SCRUTINY OF

DISHONOUR OF
CHEQUE IN LIGHT OF
THE NEGOTIABLE
INSTRUMENTS ACT
LAWS AND ANALYSIS

AUTHORS

02216503520 - KUNISHKA SHARMA

03516503520 – PRAJJWAL CHAUHAN

04816503520 – VIJAY PRATAP SINGH BHADORIYA

Contents

 Abstract

 Introduction

 Research Questions

 Research Methodology

 What is Negotiable Instruments Act?

 Cheque

 Origin of cheque

 E cheques

 Dishonour of Cheque

 Notice of dishonour

 Legal Recourse

 Exceptions to criminal liability

 Defences taken by the Drawer on Dishonour of cheque

 Wrongful Dishonour of Cheque

 Relevant case laws

 Conclusion
ABSTRACT

Negotiable Instruments comprises of very important tools required for

doing business and conducting finance related activities. It has become
an incomparable part of our lives. Advent of cheque has given new
dimensions to the commercial world. It is one of the most widely used
method of payment. This Research Paper tries to deal with Cheque and
its Dishonour which comes under the Negotiable Instruments Act, 1881.
It delves into practically procedures that needs to be followed in case of a
cheque dishonour and the available legal remedies. It also apprises the
reader with the defences that a drawer can present for his acquittal.

INTRODUCTION
The Negotiable Instruments Act is an amalgamation of two words which
means ‘Transferable documents’. It was enacted in 1881, replacing the
English Negotiable Act. The principle of Nemo dat quod non habit does
not apply here. It works on the provisions of section 31 and 32 of the
Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of
India Act provides that no person in India other than the Bank or as
expressly authorised by this Act, the Central Government shall draw,
accept, make or issue any bill of exchange, hundi, promissory note or
engagement for the payment of 3 money payable to bearer on demand.
Section 32 makes issue of the published bills and notes with fines which
may extend to the amount of the instrument. Section 6 of the same Act
mentions cheque as a bill of exchange drawn on a specified banker.

A Cheque is the most secure way in which transactions can be made.

There is nothing more secure than a cheque. Even in highly advanced
online transaction software’s there can be plethora of discrepancies and
can result in failure of transaction, in addition to this there is always a
fear of being hacked by well-equipped and sinister minded hackers.
Only the person who has signed the cheque can guarantee that it has been
paid successfully. The fact that the amount to be transferred has been
written on it which makes it impossible for anyone in the middle to
change it.1

Legally, the author of the Cheque is called “drawer”, the person in whose
favour, the Cheque is drawn is called “payee”, and the bank who is
directed to pay the amount is known as “drawee”. However, cases of
Cheque bounce are common these days. Sometimes cheques bearing
large amounts remain unpaid and are returned by the bank on which they
are drawn.

RESEARCH QUESTIONS
o What is a cheque with respect to the Negotiable Instruments
Act, 1881?
o What are the various ways through which cheque dishonour
takes place?
o Are the legal remedies available under the Indian laws in case of
a cheque dishonour actually effective?

RESEARCH METHODOLOGY
The researchers have opted for a combination of descriptive and
analytical styles of writing throughout the paper and mentioned case laws
for better understanding. Content has been collected from textbooks,
articles and web searches.

WHAT IS NEGOTIABLE INSTRUMENTS ACT?

According to Section 13 (a) of the Act, “Negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or to

1
Decriminalization of the offence of dishonour of cheques: Are we moving in the right direction?
Lexology, https://www.lexology.com/library/detail.aspx?g=5736912b-4664-4cde-af5f-5b65617c574e
(last visited Jul 13, 2021)
bearer, whether the word “order” or “ bearer” appear on the instrument or
not.”2

Negotiable Instruments basically means transferable documents which

promises to pay the bearer the sum when demanded in near future.
Although the act recognizes three types of instruments that are
Cheques, Promissory Notes and Bills of Exchange but still instruments
which fulfil the following conditions are accepted as Negotiable
Instruments:

 The proposed Instrument should be freely transferable by the

custom of trade. It can be done by delivery, endorsement or both.

 The negotiability continues till the maturity with the holder having
the right to transfer.

 The person obtaining in good faith and for consideration gets it free
from all defects and he/she can sue in his name.3

CHEQUE
Once a bank account is opened, it provides us with a cheque book
facility. The type of cheque book received would depend on the kind of
bank account you have opted.

In layman terms, a cheque can be defined as a kind of a negotiable

instrument that orders a bank to pay a particular amount of money from
an account to another person on whose name the cheque has been
furnished.
Other than this there are many other definitions of cheque are more
frequently used to explain the meaning of “cheque”. One of them is
provided in Black’s Law Dictionary 9th Edition stating cheque is a “…draft

2
Reserve Bank of India - Publications, M.rbi.org.in (2021),
https://m.rbi.org.in/Scripts/PublicationsView.aspx?id=155 (last visited Jul 8, 2021).
3
A. Singh, Introduction to Negotiable Instruments (Eastern Book Company 8) (2016)
document signed by the maker or drawer, drawn on a bank, payable on
demand and unlimited in negotiability…”4.

There are mainly four main items related to a cheque that are

1. The person in whose favour cheque is written is called the ‘payee’,

2. The main source who is directed to pay the amount i.e. the bank is
called ‘drawee’
3. The person who writes or issues the cheque is known as the
‘drawer’.
4. The currency, amount mentioned on the cheque

There are myriads of cheques but a crossed “Account Payee only”

cheque is majorly used in day to day transactions to avoid any misuse as
it ensures that the cheque is deposited into the payee’s account only.

ORIGIN OF CHEQUE
In India the instance of using a cheque can be traced back to the times of
mauryan empire where the adesha was used as an commercial
instrument was used as an order or rule on the lender desiring him to pay
the money written on the note to a third person. Similarly Romans used
prescriptions which were an early form of cheque to supplement
transactions. England by the 17th century started used bills of exchange
as a means for domestic payments. All these led to the evolution of the
present form of cheque.

Earlier the cheque was called as draw notes as one used to draw the
money written on the note from the bank and they also required
immediate payment. In the year 1717 the Bank of England introduced the
first use of a pre-printed form. The printing of these forms were done on
"cheque paper" to prevent fraud, and the customer had to be there in
person and obtain a duly numbered form from the cashier .Once written,
the cheque was supposed to be brought back to the bank for settlement.
The fall in the

4
Anubha Chaudhary, ANALYSING SECTION 6 OF THE NEGOTIABLE INSTRUMENT ACT, 1881 (2020),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3604195 (last visited Jul 9, 2021).
use of banknotes in eighteenth-century England further advanced the use
of cheques.5

In India it was first time introduced by the Bank of Hindustan followed

by enactment of Negotiable Instruments Act, 1881 which provided a
proper legal framework for non-cash paper payment instruments in the
country and defined cheque under Section 3 as:

A “Cheque” is a bill of exchange drawn on a specified banker and

not expressed to be payable otherwise than on demand and it
includes the electronic image of a truncated cheque and a Cheque in
the electronic form.

In 2012, Reserve Bank of India released a notification decreasing the

validity of a cheque from 6 months to 3 months from the date of issue.6

E CHEQUES
E-CHEQUE, Electronic cheque (e-cheque) is basically the image of a
standard paper cheque generated, written and signed in a secure
encrypted system using digital signature and asymmetric crypto system.in
layman terms an electronic cheque is nothing more than an ordinary
cheque made on a computer software and instead of signing with ink, it
is signed using the digital equivalent of ink. After the enactment of The
Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002, legal recognition has been accorded to e-cheques and they have
been bought at par with the standard cheques. Now, a “cheque” also
includes an e- cheque.7

5
Reserve Bank of India - Publications, M.rbi.org.in (2021),
https://m.rbi.org.in/Scripts/PublicationsView.aspx?id=155 (last visited Jul 8, 2021).
6
Dr. Sony Kulshrestha, A Critical Analysis of the Provisions of the Law Related to Negotiable
Instruments in the light of Negotiable Instruments Act, 1881 (Journal of Xi'an University of
Architecture & Technology) (2020), http://xajzkjdx.cn/gallery/263-feb2020.pdf (last visited Jul 15,
2021)
7
Taxguru LLP, Analysing Section 6 of Negotiable Instrument Act, 1881 TaxGuru (2021),
https://taxguru.in/corporate-law/analysing-section-6-negotiable-instrument-act-1881.html (last
visited Jul 7, 2021).
DISHONOUR OF CHEQUE
Dishonoured cheque can be basically defined as a cheque which doesn’t
honour the imposed obligations. For example, suppose that person X
writes a check to person Y, but person X has insufficient funds to pay the
check. When person Y attempts to deposit that check in their bank
account, person Y’s bank returns it to person X’s bank with a notice of
dishonour. Reference to dishonour has been made under the section 91
and 92.8

Cheques are dishonoured by the bank for various reasons. The most
common reason is insufficiency of funds. Other reasons include a
signature mismatch, overwriting, a stale date, and death of the owner,
mistake in writing the amount in words and numbers or a closed account.

The bank charges penalties for the bounced cheques and it even affects the
credit history of the user.

NOTICE OF DISHONOUR
In case of a cheque bouncing, the first step involves issuing a Notice of
Dishonour by the liable party. This is mentioned in the section 93 of the
Negotiable Instruments Act but nothing in this section renders it
necessary to give notice to the maker of the dishonoured promissory note
or the drawee or acceptor of the dishonoured bill of exchange or cheque.
It is a notice issued by the holder to the endorser notifying that the
payment has been dishonoured.9 A cheque is dishonoured only by non-
payment i.e. as soon as the banker refuses to pay the amount. Few of the
basic features of Notice of dishonour are:

 It should be given to all the associated parties within a

reasonable period of time.
 The notice may be given orally or written or partly oral or
partly written.

8
Rajesh Gupta, Dishonour of Cheques (Law & Practice) (2021).
9
Ajay Thakur, DISHONOUR OF CHEQUE blog.ipleaders.in (2021), https://blog.ipleaders.in/dishonour-
of-cheque/ (last visited Jul 9, 2021).
  No notice need be given to a maker, acceptor or drawee, who
are the principal debtors.
 The notice should be given either by the party itself or the
duly authorised agent. Notice by a stranger stands invalid.
 The notice needs to be delivered at the place of business or at
the residence of the party.
 If the party despatching the notice is unaware of the fact that the
other party to whom the notice is despatched is dead, the notice
is sufficient.

LEGAL RECOURSE
As soon as a cheque is dishonoured, the bank of the drawee immediately
issues a ‘Cheque Return Memo’ to the banker of the payee mentioning
the reason for non-payment of the written amount. The payee’s banker
hands over the dishonoured cheque and the memo to the payee. The
holder or payee can submit the cheque again within three months of the
date on it, if he believes it will be honoured in the second run. A person
may suffers a lot if a cheque issued in his favour is dishonoured due to
the reason pertaining to insufficiency of funds in the account of the
drawer of the cheque.10

In case, the payee decides to take a legal recourse, then first, the drawer
should be given a reasonable time to repay the cheque amount. Notice in
writing needs to be sent to drawer within 30 days from the date of
receiving “Cheque Return Memo” from the bank. If the cheque issuer
fails to make payment within 15 days of receiving the notice then the
payee has the right to file a criminal complaint under section 138 of the
Negotiable Instruments Act. Also the Supreme Court held that only those
courts within whose territorial limits the drawee bank is situated would
have the jurisdiction to try the case. However, the registration of
complaint needs to be done in magistrate’s court within a month of the
expiry of the notice

10
Cheque dishonoured: A step-by-step guide for legal recourse, Indiainfoline.com (2021),
https://www.indiainfoline.com/article/research-articles-personal-finance/cheque-dishonoured-a-
step-by-step-guide-for-legal-recourse-113111500895_1.html (last visited Jul 8, 2021).
period. Also it needs to be noted that in case the cheque has been bounced
due to reasons other than insufficient funds then section 138 cannot be
applied “According to section 30 of the negotiable instrument act,
1881the Drawer of the cheque, in case of dishonour is liable for holder of
the cheque, provided due notice of dishonour has been given to drawer”11

There are two types of liability on Drawer

1. CIVIL LAIBILITY
When the cheque issued by the drawer is dishonoured, then the drawer is
liable for holder. The holder of cheque can bring civil suit for recovery
of money like any other creditor. In Civil suit drawer have two options
either to pay damages or if he does not have money his property can be
attached and auctioned by court.

2. CRIMINAL LAIBILITY

Before the introduction of section 138 of negotiable instrument act, in

case of dishonour of cheque drawer may be liable under section 420 of
Indian penal code, 1960. In present also if there is a case of cheating the
drawer may be prosecuted under section 420 of IPC.

At this point it would be germane to mention that the Negotiable

Instrument Act deems dishonour of a cheque as a criminal offence.
Section 138 makes it an offence if a bank refuses to pay the money
mentioned on the cheque either because the amount of money standing to
the credit of the account of the drawer is not sufficient to honour the
cheque or that it exceeds the amount of money arranged to be paid from
the account of the drawer. While in case of dishonour by a company
section 141 extends criminal liability to the person, who was in charge of
the business of the company at the time of the offence. Directors of the

11
Surendra Malik And Sudeep Malik “Supreme Court on Dishonour of Cheques And Negotiable
Instruments” 2016 Edition
company cannot be held liable for the same if they were not present at the
time of offence. To make them liable it’s imperative to show as to how
they are connected and involved in the ongoing business of the company.
12

The law includes a punishment for a term which may extend to two
years or fine which at max may extend to twice the amount of cheque or
both. The bank also holds the right to withdraw the cheque book facility
and close the bank account for repeat offences of cheque dishonour.

Chapter XVII to the NI act was incorporated via the Banking Public
Financial Institutions and Negotiable Instruments Laws (Amendment) Act,
1988 .The object was to enhance the acceptability of cheques in
settlement of liabilities, by making the drawer liable for compensation in
case of bouncing of cheques due to insufficiency of funds in the accounts
or for the reason that it exceeds the money arranged by the drawer, with
enough safeguards to prevent harassment of honest drawers.

Also in order to use the section 138, certain conditions needs to be fulfilled
such as:

1. The reason of dishonour should be insufficiency of funds in the

drawer’s account.
2. The issued cheque is towards discharge of certain legal liability.
3. The cheque given by the drawer should be of an account
maintained by him.13

12
ROMA JAIN “Law on Dishonour of Cheque In India And It
Consequences Under Negotiable Instruments Act 1881 As Amended Upto”
http://www.legalservicesindia.com/article/article/dishonour-of-cheque-itsconsequences-under-
negotiable-instruments-act-as-amended-upto-2246-
1.html
13
Shyam Sunder Tak “Dishonour of Cheque”http://www.legalserviceindia.com/article/l277-
Dishonour-OfCheque.html
EXCEPTIONS TO CRIMINAL LAIBILITY

 Cheque given as a gift:

If a cheque issued by the drawer as a gift not for discharging liability then
the drawer is not liable and not prosecuted under section 138 of
negotiable instrument act.

 Cheque issued not for discharging liability:

If the cheque issued by the drawer is not for discharging the liability
in whole or in part of any debt then the drawer is not liable for
Criminal prosecution.

Men’s rea is not essential for offence under section 138 of negotiable
instrument act

When the cheque issued by the drawer is dishonoured and he prosecuted

under section 138 of the negotiable instrument act. Then there is no
requirement of proving men’s rea (guilty mind) of the drawer. Guilty
mind is not required for offence under section 138 of negotiable
instrument act. And the drawer cannot take defence that he have no
men’s rea on dishonouring of cheque.14

DEFENCEES TAKEN BY DRAWER ON DISHONOUR OF

CHEQUE
1. Cheque bounced given as security
If the cheque issued by drawer is bounced

And he prosecuted under section 138 of negotiable instrument act. If

drawer proved that cheque issued was not for discharging liability, but it
was given as security then he does not prosecuted under 138 of
negotiable instrument act

14
K.V. RAMANA MURTHY “LAW RELATING TO DISHONOUR OF CHEQUES IN INDIA
”http://kvramanamurthy.articlealley.com/law-relating-todishonour-of-cheques-in-india-151099.html
2. Lack of jurisdiction
If the cheque issued by drawer is bounced and offence of cheque
bounced tried in court, then there must be jurisdiction of court in which
case tried. The case will not tried in lower court to that of judicial
magistrate of first class within which jurisdiction branch of bank In
which account of the holder concerned is situated (section 142).15

3. Dispute on signature of cheque by drawer

If the cheque issued is bounced because of signature of the drawer then
only the banker can establish reliable evidence not any other party. The
banker needs to show all the previous records related to signature of
drawer. If the evidence is not provide by banker then accused can take
defence.

4. Absence of legally enforceable debt or liability

Section 138 clearly stated that the dishonoured cheque issued by the
drawer is only against the debt or liability. If the cheque issued by the
drawer is not for discharging debt and liability then the drawer not to be
prosecuted under negotiable instrument act and he can take this as a
defence.

5. Absence of legal notice

Before the proceeding start against the drawer on dishonouring of cheque
against the drawer, the holder of cheque issued legal notice of 15 days to
the drawer asking the payment16, then after this if drawer not make
payment then holder can start proceeding against drawer. If this
procedure not followed then drawer can take this as a defence.

15
Rajesh Gupta “Dishonour of Cheques (Law & Practice)”Bharat Law House Pvt. Ltd.
16
K.V. RAMANA MURTHY “LAW RELATING TO
DISHONOUR OF CHEQUES IN INDIA
”http://kvramanamurthy.articlealley.com/law-relating-todishonour-of-cheques-in-india-151099.
WRONGFUL DISHONOUR OF CHEQUE

Dishonour of cheque without any justifiable reason by a banker is

called wrongful Dishonour of cheque. If all the essentials of a valid
cheque are fulfilled and even there is enough money in the account for
the payment and still it’s not honoured then it’s a wrongful dishonour.
This might be
done intentionally or due to negligence. In this case, the bank is liable to its
customers for damages under section 31 of the Act. The banker needs to
compensate the drawer for any loss or damage caused by such default.
This is in lieu of a healthy banker-customer relationship. The same was
established in the leading case of Marzetti V. Williams.

RELEVANT CASE LAWS

Tomy Jacob Kattikaran v. Thomas Manjaly and Anr
In this case Supreme Court held that the complainant have to serve a
notice to the drawer with the stipulated period of time under Section 138
of the Negotiable Instruments Act or else it will lead to the acquittal of
the drawer.

Vijay Devranna Nayak V. Ryot Sewa Sahakari Bank Ltd

In this case, the court held that the payee can drop the suit if the drawer
pays the specified sum mentioned in the cheque after filing of the suit.
Further, the court specified that the main motive of the sections to
recover the amount which is due on the payee rather than punishing the
defaulter.

Dayawati V. Yogesh Kumar Gosain

In this case, the court took path of a new approach called Alternative
Dispute Resolution Mechanism (ADR) for ruling the cases which comes
under the bracket of Section 138 of the Negotiable Instruments Act with
a criminal nature.
CONCLUSION
It can be concluded that laws pertaining to dishonour of cheque have
evolved over the time. Section 138 of the Negotiable Instruments Act,
1881 was introduced to infuse credibility to the Act and ensure speedy
redressal in case of dishonour of cheque. This not only helped in building
the system strong but also curtailing the dishonest intention of doing
fraud. This is an appreciable and welcoming step in the banking sector.

As far as the effectiveness of these laws on dishonour of cheque is

concerned, sadly has been a let-down. As early as last year the Indian
government suggested as a move to fulfil the objective of easing the way for
business investments as part of SabkaSaath, SabkaVikas and
SabkaVishwas objective.17 The reason stated was that there are over 35
lakh pending cases related to the offence of dishonour of cheque which in
turn is clogging cases and hence affecting smooth functioning of justice delivery
mechanism.

17
Pros And Cons Of Decriminalisation Of Dishonour Of Cheque - Criminal Law - India Mondaq.com,
https://www.mondaq.com/india/crime/978864/pros-and-cons-of-decriminalisation-of-dishonour-of-
cheque (last visited Jul 17, 2021)