Dishonour of Cheque for
Insufficiency of Funds: Features, Defences and Current Scenario
Author: Nikhil Sukhija
Introduction
The
Bank of Hindustan, first joint stock bank established in 1770 introduced cheques
in India. In 1881, the Negotiable Instruments Act (NIA) formalized the usage
and characteristics of instruments like the cheque, the promissory note and the
bill of exchange. With the advent of payment through cheques, the monetary
transactions became much easier. In place of bundle of notes, a piece of cheque
became more convenient and easy to use. It immensely helped in increasing the
trade and commercial activities around the country. However, it also invited
another set of new problems where people started issuing cheques without an
intention of honouring them. The bouncing and dishonouring of cheques became a
common phenomenon. For the purpose of ensuring credibility to the holders of
the negotiable instruments, a criminal remedy in the form of penalty was
introduced through Banking, Public Financial Institutes and Negotiable
Instruments Laws (Amendment) Act, 1988 which was further modified by the
Negotiable Instruments (Amendment) Act, 2002.[1] The
penalty prescribed for the offence of cheque dishonour in Section 138 of the
NIA is imprisonment for 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. Section 139
provides a presumption of liability of the drawer of the cheque unless contrary
is proved. While Section 140 explicitly provides that “It shall not be a defence in a 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 the reasons stated in that
section”. The Section 147 of the NIA provides that all the offences in this
Act shall be compoundable. Therefore, the case of cheque dishonour is a
compoundable offence.
A step-by-step guide for legal
recourse
1. A cheque has to be 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.
2. Upon such presentation of the cheque, if it gets
dishonoured, the payee (person in whose favour cheque is drawn) have to send a
Legal Notice within 30 days from the date of return of the cheque (through
return memo).
3. The payee through the Legal Notice asks the drawer
of the cheque to pay the amount within 15 days from the receipt of the Notice.
4. Upon the expiry of the aforesaid 15 days, the payee
has to file a complaint case before the Court of Magistrate within 30 days of
the said expiry.
5. On filing of the complaint in the Court of
Magistrate, court issues summons to the Accused.
Note: In case, the payee misses any of the stipulated timeline,
he can present the cheque within its validity period, i.e. 3 months and upon
each time of the dishonour, fresh cause of action arises. Nothing in the NIA
precludes the payee from filing a separate civil suit for recovery of the
amount due for which the limitation period is 3 years from the cause of action.
The Negotiable Instruments
(Amendment) Act, 2018
The
main aim of the amendment act is to reduce the undue delay in the cheque
dishonour cases and incorporating a provision for making the payment of interim
compensation to the complainants. The objective of the Act is to promote Ease
of doing business in India.
Amendments
1. Section 143A: It provides powers to the court to
order the drawer of the cheque to pay interim compensation to the complainant
when he pleads not guilty in a case of summary trial. The amount of
compensation shall not exceed 20% of the amount of the cheque. On acquittal,
the payee is bound to refund the amount along with RBI’s prevailing interest rate,
to the drawer. The interim compensation shall be paid within 60 days from the
date of the order of court.
2. Section 148: it empowers the appellate court to
order payment pending the appeal against conviction under Section 138 of the
NIA. Minimum of 20% of the compensation awarded by the trial court may be
ordered by the appellate court which shall be in addition to the amount already
paid by the appellant under Section 143A.
Defences in the Case of Cheque
Dishonour
One
of the main ingredients in the case of cheque dishonour is that the payment
must be made for the discharge of a legally enforceable debt and due to Section
139 (as explained above) the onus is on the accused to prove that there is no
legally enforceable debt.
Cheque dishonoured was given as a Security
In
the case of Joseph Vilangadan v.
Phenomenal Health Care Services Ltd. & Anr., directors of the company
had given certain cheques as refundable security deposits for ensuring due
performance of their work. In the facts and circumstances of the case, there
existed no debt or liability and the cheques were only given for the purpose of
security. Therefore, no action under Section 138 of the NIA was maintainable.
Technical Defences
The
technical defences include limitation period and defective notice.
Limitation
The
limitation period prescribed in the chapter XVII of the Negotiable Instrument
Act, 1881 is strictly to be adhered in the cases of cheque dishonour. After the
receipt of cheque return memo of the dishonoured cheque by the payee, demand
through the legal notice should be made within 30 days.
Through
the legal notice, time period of 15 days is given to the other party following
which complainant has 30 days to file complaint under Section 138. The timeline,
if not strictly followed by the complainant may be as a defence at the disposal
of drawer.
Defective Notice
If
the mandatory legal notice is served in wrong person’s name, by quoting wrong
figures or is delivered at wrong address. The same may provide leverage to the
drawer as the mandatory requirement of Section 138 stood unfulfilled.
Vicarious Liability
Section
141 of the NIA, applies to the cases where offence is committed by a company
and it provides for vicarious liability on every person, who at the time of the
commission of the crime was in charge of and was responsible for the affairs of
the company.
A
three-Judge Bench of the Hon’ble Supreme Court in S.M.S. Pharmaceuticals Ltd.
v. Neeta Bhalla & Anr.[2],
referred to the Section 138 and 141 of the NIA and observed that a complaint
must contain material to enable the Magistrate to make up his mind for issuing
summons. It was held that Section 141 (2) of the Act envisages direct
involvement of any director, manager, secretary or other officer of the Company
in the commission of the offence. The reason for the same is that a person who
is in charge of and responsible for the conduct of the business of the Company
would naturally know why a cheque in question was issued and why it got
dishonoured. Therefore, liability arises on account of conduct, act or omission
on the part of the officer and not by virtue of his position in the company.
Thus,
if a complainant is not able disclose the necessary facts when making complaint
under Section 141 of the NIA, the same shall not be accepted by the court.
Current Scenario
Recently,
the Supreme Court of India extended the period of limitation for cheque
bouncing proceedings amid the COVID-19 pandemic and lockdown with effect from
15th March. The Supreme Court invoking its plenary powers under
Article 142 stated “In view of this
court’s earlier order on March 23 and taking into consideration the effect of
the COVID-19 and resultant difficulties being faced by the lawyers and
litigants and with a view to obviate such difficulties and to ensure that
lawyers/litigants do not have to come physically to file such proceedings in
respective Courts/Tribunal across the country including this Court, it is
hereby ordered that all periods of limitation prescribed under the Arbitration
and Conciliation Act, 1996 and under Section 138 of the Negotiable Instruments
Act 1881 shall be extended with effect from March 15 , 2020 till further
orders,”.
Ease
of doing business is the main objective behind the evolving nature of the
treatment for the dishonour of cheques. In the time of COVID-19 induced
lockdown where economic activities has taken a toll, the instances of cheque
dishonour are expected to rise. In order to unclog the courts and enhance the
ease of doing business in the country, the Department of Financial Services has
sought public comments with respect to decriminalisation of some offences like
bouncing of cheques. The move may be helpful in the short term but it also has
the potential of getting misused.
For any further queries, clarifications, and suggestions, please feel free to contact the undersigned author or write to us at protalkz03@gmail.com.
Email I'd- protalkz03@gmail.com
Contact number- 9555604055
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