Dishonour of Cheques – Section 138 of Negotiable Instruments Act

A paying banker is under a legal obligation to honour his customer’s mandate. He is bound to do so under his contractual relationship with his customer. A wrongful  dishonour will have the worse effect on the banker. However, under the following circumstances, the payment of a cheque may be refused:

  1. Countermanding: Countermanding is the instruction given by the customer of a bank requesting the bank not to honour a particular cheque issued by him. When such an order is received, the banker must refuse to pay the cheque.
  2. Upon receipt of notice of death of a customer: When a banker receives written information from an authoritative source, regarding the death of a particular customer, he should not honour any cheque drawn by that deceased customer.
  3. Upon the receipt of notice of insolvency: Once a banker has knowledge of the insolvency of a customer he must refuse to pay cheques drawn by him.
  4. Upon the receipt of notice of insanity: Where a banker receives notice of a customer’s insanity, he is justified in refusing payment of the cheque drawn by him.
  5. Upon the receipt of notice of Garnishee order: Garnishee order refers to the order issued by a court attaching the funds of the judgement debtor (i.e. the customer) in the hands of a third party (i.e. the banker). In such a case, the banker may refuse payment.
  6. Upon the receipt of notice of assignment: The bank balance of a customer constitutes an asset and it can be assigned to any person by giving a letter of assignment to the banker. In such case also the banker may refuse payment.
  7. When a breach of trust is intended: In the case of trust account, mere knowledge of the customers intention to use the trust funds for his personal use is a sufficient reason to dishonour his cheque.
  8. Defective Title: If the person who brings a cheque for payment has no title or his title is defective, the banker should refuse to honour the cheque presented by him.
  9. Other Grounds: A banker is justified in dishonouring a cheque under the following circumstances also:
    1.  a conditional one;
    2.  drawn on an ordinary piece of paper;
    3.  a stale one;
    4.  post-dated one;
    5.  mutilated;
    6.  drawn on another branch where the account is not kept;
    7.  presented during non-banking hours;
    8.  if the words and figures differ;
    9.  if there is no sufficient funds;
    10.  if the signature of the customer is forged;
    11.  if the endorsement is irregular and
    12.  if a crossed cheque is presented at the counter.

Cheque Dishonour under Section 138 of Negotiable Instruments Act

Negotiable instrument is a convenient and safe means of transferring money, and provides a permanent record and receipt for its transaction. The biggest danger in accepting a cheque is that the person writing it may not have enough money in the Bank to cover it. Forgery is another danger. The best defence against ‘bad cheques’ is to refuse to accept cheques from strangers.

The offence under section 138 of the Negotiable Instruments Act will be attracted only if the cheque is returned by the Bank unpaid either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid for from the account by an agreement made with the bank. On facts, since the cheque had been returned with an endorsement “refer to drawer”, the return was not either due to insufficient funds in the account to honour the cheque or because the amount shown in the cheque exceeded the arrangement and, therefore, even on this ground, no offence was made out. Sometimes it is also suggested that the reasons, “Exceeds Arrangement” or “Not arranged for” may lead to an unwarranted disclosure of the customer’s account and may amount to a libel. For this reason the term “Refer to Drawer” should be preferred.

On one hand, the banks are to watch the interest of their customers and to ensure that the honest bank customers are not being harassed and on the other hand, there must be a change in the attitude of the people towards the cheques which should be given an increased acceptability. The object of the notice is to give a chance to the drawer of the cheque to rectify his omission. Though in the notice demand for compensation, interest, cost etc. is also made the drawer will be absolved from his liability under section 138 if he makes the payment of the amount covered by the cheque of which he was aware within 15 days from the date of receipt of the notice or before the complaint is filed. The company court cannot call before itself the proceedings under section 138 of the Negotiable Instruments Act and quash the proceedings. The power to quash those proceedings rests only with the hierarchy of the criminal courts.

The sanctity of the proceedings under section 138 of the Negotiable Instruments Act must, thus, be preserved and those proceedings, must continue as they arise out of the failure of the company’s directors to honour the negotiable instrument duly signed by them like a cheque. The proceedings under section 138 of the Negotiable Instruments Act are not for recovery of claim of money by a creditor for which the remedy would be by filing a civil suit.

It is not necessary to always stay proceeding in civil action and whether the proceedings in action should be stayed or parallel proceeding both civil and criminal may continue depend from fact and circumstances of each case. There is no legal bar to the continuance of the civil and criminal proceedings simultaneously. Where any offence committed by a company is proved to have been committed with the consent or connivance or is attributable to any neglect on the part of any Director, Manager, Secretary or other Officer of the company then said Director, Manager, Secretary or Officer shall also be deemed to be guilty of that offence. It would mean that even if such Director, Manager, Secretary etc. was not incharge and was not responsible to the company for the conduct of the business of the company; he will still be liable if the offence was committed with his consent, connivance or due to his negligence.

It may be observed that the powers under Section 482 Cr. P.C. can be invoked only when redress under any other provision was unavailable. It has been held by the Supreme Court of India that the second revision petition even though filed under Section 482 of the Criminal Procedure Code is not maintainable. It is clear from a reading of Section 141 of the Act that if the offence under Section 138 of Negotiable Instruments Act is committed by the company or a firm, every person who was in charge and responsible for the affairs and conduct of the business for the company or firm, as the case may be at the time when the alleged offence was committed, is also liable for prosecution along with the company.

On considering the provisions of Section 138 to Section 142 of the Act. There is not hesitation in holding that there is no obligation on the part of the payee or the holder in due to specifically mentioned demanding to pay the said amount within fifteen days and there is no substance in the contention of the learned Counsel for the petitioner. The criminal proceedings are seldom stayed till the decisions of a civil suit over the self same matter but having regard to the facts and circumstances which in this Court opinion is a compelling circumstances when for ends of justice there is no way out but to stay the criminal proceeding till disposal of the civil suit. The High Court would have to proceed entirely on the basis of the allegations made in the complaint or documents accompanying the same per se. It has no jurisdiction to examine the correctness or otherwise of the allegations. These powers cannot be exercised to stifle a legitimate prosecution.

Without evidence having come on record, it will not be appropriate for the petitioner to invoke the inherent powers of this Court and seek to halt the proceedings pending before the trial Magistrate. The offence under Section 138, Negotiable Instruments Act is to be proved by a complaint by proving all the ingredients of the offence laid down in the section. All the necessary factors have to be prayed at the trial. Trial Court will be competent Court to record the findings on materials, that may be placed before it by parties on questions of facts,. Powers under Article 226 of the Constitution are not meant to be exercised for this purpose at this stage. The requirement for an offence under Section 138 of the Act is the cheque must be drawn ‘for the discharge in whole or in part of any debt or other liability’. It is settled principle of law that inherent powers under Section 482 Cr. P.C. can be invoked to prevent abuse of the process of the Court or to secure ends of justice. Section 195 of the Code provides a bar on filing of complaint while Section 340 provides for removal of the bar by conferring jurisdiction on the Court to file complaints. Once an offence has been committed and is complete offence, merely by marking the payment will not put an end to the same. It may affect the gravity of the said offence. There is no ground, thus, to quash the proceedings. It may be mentioned that the existence of a civil remedy would not necessarily exclude a trial by a criminal court of an offence. Similarly there cannot be any absolute proposition of law that whenever any civil proceeding is pending between the parties, criminal proceeding can never be proceeded with. There are many transactions, which result, civil as well as criminal liabilities. Cheating, misappropriate and theft is undoubtedly the transactions of this type.

It is settled law that pendency of the criminal matter would not be an impediment to proceed with the civil suits. The criminal Court would deal with the offence punishable under the Act. On the other hand, the Courts rarely stay the criminal cases and only when the compelling circumstances require the exercise of their power. Section 243 of the Code of Criminal Procedure does not exclude proceedings under Section 138 of the Act. Nor does Section 138 of the Act exclude the applicability of Section 243 of the Code of Criminal Procedure. In case all the conditions which are necessary for the payment of a cheque are present and have been fulfilled then if the bank dishonours a cheque it will amount to a breach of the contract for which the banker is liable to pay damages. The evidence shows that the breach of contract by the bank is confined to one particular draft or otherwise indicates that there was no intention to repudiate, damages will not be recoverable.

The defendant bank contended that the plaintiff was entitled to nominal damages only. If there is proof of special loss or damages, that will be taken into consideration for arriving at the exact quantum of damages. The Indian law on the subject is not at all different from the English law on the point. It is expected of a bank to honour its customer’s cheque if it has sufficient funds in his hands. If it fails to do so, it will be liable to damages. The reason is obvious. It injuriously affects the reputation, credit and integrity of its customer. All loss flowing naturally from the dishonour of a cheque may be taken into account in estimating the damages. To determine responsibility the law will consider the proximate and not the remote cause of an injury. So far as the civil remedy is concerned a customer on account of a wrongful dishonour can claim damages against the Bank. So far as the question of civil remedy for the payee is concerned, it is a case for recovery of money under the summary procedure which can be filed against the Drawer.

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. Even though the normal rule is that an act or illegal omission in order to constitution an offence, must be had with the requisite mental condition on the form of attention, knowledge or reasonable belief, that pre-requisites could be authority dispensed within appropriate cases by creating strict liability offences in the interest of nation, just like offences under the Prevention of Food Adulteration Act. Further, there is no point in contending that mens rea is not required for constituting an offence punishable under Section 138. As Section 142(b) indicates, the cause of action for a prosecution under 138 will arise only under Clause(c) of the proviso to Section 138 9 when the drawer fails to make the payment within fifteen days of receipt of the notice under clause (b) of the proviso and there is a prohibition against taking cognizance except on a complaint in writing by the payee or holder in due course and that too except when the complaint is made within one month of the date on which the cause of action arises.

The main punishment prescribed is imprisonment which may extend to a period of one year. As regards fine, it is stated that the quantum may extend twice the amount of the cheque. It is important to note that the fine is not a compulsory punishment and only the maximum amount is prescribed. There guidelines do not alter the nature of the punishment. In the matter of sentence, the Magistrate is given a discretionary power depending upon the amount for which the cheque is drawn. A change is also need in the moral and psychological approach to the subject to establish a convention and it should be condemned unless warranted by serious consideration to prevent some positive wrong. A change in the mental, moral and psychological attitude of all having bank accounts and issuing cheques is also need to makes them realise that a changes is a precious document and value lies in the its being honoured and not in its being retuned for want of funds.

The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument which have been found deficient in dealing with dishonour of cheques. Not only the punishment provided in the Act has proved to be inadequate, the procedure prescribed for the Courts to deal with such matter has been found to be cumbersome which resulted delay in disposing the cases. To deal with the problem effectively further amendment has been made by the Parliament.

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