Dishonor of Cheques

The Negotiable Instruments Act 1881 was amended by banking, Public financial Institutions and Negotiable Instruments Law (amendment) Act, 1988 by which a new chapter XVII was incorporate for penalties in case of dishonor of cheques due to insufficiency of funds in the account of the drawer of the cheque. The provisions incorporated were found deficient in dealing with dishonor of cheques. Punishment provided was inadequate and procedure was encumbering some. The negotiable Instruments (Amendment and Miscellaneous Provisions) act of 2002 has plugged the deficiencies to a large extent. Amendment Act of 2000 came into effect for 06.02. 2003.

Dishonor or cheque for insufficiency etc of funds in the account

Where any cheque is drawn by a person on an account maintained by him with a banker for payments 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 required 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 shall be deemed to have committed an offence and shall be punished with imprisonment for a term which may extend to two years, or with fine mat extend to twice the amount of the cheque or with both.

Thus, the cheque should be dawn by a person on an account maintained by him with the banker. The payment to another person shall be for the discharge of any debt or liability in whole or in part. The debt or the other liability must be legally enforceable debt or other liability. It shall be presumed unless the contrary is proved, that the holder of a cheque received the cheque for the discharge in whole or in part of any debt or other liability.

Presumption of dishonor

The Court shall o production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonored presume the fact of dishonor of such cheque, unless and until such fact is disproved. Accused has to consent evidence that there was no debt or liability.

In Maruti Udyog Ltd v Narrender – 1999 it is held by Supreme Court that presumption must be drawn that holder of the cheques received the cheque of the discharge of any debt or their liability , unless the contrary is proved.

In Rakesh Nemkumar Porwal v Narayana Dhondu – 1993 (1) MLJ it has been held by the Division Bench of the Bombay High court that offence under section 138 is committed only when payment is not made by drawer on expiry of 15 days after service of notice and that the circumstances under which the cheque is dishonored are to be totally ignored . Dishonor implies insufficiency of funds. A correct understanding of the terminology of dishonor etc., implies the concept of ability to obtain payment. Return of cheque is itself an indication that the funds are not forth coming. Therefore the cheque dishonored for any purpose constitutes an offence under section 138. In the case, the Supreme Court of India has held that even if cheque is dishonored because of stop payment instructions to bank, section 138 would be attracted.

Presentation of the Winding up Petition would not disentitle the creditor payee from legally enforcing the debt or other liabilities under Sec 138. Failure to pay the cheque amount for whatever reason renders the drawer of the cheque liable for penal action. Company is not prohibited from making payment of cheque during the interregnum between presentation of petition for and issuance of order of winding up.

When the cheque is dishonored due to sufficient funds, the plea that the signature of the accused was forged cannot be raised. Dishonor of cheque because of incomplete signature of drawer does not attract Section 138. There is no bar against voluntary revalidation of a negotiable instrument (including a cheque) by the drawer after the expiry of its validity period.

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