Cheque Dishonour Cases u/s N I 138

What a cheque in law means

A cheque is a transferrable (negotiable) instrument in writing, containing an unconditional order signed by its maker (drawer), directing a specified banker (drawee) to pay on demand, the sum of money specified on the instrument, to a person (payee) or to the order of him or to the bearer of it. The digitally signed electronic image of a cheque is also treated as a cheque.

A holder or a holder in due course, who becomes a possessor of the cheque by legally valid means, is also entitled to receive the amount thereon. No illegal holder of a cheque is entitled to receive the amount of the cheque.

The drawer is the maker of the cheque, drawee is the bank authorized to pay the amount and the payee is the person receiving the amount.

Negotiation means transfer

When the cheque is transferred to any person so as to make him its holder, then it can be said that it is negotiated. A cheque payable to bearer can be negotiated by just delivering it whereas a cheque payable to an order is negotiated by indorsement and delivery thereof. The term order is a direction to cause payment to be made.

Then the transferee will be clothed with all the rights of a holder in due course. The indorsement of a cheque followed by delivery transfers to the indorsee the property therein with the right of further negotiation. But the term holder does not include a person who has no right to recover the amount due thereon. Mere possession is not sufficient to be a holder.

Law governing dishnour of cheque

The laws governing dishonor of cheque are Negotiable Instrument Act, 1881, Criminal Procedures Code; 1973, Indian Evidence Act, 1872 and the Criminal Rules of Practice.

Other important allied acts relating to the case are Indian Limitation, 1963, General Clauses Act, 1897, Bankers’ Books Evidence Act, 1891 and Information Technology Act, 2000 for matters regarding electronic cheque.

The right of the accused envisaged in the Constitution of India may also come into play in a cheque case.

Drawer has liability to pay

A cheque is dishonoured when the drawer or drawee fails to pay the payee the amount of a valid cheque when it is duly presented for payment.

The drawer of a cheque is liable to compensate the holder of the cheque when the drawer gets due notice of dishonor of the cheque from the drawee (bank).

If the drawer of the cheque is a company then the company and the persons responsible for the conduct of the business have liability, but the persons who have no knowledge of the offence or have exercised due diligence to prevent the offence do not have any liability.

Offence of dishonour of cheque

Dishonour of cheque on the ground of insufficiency of fund in the bank account of the maker of the cheque is an offence, since the introduction of Section 138 in the Negotiable Instruments act, 1881( NI Act) by an amendment in 1989.

The purpose of the Section 138 is to infuse credibility to negotiable instruments, promote their use in financial transaction and deter callous issuance of cheques without honouring the promise implied in the instrument.

A drawee of a cheque (bank) having funds of the drawer must pay the cheque when a cheque is duly payable. A cheque can be transferred (negotiated) to any person by delivery. The holder thereof is entitled to receive the amount of the cheque.

An offence of dishonor of cheque is almost in the nature of a civil wrong which has been given criminal overtones.

Punishment for cheque dishonour

The offence of dishonor of cheque shall be punished for a term not exceeding two years and a fine not exceeding twice the amount of the cheque, or with both.

The court has power to direct payment of compensation in addition to the said prescribed sentence, if sentence of fine is not imposed, under Section 357(3) of the CrPC. The direction to pay compensation can be enforced by default sentence under Section 64 IPC and by recovery procedure prescribed under Section 431 CrPC ( Please see Meters and Instruments (P) Ltd. v. Kanchan Mehta: (2018) 1 SCC 560).

Five essential elements of a cheque case

The five elements of a cheque dishonor case are drawing the cheque by the accused on an account maintained by him, presentation of the cheque to the Bank by the payee, returning the cheque unpaid by the drawee bank, the payee issuing a demand notice to the drawer of the cheque, and the failure on the part of the drawer to make payment within 15 days of the receipt of notice.

When the five elements exist then the payee has a valid ground for filing a cheque case. The Magistrate while taking cognizance has to look into whether the ingredients have been made out.

What the drawee should do

When the payee present the cheque to the bank (drawee) within the period of its validity (now three months) the bank should pay the amount or return/dispatch the cheque along with the memo indicating the reason as “insufficient funds” to the customer within 24 hours, as per the RBI Circular.

Dishonour of a cheque on account of ‘stop payment’ instructions can also be proceeded against, under Section 138 of the N I Act.

What the payee must do

If the bank returns the cheque stating insufficient funds to the payee, the payee / holder in due course, within a period of 30 days of the receipt of the information of dishonor from the bank, should make a demand for payment of the amount of the cheque by sending a legal notice to the drawer.

The purpose of the notice is to give a chance for the drawer to rectify his omission and to protect an honest drawer. Once notice is sent by registered post by correctly addressing to the drawer of the cheque, the service of notice is deemed to have been effected (see Section 27 of the General Clauses Act.

If the drawer of the cheque fails to make payment to the payee the amount within a further period of 15 days of the receipt of the notice, he has committed an offence of dishonor of cheque. Then the payee/holder can make a complaint to the First Class Magistrate within another one month (British calendar month) from the date of the cause of action. The cause of action arises on the 15th day of non-payment of amount by the drawer. A holder of power of attorney can also initiate court proceedings on behalf of the complainant.

If the complaint is filed after the prescribed period, the court can condone the delay and take cognizance of the offence when there is sufficient reason. Filing of affidavit in support of the petition to condone delay is not mandatory if sufficient cause is shown in the complaint itself.

The court, which can try the case, is the one which has jurisdiction over the branch of the bank where the payee/holder maintains his account if the cheque is presented for collection, or where the drawer maintains his account if the cheque is presented for payment.

Presumption of liability on the maker

The Section 139 of the N I Act enables the court to presume that a holder of a cheque received the cheque for the discharge of any debt or liability unless the contrary is proved. The court has authority to presume the fact of dishonor of cheque from the mark or noting on the memo or slip or such other records of the bank.

The court should presume that the drawer of the cheque has liability to the payee for the amount for which the cheque is drawn. It is obligatory on the part of the court to raise this presumption. It is nothing but a presumption of law. The cheque was a post dated one in no way absolves the drawer from the penal consequences.

But, the drawer is at liberty to rebut this presumption (See N. Parameswaran Unni v. G. Kannan: (2017) 5 SCC 737). The presumption can be rebutted by cross-examination or by bringing in probabilities in his favour and impossibilities against the complainant.

Accused must rebut the presumption

To neutralise the presumption of law – that a cheque is issued for a presumed liability – the drawer has to rebut it by adducing cogent evidence. The onus of proving the presumption (as to existence of a liability) lies on the drawer (accused). It is the accused who wants the court to rebut the presumption in a way the court believes it. A mere denial by the accused is not good enough to rebut the presumption but the court is to be convinced by adducing cogent evidence. The burden therefore is on the part of the drawer (the accused in the case) to prove (rebut) that the cheque is drawn not in discharge of any debt or other liability.

When the cheque is signed by the drawer it can be filled up by any person putting the date and amount on it. It is immaterial whether the cheque was filled up by the drawer or any other person. If the cheque so signed is otherwise valid the penal provision should get attracted whoever else had filled the cheque. When signature in a cheque is denied by the accused he has to rebut the case of the complainant (See Bir Singh v. Mukesh Kumar: (2019) 4 SCC 197. ).

In the absence of any finding that the cheque was not signed by the accused or not voluntarily made over to the payee and in the absence of any evidence with regard to the circumstances in which a blank signed cheque had been given to the complainant, it would be presumed that the cheque was filled in by the payee with the acquiescence of the drawer. Subsequent filling in of an unfilled signed cheque is not considered as an alteration but a legally permissible action.

A person, who signs a cheque and makes it over to the payee, remains liable for the offence of dishonor of cheque, unless he adduces evidence to rebut the legal presumption that the cheque had been issued in discharge of a liability. It is immaterial that the cheque has been filled in by any person other than the drawer.

Bank must furnish documentary proof

The bank has a duty to support the customer in furnishing documentary proof of dishonor of cheque for the purpose of adducing evidence in any proceeding relating to it, as per RBI circular.

Bank’s slip or memo having the official mark denoting the dishonor of cheque is a prima facie evidence of facts relating to it.

Punitive, compensatory & restitutive remedies

The NI Act is punitive, compensatory and restitutive in nature. It provides for a single proceeding for enforcement of criminal liability and civil liability for realization of cheque amount. It obviates the creditor moving to two different forums for a relief.

Therefore the cheque is to be safeguarded as an easy and effective tool for money transaction.

Complaint for cheating can be filed

The recipient of a dishonoured cheque can file a complaint for the offence of cheating under Section 420 of the Indian Penal Code, 1860 (IPC) as well, if the accused had a deliberate intention to cheat the payee while issuing the cheque. The offences under the Section 138 of the N I Act and the Section 420 of the IPC are quite different. There is no constitutional bar to prosecute a person for both. This remedy is available to the complainant in addition to the remedies under Section 138 of the NI Act and the compensation under Civil Procedure Code, 1908.

The element of mens rea is not required for the offence under Section 138 of N I Act though it is an essential ingredient in a criminal offence. So absence of mens rea is not a sound defence for the accused. The court cannot initially presume mens rea in a cheque dishonor case but it can be presumed to have existed only on the basis of facts and circumstances of each case (Please see Dashrath Rupsingh Rathod v. State of Maharashtra : (2014) 9 SCC 129).

The drawer of the cheque has no subsisting account when the cheque was drawn is also not a valid defence for the accused. Therefore closing a bank account and asking the bank to stop payment, after issuing a cheque would also attract the offence under N I Act.

Summary civil suit can be filed to recover amount

When a cheque is dishonoured the amount can be recovered by filing a summary suit under Order 37 of the Code of Civil Procedure, 1908.

A summary suit differs from an ordinary civil suitg. It does not grant the defendant an inherent right to defend himself. In order to defend himself, the defendant has to seek prior permission of the court within the stipulated period of ten days. Such permission will be granted only on consideration of the affidavit filed by the defendant, which discloses some good defence on its merits.

Summary suit is permissible in matters of recovery of debt, bill of exchange etc. So, in cheque bounce issue, a summary suit could be instituted to recover the amount.

Dishonour of gift cheque not an offence

Discharge of a cheque issued as gifts does not attract the offence under Section 138 of the N I Act.

The legislative intention was that the holder of the cheque entitles to receive the amount when a liability exists on the part of the person issuing the cheque.

Bonafide failure not to attract offence

When a cheque is issued not for the purpose of discharge of any debt or liability (but as a gift) the maker of the cheque is not liable for prosecution. Even the refusal to discharge the debt for bonafide and sustainable reasons also does not attract the offence of dishonor of cheque. Only those who know fully that they have no sufficient fund in the bank and yet issue a cheque in discharge of a liability deliberately will alone be punished under the Sections 138 & 142 of the N I Act. Every offence punishable under the N I Act is compoundable.

Bank should not pay a forged cheque

When a cheque which is presented for encashment contains a forged signature the bank has no authority or liability to make payment against such a cheque.

The bank would be acting against law in debiting the customer with the amounts covered by such cheques.

Interim compensation & deposit for appeal

N I Act has been amended from time to time to provide speedy disposal of cheque cases and to prevent the recipient of a dishonoured cheque spending considerable time and resources in court.

The Section 143A, inserted in the Act in September 2018, empowers the trial court to order the drawer of the cheque to pay interim compensation not exceeding 20% of the amount of the cheque to the complainant upon framing of charge against the accused. Such compensation may be recovered as if it were a fine under Section 421 of the CrPC. The Section has no retrospective application but only be applicable in the cases filed after 2018 amendment.

Similarly the Section 148 specifies that in case the drawer files an appeal against his conviction, the appellate court can direct the drawer to deposit a minimum amount of 20 per cent of the fine or compensation awarded by the trial court. Such a deposit works as a safeguard against filing appeal just for obtaining a stay in such cases just for delaying the payment. The appellate court can release the amount deposited to the complainant at any time during the pendency of the appeal. This amount shall be in addition to the compensation paid at the trial stage.

The payment of interim compensation at the trial and the deposit amount at the appellate stage has to be made within 60 days from the date of the order by the court trying the offence or the appeal as the case may be. The concerned court can further extend this period for another 30 days as well in case of sufficient reasons.

In case the drawer (appellant) is acquitted by the trial Court or the appellate Court, the payee (complainant) shall be directed to repay the interim compensation or amount deposited at the appeal stage, to the drawer (appellant) along with such interest, within 60 days of the court’s order. This period can be further extended by another 30 days for sufficient reasons.

Apply procedure of summons case or summary trial

All offences relating to cheque dishonor shall be tried by a Judicial Magistrate of First Cass applying Sections 262 to 265 of the Criminal Procedure Code, 1973 (CrPC). The Magistrate can pass a sentence of imprisonment for a term not exceeding one year and a fine of Rs 5000/- by following summary trial proceedings.

During the trial if it appears to the Magistrate that the nature of the case is one that demands a sentence of imprisonment for a term exceeding one year he can after hearing the parties record an order regarding it and hear or rehear the case in the manner a summons case is heard. The trial may be conducted expeditiously on day to day basis and concluded within six months as far as possible.

Summary trial procedures in cheque case

In all offence under Chapter XVII of the N I Act the Magistrate can follow summary trial procedures, provided for in Sections 262 to 265 of the CrPC. Summary trial is an abridged form of regular trial. It is a short cut procedure.

In summary trial, the Magistrate will have to record the plea of the accused, the substance of the evidence and the judgment containing a brief statement of the reasons for the finding, while disposing of the case. The complainant can give his evidence by way of an affidavit and such affidavit shall be read in evidence.

When following summary trial procedures, the Magistrate can pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand Rupees.

When summary proceedings are inappropriate

In the course of the summary trial proceedings if the Magistrate finds that it is undesirable to try the case summarily he can follow the summons case procedures laid down in the CrPC.

When the Magistrate switches over to the summons trial procedure he can recall and rehear the witnesses as well.

Summons trial procedures in cheque case

In summons trial in a cheque case, the court follows less elaborate trial procedures than in a warrant case. Even the method of preparing the record of evidence is less formal in order to decide the case quickly.

Filing of complaint: The first stage in a criminal prosecution against cheque dishonor is filing of a complaint before the Judicial Magistrate of the First Class. The application should accompany supporting documents such as bounced cheque with bank slip, a copy of the legal notice with acknowledgment for the delivery/receipt, a copy of the reply notice, and a copy of the documents such as promissory note etc.

If the complaint is in order the Magistrate will ask the complainant to appear before the court on a specified day for him to inquire into whether there is sufficient ground for proceeding.

Complainant appears & states the case: On the designated day for appearance, the complainant or his authorized agent should appear before the court. Then the court will examine upon oath the complainant and the witnesses present, if any, must provide substantive material facts of the case and the substance of which will be reduced to writing. The complainant has freedom to give either oral evidence or evidence by way of affidavit. The affidavit and the documents along with the complaint are good enough to be read in evidence both in the pre-summoning stage and the post summoning stage.

If the court is satisfied and finds some substance in the complainant, then summons will be issued to the accused asking him to appear before the Court. This is a weeding out operation to distinguish whether the complaint is a genuine one or an unfounded one, so as to ensure that the accused is summoned only when the case is a substantial one.

Summons to the accused / witness: If the court decides to proceed with the case, take cognizance) it will issue summons to the accused or witness. The summons must be served, either through speed post / approved courier service to the place where the accused normally resides, do business, or engage in work. Any refusal to take delivery of summons, as reflected in the acknowledgement or endorsement of the postal department or courier service, will be treated as due service.

Accused appears on summons: On receipt of the summons, along with a copy of the complaint and other documents, the accused should appear before the court in person or through his Counsel.

When the accused appears, the court would state the offence to him and inquire whether he is willing to pay the amount due along with reasonable interest, or has any defence to make. The record should show what is stated to him. The purpose of this questioning is to make the accused aware of the charge against him as no formal charge will be framed, as in a warrant case, in this type of trial. He should be made aware that he should be put on the trial as to the offence or facts charged against him.

The court may direct the accused to furnish a bail bond to ensure his appearance during trial and ask him to take notice to enable him to enter his plea of defence and fix the case for defence evidence.

When accused pleads guilty: If the accused pleads guilty, the Magistrate shall record the plea as nearly as possible in the words used by the accused and convict him thereon in his discretion if he accepts the plea. If plea is accepted, the court will post the matter for judgment.

Warrant when accused fails to appear: If the accused or his pleader fails to appear before the court, then the court will verify whether the summons issued by the court is received by the accused. If it is received, the court will issue an arrest warrant against him.

When accused denies charge: If the accused denies the charge the Magistrate would allow the complainant to open his case by giving the facts and circumstances constituting the offence and stating what evidence he proposes to prove the case.

Complainant to provide evidence: The Magistrate then hears the complainant and takes all such evidence in support of the complaint. On application of the complaint the Magistrate can issue summons to any witness directing him to attend the court or produce any document or thing before it. The Magistrate can ask the complainant to deposit reasonable expenses required for the witness to attend the court.

The complainant can give evidence on proof affidavit. The court can also ask anyone to provide evidence on proof affidavit, on request of the parties in the case. The accused or his Counsel can cross examine the witnesses. After examination of the complainant’s witnesses the Magistrate shall make a memorandum of the substance of his evidence which would form part of the record.

Complainant’s Oral & written arguments: On conclusion of complainant’s evidence the complainant would be allowed to present concise oral arguments and file written arguments thereof.

Defendant adduces Evidence: Then the Magistrate will give the accused an opportunity to submit his list of documents and witnesses, and adduce his evidence in support of his case. On the application of the accused the Magistrate can issue summons to any witness directing him to attend or produce any document or other thing. The accused has to deposit the expenses in that regard. The witnesses will be cross examined by the complainant. After this, the case will be posted for hearing.

Defence arguments: The Magistrate shall hear the defence arguments ( both oral and written) against the incriminating evidence and every circumstance brought in by the complaint.

Delivery of Judgment: On concluding the arguments, the case will be posted for judgment. If the court finds that the complaint is proved upon taking the evidence for the prosecution and for the defence, then the accused will be punished with fine or imprisonment or both.

If the accused is convicted, he will be subjected to arrest. He can move a petition for suspension of his sentence for a period of 30 days, enabling him to file an appeal before the appeal (Sessions) court.

If the court finds no substance in the complaint, then the court will acquit the accused.

The Supreme Court says that the trial court must conduct a cheque dishonor case within three months of assigning the case [see Indian Bank Association v Union of India: 2014 (5) SCC 590].