If Your Cheque Is Dishonoured Due To Any Reason – You Are In Trouble

At the outset, I wish to make it clear that I won’t go into the details pertaining to Section 138 of the Negotiable Instruments Act (“NI Act”) which comes into play whenever is a cheque is dishonoured. It gives you a legal remedy of approaching the Court and initiate Criminal proceedings against the person who issued you the cheque. I’m assuming that you know the basics of this provision and are here to find out whether the same is applicable to other reasons for dishonour of a cheque or not. Hence I’ll dive straight into the other complexities attached with it.

Now the question is whether dishonour of a cheque due to “stopped payment by drawer” or “account closed” or “signatures do not match” would constitute an offence under Section 138 of the NI Act?

Before we go any further, it is imperative that we know what exactly the laws says when a cheque is dishonoured. Section 138 of the NI Act reads as under:

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 provisions of this Act, be punished with 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.

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.

On a careful reading of the above provision, it seems that a ‘dishonour’ of cheque would constitute an offence only if the cheque is returned by the bank ‘unpaid’ either because the amount of money standing to the credit of the drawer’s account is insufficient to honour the cheque a.k.a. ‘insufficiency of funds’ or that the amount exceeds the amount arranged to be paid from that account by an agreement with that bank.

Now with that in mind, does it mean that if a cheque is dishonoured due to reasons other than insufficient funds, then it would not be an offence under Section 138 of NI Act, and that the ‘payee’ would have to go for an alternate remedy for the recovery of his amount?

Well, that certainly could not have been the objective of the law makers when they framed Section 138 of NI Act. But then, if the Section does not expressly include “stopped payment by drawer” or “account closed” or “signatures do not match” or other reasons due to which a cheque may get dishonoured, then what to do about it?

Before we discuss this at length, it is important to also take a look at Section 139 of the NI Act, which reads as under:

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.

Now with above provisions in perspective, there is only one place where we can hope find an answer to our dilemma. You guessed it right. We will have to take the tried and tested road and examine some decisions of the Supreme Court of India and see what the Apex Court has to say about this.

PAYMENT STOPPED BY DRAWER

Now in the case of “Modi Cements Ltd. vs. Kuchil Kumar Nandi” [footnote](1998) 3 SCC 249[/footnote], the simple issue before the Courts was that the cheques were dishonoured with the remark “payment stopped by the drawer”, the High Court quashed the complaints, hence the matter came up before the Apex Court.

The technical grounds taken at the time of quashing was that mere endorsement of the Bank “payment stopped” was not sufficient to entertain the complaint as that was not an ingredient of the offence under Section 138 of the Act.

However, the Supreme Court rejected the said contention, while relying upon the decision in the case of “Electronics Trade & Technology Development Corporation Ltd., Secunderabad vs. Indian Technologists & Engineers (Electronics) (P) Ltd. & Anr.” [footnote]1996 (2) SCC 739[/footnote], wherein the Supreme Court observed that:

“It would thus be clear that when a cheque is drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person out of the account for the discharge of the debt in whole or in part or other liability is returned by the bank with the endorsement like (1) in this case, “I refer to the drawer” (2) “instructions for stoppage of payment” and (3) “stamp exceeds arrangement”, it amounts to dishonour within the meaning of Section 138 of the Act. On issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied.”

That in this case, it was again contended by the Lawyer for the Accused Persons before the Supreme Court, that stoppage of payment due to instructions does not amount to an offence under Section 138, therefore the ingredients in Section 138 had not been satisfied. However, the Supreme Court again rejected this contention, while observing that:

“The object of bringing Section 138 on statute appears to be to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. Despite civil remedy, Section 138 intended to prevent dishonesty on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account maintained by him in a bank and induce the payee or holder in due course to act upon it. Section 138 draws presumption that one commits the offence if he issues the cheque dishonestly. It is seen that once the cheque has been drawn and issued to the payee and the payee has presented the cheque and thereafter, if any instructions are issued to the Bank for non-payment and the cheque is returned to the payee with such an endorsement, it amounts to dishonour of cheque and it comes within the meaning of Section 138.”

A cheque dishonoured due to “stopped payment” would come under the purview of Section 138 of the NI Act. This legal position was again confirmed by the Supreme Court in the case of “M.M.T.C. Ltd. and Anr. vs. M/s Medchl Chemicals and Pharma (P) Ltd. and Anr.” [footnote](2002) 1 SCC 234[/footnote], wherein the Court observed:

“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.”

However, the Supreme Court in its wisdom, carved out an exception in the case of “stopped payment” by the drawer, wherein if an Accused can prove that the instructions for “stop payment” to the Bank was given due to a valid reason, then an offence under Section 138 and a presumption under Section 139 of the NI Act would not be attracted towards him. The Apex Court explained this while stating that:

“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 was 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 an 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.”

So if you instructed your bank to stop payment of a cheque issued by you, you should have a pretty convincing reason to back it up.

ACCOUNT CLOSED

Now let’s take a look at a situation where the drawer of the cheques closes his account before it could be encashed, as a result, the cheque is dishonored with the remarks “account closed”.

However, before going any further, it is necessary to look at Section 140 of the NI Act, which reads as under:

140. Defence which may not be allowed in any prosecution under section 138:

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.

Now in the case of “NEPC Micon Ltd. vs. Magma Leasing Ltd.” [footnote](1999) 4 SCC 253[/footnote], the argument put forth by the Lawyer for the Accused before the Supreme Court was that on the face of it, the Complaint does not make out any offence punishable under Section 138 of the NI Act since the cheques were returned by the bank with an endorsement account closed which is not covered by the section. It was also submitted that Section 138 envisages only two situations, which would fall within its purview, namely, (i) the amount of money standing to the credit of the account is insufficient to honour the cheque; or (ii) that it exceeds the amount arranged to be paid from that account by an agreement made with the bank. It was further contended that there are more than 40 kinds of eventualities where the bank may return the cheque but the legislature in its wisdom has specified only the aforesaid two situations and, therefore, return of the cheque on the ground that the account being closed would not fall within Section 138. However, the Supreme Court rejected the same while observing:

“Further, Section 140 provides that it shall not be a defence in prosecution for an offence under Section 138 that the drawer has no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that Section. Dishonouring the cheque on the ground that account is closed is the consequence of the act of the drawer rendering his account to a cipher. Hence, reading Section 138 and 140 together, it would be clear that dishonour of the cheque by a bank on the ground that account is closed would be covered by the phrase the amount of money standing to the credit of that account is insufficient to honour the cheque.”

In the same case, although it was argued by the Lawyer for the Accused that since Section 138 is a penal provision, it should be strictly interpreted and if there is any omission by the Legislature (“account closed” or anything similar not being mentioned in Section 138), wider meaning should not be given to the words than what is used in the Section. However, the said contention was rejected by the Supreme Court while stating that:

“In our view even with regard to penal provision, any interpretation, which withdraws life and blood of the provision and makes it ineffective and a dead letter should be averted. If the interpretation, which is sought for, were given, then it would only encourage dishonest persons to issue cheques and before presentation of the cheque close that account and thereby escape from the penal consequences of Section 138.”

Planning to close your account? Don’t issue a cheque from it.

SIGNATURES DO NOT MATCH

Now the next major situation which needs to be examined is what if the signatures on the cheque do not match the specimen signature registered with the bank, thereby resulting in the cheque being dishonored with the remark “signature do not match”.

The Supreme Court in the case of “Laxmi Dyechem vs. State of Gujarat and Ors.” [footnote](2012) 13 SCC 375[/footnote], clarified this legal position along with in all other contingencies arising our of dishonor of cheque, while stating that:

“We find ourselves in respectful agreement with the decision in NEPC Micon Ltd. (supra) that the expression “amount of money …………. is insufficient” appearing in Section 138 of the Act is a genus and dishonour for reasons such “as account closed”, “payment stopped”, “referred to the drawer” are only species of that genus. Just as dishonour of a cheque on the ground that the account has been closed is a dishonour falling in the first contingency referred to in Section 138, so also dishonour on the ground that the “signatures do not match” or that the “image is not found”, which too implies that the specimen signatures do not match the signatures on the cheque would constitute a dishonour within the meaning of Section 138 of the Act. This Court has in the decisions referred to above taken note of situations and contingencies arising out of deliberate acts of omission or commission on the part of the drawers of the cheques which would inevitably result in the dishonour of the cheque issued by them. For instance this Court has held that if after issue of the cheque the drawer closes the account it must be presumed that the amount in the account was nil hence insufficient to meet the demand of the cheque. A similar result can be brought about by the drawer changing his specimen signature given to the bank or in the case of a company by the company changing the mandate of those authorised to sign the cheques on its behalf. Such changes or alteration in the mandate may be dishonest or fraudulent and that would inevitably result in dishonour of all cheques signed by the previously authorised signatories. There is in our view no qualitative difference between a situation where the dishonour takes place on account of the substitution by a new set of authorised signatories resulting in the dishonour of the cheques already issued and another situation in which the drawer of the cheque changes his own signatures or closes the account or issues instructions to the bank not to make the payment. So long as the change is brought about with a view to preventing the cheque being honoured the dishonour would become an offence under Section 138 subject to other conditions prescribed being satisfied.”

Got a sloppy signature? I have one too. Be very careful while writing and signing a cheque.

In view of all the abovementioned decisions, it becomes crystal clear that dishonour of cheque on the ground that the payment has been stopped, regardless whether such stoppage is with or without notice to the drawer, and regardless whether the stoppage of payment is on the ground that the amount lying in the account was not sufficient to meet the requirement of the cheque, or whether the account was closed by the drawer, or whether the signatures on the cheque do not match the specimen signatures with the bank, would clearly attract the provisions of Section 138 of the NI Act, which is punishable with imprisonment for up to 2 years. You would not want to go behind bars over a dishonoured cheque.

• Disclaimer: This article is not a substitute for professional legal advice. This article does not create an attorney-client relationship, nor is it a solicitation to offer legal advice.

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