Law on the dishonor of cheques under the Negotiable Instruments Act, 1881

The dishonor of a cheque, commonly referred to as "cheque bounce," is a significant offence under Indian law, governed primarily by the Negotiable Instruments Act, 1881 (NI Act). The provisions under this Act provide a robust legal framework for addressing cases where cheques are dishonored due to insufficient funds or other reasons. This article delves into the laws related to cheque dishonor, with insights from recent Supreme Court judgments.

1. Section 138 of the Negotiable Instruments Act, 1881

Section 138 of the NI Act is the cornerstone of laws concerning the dishonor of cheques. This section makes it a criminal offence to issue a cheque that is dishonored due to insufficient funds or if it exceeds the amount arranged to be paid by the drawer with the bank.

Key Elements of Section 138:

• Dishonor Due to Insufficiency of Funds: The cheque must be returned by the bank due to insufficient funds or if it exceeds the amount arranged to be paid from the account.
• Presentation of Cheque: The cheque must be presented to the bank within three months from the date it is drawn or within its validity period, whichever is earlier.
• Notice of Dishonor: The payee or the holder of the cheque must issue a written notice to the drawer within 30 days from the receipt of information regarding the dishonor of the cheque.
• Failure to Make Payment: If the drawer fails to make the payment within 15 days from the receipt of the notice, the payee has the right to initiate legal action.

Penalties under Section 138:

• Imprisonment: The drawer can be punished with imprisonment for up to two years.
• Fine: The fine can extend to twice the amount of the cheque.
• Compensation: The court may direct the drawer to compensate the payee for the cheque amount.

2. Section 139: Presumption in Favor of the Holder

Section 139 of the NI Act presumes that the cheque was issued for the discharge of a debt or liability. This shifts the burden of proof to the drawer, who must prove that the cheque was not issued for such purposes. This presumption strengthens the position of the payee and discourages frivolous defenses from the drawer.

3. Section 140: Defense Not Available

Under Section 140, the drawer of a cheque cannot plead that he had no reason to believe that the cheque would be dishonored. This section prevents the drawer from escaping liability on the grounds that he was unaware of insufficient funds in his account.

4. Section 142: Cognizance of Offences

Section 142 outlines the procedure for taking cognizance of offences under Section 138. It mandates that:

• A complaint must be filed within one month of the expiry of the 15-day notice period given to the drawer.
• The complaint can only be filed in the court within whose jurisdiction the bank branch where the cheque was presented is located.
• The court must be satisfied that the complainant has followed the procedure set out in Sections 138 and 139 before taking cognizance of the offence.

5. Amendments to the NI Act

The NI Act has been amended several times to address issues related to cheque dishonor, making the law more stringent and ensuring quicker resolution of cases.

Negotiable Instruments (Amendment) Act, 2015:

• Jurisdiction: This amendment allows the payee to file a case in the court where the bank branch of the payee is located, regardless of where the cheque was dishonored. This was introduced to curb the practice of filing cases in distant locations to harass the payee.

Negotiable Instruments (Amendment) Act, 2018:

• Interim Compensation: Courts can now direct the drawer to pay interim compensation to the complainant, which can be up to 20% of the cheque amount during the pendency of the case.
• Speedy Trial: The amendment also aimed at ensuring the speedy trial of cases related to cheque dishonor by introducing measures to reduce unnecessary delays.

6. Recent Supreme Court Judgments

The Supreme Court of India has significantly shaped the interpretation and enforcement of laws on cheque dishonor through various landmark judgments:

• Vijayan vs. Baby and Anr. (2011): The Court emphasized the importance of Section 138, stating, “The purpose of incorporating penal provisions in the Negotiable Instruments Act was to infuse confidence in the efficacy of banking operations and to promote the greater use of cheques and other negotiable instruments in the settlement of liabilities.”
• Dashrath Rupsingh Rathod vs. State of Maharashtra (2014): This judgment clarified jurisdictional issues, ruling that “The place, situs, or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank is located, wherein the dishonor takes place.” This ruling aimed to prevent misuse of jurisdictional provisions to harass the payee.
• Meters and Instruments Pvt. Ltd. & Anr. vs. Kanchan Mehta (2017): The Supreme Court highlighted the need for a speedy trial and alternative dispute resolution, observing that “Compounding at the initial stage deserves to be encouraged but is not debarred at a later stage subject to appropriate compensation.” This approach aims to reduce the judiciary's burden and expedite resolutions.
• Sujata Singhi vs. Shyamal Kumar Sen (2020): The Court reiterated that Section 138 is a strict liability offence, where the mere dishonor of a cheque due to insufficient funds is sufficient to attract liability. The Court stated, “The offence under Section 138 of the Negotiable Instruments Act is a strict liability offence. The mere dishonor of the cheque due to insufficiency of funds is sufficient to constitute an offence.”

7. Procedure for Filing a Cheque Bounce Case

To initiate a case under Section 138, the following steps should be followed:

1. Issuing Demand Notice: The payee must issue a demand notice within 30 days of receiving information about the dishonor.
2. Filing a Complaint: If the drawer fails to pay within 15 days of receiving the notice, the payee can file a criminal complaint before the appropriate magistrate within one month.
3. Court Proceedings: The court, after verifying the complaint, will issue summons to the drawer, and the trial will proceed. The court may also direct interim compensation to the complainant.
4. Judgment: After considering the evidence, the court will deliver its judgment. If found guilty, the drawer may face imprisonment, a fine, or both.

Conclusion

The laws on the dishonor of cheques under the Negotiable Instruments Act, 1881, are designed to ensure the reliability and credibility of cheque transactions in India. The provisions, particularly Section 138, provide a strong legal framework for penalizing defaulters and protecting the interests of the payees. Recent judgments by the Supreme Court have further clarified and strengthened these laws, emphasizing the need for swift justice, reducing procedural delays, and upholding the integrity of negotiable instruments in India's financial system.

Feel free to get in touch if you need any help or have any queries:

Amarjeet Singh, Advocate

LinkedIn: https://www.linkedin.com/in/amarjeetpanghal

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