ACADEMIC SESSION: 2017-18

FINAL DRAFT:

ON THE TOPIC

CONSEQUENCES OF DISHONOURING OF CHEQUE

UNDER THE GUIDANCE OF:

Dr. Aparna Singh

Assitant Professor

Dr. Ram Manohar Lohiya National Law University

SUBMITTED BY:

Saurav Singh

Enroll.- 150101119, Section-B

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 ACKNOWLEDGMENT:

I express my gratitude and deep regards to my teacher Dr. Aparna Singh for giving me such
a challenging topic and also for her exemplary guidance, monitoring and constant
encouragement throughout the course of this thesis.

I also take this opportunity to express a deep sense of gratitude to my seniors in the college
for their cordial support, valuable information and guidance, which helped me in completing
this task through various stages.

I am obliged to the staff members of the Madhu Limaye Library, for the timely and valuable
information provided by them in their respective fields. I am grateful for their cooperation
during the period of my assignment.

- Saurav Singh

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TABLE OF CASES AND STATUTES ......................................................................................... 4
INTRODUCTION .......................................................................................................................... 6
DISHONOUR OF CHEQUES – MEANING................................................................................. 7
DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138 ..................................... 8
Object of Section 138 ................................................................................................................................ 9
Ingredients and requirements of the penal provisions .......................................................................... 10
1. Cheque drawn on a bank account ..................................................................................................... 10
2. Issue of Cheque in discharge of a debt or liability ......................................................................... 11
a) Presentation of the Cheque within six months or within the period of its validity .................. 11
b) Return of the Cheque unpaid for reason of insufficiency of funds .......................................... 11
c) Issue of the notice of dishonour demanding payment within thirty days of receipt of
information as to dishonour of the Cheque. .................................................................................. 11
d) Failure of the drawer to make the payment within fifteen days of the receipt of the payment
........................................................................................................................................................ 11
Scope and applicability of Section 138 ................................................................................................... 11
DISHONOUR OF CHEQUE – OFFENCE BY DRAWER ......................................................... 12
Notice of Dishonour ................................................................................................................................ 12
Cause of Action ....................................................................................................................................... 13
Written Complaint .................................................................................................................................. 13
Cognizance of Offence ............................................................................................................................ 13
PROCEEDINGS AGAINST DISHONOUR OF CHEQUE ........................................................ 14
Criminal Proceeding – Chapter XVII of the Negotiable Instruments Act ................................................ 14
Summary Proceeding - Order 37 of the Code of Civil Procedure ........................................................... 15
OFFENCES - CHEATING AND FORGERY ............................................................................. 16
Cheating by Personation ......................................................................................................................... 17
Forgery .................................................................................................................................................... 17
DRAWER’S LIABILITY FOR DISHONOUR OF CHEQUE .................................................... 19
Consequence of part payment by drawer after issue of notice ............................................................. 19
Liability of drawer after deposit of entire amount during trial .............................................................. 19
Death of Drawer...................................................................................................................................... 20
Drawer declared insolvent ...................................................................................................................... 20
DRAWEE’S LIABILITY FOR DISHONOUR OF CHEQUE .................................................... 21
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CONCLUSION ............................................................................................................................. 23
TABLE OF CASES AND STATUTES
Table of Cases

1. Om Prakash Maniyar v. Swati Bhide [1992 Mah LJ 302 at 304]

2. Medical Chemicals & Pharma P Ltd v. Biological E Ltd

3. Pankajbhai Nagjibhai Patel v. State

4. Keshavji Madhavji v. Emperor [AIR 1930 Bom 179]

5. Baijnath Sahay v. Emperor [AIR 1933 Pat 183]

6. Abdul Samod v. Satya Narayan Mahavir

7. Mrs. R. Jayalaxmi v. Mrs. Rashida

8. Mrs. Rama Gupta v. Bakesman’s Home Product Limited Patiala

9. Calcutta Sanitary Wares v. C. T. Jacob

10. M. M. Malik v. Prem Kumar Goyal

11. Rakesh Menkumar Porwal v. Narayan Dhondu Joglekar

12. M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s. Indian
Technologists & Engineers (Electronics) Pvt. Ltd. and another

13. New Central Hall v United Commercial Bank Ltd.

14. Jogendra Nath Chakrawarti v. New Bengal Bank Limited [AIR 1939 Cal. 63]

Table of Statutes

1. Negotiable Instruments Act, 1881

2. Civil Procedure Code, 1908

3. Code of Criminal Procedure, 1973

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RESEARCH METHODOLOGY

Aims and objectives

The project aims at studying the various aspects related to dishonour of Cheques and liability arising
therefrom. It begins by defining the concept of dishonour of Cheques and then proceeds to the liability
arising out of such dishonour and the laws related thereto. The ultimate objective is to understand the
liability and the penal provisions for dishonour of Cheques and then to understand its application in the
Indian context.

Scope

The scope of the project has been restricted to the broad topics like the laws applicable and the procedures
followed. The author has limited the scope to a very conceptual and theoretical understanding of dishonour
of Cheques and liability arising therefrom.

Method of writing

The researcher has endeavored to use a combination of descriptive and analytical styles of writing
throughout this project and has cited various case laws for better understanding of the topic. More emphasis
has been placed on the descriptive style of writing.

Sources of Data

The main sources have been textbooks, articles and web-search.

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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 dishonoured,
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 a 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
dishonour 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[3].

Of the ten sections comprising chapter XVII of the Act, section 138 creates statutory offence in the matter
of dishonour 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 debt or 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 honour the Cheque or that it exceeds the amount arranged to be paid from
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that account by an agreement made with that bank, such person shall be deemed to have committed an
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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.

This paper deals with the various aspects of dishonour of Cheques and then, proceeds towards the liability
arising out of such dishonour.

DISHONOUR OF CHEQUES – MEANING

Section 6 of the Negotiable Instruments Act, 1881 defines a Cheque as

"a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand".

"Dishonour" 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

Black’s Law Dictionary2 defines the term "Dishonour" 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 'dishonour' has been made in Section 91 and Section 92 of the Negotiable Instruments
Act, 1881.

Section 91 - Dishonor by non- acceptance

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1
Vide Wharton’s Law Lexicon, 1978 Ed. p. 335
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2 Vide Rakesh Porwal v. Narayan Joglekar, 1993 Cr LJ 680 p. (688) (Bom).

"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- Dishonour 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 dishonour takes place and the holder acquires at once
the right of recourse against the drawer and the other parties on the Cheque.

Dishonour 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 dishonoured 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.

DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138

Section 138 of the Negotiable Instruments Act, 1881

Dishonour of Cheques is considered as an offence under Section 138 of the Negotiable Instruments Act,
1881. Section 138 deals with Dishonour of Cheque for insufficiency of funds in the accounts. The Section
reads as follows:

"Where any Cheque drawn by a person 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
debt or other liability, 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 from that account by an agreement made with that bank, such person shall be deemed to have
committed an offence and shall without prejudice to any other provisions of this Act, be punished with
imprisonment for a term which may extend to two year, or with fine which may extend to twice the amount
of the Cheque, or with both.
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Provided that nothing contained in this section shall apply unless-

(a) The Cheque has been presented to the bank within a period of six months from the date on which it is
drawn or within the period of its validity, whichever is earlier.

(b) The payee or the holder in due course of the Cheque, as the case may be, makes a demand for the
payment of the said amount of money by giving a notice, in writing, to the drawer, of the Cheque, within
thirty days of the receipt of information by him from the bank regarding the return of the Cheques as unpaid,
and

(c) The drawer of such Cheque fails to make the payment of the said amount of money to the payee or, as
the case may be, to the holder in due course of the Cheque, within fifteen days of the receipt of the said
notice".

Object of Section 138

The object of Section 138 is to make drawer of the Cheque subject to penalty when the Cheque bounces on
the ground of insufficient funds.

The plain reading of Section 138 of the Negotiable Instruments Act makes it clear that, the words, "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 from that account…" have been specifically used. It would,
therefore, mean that only two contingencies are contemplated and as such, the words-"either-or" have been
used. It is, therefore, clear that the Cheque should be dishonoured either for the insufficiency of the amount
or, because it exceeds the amount arranged to be paid from that account. No third 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 dishonoured 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 dishonoured and would be returned as unpaid,
however it is not in respect of any of these contingencies that he dishonour of a Cheques has been made
penal under Section 138 of the said Act. In Om Prakash Maniyar v. Swati Bhide3, the submissions on behalf
of the petitioners to the effect that the dishonour because of the closure of the account should be held as
penal, was not accepted by the court.
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3
1992 Mah LJ 302 at 304
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.

Ingredients and requirements of the penal provisions

Section 138 creates an offence for which the mental elements are not necessary. It is enough if a Cheque is
drawn by the accused 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 discharge in whole or in part, of any debt or other liability
due. Therefore, whenever the Cheques are on account of insufficiency of funds or reasons referable to the
drawer’s liability to provide for funds, the provisions of section 138 of the Act would be attracted, provided
the following conditions are satisfied:

1. Cheque drawn on a bank account

Section 138 requires, that a Cheque, to be caught by the section, should be 'drawn by a person on an account
maintained by him with the banker for payment of any amount of money'. Existence of a "live account" at
the time of issue of Cheque is a condition precedent for attracting penal liability for the offence under this
section. The Cheque is returned by the bank unpaid either because of the insufficiency of the amount or,
because it exceeds the amount arranged to be paid from that account. The words "that account" in the section
denote to the account in respect of which the Cheque was drawn. No doubt if any person manages to issue
a Cheque without an account with the bank concerned its consequences would not snowball into the offence
described under section 138 of the Act. For the offence under section 138 of the Act there must have been
an account maintained by the drawer at the time of the Cheque was drawn.
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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 is not an
inflexible rule, and a statute may relate to such subject-matter and may be so framed as to make an act criminal, whether there has 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 day which is so conceived – Wills R. v.
Page

Tolson, (1889) 23 Q.B.D 173 (vide Wharton’s Law Lexicon 14 th Ed., Fifth Imp., 1992).
5 Mahendra A.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases 438 (Bom.)
2. Issue of Cheque in discharge of a debt or liability
The Cheque unpaid by the bank must have been issued in discharge of a debt or other liability wholly or in
part. Where a Cheque is issued not for the purposes of discharge of any debt or other liability, the maker of
the Cheque is not liable for prosecution under section 138 of the Act. A Cheque given as a gift or for any
other reasons and not for the satisfaction of any debt or other liability, partly or wholly, even if it is returned
unpaid will not meet the penal consequences.

If the above conditions are fulfilled, irrespective of the mental conditions of the drawer he shall be deemed
to have committed an offence, provided the other four requisites are fulfilled:

a) Presentation of the Cheque within six months or within the period of its validity
The Cheque must have been presented to the bank within a period of six months from the date on which it
is drawn or its period of validity, whichever is earlier. Thus if a Cheque is valid for three months and is
presented to the bank within a period of six months the provisions of this section shall not be attracted.
However if the period of validity of the Cheque is not specified or prescribed the Cheque is presented within
six months from the date the cause of action can arise. The six months are taken from the date the Cheque
was drawn.

b) Return of the Cheque unpaid for reason of insufficiency of funds

The Cheque must be returned either because the money standing to the credit of that account is insufficient
to honour the Cheque or that it exceeds the arrangement made to be paid from that account by an agreement
with the bank.

c) Issue of the notice of dishonour demanding payment within thirty days of receipt of information as
to dishonour of the Cheque.
The payee or the holder in due course of the Cheque has to give a notice in writing making a demand for
payment of the said amount of money to the drawer of the Cheque. Such notice must be given within 30
days of information from the bank regarding the return of Cheque as unpaid.

d) Failure of the drawer to make the payment within fifteen days of the receipt of the payment
After the receipt of the above notice the drawer of the Cheque has to make payment of said amount of
money to the payee or to the holder in due course of the Cheque within 15 days of the receipt of the notice.
If the payment is not made after the receipt of the notice within stipulated time, a cause of action for
initiating criminal proceedings under this section will arise.

Scope and applicability of Section 138

According to the Section 138 whenever any Cheque for discharge of any legally enforceable debt or other
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liability is dishonoured by the bank for want of funds and the payment is not made by the drawer despite a
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legal notice of demand, it shall be deemed to be a criminal offence.

Where a Cheque is issued not for the purpose of discharge of any debt or other liability, the maker of the
Cheque is not liable for prosecution. For example, if the Cheque is given by way of a gift or present and if
it is dishonoured by the bank, the maker of the Cheque is not liable for prosecution6.

DISHONOUR OF CHEQUE – OFFENCE BY DRAWER

The word 'offence' is not defined in the Negotiable Instruments Act, 1881. According to section 3(38) of
the General Clauses Act it means any act or omission made punishable by any law for the time being in
force.

As noticed in the previous topic, what is made an offence is not the drawing of Cheque alone. It must have
been drawn in discharge, in whole or in part, of a legally enforceable debt or other liability. It must have
been duly presented in time and dishonoured. There must be a written demand for the amount within a
specified time, followed by failure to make payment within another specified time. It becomes an offence
only on such failure which is an illegal omission7.

It is the person who draws and issues a Cheque that falls within the ambit of Section 138 of the Negotiable
Instruments Act, 1881. The maker of Cheque (who signs the Cheque) is called the `drawer'.

When a person is aware of the fact that there are no funds in one's bank account if he issues Cheque to a
trader for goods purchased, the bank will return the Cheque for insufficiency of funds. By issuing a Cheque
under such circumstance, drawer commits an offence under Section 138 of the Negotiable Instruments Act.

On the Cheque being dishonoured, the payee in terms of Section 138 of the Act can call upon the guilty to
pay the money covered by the returned Cheque within 30 days from the date of return, only after serving a
notice of dishonour to the drawer. If the drawer does not pay the amount despite the notice within 15 days
from the receipt thereof, the drawer commits an offence under Section 138 of the Negotiable Instruments
Act, 1881.

Notice of Dishonour
Notice of Dishonour is a formal communication of the fact of dishonour of Cheque. Sub-section (b) of
Section 138 of the Negotiable Instruments Act requires the payee or the holder in due course to issue a
notice in writing to the drawer of the Cheque within 15 days of the receipt of the information by him from
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6
Mohan Krishna (B) v Union of India 1996 Cri LJ 636 (AP)
7
Anto (K S) v Union of India (1993) 76 Comp Cas 105 (Ker).
the bank regarding the return of the Cheque as unpaid. The sub-section further provides that the drawer has
to comply with the demand within 15 days of the receipt of the said notice.

The demand notice envisaged in section 138 is in effect a notice of dishonour to the drawer combined with
a demand on him to pay the amount of the dishonoured Cheque within the time allowed by the statute. It
serves as a warning to the person to whom the notice is given that he could now be made liable. If the holder
fails to give this notice to the drawer, except in cases when notice of dishonour may be excused, all prior
parties liable thereon are discharged of their liability.

Cause of Action
Cause of action for prosecution under section 138 of the Negotiable Instruments Act does not arise by mere
presentation of the Cheque in bank and by its dishonour.

A division bench of the Kerala High Court8, after considering the ambit and scope of Sections 138 and 142
of the Negotiable Instruments Act, has held that the prosecution for such an offence would only be
maintainable when the period of 15 days from the receipt of the notice by the drawer of the Cheque has
elapsed. The court observed that the dishonour of the Cheque by itself does not give rise to a cause of action
because payment can be made on receipt of the notice of demand contemplated in clause (b) of Section 138
and in that event, there is no offence, nor any attempt to commit the offence nor even a preparation to
commit the offence. Failure to pay the amount within fifteen days of receipt of notice alone is the cause of
action that would permit a prosecution and nothing else.

Written Complaint
A complaint is required to be filed by the payee or the holder in due course of the dishonoured Cheque.

Section 142 (a) of the Negotiable Instruments Act, makes it clear that only upon a complaint in writing
made by the payee or the holder in due course of the Cheque, the court can take cognizance of the offence.
If the payee or the holder in due course does not file a complaint, the drawer cannot be prosecuted.

Cognizance of Offence
In terms of Section 142 of the Negotiable Instruments Act, 1881, no court shall take cognizance of any
offence punishable under section 138 except upon a written complaint made by the payee or the holder in
due course of the dishonoured Cheque and filed within one month of the date on which the cause of action
arose. No court inferior to that of a metropolitan magistrate or a first-class judicial magistrate can try an
offence under section 138.
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8
N.C. Kumaresan v. Ameerappa 1991 (1) KLT 797
Section 142 states that the cognizance of an offence can be taken under Section 138 upon a complaint in
writing which must be made within one month by the payee or holder in due course from the date on which
the cause of action arises under clause (c) of the proviso to section 1389. In substance we can say that when
a drawer, served with a notice within 30 days from the date on which the payee or the holder in due course
has come to know about the return of the Cheque and the drawer does not make the payment as demanded,
the complaint shall have to be filed within 30 days from the date on which the 15 days’ time expires.

The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 has introduced a
proviso to Section 142 permitting the court to take cognizance of a complaint after the prescribed period if
the complainant satisfies the court that he had sufficient cause for not making a complaint within such
period. It would thus be within the discretion of the court to condone the delay, depending upon the
causative circumstances.

PROCEEDINGS AGAINST DISHONOUR OF CHEQUE

Prior to the incorporation of chapter XVII in the Negotiable Instruments Act in 1988, to deter and penalize
the issue of worthless Cheques, it was only under the provisions of the Indian penal Code 1860 (IPC) that
the drawer of a Cheque could be criminally prosecuted if it could be shown that he cheated someone by
issuing the Cheque. Even after the introduction of the specific provisions in the Negotiable Instruments
Act, a drawer can be prosecuted under IPC for cheating, but he cannot be prosecuted and punished for the
same offence under both the enactments. Mens rea or dishonest intention must be established to prove
cheating, but it is not an essential element of an offence under section 138 of the Negotiable Instruments
Act.

Criminal Proceeding – Chapter XVII of the Negotiable Instruments Act

Chapter XVII inserted by the Banking, Public Financial Institutions and Negotiable Instruments Laws
(Amendment) Act, 1988 provides for penalties in case of dishonour of certain Cheques for insufficiency of
funds in the accounts or for the reason that the amount exceeds the arrangement made by the drawer.

As per the penal provisions under the Act, the drawer, committing an offence under Section 138, is liable
to be punished with imprisonment for a term which may extend to two years, or fine which may extend to
twice the amount of the Cheque or both.
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9
Kody Elecot Ltd v. Down Town Hospital
Summary Proceeding - Order 37 of the Code of Civil Procedure
When a Cheque is dishonoured, the holder or payee of the Cheque can sue the drawer or endorser for the
recovery of amount along with interest. Besides a civil suit for recovery of the amount, proceeding in a
summary manner can be initiated under Order 37 of the Code of Civil Procedure. The advantage of suing
under chapter XXXVII of Civil Procedure Code is that the defendant is not allowed in such cases to defend
the suit without leave obtained from Court and it is provided further that a decree passed under the said
Order, may be executed forthwith. If no such leave is applied for or granted ,the allegations in the plaint
shall be deemed to be admitted, and the plaintiff is entitled to a decree for the principal sum and also the
interest as calculated under Section 9 and 80 of the Negotiable Instruments Act, 1881.

Criminal prosecution under section 138 does not bar a civil action against the drawer on the dishonoured
Cheque. In Medical Chemicals & Pharma P Ltd v. Biological E Ltd., the Supreme Court said:

"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".

In addition to the remedies available under the Act the payee can also resort to remedies available under
Civil Procedure Code and Consumer Protection Act. In Pankaj Bhai Saibai Patel v. State, it has been held
that in view of the limit of fine as prescribed in Section 29(2), Code of Criminal Procedure, the Magistrate
who thinks it fit that the complainant must be compensated for loss can resort to section 357(3) of the code
and can award compensation to the complainant for which no limit is prescribed in Section 357(3). The
power of Courts to award compensation is not ancillary to other sentences but it is in addition thereto.

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OFFENCES - CHEATING AND FORGERY
Cheating being an offence is defined under Section 415 of the Indian Penal Code as follows:

"Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver
any property to any person, or to consent that any person shall retain any property, or intentionally induces
the person so deceived to do or omit to do anything which he would not do omit if he were not so deceived,
and which act or omission causes or is likely to cause damage or harm to that person in body, mind,
reputation or property, is said to "cheat".

Explanation. A dishonest concealment of facts is deception within the meaning of this section."

In order to bring the case within the definition of Cheating under section 415 of the IPC, it has to be shown
by the prosecution that there was some inducement on the part of the accused persons and the said
inducement was made fraudulently or dishonestly with a view to deceive the complainant. It is further to
be shown by the prosecution that due to deception practiced by the accused persons, the person so deceived
had delivered the property to the accused persons or had given consent that the accused person shall retain
that property.

To hold a person guilty of the offence of cheating it has to be shown that his intention was dishonest at the
time of making the promise.

Whenever a Cheque issued with dishonest intentions is dishonoured, the drawer of the Cheque can be
proceeded against under sections 417 & 420 of the IPC by the payee or holder in due course of the Cheque.

In Keshavji Madhavji v. Emperor [AIR 1930 Bom 179] it was observed that ‘it was for the prosecution to
establish facts which point prima facie to the conclusion that the failure to meet the Cheque was not
accidental but a consequence expected and therefore, intended by the accused. It will then be for the accused
to establish any facts that may be in his favour which are specially within his knowledge and as to which
the prosecution could not be expected to have any information’. A mere allegation that a Cheque issued by
the accused to the complainant had been dishonoured is not sufficient to establish the offence of cheating
under section 415 of the IPC.

In Baijnath Sahay v. Emperor [AIR 1933 Pat 183] it was observed that the act of drawing a Cheque implied
at least three elements: (a) that the drawer has an account with the bank in question; (b) that he has authority
to draw on it for the amount shown on the Cheque; (c) that the Cheque as drawn, is valid order for the
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payment of the amount, or that the present state of affairs is such that in the ordinary course of events, the
Cheque will on future presentment be dishonoured. Drawing of a Cheque does not imply a representation
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that the drawer already had the money in the bank to the amount shown on the Cheque, for he may either
have authority to overdraw, or have an honest intention of paying in the necessary money for before Cheque
can be presented.

Thus mere dishonour for lack of funds does not amount to cheating; for cheating to be established a mental
element to deceive is necessary.

Cheating by Personation
Section 416 of IPC defines cheating by personation as follows:

"A person is said to cheat by personation if he cheats by pretending to be some other person, or by
knowingly substituting one person for another, or representing that he or any other person is a person other
than he or such other person really is.

Explanation. -The offence is committed whether the individual personated is a real or imaginary person."

The personation referred to in this section may be either by words or by conduct. The offence under section
416 of IPC owes its gravity to the fact that it affects not only the person deceived but also the person
personated.

Offence of cheating by personation is punishable under section 419 of IPC whereas general cheating is
punishable under section 417 and section 417 of IPC.

Forgery
Section 463 of IPC defines forgery as:

"Whoever makes any false documents or electronic record part of a document or electronic record with,
intent to cause damage or injury, to the public or to any person, or to support any claim or title, or to cause
any person to part with property, or to enter into any express or implied contract, or with intent to commit
fraud or that fraud may be committed, commits forgery."

Section 464 of IPC deals with making a false document and provides as under:

A person is said to make a false document or false electronic record-

Firstly -Who dishonestly or fraudulently makes, signs, seals or executes a document or part of a document
or makes or transmits any electronic record or part of any electronic record, affixes any digital signature on
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any electronic record, or makes any mark denoting the execution of a document or the authenticity of the
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digital signature, with the intention of causing it to be believed that such document or part of document,
electronic record or digital signature was made, signed, sealed, executed, transmitted or affixed by or by
the authority of a person by whom or by whose authority he knows that it was not made, signed, sealed,
executed or affixed; or

Secondly- Who, without lawful authority, dishonestly or fraudulently, by cancellation or otherwise, alters
a document or an electronic record in any material part thereof, after it has been made, executed or affixed
with digital signature either by himself or by any other person, whether such person be living or dead at the
time of such alteration; or

Thirdly- Who dishonestly or fraudulently causes any person to sign, seal, execute or alter a document or an
electronic record or to affix his digital signature on any electronic record knowing that such person by
reason of unsoundness of mind or intoxication cannot, or that by reason of deception practiced upon him,
he does not know the contents of the document or electronic record or the nature of the alterations.

Explanation 1 – A man’s signature of his own name may amount to forgery.

Explanation 1 – The making of a false document in the name of a fictitious person, intending it to be
believed that he document was made by a real person, or in the name of a deceased person, intending it to
be believed that the document was made by the person in his lifetime, may amount to forgery.

Banker’s liability for payment made on forged Cheques

Relationship between a banker and his customer is that of a debtor and creditor. When a Cheque with a
forged signature is presented, the banker has no authority to make payments on it, and if he does make such
payment he would be acting contrary to the law and would be liable to the customer for the said amount. A
bank in such cases can escape liability only if it can show that the customer is not entitled to make a claim
on account of adoption, estoppel or ratification.

The rule of law in this regard can be stated as follows:

When a Cheque duly signed by a customer is presented before a bank with whom he has an account there
is a mandate on the bank to pay the amount covered by the Cheque. However, if the signature on the Cheque
is not genuine, there is no mandate on the bank to pay. The bank when makes payment on such a Cheque,
cannot resist the claims of the customer with the defence of negligence on its part, such as leaving the
Cheque book carelessly so that the third parties could easily get hold of it. This is because a document in
Cheque form, on which the customer’s name as drawer is forged, is a mere nullity. The bank can succeed
18

only when it establishes adoption or estoppel.

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 DRAWER’S LIABILITY FOR DISHONOUR OF CHEQUE
Section 30 of the Negotiable Instruments Act, 1881 reads as follows:

"the drawer of a bill of exchange or a Cheque is bound, in case of dishonour by the drawee or acceptor
thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by, the
drawer".

Section 30 makes it imperative that the notice of dishonour should of necessity be served on to the drawer
of such Cheque. It is clear that the drawer shall be bound to compensate the payee or the holder, as the case
may be, if only he has been served with the notice of dishonour.

Section 138 of the Negotiable Instruments Act requires that the payee or the holder in due course of the
Cheque to issue a notice in writing to the drawer making a demand for payment of the Cheque amount.
Such notice must be given within 30 days of information from the bank regarding the return of Cheque as
unpaid.

The requirement of giving of notice is mandatory. There is no mode prescribed under section 138 for serving
the notice. It is sufficient that the notice in writing is served on accused. Where no notice making demand
for payment was served upon the drawer as contemplated under clause (b) and clause (c) of Section 138,
which would mean that no demand has been made within the specified time from the date of dishonour of
Cheque in question, conviction will not be sustainable10.

Consequence of part payment by drawer after issue of notice

Section 138 clearly shows that in the event of the drawer of the Cheque failing to make the payment of the
said amount of money, a prosecution can be maintained. The expression "said amount of money" can only
denote the amount for which the Cheque is drawn and cannot relate to a part of it. Even where part payment
is made by the drawer after issue of statutory notice, the prosecution cannot be quashed11.

Liability of drawer after deposit of entire amount during trial

As stated by the Supreme Court once the offence is committed, any payment made subsequent thereto will
not absolve the accused of the liability of criminal offence, though in the matter of awarding of sentence, it
may have some effect on the court trying the offence. But by no stretch of imagination, a criminal
proceeding could be quashed on account of deposit of money in the court or that an order of quashing of
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10
Adhikari (B) v. Ponraj 1996 Cri LJ 180 (Mad)
11
Ruby Leather Exports v. Venu (K) (1995) 82 Comp Cas 776 (Mad).
criminal proceeding, which is 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 consequence12.

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 complainant13.

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.

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12
Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)
13
Bhupinder Lima v. State (2000) 99 Comp Cas 424 (AP)
DRAWEE’S LIABILITY FOR DISHONOUR OF CHEQUE
Rightful Dishonour - when bank may refuse to honour

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 honour 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 Income-Tax 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.

Wrongful dishonour of Cheque – Drawee/ bank’s liability to pay damages

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 contract for which the banker
is liable to pay damages.

The liability of drawee of Cheque in case of a wrongful dishonour has been dealt with under Section 31 of
the Negotiable Instruments Act, 1881. Section 31 states as follows:

"the drawee of a Cheque having sufficient funds of the drawer in his hands properly applicable to the
payment of such Cheque must pay the Cheque when duly required so to do, and, in default of such payment,
must compensate the drawer for any loss or damage caused by such default".

The position of law has also been made clear in a number of authorities. Reference may be made to the
following:

In New Central Hall v United Commercial Bank Ltd. the Madras High Court held that where a banker
having sufficient funds of a customer in his hands fails, even by mistake to honour Cheque issued by the
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customer, the customer has a right to claim damages.

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In Jogendra Nath Chakrawarti v. New Bengal Bank Limited14, it was held, "where the banker, being bound
to honour his customer’s Cheque, has failed to do so, he will be liable in damages. If, special damage,
naturally ensuing from the dishonour, is proved, it will be properly taken into account in assessing the
amount of the damages. If the customer be a trader, the court may properly award substantial damages, in
the absence of proof of special damages. In other cases the customer will be entitled to such damages as
will reasonably compensate him for the injury which, from the nature of the case, he has sustained. All loss
flowing naturally from the dishonour of a Cheque may be taken into account in estimating the damages.

Compensation for wrongful dishonour

Wrongful dishonour of a Cheque exposes the drawee bank to statutory liability to the drawer to compensate
him for 'any loss or damage cause by such default'.

The principle of awarding compensation to the drawer of a Cheque is reparation for the injury sustained or
likely to be sustained by reason of dishonour. In almost every case the drawer can recover substantial
damages against the drawee on the basis of injury to his credit, although he may not be able to prove that
he had suffered actual pecuniary loss through the dishonouring of the Cheque15. However, there appears to
be a distinction between a trader and a non-trader in this respect, while a trader is always entitled to
substantial damages for dishonouring of his Cheque, a non-trader will be entitled only to nominal damages
in the absence of an allegation and proof of substantial damages16.

The General rule followed by the courts in awarding damages is that damages are awarded for foreseeable
and actual loss suffered and the quantum of damages is usually based on the principle of ‘restitution in
integral’ i.e. restoring the person to the position he would have been in if he had not suffered a damage.
But in case of tradesman’s Cheque the damages awarded are inversely proportional to the amount on the
Cheque. Thus, smaller the amount of the dishonoured Cheque, greater are the damages paid. The reason
behind this rule is, businessman’s loss of reputation or status or goodwill is once again inversely
proportional to the amount of the Cheque.

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14
AIR 1939 Cal. 63
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15
Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 595
16
Gibbons v. Westminster Bank (1939) 3 All E.r. 577
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.

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 dishonoured 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 drawer’s
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
dishonour of Cheques and the liability arising therefrom, it could make the process of recovery of damages
faster for the aggrieved party. For example, the Debts Recovery Tribunals have been established by the
Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery
of debts due to banks and financial institutions. Establishment of a similar tribunal to deal with the cases of
dishonour of Cheques could perhaps provide a faster relief to the aggrieved party.
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BIBLIOGRAPHY
1. R.K Suri; Dishonour of Cheques- Prosecution & Penalties, ALT Publishers, Hyderabad;

2. S.N. Gupta, Dishonour of Cheques-Liability Civil & Criminal, Universal Book Traders, Delhi;

3. Rajesh Gupta, Dishonour of Cheques – Law and Practice, Bharat Law House Pvt Ltd, New
Delhi;

4. A.N Saha, Law of Dishonour of Cheques, Orient Publishing Company, New Delhi;

5. S.K. Awasthi, Law of Dishonour of Cheques – Forgery and Cheating, CTJ Publications, Pune;

6. R. Swaroop, Cases on Dishonour of Cheques (Under Section 138 to Section 142 of the
Negotiable Instruments Act), Law Aid Publications, Madras;

7. Bhashyam & Adiga, The Negotiable Instruments Act, Bharat Law House, New Delhi;

8. M.S. Parthasarthy, Cheques in Law and Practice, Universal Law Publishing Co. Pvt. Ltd.,
Delhi;

9. S. Chand, Business laws, S. Chand and Company Ltd., New Delhi;

10. Article by T.N Pandey, Dishonour of Cheques: whether all directors of a company can be
prosecuted in case of dishonour of Cheques.

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