Dishonour of a cheque is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881, subject to certain conditions being fulfilled. Every year, millions of cheque dishonour or cheque bouncing cases are registered in India. A major share of all pending criminal cases in India is comprised of these cheque bounce cases.
Main reason for such large number of cheque bounce cases is the fact that cheque is one of the most common methods of payment for goods purchased or services rendered. Section 40-A of the Income Tax Act, 1961, lays down certain disincentives if the payments are made otherwise than by account payee cheque or bank draft if the amount exceeds ₹ 20,000. Likewise, Section 269-SS of the Income Tax Act places restrictions on taking of certain loans and deposits, of an amount more than ₹ 20,000 by a mode other than an account payee cheque or an account payee bank draft; and, similar restrictions are placed in Section 269-T of the Income Tax Act on repayments of certain loans and deposits.
Thus, payment by cheque is one of most recognized mode of payment if the payment exceeds ₹ 20,000. Cheque is not a prepaid instrument, i.e., the money is paid by the bank from the account of person (called “drawer”) issuing the cheque only after the cheque is presented for encashment. Due to this reason, many a time, the cheques are dishonoured due to insufficient balance, closure of bank account, mismatching of signatures, other discrepancies, etc. However, not every cheque dishonour amounts to an offence under Section 138 of the N.I. Act. Let us try to understand what are the conditions subject to which an offence under Section 138 of the said Act can be said to have been committed in the case of dishonour of a cheque. We shall also see certain other conditions for filing a complaint under Section 138 of the Negotiable Instruments Act.
Let us first see the contents of Section 138 of the Negotiable Instruments Act:
“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 provision of this Act, be punished 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:
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, 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.”
Having seen the contents of this section, let us now analyse what are the basic ingredients of the offence of cheque bounce, or the conditions for the offence under this section being made out.
(A) Cheque should have been issued for discharge of any debt or liability:
Cheque should have been issued for payment of money for the discharge, in whole or in part, of any debt or other liability. Thus, if the cheque is issued for purchasing some goods or for payment for some services rendered or for some earlier debt or for payment of salary for some work done, etc., the offence under this section may be attracted. Moreover, the Explanation to Section 138 clarifies that “debt or other liability” means a legally enforceable debt or other liability. On the other hand, if the cheque is issued for any other purpose, for example, for giving loan to another person, or for giving a gift or donation to another person, offence under this section will not be attracted.
(B) Cheque should have been returned unpaid:
Cheque should have been returned by the bank unpaid, either (1) because of the amount of money standing to the credit of that account is insufficient to honour the cheque, or (2) that it exceeds the amount arranged to be paid from that account by an agreement made with that bank. However, if the cheque is returned unpaid for some other reason(s), offence under Section 138 may not be attracted. In fact, there could be a large number of reasons for which a cheque could be returned. See here, for a complete list of reasons for which a cheque could be returned unpaid by a bank.
It may thus be seen that while a cheque could be returned for various reasons, an offence under Section 138 of the Negotiable Instruments Act would be attracted mainly when either (1) because of the amount of money standing to the credit of that account is insufficient to honour the cheque, or (2) that it exceeds the amount arranged to be paid from that account by an agreement made with that bank.
However, some other reasons (mentioned above) may also be considered by the court as amounting to either of the above two reasons thereby making out an offence. For example, in the recent case of Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375 : 2013 Cri LJ 3288, a 2-Judge bench of the Supreme Court comprising of Justice T.S. Thakur and Justice Gyan Sudha Misra, has held that there may 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.
It may be noted that if a cheque is returned on the grounds of “stop payment” instructions issued by the drawer of the cheque, then also offence under Section 138 may be attracted.
(C) Cheque should have been presented to the bank within validity period:
The third condition is that the cheque must have 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. This condition is obvious since a cheque, if it is presented to the bank after the period of its validity or after 6 months, will be invalid only due to that reason and will thus be returned merely because of that reason without there being any fault on the part of the drawer of the cheque.
(D) Demand by notice to be made within one month:
The fourth condition is that the payee (or the holder in due course of the cheque) must make a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.
(E) Drawer fails to make payment within 15 days of receipt of such notice:
The last condition is that 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 15 days of the receipt of the such notice.
If all the above-mentioned 5 conditions are satisfied, then the offence under Section 138 of the N.I. Act is made out.
Within how many days the complaint needs to be filed?
As per the provisions of Section 142 of the Negotiable Instruments Act, a complaint can be made about the offence of cheque bounce under Section 138 of the Act, within one month of the expiry of 15 days period from receipt of above notice by the drawer of the cheque if no payment is made within those 15 days. However, the court has the power to condone the delay if the complainant satisfies the court that he had sufficient cause for not making a complaint within such period.
Where can the complaint be filed?
The complaint is required to be filed in the court of the Magistrate who has jurisdiction over the place where the branch of the bank is situated in which the account of drawer of the cheque exists on which bank account the cheque was made. The place of the bank where the cheque is presented by the payee is not relevant now. Only the place where the bank account of the drawer of the cheque is situated, is now relevant. This is as per the recent judgment dated 1 August, 2014 of a 3-Judge bench of the Supreme Court in the case of Dashrath Rupsingh Rathod v. State of Maharashtra, in Criminal Appeal No. 2287 of 2009 (see here). However, in the case of a multi-city cheque, a single judge bench of the Bombay High Court, vide its judgment dated 25 August 2014 (see here) in the case of Ramanbhai Mathurbhai Patel v. State of Maharashtra in Criminal Writ Petition No. 2362 of 2014, has recently given a different judgment. Please read, our article on this issue: Jurisdiction in a case of cheque bouncing – back to square one.
If a cheque is issued by a partnership firm having two partners.The cheque is signed by one partner as partner.Now the question is whether the other partner who is non-signatory to the cheque is liable u/s 138 of the NIA.