KNOW THE LAW- Grounds on which a Cheque can be Dishonored

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November 23, 2017

Section 138 of the Negotiable Instrument Act, 1881 draws criminal implications in the event of dishonor of cheque (commonly referred to as ‘cheque bounce’) for insufficiency of funds etc. of funds in the account. In common parlance, it is believed that criminal proceedings under Section 138 of the Act would be attracted only when:

  • The cheque is returned by the bank unpaid either because the amount of money standing to the credit of the account is insufficient; or
  • That it exceeds the amount arranged to be paid from that account by an agreement made with the bank

And in the aforesaid cases, the person by whom the cheque has been drawn is liable for criminal proceedings under Section 138 of the Act.

Here it would be relevant to reproduce relevant extract of Section 138 of the Act:

  1. Dishonour of cheque for insufficiency, etc., of funds in the account.—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 provision of this Act, be punished with imprisonment of a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both..

Thus, from the above, it is manifest that a dishonour would constitute an offence only if the cheque is retuned by the bank ‘unpaid’ either because the amount of money standing to the credit of the drawer’s account is insufficient to honour the cheque or that the amount exceeds the amount arranged to be paid from that account by an agreement with that bank.

However, the judicial dictum has time and again expounded that the aforesaid are not the only contingencies which attract criminal proceedings under Section 138 of the Act. Other grounds on which a cheque can be dishonored are enumerated below:

Also read Notice of Dishonor of Cheque: Law and Important Judgments

“Stop Payment” Instructions

The Judiciary has time and again been confronted with the issue whether a cheque is dishonoured by reason of “stop-payment” instruction. This aspect had been deliberated by the Supreme Court in the case of Modi Cements Ltd. v. Kuchil Kumar Nandi[1], wherein the Supreme Court opined that if the drawer issues a notice to the drawee or to the Bank for stoppage of the payment, the same will not preclude an action under Section 138 of the Act by the drawee or the holder of a cheque in due course. However, a presumption in favour of holder as provided under Section 139 of the Act must follow. This implies that if the accused can show that the “stop- payment” instructions were not issued because of insufficiency or paucity of funds. and that the stop-payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under Section 138 of the Act would not be made out[2].

A similar view has been taken by the Supreme Court in the case of Goaplast (P) Ltd. Chico Ursula D’souza & Anr.[3], wherein the Court held that ‘stop payment instructions’ and consequent dishonour of the cheque of a post-dated cheque attracts provision of Section 138 of the Act.

Cheque has been lost

In the case of Rangappa v. Sri Mohan[4], the Supreme Court has held that failure of the drawer of the cheque to put up a probable defence for rebutting the presumption that arises under Section 139 of the Act would justify conviction under Section 138 of the Act even when the appellant drawer may have alleged that the cheque in question had been lost and was being misused by the complainant.

Account closed

NEPC Micon Ltd. v. Magma Leasing Ltd.[5]– In this case, the Supreme Court extensively discussed the aspect of dishonor of cheque where the cheque is returned by the Bank unpaid on the ground that the ‘account is closed’.

The Supreme Court in the case observed that if a cheque is dishonoured as the account of money standing to the credit of ‘that account’ was ‘nil’ at the relevant time apart from it being closed. Closure of the account would be an eventuality after the entire amount in the account is withdrawn. It means that there was no amount in the credit of “that account” on the relevant date when the cheque was presented for honouring the same. The Court in the case made a noteworthy observation that the expression “the amount of money standing to the credit of that account is insufficient to honour the cheque” is a genus of which the expression “that account being closed” is specie. After issuing the cheque drawn on an account maintained, a person, if he closes ‘that account’ apart from the fact that it may amount to another offence, it would certainly be an offence under Section 138 as there was insufficient or no fund to honour the cheque in ‘that account

“Signatures do not match” 

In a recent case of M/s Laxmi Dychem v. State of Gujarat[6], Two-Judge Bench of the Supreme Court was confronted with the question whether signature mismatch by drawer of cheque would tantamount to cheque dishonor under Section 138 of the Act.  The Court held in the affirmative and opined “signatures do not match” or that the “image is not found”, which too implies that the specimen signatures do not match the signatures on the cheque would constitute a dishonour within the meaning of Section 138 of the Act.

Signature mismatch on account of change in specimen signature or change of authorized signatory of a company

In Laxmi Dychem case (supra), the Court also deliberated on the aspect whether an offence under Section 138 of the Act would be made out in case the drawer changes his specimen signature given to the bank or in the case of a company by the company changing the mandate of those authorised to sign the cheques on its behalf?

In this context, the Court stated that so long as the change is brought about with a view to preventing the cheque being honoured the dishonour would become an offence under Section 138 of the Act subject to other conditions prescribed being satisfied.  

Court further observed that there may indeed be situations where a mismatch between the signatories on the cheque drawn by the drawer and the specimen available with the bank may result in dishonour of the cheque even when the drawer never intended to invite such a dishonour. We are also conscious of the fact that an authorised signatory may in the ordinary course of business be replaced by a new signatory ending the earlier mandate to the bank. Dishonour on account of such changes that may occur in the course of ordinary business of a company, partnership or an individual may not constitute an offence by itself because such a dishonour in order to qualify for prosecution under Section 138 of the Act.  Court stated that in such cases shall have to be preceded by a statutory notice where the drawer is called upon and has the opportunity to arrange the payment of the amount covered by the cheque. It is only when the drawer despite receipt of such a notice and despite the opportunity to make the payment within the time stipulated under the statute does not pay the amount that the dishonour would be considered a dishonour constituting an offence, hence punishable.

The obiter dicta pronounced by the Indian Judiciary in aforesaid cases indicate that the Court has been liberal while interpreting law relating to dishonor of cheque and legislative intent behind enactment of Section 138 to 142 of Negotiable Instruments Act i.e. to inculcate faith in the efficacy of banking operations and giving credibility to negotiable instruments in business and day to day transactions by making dishonour of such instruments an offence has been kept intact.

Other settled legal position is that Section 138 of the Act cannot be applied in isolation and ignoring Section 139 of the Act which envisages a right of rebuttal before an offence could be made out under Section 138 of the Act.

[1] 72 (1998) DELHI LAW TIMES 179 (SC)

[2] M/s Laxmi Dychem v. State of Gujrat, (2012) 13 SCC 375

[3] (2003) 3 SCC 232

[4] (2010) 11 SCC 441

[5] IV (1999) SLT 254

[6] (2012) 13 SCC 375