Cheque Bouncing Laws in India

The term, ‘cheque’ has been defined under Section 6 of the Negotiable Instruments Act, 1881 (N.I. Act) as “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”. The person who issues the cheque is called a drawer under Section 7 and the person to whom the amount is being payed is usually called the ‘payee’. A cheque once issued is valid for a period of 3 months from the date of its issue and the payee must deposit the same for withdrawal within that stipulated time only in order to successfully be credited with the amount.

What is Cheque Bouncing in Legal Parlance?

What is in common parlance usually understood to be ‘cheque bouncing’, is actually termed ‘dishonour of cheque’ under Section 138 of the Negotiable Instruments Act, 1881. A dishonour of cheque is said to occur under the said section when due to reason of insufficient amount in the account of the drawer the transaction cannot be honoured. Though insufficiency of funds is the most common reason for dishonour of cheque, other grounds which may also amount to dishonour of cheque are:

• Section 91 of the N.I. Act provides that dishonour of a bill of exchange (cheque) may also occur when the payee of the cheque makes a fault in acceptance or refuses to accept the cheque.
• Damaged/Distorted Cheque- if the cheque issued is torn, damaged or in a bad shape, it may amount to dishonour of cheque.
• If there is any kind of over-writing or scribbling on the cheque.
• If all the details for example, amount, account number, name of the payee etc are not duly filled in.
• If the signature of the issuer does not match the signature kept with the records of the bank.
• If there is court order restraining or injuncting against the payment of amount through that particular cheque.
• If the bank receives information about death or lunacy of the issuer before the amount is withdrawn or if there is any other kind of material alteration in the circumstances.

Offence of Cheque Bouncing: Whether a Criminal or Civil Action?

Section 138 seeks to impose such a defaulting drawer of cheque with a criminal liability, which could involve either an imprisonment which could extend for a period of two years or a fine equivalent to twice the amount dishonoured or both. Therefore, this makes it evident that an action for dishonour of cheque has penal (criminal) consequences

Indian Evidence Act, 1872- Section 4 of the Indian Evidence Act, 1872 provides for three types of presumptions that a criminal court may possess during the trial of any criminal offence. In case of the offence of dishonour of cheque, this standard is prescribed as ‘shall presume’ by Section 119 of the Negotiable Instruments Act, 1881. The provision reads as under:
“In a suit upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved.”

Summary Trial under Cr.PC., 1973

In the case of Shree Raj Travels and Tours v. Destination of the World, the Delhi High Court observed that all case brought under section 138 of the N.I. Act, that is cases of dishonour of cheque must follow the procedure for summary trial under section 261 of the Code of Criminal Procedure, 1973. The Court went on to describe the entire procedure in details which is as under:

The summary trial procedure to be followed for offences u/s 138 N.I. Act would thus be as under:

Step I: On the day complaint is presented, if the complaint is accompanied by affidavit of complainant, the concerned MM shall scrutinize the complaint & documents and if commission of offence is made out, take cognizance & direct issuance of summons of accused, against whom case is made out.

Step II: If the accused appears, the MM shall ask him to furnish bail bond to ensure his appearance during trial and ask him to take notice u/s 251 Cr. P.C. and enter his plea of defence and fix the case for defence evidence, unless an application is made by an accused under section 145(2) of N.I. Act for recalling a witness for cross examination on plea of defence.

Step III: If there is an application u/s 145(2) of N.I. Act for recalling a witness of complainant, the court shall decide the same, otherwise, it shall proceed to take defence evidence on record and allow cross examination of defence witnesses by complainant.

Step IV: To hear arguments of both sides

Compounding of Offence of Dishonour under Cr.P.C-

Section 147 of the Negotiable Instruments Act, 1881 states that every offence under the Act (including the offence of dishonour of cheque) is compoundable. This brings into play section 320 of the Code of Criminal Procedure, 1963 which provides the procedure for compounding of criminal offences. Compounding of offences is a procedure in which the accused is required to admit to the guilt and in return the prosecution agrees to drop the criminal charges, however, it may impose other conditions or demand payment of money. So long as the accused complies with the terms of compounding arrived at, the prosecution cannot proceed against the accused on the same matter. However, it may continue with the charges in case the accused breaches the settlement. Therefore, if the accused is willing to enter into compounding proceedings, he or she must first be sure of his capacity to fulfil the conditions imposed by the prosecution.

Limitation Period for Filing Action of Dishonour-

Under Article 137 of the Limitation Act, an action for dishonour of cheque must be brought by the drawer within a period of three years from the date of arising of cause of action, that is from the date that the cheque was dishonoured.

Obligations on the Payee of a Cheque

Before the drawer of the cheque can be imputed with criminal liability for the dishonour, Section 138 places certain obligations which first need to be fulfilled by the payee. These are:

1. The payee must have deposited the cheque with its banker for withdrawal within its period of validity.
2. The payee must intimate the drawer of such dishonour within 30 days of receiving information from the bank regarding the same. He must also demand that the amount in default be paid by the drawer within 15 days of the receipt of such notice. This notice must be a detailed one, which must inform the payer not just of the fact of dishonor, but also of the other details, for example, the cheque number, the reason given by the bank for the dishonor, if caused due to insufficiency of funds then by what amount did it fall short of the exact requirement, the possible course of action that the drawer would take if the demand of payment within the next 15 days is not fulfilled etc.

Steps To be taken by the Drawer in case of Action for Dishonour of Cheque

1. The drawer must pay the amount within 15 days of receiving notice of dishonour from the payee, lest face criminal sanctions prescribed under the provisions.
2. In August 2018, the Parliament amended the Negotiable Instruments Act, 1881 and inserted Section 148 in the Act. Under the same, if a drawer has been convicted under Section 138 and wishes to appeal against the same, he must first deposit a minimum of 20% of the default amount with the court. In case he is acquitted in the appeal, he will be refunded the amount.
3. The Supreme Court recently held in Surender Singh v. Virender Gandhi that Section 148 can be applied with a retrospective effect.
4. Under Section 140 the drawer is prohibited from taking the defense that he had no reason to believe that the cheque may be dishonored.
5. Under Section 147 of the Act, the offense of cheque is dishonor is compoundable and therefore the drawer must make every effort to settle the dispute with the payee instead of choosing the oft-lengthy procedures of conventional litigation.

Consequences Which Will Have to Be Suffered by A Drawer if Found Guilty of Offence of Dishonour of Cheque

• Punishment Prescribed under Section 138 Negotiable Instruments Act, 1881

As mentioned earlier, the punishment prescribed under section 138 of the negotiable Instruments Act, 1881 is that the person found guilty may be imprisoned for a term which may extend to two years or for fine of an amount which extends to twice the amount dishonored, or both.

• Consequences under the Relevant RBI Guidelines

Paragraph 15 of the Reserve Bank of India Master Circular on Customer Service in Banks dated July 1, 2015, provides for the detailed procedure which banks must adopt in cases of dishonor of cheque. Some of the most important points in this regard are as under:

1. Banks are required to implement the recommendations of the Goiporia Committee that dishonored instruments are returned/despatched to the customer promptly without delay, in any case within 24 hours.
2. The paying bank should return dishonored cheques presented through clearing houses strictly as per the return discipline prescribed for respective clearing houses in terms of Uniform Regulations and Rules for Bankers’ Clearing Houses. The collecting bank on receipt of such dishonored cheques should despatch it immediately to the payees/holders.
3. In relation to cheques presented directly to the paying bank for settlement of the transaction by way of transfer between two accounts with that bank, it should return such dishonored cheques to payees/ holders immediately.
4. In case of dishonor/return of cheques, the paying banks should clearly indicate the return reason code on the return memo/objection slip which should also bear the signature / initial of the bank officials as prescribed in Rule 6 of the Uniform Regulations and Rules for Bankers’ Clearing Houses (URRBCH).
5. With a view to enforcing financial discipline among the customers, banks should introduce a condition for the operation of accounts with cheque facility that in the event of dishonor of a cheque valuing rupees one crore and above drawn on a particular account of the drawer on four occasions during the financial year for want of sufficient funds in the account, no fresh checkbook would be issued. Also, the bank may consider closing the current account at its discretion. However, in respect of advances accounts such as cash credit account, overdraft account, the need for continuance or otherwise of these credit facilities and the cheque facility relating to these accounts should be reviewed by an appropriate authority higher than the sanctioning authority.
6. If a cheque is dishonored for a third time on a particular account of the drawer during the financial year, banks should issue a piece of cautionary advice to the concerned constituent drawing his attention to the aforesaid condition and consequential stoppage of cheque facility in the event of cheque being dishonoured on fourth occasion on the same account during the financial year. Similar cautionary advice may be issued if a bank intends to close the account.

• Steps That May Be Taken by the Bank

Under Rules 15.7 of the RBI Master Circular on Customer Service for Banks, every bank is free to devise its own policy to deal with cases of cheque bouncing. These internal guidelines relating to dishonour of cheque need to be approved by the Board of the bank and may be either preventive or curative in nature.

Therefore, every bank has its own set of disciplinary actions which may be taken against the payer of the cheque in case he or she is found guilty of dishonour of cheque. These steps might include refusal to give cheque books to the customer in case of repeated instances of cheque dishonour, closure of bank account etc.

• Adverse Effect on Credit Score

A person’s credit score does get negatively impacted due to frequent instances of dishonour of cheque. Though not all banks report every instance of cheque bouncing to credit bureaus, they will do the same if it becomes a regular thing. This might affect the ability of the defaulter to avail loans in the future. Therefore, to be on the safe side, it is suggested that an issuer of cheque must honour it at any cost.

• Liable for Civil Suit for Recovery of Dues

Order 37, Rule 2 of the Code of Civil Procedure, 1908 provides that the Order shall apply to:

(a) suits upon bills of exchange, hundies and Promissory notes,
(b) suits in which the plaintiff seeks only to recover a debt or liquidated demand in money payable by the defendant, with or without interest.”

This means that the drawer is also entitled to bring a civil suit for recovery of the amount. As this is a civil cause, the protection of section 300 of the Code of Criminal Procedure, 1973 or that of Article 20 (2) of the Constitution of India, 1950 cannot be sought by the payer.

Ricky Chopra International Counsels’ Experience of Handling Cheque Bouncing Cases

Ricky Chopra International Counsels is one of the leading litigation firms in Gurgaon with a specialized team dedicated to commercial litigation. Our dedicated, committed and passionate team of lawyers is experienced in dealing with both civil as well as criminal actions brought against a person for the dishonor of cheque. We are familiar with all the procedures prevalent in different types of court including courts of small causes, consumer tribunal, and the court of the district magistrate.

Conclusion

The offense of cheque dishonor is therefore a serious one and a person who is uncertain of the procedure that is to be followed after a cheque has been dishonored must definitely take legal assistance.