Consequences of Stop Payment on cheque dishonour when there is a dispute...

Consequences of Stop Payment on cheque dishonour when there is a dispute between parties

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When there is a dispute between parties and drawer stops the payment of cheque with reason either “Refer to Drawer” or “Payment stopped by Drawer”, and now if payee presents the cheque in Bank and the same returns with one of the above reasons: what would be the consequences for Drawer and who has legally strong side in such a case?

Answer: There are judgments of the Supreme Court laying down that “stop payment” instructions given by the drawer of the cheque do not really alter the character of a cheque dishonour case, provided all other ingredients of the offence defined under Section 138 of the Negotiable Instruments Act, 1881, are satisfied.

In the case of Rangappa v. Sri Mohan, (2010) 11 SCC 441, the Supreme Court held that Section 138 of the Act can indeed be attracted when a cheque is dishonoured on account of “stop payment” instructions sent by the accused to his bank in respect of a post-dated cheque, irrespective of insufficiency of funds in the account.

In the case of Goaplast (P) Ltd. v. Chico Ursula D’Souza, (2003) 3 SCC 232, where the issue involved was “stop payment” instructions given by the drawer of a cheque (who was accused in a cheque bouncing case), the Supreme Court held as under:

“For appreciating the issue involved in the present case, it is necessary to refer to the object behind introduction of Chapter XVII containing Sections 138 to 142. This chapter was introduced in the Act by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (Act 66 of 1988) with the object of inculcating faith in the efficacy of banking operations and giving credibility to negotiable instruments in business transactions and in order to promote efficacy of banking operations. With the policy of liberalisation adopted by the country which brought about increase in international trade and commerce, it became necessary to inculcate faith in banking. World trade is carried through banking operations rather than cash transactions. The amendment was intended to create an atmosphere of faith and reliance on banking system. Therefore, while considering the question of applicability of Section 138 of the Act to a situation presented by the facts of the present case, it is necessary to keep the objects of the legislation in mind. If a party is allowed to use a cheque as a mode of deferred payment and the payee of the cheque on the faith that he will get his payment on the due date accepts such deferred payment by way of cheque, he should not normally suffer on account of non-payment. The faith, which the legislature has desired that such instruments should inspire in commercial transactions would be completely lost if parties are as a matter of routine allowed to interdict payment by issuing instruction to banks to stop payment of cheques. In today’s world where use of cash in day-to-day life is almost getting extinct and people are using negotiable instruments in commercial transactions and plastic money for their daily needs as consumers, it is all the more necessary that people’s faith in such instruments should be strengthened rather than weakened. Provisions contained in Sections 138 to 142 of the Act are intended to discourage people from not honouring their commitments by way of payment through cheques. It is desirable that the court should ban in favour of an interpretation which serves the object of the statute. The penal provisions contained in Sections 138 to 142 of the Act are intended to ensure that obligations undertaken by issuing cheques as a mode of payment are honoured. A post-dated cheque will lose its credibility and acceptability if its payment can be stopped routinely. A cheque is a well-recognized mode of payment and post-dated cheques are often used in various transactions in daily life. The purpose of a post-dated cheque is to provide some accommodation to the drawer of the cheque. Therefore, it is all the more necessary that the drawer of the cheque should not be allowed to abuse the accommodation given to him by a creditor by way of acceptance of a post-dated cheque. If stoppage of payment of a post-dated cheque is permitted to take the case out of the purview of Section 138 of the Act, it will amount to allowing the party to take advantage of his own wrong.”

In the above case of Goaplast (P) Ltd., the Supreme Court also referred to Section 139 of the Negotiable Instruments Act, which raises presumption in favour of the payee or holder, in the following words:

139. Presumption in favour of holder.—It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque, of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability.”

In that case, the Supreme Court further held as under:

“Thus it has to be presumed that a cheque is issued in discharge of any debt or other liability. The presumption can be rebutted by adducing evidence and the burden of proof is on the person who wants to rebut the presumption. This presumption coupled with the object of Chapter XVII of the Act which is to promote the efficacy of banking operation and to ensure credibility in business transactions through banks persuades us to take a view that by countermanding payment of post-dated cheque, a party should not be allowed to get away from the penal provision of Section 138 of the Act. A contrary view would render Section 138 a dead letter and will provide a handle to persons trying to avoid payment under legal obligations undertaken by them through their own acts which in other words can be said to be taking advantage of one’s own wrong. If we hold otherwise, by giving instructions to banks to stop payment of a cheque after issuing the same against a debt or liability, a drawer will easily avoid penal consequences under Section 138. Once a cheque is issued by a drawer, a presumption under Section 139 must follow and merely because the drawer issued notice to the drawee or to the bank for stoppage of payment it will not preclude an action under Section 138 of the Act by the drawee or the holder of the cheque in due course. … … On the faith of payment by way of a post-dated cheque, the payee alters his position by accepting the cheque. If stoppage of payment before the due date of the cheque is allowed to take the transaction out of the purview of Section 138 of the Act, it will shake the confidence which a cheque is otherwise intended to inspire regarding payment being available on the due date.”

In the case of M.M.T.C. Ltd. v. Medchl Chemicals and Pharma (P) Ltd., (2002) 1 SCC 234, the Supreme Court has held as under:

19. … It has been held that even though the cheque is dishonoured by reason of “stop-payment” instruction an offence under Section 138 could still be made out. It is held that the presumption under Section 139 is attracted in such a case also. The authority shows that even when the cheque is dishonoured by reason of stop-payment instructions by virtue of Section 139 the court has to presume that the cheque was received by the holder for the discharge, in whole or in part, of any debt or liability. Of course this is a rebuttable presumption. The accused can thus show that the “stop-payment” instructions were not issued because of insufficiency or paucity of funds. If the accused shows that in his account there were sufficient funds to clear the amount of the cheque at the time of presentation of the cheque for encashment at the drawer bank and that the stop-payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under Section 138 would not be made out. The important thing is that the burden of so proving would be on the accused. Thus a court cannot quash a complaint on this ground.”

In the aforesaid case of Rangappa v. Sri Mohan, (2010) 11 SCC 441, the Supreme Court further held that the presumption mandated by Section 139 of the Negotiable Instruments Act does indeed include the existence of a legally enforceable debt or liability. It was further held that this is of course in the nature of a rebuttable presumption and it is open to the accused to raise a defence wherein the existence of a legally enforceable debt or liability can be contested. However, there can be no doubt that there is an initial presumption which favours the complainant, even in the case of “stop payment” instructions given by the drawer.

Thus, the principle laid down by the Supreme Court on the issue of “stop payment” instructions in cheque bouncing cases is that even in these cases an offence under Section 138 of the Negotiable Instruments Act could be made out, provided other ingredients of the offence are made out. It has also been held that presumption mandated by Section 139 of the Negotiable Instruments Act regarding the existence of a legally enforceable debt or liability is raised even in a case of “stop payment” instructions. However, if the accused shows that in his account there were sufficient funds to clear the amount of the cheque at the time of presentation of the cheque for encashment at the drawer bank and that the stop-payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under Section 138 would not be made out.

Thus, in spite of the fact that “stop payment” instructions have been issued by the drawer, if the cheque is presented by payee in the bank and if it is dishonoured, the offence of cheque bounce may still be made out depending on other facts and circumstances of the case.

Reverting to your first question, the drawer may have to face the consequences of being found guilty of the offence under Section 138 if ingredients of this offence are made out, in spite of the “stop payment” instructions. The answer to your second question “who has legally strong side in such a case” depends on the factual matrix of the individual case and no general rule can be laid down which will be applicable to all cases.

Also see: Other articles on cheque dishonour.

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