Short Note on Dishonor of Cheque (Cheque Bounce)

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June 24, 2019

Chapter XVII of the Negotiable Instrument Act, 1881 (hereinafter referred to as the NI Act) envisages provisions relating Of Penalties Case of Dishonour of Certain Cheques for Insufficiency of Funds in the Accounts.

What does the Law say?

Section 138- 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 provisions of this Act, be punished with imprisonment for 19 [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both: 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, 20 [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque 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.

Explanation — For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.]

Here it would be germane to mention that the NI Act makes dishonor of cheque a criminal offence. Section 138 creates an offence when a cheque is returned by the bank unpaid either because of the amount of money standing to the credit of the account of the drawer is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from the account of the drawer. The law entails a punishment for a term which may extend to two years or fine which may extend to twice the amount of cheque.

Chapter XVII to the NI act was incorporated vide the Banking Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 with the object to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheques due to insufficiency of funds in the accounts or for the reason that it exceeds the arrangements made by the drawer, with adequate safeguards to prevent harassment of honest drawers.

Conditions for an offence under Section 138 of NI Act:

  1. Person must have drawn a cheque on an account maintained by him in a bank for payment of a certain sum of money to another person;
  2. The cheque has been presented to the bank within a period of six months from the date appearing on its face or within the period of its validity;
  3. Cheque is returned by the Bank unpaid
  4. The payee or the holder in due course of cheque makes a demand for the payment of said amount;
  5. The drawer of such cheque fails to make payment to the payee of holder in due cours

Defence which may not be allowed in any prosecution under Section 138 of NI Act:

Section 140 of the NI Act provides that it shall not be a defence in prosecution for an offence under Section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for reasons stated in the Section.