Dishonor of Cheque

Dishonor of Cheque

Liability under the negotiable instruments act
  • Where any cheque drawn by a person for the discharge of a liability is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or;
  • That it exceeds the amount arranged to be paid from that account by an agreement made with that bank
Such person cheque shall be deemed to have committed an offence and shall be punishable with imprisonment for a term, which may extend to two year, or with fine, which may extend to twice the amount of the cheque or with both.

What constitutes an offence
Such cheque should have been presented to the bank within a period of six months of the date of on which it is drawn or within the period of its validity, which ever is earlier; and
The payee or holder in due course of such cheque should have made a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque within thirty days of the receipt of the information by him from the bank regarding the return of the cheque unpaid; and
The drawer of such cheque should have failed to make the payment of the said amount of money to the payee or the holder in due course of the cheque within fifteen days of receipt of the said notice.
The cheque in question should have been issued in discharge of whole or part of a debt or liability otherwise the maker of the cheque is not liable for prosecution. For example if the cheque is given as a gift or present and if the bank dishonors it the maker of the cheque is not liable for prosecution.

Offences by Companies
If the person committing the offence is a company, every person who, at the time offence was committed, was in charge of, and responsible to the company for the conduct of the business of the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished.
If a person proves that the offence was committed without his knowledge, or that he had exercised due diligence to prevent the commission of such offence, he shall not be punishable.
Where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial Corporation owned or controlled by the Central Government or State Government, he shall not be liable for prosecution.
Where any offence has been committed by a Company and f it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of any director, manager, secretary, or other officer of the Company, such person shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Presentation of cheque any number of times
There is no embargo upon the payee to successively present a dishonored cheque during the period of its validity.
There is no restriction regarding the no of times a cheque can be presented and that every subsequent representation and dishonor gives rise to fresh cause of action for filing complaint.
In the course of business transactions it is not uncommon for a cheque being returned due to insufficient funds or similar such reason and being presented again by the payee after sometime, on his own volition or at the request of the drawer, in expectation that it would be encashed.
For dishonor of one cheque there can be only one offence and such offence is committed by the drawer immediately on his failure to make the payment within 15 days of the receipt of the notice served.
On each presentation of the cheque and its dishonor, a fresh right and not cause of action accrues. Therefore the payee without taking pre-emptory action in exercise of his right may, go on presenting the cheque so as to enable him to exercise such right at any point of time during the validity of the cheque.
Cause of action would arise only on failure to pay after notice.
Once a notice for payment is given a fresh cause of action will not arise if the cheque is presented again and it is dishonored.

Effect of stop payment
Stop payment instructions cannot obviate the offence.
Even if stop payment instructions are given and notice of the same is given to the payee or holder in due course liability cannot be avoided.
The position will not be different even if the drawer had instructed the bank to stop payment prior to the presentation of the cheque for encashment.
Once the cheque is issued there is a presumption, that the holder received the cheque for the discharge, of any debt or liability and merely because the drawer issues a notice to the drawee or to the bank for stoppage of the payment it will not preclude an action under the Act.

Notice in case of dishonor
The requirement of giving of notice is mandatory. If no notice making a demand for payment is served upon the drawer within 30 days from the date of dishonor of cheque, a complaint is not maintainable unless the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.
Notice means a notice in writing.
A postal acknowledgement due containing the signature of the accused is proper proof of service of the notice on the addressee shown in the postal acknowledgement.
When a notice is returned by the sender as unclaimed such date would be the commencing date in reckoning the period of 15 days. Such reckoning would be without prejudice to the right of the drawer of the cheque to show that he had no knowledge that the notice was brought to his address.
The notice need not necessarily be by registered post only. It can be sent by a telegram, fax or by a letter as well.
However it is preferable to send the notice by registered post, as that is clear evidence of service.

Period for payment
If payment is not made within 15 days of the receipt of the notice then the offence shall be deemed to have been committed.
The cause of action for filing complaint would arise after the completion of 15 days from the date the drawer receives the notice and fails to pay the amount within that period.
The court cannot take cognizance prior to the lapse of the period of 15 days even if there was a denial of the liability earlier, even after denial liability to pay the amount, the accused can at any time change his mind within 15 days of receipt of notice, make payment and avoid prosecution.
The offence shall be deemed to be committed only from the date when notice period expired.
The drawer cannot take the excuse that he had no reason to believe when he issued the cheque that the cheque may be dishonored on presentation for the reasons stated above.

1.    To file a civil suit
2.    To file a complaint under section 138 of the Negotiable Instruments Act, 1881
3.    To file complaint under section 420 for cheating under the Indian Penal Code

In case a person has filed suits for recovery, he is not precluded from filing a complaint under section 138 of the Negotiable Instruments Act and section 420 of the Indian Penal Code. Both remedies may be simultaneously possible. A civil suit cannot debars the criminal prosecution.


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