ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my teacher Mr.

Asraf Uddin, Lecturer ,Department Of Law , Leading University,
who gave me the golden opportunity to do this wonderful assignment on
the topic of “Dishonor of Cheques and Its Legal Process”, which also
helped me in doing a lot of Research and I came to know about so many
new things I am really thankful to him. He has been a never-ending
source of equanimity and extra-ordinary competence at every stage of my
task. His valuable comments and suggestions proved greatly beneficial to
me. The Advice, Suggestion and proper guidance of my honourable
teacher helps me for made my text more informative.

My sincerest thanks go to the others who were involved and helped

directly and indirectly in preparing this assignment as well as Department
of Law, Leading University for the support as well as giving me the
opportunity to prepare this assignment as a part of my LL.B program.

I would like to express my deep gratitude to above-mentioned people for

their contribution to fulfill our aim.
Introduction

A cheque is said to be dishonored when the payment is not made on its

presentment to the bank. Before 1988, no liability was incurred in case of
dishonour of cheque, but the insertion of Section 138 in the Negotiable
Instruments Act, 1881 (hereinafter referred to as the Act) imposed collective
liability of a criminal as well a civil nature, by way of short-term imprisonment
and fine, provided a cheque is dishonored. The rationale behind said insertion
was to create and develop the faith of cheque as a valid monetary instrument
among the populace.

Currently nearly all the banks, whether public or private, issue cheques for the
transfer of money and usage of the same has been augmented to a large extent
since before. In these circumstances, cases involving dishonour of cheque were
bound to increase, which prompted the legislature to examine the idea of
providing remedy by affixing civil and criminal liability to such offence. The
newly incorporated provisions to some extent created apprehension of
punishment in the mind of the drawer of the cheque to not issue cheques
without having sufficient amount of money in their accounts. However, the evil
was far from eradicated, which is evident from the huge bulk of cases involving
dishonour seeking judicial relief even at present. There are certain ingredients
enunciated by the judiciary and provided in the Act itself that must be fulfilled
in order to hold liable a drawer for the dishonour of cheques. The main object
of the Act is to legalize the system by which instruments contemplated by it can
pass from hand-to-hand by negotiation like any other good.

Understanding Cheque and Dishonour of

Cheque
Cheque :A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand. This definition includes the
electronic image of a truncated cheque and a cheque in the electronic form. It is an
unconditional order in writing, written by one person to another (the latter being a
banker), signed by the person giving it, entailing the banker for whom it is written,
pay on demand a sum definite in money to or to the order of a specified person, or to
bearer.

Different Types of Cheque:

 Bearer Cheque
 Order Cheque

 Uncrossed / Open Cheque

 Cross Cheque
 Anti-Dated Cheque

 Post Dated Cheque

 Stale Cheque

Dishonour of Cheque:A cheque is said to be dishonored when it is refused to be

accepted or paid when presented to the bank. It refers to a cheque that is drawn
by a bank customer on his bank, which cheque has been dishonored by the
bank upon presentation by the payee of the cheque or the payee’s authorized
agent, ostensibly, because there was either outright lack of funds or
insufficiency of funds in the account on which the cheque was drawn. Further,
Section 92 of the Act defines, a cheque is said to be dishonored by non-
payment when the maker of the note, accept or of the bill or drawee of the
cheque makes default in payment upon being duly required to pay the same. In
the case of K. Venkatasubbaya vs. P.R. Rao Tobacco Co., the court, in
accordance with the said Section, held that 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.

Legal Framework of Dishonour of Cheque

To ensure prompt remedy against defaulters and to make sure of credibility of
the holders of negotiable instruments, a criminal remedy of penalty was
inserted in the Act, in form of the Banking, Public Financial Institutions and
Negotiable Instruments Laws (Amendment) Act, 1988 that inserted Sections
138 to 147 in the Act, which were further modified by the Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 2002. The issue
of dishonour of cheque is dealt under Sections 138 to 147 of the Act, which
provide for remedies and various forms of punishment in case of dishonour of
cheque. Section 138 of the Act pertains to dishonour of cheque for
insufficiency of funds in the account. It provides that a person shall be
punishable for two years imprisonment or with fine, if the cheque issued by
drawer is returned by the bank unpaid. The cheque must be issued in discharge
of whole or part of any debt or other liability. A presumption is drawn against
the drawer and in favour of the holder under Section 139 of the Act that
cheque is received by the holder in discharge of whole or in part of any debt or
other liability. Further, Section 140 of the Act provides that a person drawing a
cheque cannot take up the defence that when he drew the cheque he had no
idea of the insufficiency of credit balance in his account.
Section 141(1) of the Act introduces a singular concept of offence, viz. those
committed by bodies corporate. It provides that if a person committing an
offence is a company, every person who at the time said 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.
Section 142 of the Act 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 138. If there is no proof
of service of the notice of demand as required under Section 138, the
prosecution of the drawer is not permissible. The summary trial of cases has
been provided under Section 143 of the Act, notwithstanding anything
contained in the Code of Criminal Procedure, 1973 (2 of 1974) (hereinafter
referred to as code). All offences under this chapter shall be tried by a judicial
magistrate of the first class or by a metropolitan magistrate and the provisions
of Sections 262 to 265 of the code shall, as far as may be, apply to such trials.
Further under Section 144 of the Act, mode of service of summons has been
provided. Section 145 deals with the evidence on affidavit. Section
146 perceives bank’s slip as prima facie evidence of certain facts and Section
147 states that all the offences punishable under the Act shall be
compoundable.

Reason for Dishonor of Cheque

There can be two main reasons for dishonour of a cheque:

In the first case, where the non-payment is owing to a technical default, the
payee can approach the drawer to issue a fresh cheque. If the drawer refuses to
replace the defective cheque or if the replacement cheque too is found
defective, the remedy under law is to file a civil case for breach of contract.
Under this route, the amount of the payment, damages, and cost of legal fees
can be recovered from the drawer.

If the non-payment is because of lack of funds in the drawer’s account, the

payee can recover the amount by filing a civil case. However, if the cheque was
given in discharge of a debt or a liability towards the payee, the dishonour of
the cheque amounts to a criminal offence and recourse is available under
Section 138 of the Negotiable Instruments Act, 1881.

The other valid reasons for a cheque dishonour is that the account on which the
cheque has been issued is closed or a 'stop payment instruction' has been given
by the drawer of the cheque to the bank. These reasons stand as valid grounds
for action against the drawer of the cheque.
Upon dishonour of a cheque, the bank on which the cheque is drawn (the
drawer’s bank) returns the cheque along with a note to the payee’s bank. This
note called the ‘Cheque Return Memo’, records the fact of dishonour and
shows the reason for such a dishonour. The payee can re-deposit the cheque
during its validity (within 3 months from its stated date of issue) or can proceed
to take legal action. The payee has to provide a written notice to the drawer if
he decides to proceed legally giving the payee enough time to repay the
amount.

The requirements for recovery under Section 138

The Negotiable Instruments Act, 1881 require that the payee should follow a certain
procedure to claim relief under Section 138.

The steps to be taken by the payee for recovery of the cheque amount are as
under:

Step 1: On dishonour of cheque, collect the dishonored cheque and cheque

return memo from the bank immediately.

Step 2: Within 30 days from the date of dishonour of the cheque, send a
demand notice to the drawer giving a brief background of the transaction,
intimation about the fact of the dishonour and requiring the drawer to pay the
cheque amount within 15 days from the date of receipt of the demand notice.

Step 3: If the drawer fails to make the payment within the notice period of 15
days, then the payee can file a complaint against the drawer under Section 138
of the Negotiable Instruments Act, 1881. The complaint should be filed before
the magistrate within 30 days from the end of notice period.

Step 4: The court will issue summon to the drawer of the dishonored cheque.
On receiving the summons the drawer has to be present in court and file an
appearance through his advocate. After the parties complete their written
pleadings and lead evidence to support their case, the magistrate will pass an
appropriate order in the matter.

The documents to be filed along with the complaint

The payee should have the following documents ready for recovery
of the cheque amount:
 Agreement/contract between the drawer and the payee including
invoices, bills, etc, against which the dishonored cheque was issued.

 Acknowledgement, if any, of goods or services received by the drawer

(In case of contracts for supply of goods and services)

 Dishonoured cheque.
  Cheque return memo from bank stating reason for dishonor of cheque

 Copy of the demand notice sent to the drawer and proof of dispatch of
the demand notice(if any)

 Postal acknowledgment for delivery of demand notice to the drawer.

The penalty imposed under Section 138

If the case is proved against the drawer of the dishonored cheque, then the
magistrate can levy a fine on the drawer, which may be up to twice the amount
of the dishonored cheque and/or imprisonment for a period up to two years.
Also if the drawer repeats the offence more than once then the drawee bank has
a right to stop the cheque facility to the drawer and close his account for an
indefinite period.

CONCLUSION

In the concluding part of this research project, the researcher would simply
seek to indicate that the analysis hereinabove is by no means whatsoever to be
perceived as an exhaustive compendium regarding the offence of dishonour of
cheques . Nor does the researcher claim to have traced even a substantial
number of the complex contours of the manner in which the said subject-matter
has been treated by the Negotiable Instruments Act. The primary aim of the
project has chiefly been to draw attention to the rationale justifying the separate
treatment of the concept of dishonour by individuals and bodies corporate.
Such aim gains further significance in the light of the attachment of both civil
and criminal liabilities along with the offence that is caused by a cheque being
dishonored under the statutorily prescribed circumstances. Given the widely
differing views regarding the varying nature and dominion of the companies
and the oft-raised confusion in respect of identifying the persons at the helm of
the affairs of the corporate entity, an effort such as the one undertaken in course
of this project is of paramount importance in the legal and commercial domains
of the modern world. The necessity for such a separate treatment for corporate
bodies is perhaps best voiced in the words of Hazlitt: “Corporate bodies are
more corrupt and profligate than individuals, because they have more power to
do mischief, and are less amenable to disgrace or punishment. They neither feel
shame, remorse, gratitude nor goodwill.”
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1. https://www.indiainfoline.com/article/research-articles-personal-
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2. https://mylegalwork.com/guides/cheque-dishonour
3. https://www.hg.org/legal-articles/cheque-dishonour-law-in-
bangladesh-37971
4. https://www.lawteacher.net/free-law-essays/business-
law/liability-of-companies-for-dishonour-of-cheques-business-law-
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5. https://www.indiainfoline.com/article/research-articles-personal-
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