisions) Act, 2002.
Of the ten sections comprising chapter XVII of the Act, section 138 creates statutory offence
in the matter of dishonor of cheques on the ground of insufficiency of funds in the account
maintained by a person with the banker. Section 138 of the Negotiable Instruments Act, 1881
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 debtor 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 honor 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.
Section 138 of the Act can be said to be falling in the acts which are not criminal in real
sense, but are acts which in public interest are prohibited under the penalty or those where
although the proceeding may be in criminal form, they are in reality only a summary mode of
enforcing a civil right. Normally in criminal law existence of guilty intent is an essential
ingredient of a crime. However the Legislature can always create an offence of absolute
liability or strict liability where mens rea is not at all necessary.
Dishonor" means "to refuse or neglect to accept or pay when duly presented for payment of a
bill of exchange or a promissory note or draft on a banker 1 .
Blacks Law Dictionary2:
Defines the term "Dishonor" as "to refuse to accept or pay a draft or to pay a promissory note
when duly presented. An instrument is dishonored when a necessary or optional presentment
is duly made and due acceptance or payment is refused, or cannot be obtained within the
prescribed time, or in case of bank collections, the instrument is reasonably returned by the
midnight deadline;
Reference to the term 'dishonor' has been made in Section 91 and Section 92 of the
Negotiable Instruments Act, 1881.
Section 91 - Dishonor by non-acceptance "A bill of exchange is said to be dishonored by
non-acceptance when the drawee, or one of several drawee not being partners, makes default
in acceptance upon being duly required to accept the bill, or where presentment is excused
and the bill is not accepted.
Where the drawee is incompetent to contract, or the acceptance is qualified the bill may be
treated as dishonored".
Section 92- Dishonor by non-payment - "A promissory note, bill of exchange or cheque is
said to be dishonored by non-payment when the maker of the note, acceptor of the bill or
drawee of the cheque makes default in payment upon being duly required to pay the same.
Thus if on presentation the banker does not pay, then dishonor takes place and the holder
acquires at once the right of recourse against the drawer and the other parties on the cheque.
Dishonor of cheque has been considered as a criminal offence under Section 138 of the
Negotiable Instruments Act, 1881. According to Section 138 whenever any cheque for
discharge of any legally enforceable debt or other liability is dishonored by the bank for want
of funds and the payment is not made by the drawer despite a legal notice of demand, it shall
be deemed to be criminal offence.
10
11
contingency or eventuality has been contemplated and the specific clear wording of Section
138 eliminates any third contingency than mentioned in the Section itself.
The cheques can be dishonored for many other reasons and there may be so many
eventualities in which the payee is denied payment by the bank, the reasons such as
mentioning the date incorrectly or some corrections not initialed or the difference in between
the amount mentioned in figures and words, are certain other contingencies in which the
cheques will be definitely dishonured and would be returned as unpaid however it is not in
respect of any of these contingencies that he dishonor of a chequesh as been made penal
under Section 138 of the said Act. In Om Prakash Maniyar v. Swati Bhide 3, the
submissions on behalf of the petitioners to the effect that the dishonor because of the closure
of the account should be held as penal, was not accepted by the court.
Section 138 was introduced with a laudable public policy behind it. It is intended to prevent
or curtail a mischief which is likely to affect financial transactions, and thereby trade and
business and ultimately, economy of the country.
Exclusion of Mens Rea4:
For committing an offence under Section 138 of the Act "mens rea" is not an essential
ingredient5.
Section 138 of the Negotiable Instruments Act, 1881, excludes mens rea by creating strict
liability and this is explicit from the words 'such person shall be deemed to have committed
an offence'. The returning of the cheque by the bank either because he amount of money
standing to the credit of the drawer of the cheque is insufficient or the amount covered by the
cheque is in the excess of the amount arranged to be paid from that account by an agreement
with the bank are the two necessary conditions creating strict liability.
4 Mens Rea, a guilty mind Although prima facie and as a general rule there must be a mind
at fault before there can be a crime, it isnot an inflexible rule, and a statute may relate to
such subject-matter and may be so framed as to make an act criminal, whether therehas
been any intention to break the law or otherwise to do wrong or not. There is a large body of
Municipal law at the present daywhich is so conceived Wills R. v. Tolson, (1889) 23 Q.B.D
173 (vide Whartons Law Lexicon 14th Ed., Fifth Imp., 1992).
5 Mahendra A.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases 438 (Bom.)
12
13
14
15
otherwise unsustainable in law, could be sustained because of the deposit of money in this
court. The deposit of money by the drawer, therefore, during the trial is of no consequence 8.
Death of Drawer
The criminal liability cannot be fastened to the heirs and the legal representatives of the
person who is said to have been guilty of the offence in question. The cheque presented for
realization by the complainant was returned on the ground of insufficient funds. The notice
sent was returned with postal endorsement 'party expired'. Wife and daughters of the drawer
of the cheque cannot be prosecuted for the offence under Section 138 of the Act for the
alleged failure of the drawer in meeting the liability to pay the amount covered by the cheque
which was dishonoured in response to the notice sent by the complainant 9
Drawer declared insolvent
The drawer cannot escape from the criminal liability by putting forward he plea that he is not
bound to discharge the liability mentioned in the complaint as he was already declared as an
insolvent, especially when there is section 139 permitting the court to presume that there is
an existing liability and the issuance of the cheque was made towards the discharge of the
said liability.
DRAWEES LIABILITY FOR DISHONOUR OF CHEQUE
Rightful Dishonor - when bank may refuse to honor
When there is the relationship of banker and customer between the parties, the banker is
under an obligation to pay cheques when a mandate to pay is received from the customer, or
when a cheque is issued. However, there may be a number of circumstances when the bank
has no other alternative but to return the cheque and in all such cases the bank is fully
justified in returning the cheque. These are the cases which may be termed as a countermand
from the customer which means an order to revoke the former instructions and annulling the
former mandate given by the customer to the bank to honor the cheques and it also means the
situations resulting from the closure of account by the customer, prohibitory 'garnishees'
orders having been received from the court or orders for payment having been received from
the court or orders for payment having been received under Section 226 (3) of the IncomeTax Act, 1961 and similarly it also means the situation when there is a restrained order from
the court, notice of death of the customer, lunacy of the customer, notice of loss of cheque or
forged signatures on the cheque.
8 Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)
9 Bhupinder Lima v. State (2000) 99 Comp Cas 424 (AP)
16
10 Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 595
11 Gibbons v. Westminster Bank (1939) 3 All E.r. 577
17
18
director, manager, secretary or other officer shall also be deemed to be guilty of that offence
and shall be liable to be proceeded against and punished accordingly.
19
be given to the drawer and each endorser. However, any drawer or endorser to whom such
notice is not given shall be discharged from his liability.
CHAPTER 2
LEGISLATIVE PROVISIONS
STATUTORY PROVISIONS FOR LEGAL PROTECTION FOR DISHONOR OF
CHEQUES:
Chapter XVII Of penalties in case of dishonor of certain cheque for insufficiency of
funds in the accounts
Section 138- Dishonor of cheques for insufficiency, etc. of funds in the account.
Section 139- Presumption in favor of holder.
Section 140- Defence which may not be allowed in any prosecution under section 138.
Section 141- Offences by companies.
Section 142- Cognizance of offences
Section 143- Power of Court to try cases summarily.
Section 144- Mode of service of summons.
Section 145- Evidence on affidavit.
Section 146- Banks slip prima facie evidence of certain facts.
Section 147- Offences to be compoundable.
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CHAPTER 3
JUDICIAL ANALYSIS
1. Abdul Samod v. Satya Narayan Mahavir12, High Court of Punjab and Haryana
thoroughly analyzed section 138 of the Act. Honble Mr. Justice A.P. Chowdhury
stated that there are five 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.
2. New Central Hall v United Commercial Bank Ltd.13, the Madras High Court
held that where a banker having sufficient funds of a customer in his hands fails,
even by mistake to honor cheque issued by the customer, the customer has a right to
claim damages.
3. Jogendra Nath Chakrawarti v. New Bengal Bank Limited 14, it was held, where
the banker, being bound to honor his customers cheque, has failed to do so, he will
be liable in damages. If, special damage, naturally ensuing from the dishonor, is
proved, it will be properly taken into account in assessing the amount of the damages.
12 PLR 1990(2) 269
13 AIR 1959 Mad 153
14 AIR 1939 Cal. 63
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4. Calcutta Sanitary Wares v. C. T. Jacob 15, where the Court was considering a
situation whereby the cheque was initially dishonored 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 dishonor presupposes 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.
5. Sadanandan Bhadran v. Madhavan Sunil Kumar16, A cheque can be presented any
number of times during the period of its validity- Whether dishonor of the cheque on
each occasion of its presentation gives rise to a fresh cause of action within the
meaning of Sec. 142(b) of the act - Held No. - A competent court can take cognizance
of a written complaint of an offence u/s.138 if it is made within one month of the date
on which the cause of action arises under clause c of Sec.142 gives it is a restrictive
meaning - it is the failure to make payment within 15 days from date of receipt of
notice which will give rise to cause of action - Cause of action within meaning of Sec.
142 (c) arises and can arise only once - impediments which negate concept of
successive causes of actionHeld.: On each presentation of the cheque and its dishonour a fresh right and not
cause of action - accrues in his favour. He may, therefore, without taking pre-emptory
action in exercise of his right under clause (b) of Section 138, go on presenting the
cheque so as to enable him to exercise such right at any point of time during the
validity of the cheque. But, once he gives a notice under clause (b) of Sec. 138 he
forfeits such right for in case of failure of the drawer to pay the money within the
stipulated time he would be liable for the offence and the cause of action for filing the
complaint will arise. Needless to say, the period of one month for filing the complaint
will be reckoned from the day immediately following the day on which the period of
fifteen days from the date of the receipt of the notice by the drawer expires.
22
6. N.E.P.C Mecon Ltd. V. Magma Leasing Ltd., 17 the Supreme Court observed that the
object of bringing Section 138 on Statute appears to inculcate faith in the efficacy of
banking operations and credibility in transaction in business on negotiable instrument
and to promote the efficacy of the banking operation and to ensure credibility in
transacting business through cheques.
7. M/S Modi Cements Ltd v. K K Nandi,18 the Supreme Court while explaining the
object of Chapter XVII Of penalties in case of dishonor of certain cheque for
insufficiency of funds in the accounts, is to promote the efficacy of banking
operations and to ensure credibility in transacting business through cheques.
CHAPTER 4
CONCLUSION
The law relating to Negotiable instruments is the law of the commercial world which was
enacted to facilitate the activities in trade and commerce, making provision of giving sanctity
to the instrument of credit which would be deemed convertible into money and easily
passable from one person to another. In the absence of such instruments, the trade and
commerce activities were likely to be adversely affected as it was not practical for the trading
community to carry on with it the bulk of currency in force.
The main object of the Act is to legalize the system by which instruments contemplated by it
could pass from hand to hand by negotiation like any other goods.
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 merely relying on the
Court judgments.
17 AIR 1999 SC 1952
18 AIR 1998 SC 1057
23
Though insertion of the penal provisions have helped to curtail the issue of cheque
lightheartedly or in a playful manner or with a dishonest intention and the trading community
now feels more secured in receiving the payment through cheques. However there being no
provision for recovery of the amount covered under the dishonored cheque, in a case where
accused is convicted under section 138 and the accused has served the sentence but, unable
to deposit amount of fine, the only option left with the complainant is to file civil suit. The
provisions of the Act do not permit any other alternative method of realization of the amount
due to the complainant on the cheque being dishonored for the reasons of "insufficient fund"
in the drawers account.
However, the processes to seek civil justice is notoriously dilatory and recover by way of a
civil suit may take inordinately long time therefore if the Government of India could
establish a tribunal to deal with the dishonor of cheques and the liability arising there from, it
could make the process of recovery of damages faster for the aggrieved party.
BIBLIOGRAPHY
1. R N Chaudharys Banking laws
2. R.K Suri; Dishonour
Publishers,Hyderabad;
of
Cheques-
Prosecution
&
Penalties,
ALT