DISHONOUR OF CHEQUES AND CHEQUE FRAUDS

FACULTY: Ms. Madhurima De Sarkar

SUBMITTED BY: Sara Parveen

SEMESTER IX

ROLL NO. 130

HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR

DATE OF SUBMISSION: 26th September, 2016

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 ACKNOWLEDGEMENTS

I owe a great many thanks to a great many people who helped and supported me
during the writing of this project.

My deepest thanks to Lecturer, Ms. Madhurima De Sarkar, the Guide of the project
for guiding and correcting various documents of mine with attention and care. She
has taken pain to go through the project and make necessary correction as and
when needed.

My deep sense of gratitude and thanks and appreciation to the helpful seniors at
Hidayatullah National Law University for their support and guidance.

I would also thank my Institution and my faculty members without whom this
project would have been a distant reality. I also extend my heartfelt thanks to my
family, friends and well wishers.

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 TABLE OF CONTENTS

Introduction..04
Objectives.05
Research Methodology.05
Object06
Jurisdiction09
Cognizance of Offence.09
Limitation..10
Punishment....11
What is cheque fraud.13
Types of Cheque fraud..16
Conclusion..20
Referencers.22

INTRODUCTION

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With the advent of payment through cheques, monetary transactions became much
easier. In place of bundle of notes a piece of cheques is much easier to carry. It has
facilitated trade and commerce tremendously. But with the arrival of cheque
system the problem of bouncing or dishonoring of cheque also started. People
started to issue cheques without intention of honoring them. This led to decline in
the value system of trade and credibility of business. Some step was needed to curb
this. For commerce to flourish it was needed that some law, which could ensure
credibility to the holder of the negotiable instrument, should be enacted. 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 on cheque not being honored by their bankers and returned unpaid.
The money could be recovered on filing a civil suit by the holder but it would take
a lot of time.

OBJECTIVE
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 To know as to what is dishonor of cheques
To study about the jurisdiction of Negotiable Instruments Act.
To study about the various kinds of cheque frauds.

RESEARCH METHODOLOGY

This paper is a Doctrinal research. Both, secondary and primary resources have
been largely used to gather information and data about the topic. Books and other
reference as guided by Faculty have been primarily helpful in giving this project a
firm structure. Websites, dictionaries and articles have also been referred. The
sources of this project work are only secondary sources (books, journals, internet,
etc). Further footnotes have been provided wherever needed, to acknowledge the
source.

OBJECT

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To ensure promptitude and 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 the form of Banking, Public Financial
Institutes and Negotiable Instruments Laws (Amendment) Act,1988 which were
further modified by the Negotiable Instruments (Amendment and Miscellaneous
Provisions) Act ,2002. The object and purpose of bringing in the act was to make
the person dealing in commercial transactions work with a sense of responsibility
and for that reason under the amended provisions of law lapse on their part to
honour their commitment renders the persons liable for criminal prosecution.

What is Negotiable Instrument?

A Negotiable instrument is a specialized type of "contract" for the payment of

money that is unconditional and capable of transfer by negotiation. As payment of
money is promised later, the instrument itself can be used by the holder in due
course frequently as money. It is a transferable, signed document that promises to
pay the bearer a sum of money at a future date or on demand. Examples include
checks, bills of exchange, and promissory notes. A negotiable instrument means
a promissory note, bill of exchange or cheque payable either to order or to bearer.

Section 138 to 142 of chapter XVII, of the negotiable Instrument Act,1881, deals
with dishonoring of cheques.. The Parliament in its wisdom had chosen to bring
section 138 on the statute book in order to introduce financial discipline in business
dealings. Prior to insertion of 138 of NI, a dishonored cheque left the person
aggrieved with the only remedy of filing a claim. The remedy available in civil
court is a long drawn matter and an unscrupulous drawer normally takes various
pleas to defeat the genuine claim of the payee. Section 138 has converted civil
liability into criminal offence. This has been inserted by the parliament with the

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object and purpose of holding a person criminally responsible for his acts in
commercial transactions trade and business dealings with people carried out
carelessly or without sense of responsibility.

Offence under 138 is an offence without any mens rea .It is not a criminal offence
in real sense as it does not require mens rea, like few other criminal offences, but
as public interest is hampered by such offence so it has been made a punishable
offence. It includes strict liability. Creation of the strict liability is an effective
measure by encouraging greater vigilance to prevent usual callous attitude of
drawers of cheques in discharge of debts.

The circumstances under which such a dishonour takes place are not of much
importance. Any reason for dishonour is an offence under section 138 of the NI
Act. Marginal Note stating "Dishonour of cheque for insufficiency etc. of funds in
accounts" addition of word "etc." cannot be considered to be an accident.

Ingredients

The essential ingredients of sec138 are as follows:-

1. Drawing of a cheque by a person on an account of any debt or other liability.

2. Presentation of the cheque to the bank within a period of 6 months from date of
its drawing or within the period of its validity.

3. Returning of the cheque unpaid by the drawee bank.

4. Notice in writing to the drawer of cheque within 30 days of receipt of

information regarding return of cheque as unpaid in form of debit advance or
return memo.

5. Failure of the drawer to make payment within 15 days of receipt of notice.

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The provisions of section 138 will be attracted only when the cheque has been
issued for the discharge of any debt or other legally enforceable liability. The
maker of the cheque is not liable for prosecution if cheque which is dishnoured, is
the one, which is given as gift, present or donation. The offence gets completed
only after notice is served and payment as required by notice is not made.

Letters written by complainant can be construed as notice under Section 138 NIA.-
Complaint can be filed on 16th day .Notice need not be sent through registered
post notice/letter sent under certificate of posting is presumed to have received by
accused. Notice served on company but not MD and director who are parties in
complaint, is valid notice U/S 138. Notice to reasonably correct address is
sufficient. A notice refused to be accepted by the addressee can be presumed to
have been served on him. Drawer of cheque is alone liable. Even it is true that the
cheque was issued by the first accused towards the discharge of the liability of the
petitioner/second accused company. Still the 2nd accused company cannot be
prosecuted as it is not the drawer.

When a cheque of joint account is return as signature required from another

director, 138 will lie. Cheque returned as account operation jointly. Another
director signature required it amounts to dishonor. Even if notice is issued
stopping payment before the payee deposited the cheque in his bank, offence is
complete. In the case of dishonour of cheque 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 receipt of the notice by the drawer
expires.

JURISDICTION

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Presence of all the above mentioned ingredients is necessary to attract the
provision of section 138 of the N.I. Act. It is not necessary that all the above five
acts should have been perpetrated at the same locality, they may have been
performed in five different localities. Complaint can be filed at any of the places
mentioned below. One of the Courts exercising jurisdiction in one of the five local
areas can become the place of trail for the offence under sec. 138 of the Act

1.Where the cheque was drawn.

2. Where the cheque was presented for encashment.

3. Where the cheque was returned unpaid by drawee bank.

4. Where notice in writing was given to drawer of cheque demanding payment.

5. Where drawer of cheque failed to make payment within 15 days of receipt of

notice.

COGNIZANCE OF OFFENCES

Under Section 142, courts take cognizance of offences punishable under Section
138 only upon a complaint made by the payee or, as the case may be, the holder in
due course of the cheque. The complaint must be in writing and be made within
one month of the date on which the cause of action i.e. after the person drew the
cheque fails to pay the amount within 15 days of the receipt of notice of its
dishonor. No court inferior to that of a Metropolitan Magistrate or a Judicial
Magistrate of the first class has the power to try any offence punishable under
section 138.

By the 2002 amendment Courts have been provided discretion to waive the period
of one month, which has been prescribed for taking cognizance of the case under

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the Act; Cognizance of a complaint may be taken by the Court after the prescribed
period, if the complainant satisfies the Court that he had sufficient cause for not
making a complaint within such period.

The Magistrate while taking cognizance has to look into the question whether the
ingredients of an offence have been made out or not. So long as the period of
notice does not expire there can be no cause of action with the payee to make the
drawer liable criminally.1

LIMITATION

The time period laid down in the act has to be strictly followed. Any lapse in
adhering to the schedule, shall take away a cause of action under Sec. 138. The
time limits placed cannot be condoned by the Courts. The limitations which has to
be kept in mind and taken into account are as follows:

Cheque should be presented to the bank for encashment within its validity period.

Within fifteen days from the receipt of return memo indicating reason of
dishonour, a notice should be sent demanding the amount of dishonored cheque.

If the drawer does not pay the amount of dishonoured cheque within the grace
period, a complaint thereafter should be filed within one month in the relevant
court having jurisdiction.

Limitation for filing complaint limit defined as from a particular day . The first day
is to be excluded. Period of 15 days from the date of receipt of notice ending on

1http://www.mondaq.com/india/x/433334/trials+appeals+compensation/Section+13

8+Negotiable+Instruments+Act+1881+An+In+Depth+Analysis

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14-10-1995 so, 30 days period begins on 15-10-1995. Complaint filed on15-11-
1995 is within time.

Death of complainant will not terminate proceedings U/S 138 NI Act.

Complainants presence is not necessary .Legal heirs can be impleaded.

PUNISHMENT

Punishment for accused if proved guilty under section 138 N.I. Act:

1. Imprisonment of up to 2 years

2. Penalty of up to twice the amount of the bounced cheque.

Beside the punishments, the court can grant compensation to the complainant
under section 357 of the Code of Criminal Procedure, 1973 and no limit has been
provided for the amount of compensation.

By the 2002 amendment the term of imprisonment has been increased to two years.

COMPOUNDABLE OFFENCE

By an amendment introduced in 2002, under Section 147, an offence related to the

dishonour of a cheque and every other offence punishable under the Negotiable
Instruments Act, 1881 can be privately settled.

OFFENCE UNDER 138 BY COMPANY

If the person committing an offence under Section 138 is a company, every person
who, at the time the offence was committed, was in charge of, and was responsible
to, the company for the conduct of the business of the company, as well as the
company, shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly. A person shall not be liable if he

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proves that the offence was committed without his knowledge, or that he had
exercised all due diligence to prevent the commission of such offence. Where a
person is nominated as a Director of a company by virtue of his holding any office
or employment in the Central Government or State Government or a financial
corporation owned or controlled by the Central Government or the State
Government, as the case may be, he shall not be liable for prosecution. Where any
offence under this Act has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is attributable to,
any neglect on the part of, any director, manager, secretary or other officer of the
company, such 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. Notice served on company but not MD and director who are parties in
complaint , is valid notice U/S 138.2

CIVIL OR CRIMINAL WRONG

Merely because an act has a civil remedy is not sufficient to denude it of its
criminal outfit. Both criminal law and civil law remedy can be pursued in diverse
situations. As a matter of fact they are not mutually exclusive but clearly co-
extensive and essentially differ in their content and consequence. The object of
criminal law is to punish an offender who commits an offence against a person,
property or the State for which the accused, on proof of the offence, is deprived of
his liberty and in some cases even his life. This does not, however, affect civil
remedies at all for suing the wrongdoer in case like arson, accidents etc. It is
anathema to suppose that when a civil remedy is available, a criminal prosecution
is completely barred. Filing of civil suit and filing of criminal compliant are not
alternative remedies and they are different type of rights. There is nothing in law to
2 http://www.pbr.co.in/November2014/13.pdf

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prevent the criminal courts from taking cognizance of the offence merely because
on the same facts, the person concerned might also be subjected to civil liability or
because civil remedy is obtainable. Sec.420 is valid even after Sec.138 is
introduced.32 Section 420 Indian Penal Code can be clubbed with complaints filed
Under Section 138 of NI Act. If Section 138 not made out then Section 420 IPC
can be drawn such complaint was dismissed by magistrate under Section 138 and
141 of NI Act. High Court directed to take cognizance under Section 120-B and
420 IPC. Such decision of the High Court held to be valid by the Supreme Court.
When the cheque was dishonored for insufficiency of funds such person issuing a
cheque is liable for offence of section 138 of N.I.Act but not u/s 420 of IPC. In
case of prosecution launched under Section 420 IPC in respect of dishonour of
cheques, prosecution has to establish facts which prima facie point to the
conclusion that the failure to meet the cheque was not accidental but was a
consequence expected and was intended by the accused.

WHAT IS CHECK FRAUD?

Check fraud is one of the largest challenges facing businesses and financial
institutions today. With the advancement of computer technology it increasingly
easy for criminals, either independently or in organized gangs, to manipulate
checks in such a way as to deceive innocent victims expecting value in exchange
for their money.

A significant amount of check fraud is due to counterfeiting through desktop

publishing and copying to create or duplicate an actual financial document, as well
as chemical alteration, which consists of removing some or all of the information
and manipulating it to the benefit of the criminal. Victims include financial
institutions, businesses who accept and issue checks, and the consumer. In most

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cases, these crimes begin with the theft of a financial document. It can be
perpetrated as easily as someone stealing a blank check from your home or vehicle
during a burglary, searching for a canceled or old check in the garbage, or
removing a check you have mailed to pay a bill from the mailbox.

TYPES OF CHECK FRAUD

FORGERY

For a business, forgery typically takes place when an employee issues a check
without proper authorization. Criminals will also steal a check, endorse it and
present for payment at a retail location or at the bank teller window, probably using
bogus personal identification.

COUNTERFEITING AND ALTERATION

Counterfeiting can either mean wholly fabricating a check --using readily available
desktop publishing equipment consisting of a personal computer, scanner,
sophisticated software and high-grade laser printer -- or simply duplicating a check
with advanced color photocopiers.

Alteration primarily refers to using chemicals and solvents such as acetone, brake
fluid and bleach to remove or modify handwriting and information on the check.
When performed on specific locations on the check such as the payee's name or
amount, it is called-spot alteration; When an attempt to erase information from the
entire check is made, it is called-check washing. For further information regarding
this subject, visit HERE.

PAPERHANGING

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This problem primarily has to do with people purposely writing checks on closed
accounts (their own or others), as well as reordering checks on closed accounts
(their own or others).

CHECK KITING

Check Kiting is opening accounts at two or more institutions and using "the float
time" of available funds to create fraudulent balances. This fraud has become
easier in recent years due to new regulations requiring banks to make funds
available sooner, combined with increasingly competitive banking practices.

It has been estimated that the annual losses due to check fraud are in the billions of
dollars and continue to grow steadily as criminals continue to seek ways to earn a
living by defrauding others. For the consumer, the amount of inconvenience and
anxiety caused by resolving problems with the account, local merchants, as well as
possible repercussions with credit bureaus can be considerable.

Some forms of check fraud involve the use of a second bank or a third party, often
a place of retail, in order to delay the absence of funds in a transactional account on
the day the check is due to clear at the bank. Such acts are frequently committed by
bankrupt or temporarily unemployed individuals or small businesses seeking
emergency loans, by start-up businesses or other struggling businesses seeking
interest-free financing while intending to make good on their balances, or by
pathological gamblers who have the expectation of depositing funds upon winning.
It has also been used by those who have some genuine funds in interest-bearing
accounts, but who artificially inflate their balances in order to increase the interest

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paid by their banks. In recent years, criminals have started taking advantage of the
check float to pass fraud checks through solicited users of online auctions.3

SIGNS FOR BAD CHECKS:

Below are several signs which may indicate a bad check. While one sign on its
own does not guarantee a check to be counterfeit, the greater the number of signs,
the greater the possibility that the check is bad.

The check lacks perforations.

The check number is either missing or does not change.
The check number is low (like 101 up to 400) on personal checks or (like
1001 up to 1500) on business checks. (90% of bad checks are written on
accounts less than one year old.)
The type of font used to print the customer's name looks visibly different
from the font used to print the address.
Additions to the check (i.e. phone numbers) have been written by hand.
The customer's address is missing.
The address of the bank is missing.
There are stains or discolorations on the check possibly caused by erasures
or alterations.
The numbers printed along the bottoms of the check (called Magnetic Ink
Character Recognition, or MICR, coding) is shiny. Real magnetic ink is dull
and non glossy in appearance.
The MICR encoding at the bottom of the check does not match the check
number.
The MICR numbers are missing.

3 "Fake Checks | Consumer Information". www.consumer.ftc.gov. Retrieved 2016-

02-27.

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 The MICR coding does not match the bank district and the routing symbol
in the upper right-hand corner of the check.
The name of the payee appears to have been printed by a typewriter. Most
payroll, expenses, and dividend checks are printed via computer.
The word VOID appears across the check.
Notations appear in the memo section listing "load," "payroll," or
"dividends." Most legitimate companies have separate accounts for these
functions, eliminating a need for such notations.
The check lacks an authorized signature.4

COMBATING CHEQUE FRAUD

In most jurisdictions, passing a cheque for an amount of money the writer knows is
not in the account at the time of negotiation (or available for overdraft protection)
is usually considered a violation of criminal law. However, the general practice
followed by banks has been to refrain from prosecuting cheque writers if the
cheque reaches the bank after sufficient funds have been deposited, thereby
allowing it to clear. But the account holder is normally held fully liable for all bank
penalties, civil penalties, and criminal charges allowable by law in the event the
cheque does not clear the bank.

Only when the successful clearance of a cheque is due to a kiting scheme does the
bank traditionally take action. Banks have always had various methods of detecting
kiting schemes and stopping them in the act. Computer systems in place will alert
bank officials when a customer engages in various suspicious activities, including
frequently depositing cheque bearing the same, large monthly total deposits
accompanied by near-zero average daily balances, or avoidance of tellers by
frequent use of ATMs for deposits.

4 http://www.ckfraud.org/ckfraud.html

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New technology in place today may make most forms of cheque kiting and paper
hanging a thing of the past. As new software rapidly catches illegal activity at the
teller/branch level instead of waiting for the nightly runs to the back office,
schemes are not only easier to detect, but may be prevented by tellers who deny
customers illegal transactions before they are even started.

Part of how banks are combating cheque fraud is to offer their clients fraud
protection services. Because it is impossible for banks to know every cheque that a
customer writes and which may or may not be fraudulent, the onus is on the clients
to make the bank aware of what cheques they write. These systems allow
customers to upload their cheque files to the bank including the cheque number,
the amount of money, and in some cases, the payee name. Now, when a cheque is
presented for payment, the bank scrubs it against the information on file. If one of
the variables does not match, then the cheque would be flagged as a potentially
fraudulent item.

These services help with external fraud but they do not help if there is internal
fraud. If an employee sends information to the bank with fraudulent items, then the
bank would not know to deny payment. A system of dual controls should be put
into place in order to not allocate all capabilities to one person.

Before the passage of the Check Clearing for the 21st Century Act, when cheques
could take 3 or more days to clear, playing the float was fairly common practice in
the USA in otherwise-honest individuals who encountered emergencies right
before payday.

Circular and abandonment frauds are gradually being eliminated as cheques will
clear in Bank B the same day they are deposited into Bank A, giving no time at all
for non-existent funds to become available for withdrawal. With image-sharing

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technology, the funds that temporarily become available in Bank A's account are
wiped out the same day.

While there may still be some room for retail kiting, security measures taken by
retail chains are helping reduce such incidents. Increasingly, more chains are
limiting the amount of cash back received, the number of times cash back can be
offered in a week or a given period of time, and obtaining transactional
account balances before offering cash back, thereby denying it to those with low
balances. For example, Wal-Mart's policy is to determine account balances of those
obtaining cash back, and some Safeway locations will not offer cash back on any
accounts with balances under $250, even when funds are sufficient to cover the
amount on the cheque. Customers who are noted to obtain cash back frequently are
also investigated by the corporation to observe patterns.

Some businesses will also use the cheque strictly as an informational device to
automatically debit funds from the account, and will return the item to the
customer thereafter. However, in the United States this is done through
the Automated Clearing House (ACH); though faster than traditional check
clearing, contrary to popular belief the ACH is not instantaneous. Though this
practice reduces the room for kiting (by reducing float), it does not always
eliminate it.5

5 "Check Services". Board of Governors of the Federal Reserve System. Retrieved 16

January 2013.

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 CONCLUSION

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. It makes the matter of dishonoring of cheques on grounds of insufficient
fund, a statutory offence. In the cases of dishonour of cheques mens rea is not
required. Offence under 138 is an offence without any mens rea but it is based on a
negotiable instrument ie cheque, If a cheque is issued in discharge of a legally
enforceable debt and on presentation of the cheque for encashment the same is
dishonoured and offence will come into existance under section 138 of the N.I act.
The circumstances under which the dishonour took place is irrelevant. The law
only takes cognizance of the fact that the payment has not been forthcoming and it
matters little that any of the manifold reasons may have caused that situation38.
Defect in structure cheque will not attract Sec. 138. Dishonour of cheque because
of incomplete signature on cheque of drawer did not attract section 138.Complaint
under section 138 of the Act cannot be quashed or dismissed merely because the
notice was not served on the accused or drawer, without enquiring into the
circumstances leading to the non serving of the notice.Burden is on the
complainant to show that the accused has managed to get incorrect postal order
endorsement made.

It is erroneous to construe that section 138 would not apply from a closed bank
account, section 138 does not call for such a narrow construction, and such an
interpretation would defeat the provision of the act.

The burden of proof as to cheque has not been issued for legal debt or liability, is
always on the accused. Complainant is not required to adduce number of witnesses
and bulk of documentary evidence on the question.

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 REFERENCES

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 http://www.legalservicesindia.com/article/article/dishonour-of-cheques-236-
1.html
http://dictionary.cambridge.org/dictionary/english/dishonour
http://www.mhcolaw.com/admin/public/uploads/MHCO%20Update-
%20Dishonour%20of%20Cheques.pdf
http://www.pbr.co.in/November2014/13.pdf
http://www.ckfraud.org/ckfraud.html

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