Legal Aspects of Cheque Bounce/ Dishonor

In the present era of banking, cheque is one of the prominent ways of transactions. The cheque is not only use by the traders, businessmen, entrepreneurs but also individuals. After demonetization, the use of cheque to make the payment has been increased drastically. On daily basis people are using cheque not only for commercial purpose but also for personal purpose and the most common uses for individual purpose are friendly loan, security cheques, provide cheques to relatives for their own use etc. The motive to write this article is to provide information to understand the legal aspects in case of cheque bounce or dishonor and avoid common mistakes.
What is a “Cheque”?
A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. (Section 6 of Negotiable Instrument Act, 1881)
The person who issues the cheque is called a “Drawer” and the person in whose favour the cheque is issued, called a “Drawee”.
What are the characteristic of the cheque?
a) The cheque should be in writing
b) It should be without condition
c) It must have specified banker
d) It must have specified drawee, in whose favour the cheque is issued.
e) The consideration amount should be written in numeric and in words as well.
f) It is payable on demand only and it has to be present within three months from its date.
g) It should contain drawer’s signature and specific date.
* IMP: – if there is difference in amount between words and numeric than only amount written in words shall prevail over the amount written in numeric.
Section 138 of Negotiable Instrument Act, 1881
Dishonour of cheque for insufficiency, etc., of funds in the account.
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 provision of this Act, be punished with imprisonment for a term which may extend to one year, 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 fifteen 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.
Basic elements of the offence of cheque bounce/ dishonor under section 138 of Negotiable Instrument Act
1. The cheque was issued to discharge the liability which should be legally enforceable.
2. The cheque should have been present within 3 months from its date or within its validity period whichever earlier.
3. The holder of the cheque or the payee should issue a demand/ legal notice to the drawer within 30 days from the date of receipt of the information by him from the Bank regarding dishonor of cheque. and
4. The drawer/ payee failed to make the payment within 15 days from the date of receiving of the payment.
REASONS OF CHEQUE BOUNCE
“Funds Insufficient”
As per section 138 of Negotiable Instrument Act, there are two aspects as following:-
a) ‘Either because of the amount of money standing to the credit of that account is insufficient to honour the cheque’ or
b) it exceeds the amount arranged to be paid from that account by an agreement made with that bank
Besides above, the following reasons also come under the ambit of section 138 of Negotiable Instrument Act.
1. ‘STOP PAYMENT’ INSTRUCTION
Justice S. Nijjar of Bombay High Court said in a case titled ‘Mahendra A. Dadia And Others vs State Of Maharashtra & Another’ that “Once a cheque was issued by the drawer and if the drawer stop the payment of the said cheque, it shall be considered as dishonor of cheque under the purview of section 138 of Negotiable Instrument act, 1881.
2. DRAWER’S ACCOUNT CLOSED
In the case of ‘NEPC Micon Limited and Others vs Magma Leasing Limited’ the bench of Supreme Court comprising Justice K.T. Thomas and Justice M.B. Shah, stated that if the drawer after issuing the cheque to payee, closed the account before presentation of said cheque, is an offence under section 138 Negotiable Instrument Act, 1881.
3. REFER TO DRAWER
Punjab and Haryana High Court observed in case titled ‘Lilly Hire Purchase Pvt. Ltd. vs Darshan Lal’ that the cheque dishonored with the remarks “refer to drawer” which expression means that there were not sufficient funds with the bank in the account of the respondent. This fulfils the essential condition to make out a case under Section 138 of the Act.
4. ‘NOT A CLEARING MEMBER’
Cheque should be present before the bank on which such cheque drawn and if the cheque is not present so than offence under section 138 would not be attracted. It is also important to mention here that when the bank on which the cheque is drawn is not a clearing member of the Reserve Bank of India, the cheque gets dishonor with the remark ‘NOT A CLEARING MEMBER’. However in such case the provision under section 138 would not be attracted.
5. SIGNATURE MISMATCH/ IMAGE IS NOT FOUND
One should be very careful while signing a cheque as if drawer’s signature mismatched with bank record then it shall be an offence under section 138 of Negotiable Instrument Act. Gujrat High Court stated in a case “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 of Negotiable Instrument Act, so also dishonour on the ground that the ’signature does 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”.
ACTIONS TO BE TAKEN BEFORE FILING A COMPLAINT CASE U/S 138 OF NEGOTIABLE INSTRUMENT ACT BEFORE COMPETANT COURT
Compliance of section 138 Negotiable Instrument Act before filing a complaint case, are as follows:
Provided that nothing contained in this section shall apply unless-
(a) the cheque has been, presented to the bank within a period of three 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.

Explanation
The very first essential of section 138 is one need to send demand notice within 30 days from the date of receipt of the information of dishonor of cheque from the bank.
The demand notice should be sent through speed post/ authorized courier/ registered post.
• It is the responsibility of the drawer to send the demand notice on correct address rather than just mentioned incorrect or incomplete address and if the demand notice returned back with remarks incomplete address/ incorrect address/ door is locked/ not reside – return of acknowledgement with such endorsement – notice is not served.
• If demand notice returned with the remark ‘not claimed’, is deemed to be served.
• The complaint of cheque bounce has to be accompanied with postal receipt along with acknowledgment receipt to show that demand notice was duly served.
After sending the demand notice, one needs to wait for 15 days from the date of receipt of the legal notice duly served on such date for giving appropriate opportunity to make the payment by the drawer.
If the drawer of such cheque fails to make the payment of the said amount of the money to the payee or, as the case may be or to the holder in due course of the cheque, the payee need to file a criminal complaint before a competent judicial magistrate within 30 days from the expiry of said period of 15 days.
Where to file criminal complaint?
“When the cheque is delivered for collection through an account, the complaint is to be filed before the Judicial Magistrate – Ist Class or Metropolitan Magistrate, where the branch of the bank is situated, where the payee or the holder in due course maintains his account and, secondly, when the cheque is presented for payment over the counter, the complaint is to be filed before Judicial Magistrate – Ist Class or Metropolitan Magistrate, where the drawer maintains his account.

What documents are required to file criminal complaint in cheque bounce case?
1. Original Cheque
2. Original returning memo stating the reason to dishonor the cheque
3. Copy of demand notice send to the drawer.
4. Original postal receipts of the demand notice.
5. Original acknowledgement receipt of the post.
6. The envelope in which the demand notice was send (In case if demand notice returned to the sender)
7. Other relevant documents to prove the legally enforceable liability/ debts.
VARIOUS OTHER ASPECTS OF CHEQUE BOUNCE/ DISHONOR OF CHEQUE
Offence by companies (Section 141)
(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:
– Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.
– Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the state Government, as the case may be, he shall not be liable for prosecution under this Chapter.
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly,
Explanation-For the purposes of this section,-
(a) ”company” means anybody corporate and includes a firm or other association of individuals; and
(b) “director”, in relation to a firm, means a partner in the firm.
The Hon’ble Supreme Court has held that merely being a director of a company is not sufficient to make a person liable under section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact and there is no deemed liability of a director in such cases. AIR 2005 (SCW) 4740; AIR 2005 SC 3512, AIR 2007 SC 1682
Supreme Court has also held that for the directors of the company to be made liable for an offence under sec 138, the complaint must contain specific allegations against directors as to how directors are in charge and responsible for conduct of business of company. Mere allegation in complaint that accused persons are directors and responsible officers of the company is not sufficient. AIR 2007 SC 1454
Presumption in Favour Of Holder (Section 139)
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.
“The effect of these presumptions is to place the evidential burden on the accused of proving that the cheque was not received by the complainant towards the discharge of any liability. Because both sections 138 and 139 require that the court shall presume the liability of the drawer of the cheques for the amounts for which the cheques are drawn…it is obligatory on the courts to raise this presumption in every case where the factual basis for the raising of this presumption had been established. It introduced an exception to the general rule as to the burden of proof in criminal cases and shifts the onus on to the accused.”

Issue Blank Cheque in good faith
Respondent issued a blank cheque without mentioning the date and amount and sent it with a letter requesting complainant to present it after a month – Question whether blank cheque will come within the definition of cheque? – If the cheque is not drawn for a specified amount it would not fall within a definition of bill of exchange – Act of complainant in filling up amount portion and date was a material change and it could not be enforced even though it was issued for a legal liability – Alteration without the consent of the party who issued the cheque rendered cheque invalid.
2004 (1) CRIMES 567 (AP)
Admission of signature on the cheque is not equivalent with admission of execution – Right of the accused to contend that a blank signed cheque was mis-utilised by the payee cannot be taken away by such mere admission of signature.
AIR 2007 (DOC) 195 (KER.); 2007 (1) KLT 525 (KER)
Accused entered into security arrangement with complainant for sale of its product – Accused issued blank cheques as security to security agency agreement – No debt or liability existed when cheques were handed over to drawee complainant – Complaint based on blank cheque issued towards security is not maintainable.

© Prominent Legal Solutions
Author :- Atul K. Sharma (Advocate)
Disclaimer :- The present article is only for knowledge purpose and action(s) or inaction(s) taken by the readers/ viewers on the basis of aforesaid article is/are solely on their own risk and it is advisable by the author to take any action on the basis of aforesaid article, kindly consult with advocate, legal expert or subject expert. The author does not solicit, invite or induce of any sort to create attorney-client relationship.