Cheque Dishonour: All You Need to Know

The Indian banking and finance industry witnessed some important changes in the past one year. Two major changes were demonetization and the implementation of GST. While we have moved ahead with these changes, we also need to know the very basics related to the industry. This is because various amendments keep taking place and affect our day to day lives. Therefore, we need to keep ourselves updated, logically and legally. With that aim, the present blog attempts to make our readers understand all about cheque dishonour.

However, before doing that, we will touch upon some basic terms.

What is a Cheque?

Cheques need no introduction. As for definition, it is simply a means of paying another person a certain amount instead of direct currency. The intermediary involved in this process is the Bank.

The Bank pays the money from the account of the person who intends to make such payment. Thus it involves three parties in the process. Drawer (the one who draws the cheques), Payee (the person who will receive the payment) and Drawee (the Bank which makes the payment from the account of Drawer). Briefly, a cheque has the following characteristics.

  • Written and signed.
  • Transferable in nature.
  • Confers title on a person (the Payee).
  • Made/drawn for consideration.
  • Time bound.

What does the Law say?

Legally, the Negotiable Instruments Act deals with all issues relating to cheques in India. The Act was enacted to enable smooth and reliable payments.

It specifically introduces and governs instruments of credit used in trade and commerce instead of a currency.

The reason for introducing this different method of payment is three fold.

First, dealing in such instruments is more convenient than dealing in currency.

Secondly, cheques come to our rescue when the payment is to be made to a distant person.

Thirdly, such methods (like cheques) help in keeping a record and database of money transactions. This is mainly because an intermediary (the Bank) is involved in the payment of money rather than two parties only.

What is Cheque Dishonour?

Many a time we hear of cheque dishonour. In common parlance, the word dishonour means ‘to fail to observe or respect’. So is the case with cheques.

On certain grounds, the Bank may fail to honour the cheque drawn.

The law relating to cheques (NI Act) covers the above concept under Section 138.

Section 138 is important in its own sense. It is a special provision dealing with the dishonour of cheques and incorporates the principle of strict liability.

It is interesting to mention that previously, dishonour of cheque only meant a civil liability under the Act.

However, after 1989 the nature of liability changed from civil to criminal. The main reason behind doing so was the seriousness of the act and the consequences relating to it.

This is a unique type of offence. Unlike the Indian Penal Code which punishes natural crimes, section 138 creates an offence by legal fiction.

Conditions for using Section 138

It might seem like a convenient tool to use whenever there is a cheque dishonour. But, you need to make sure that you fulfill certain conditions before you can use it.

Have a look at the below check list to know when you can invoke it.

Be within time

Make sure to present the cheque to the Bank within its validity period. For Account Payee cheques, this time limit is generally three months.

Purpose

You can invoke this provision only if the intended payment was towards discharge of a debt or any particular liability.

Thus, it excludes instances of giving out loans, gifts and unlawful payments.

Intimation to the Drawer

In case of dishonour/non-payment by the Bank, the Payee will receive a Cheque Return Memo from the bank. The Payee should send this memo along with the notice to the Drawer within 30 days of the receipt of the Memo.

Failure to pay

There must be a default in the payment of the money within 15 days of the receipt of such notice and Memo from the Payee.

Grounds for Cheque Dishonour

Next, we shall list the grounds for dishonouring of cheque. It is pertinent to note that the below grounds do not relate specifically to section 138. They include grounds iterated by the Indian Courts while dealing with cheque dishonour cases:

  • Lack/insufficiency of funds in the account of the Drawer.
  • Closure of Drawer’s account (on his instructions or otherwise, like became inactive)
  • Before clearing of the cheque by the Bank, the Drawer has given instructions not to do so.
  • The cheque was presented to the wrong Bank for clearing.
  • Mismatch of signatures.
  • Discrepancy in date or amount written.

As for the 1st point above, it is also called “bouncing of cheque”. While dishonour of cheque can be for a number of reasons, cheque bouncing is a term we generally use when the funds are insufficient.

By now we already know that dishonour of cheque is a criminal offence as per the law. It is punishable by imprisonment up to two years or fine or with both.

Jurisdiction: Where to File a Case for Cheque Dishonour?

Cases related to section 138 are heard by Judicial Magistrate First Class. The recent Negotiable Instruments Ordinance, 2015 resolved the conflict relating to jurisdiction.

It clarifies the jurisdiction by bifurcating it into two situations.

Situation 1: Cheque presented for collection through an account

Jurisdiction shall lie with Court where the branch of the bank where the payee or holder, maintains the account, is situated.

Situation 2: Cheque presented for payment by the payee or holder otherwise through his account

Jurisdiction lies with Court where the branch of the Drawee bank where the drawer maintains the account, is situated.

Thus, the law relating to cheques in India is quite stringent.

It covers the nature of the very instrument and provides legal sanctity to it.

Moreover, it makes dishonour of cheques a criminal offence by affixing strict liability on the Drawer who intends to deceive the innocent Payee.

Most importantly, the 2015 Ordinance brought about major clarity on jurisdictional issues surrounding cheque dishonour cases. It is expected that both parties will benefit from it.

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