Dishonor of Cheques

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DISHONOUR OF CHEQUES APURVA AGRAWAL

GODREJ & BOYCE MFG. CO. LTD.

September 26, 2004

WHAT IS A BILL OF EXCHANGEA "Bill of Exchange" is a negotiable instrument in writing containing an instruction to a third party to pay a stated sum of money at a designated future date or on demand.

WHAT IS A CHEQUEA "cheque" on the other hand is a bill of exchange drawn on a bank by the holder of an account payable on demand. Thus a "cheque" under Section 6 of the NIA is also a bill of exchange but it is drawn on a banker and is payable on demand. It is thus obvious that a bill of exchange even though drawn on a banker, if it is not payable on demand, it is not a cheque.

WHAT IS A POSTDATED CHEQUEA "postdated cheque" is only a bill of exchange when it is written or drawn, it becomes a "cheque" when it is payable on demand.

The postdated cheque is not payable till the date which is shown on the face of the said document. It will only become cheque on the date shown on it and prior to that it remains a bill of exchange under Sec 5 of the NIA.

WHAT IS A POSTDATED CHEQUE Contd As a bill of exchange a postdated cheque remains negotiable but it will not become a "cheque" till the date when it becomes "payable on demand".Refer: Anil Kumar Sawhney V. Gulshan Rai 1993-(004)-SCC -0424 SC

WHAT IS A CHEQUE? SIMPLIFIED You can order the Bank to pay someone, on your behalf You can do this by giving a cheque to the payee A cheque is like an order to the bank

When the payee shows it to your bank, the bank will pay the money This is called honoring a cheque

DEPOSITING A CHEQUE Godrej has received a cheque say from me My bank account is in ABN Amro Bank, Sakhar Bhawan, Nariman Point, Mumbai Will Godrej send a peon to collect the money from ABN Amro Bank, Sakhar Bhawan, Nariman Point, Mumbai?

DEPOSITING A CHEQUE Contd Godrejs account is with ICICI Bank, Vikhroli Godrej will request its bank ICICI Bank to collect the money on its behalf Godrej will do this by simply depositing the cheque in their account with ICICI Bank, Vikhroli

ENDORSING A CHEQUE Godrej has received a cheque Godrej will deposit this cheque into their bank i.e. ICICI Bank, Vikhroli and receive the payment in 23 days if it is a local cheque or about 21 days if it is an outstation cheque (cheques which cannot be drawn on par).

ENDORSING A CHEQUE Contd What if Godrej needs the money urgently? The cheque can be endorsed to a third party say me Apurva Agarwal I can give you cash against the cheque at a discount I will deposit the cheque into my account and my bank will collect the money on my behalf

ENDORSING A CHEQUE Contd Endorsement is done on the reverse of the cheque

Normally only bearer and simple crossed cheques can be endorsed.

THE PAYEE A cheque will mostly be paid to the person named as payee Making out a cheque in the name of Mr. Singh is not a good idea. Say Mr. Satbir Singh instead

Suppose a payment has to be made to Godrej Soaps Limited. The full name has to be written. Just saying Godrej is not enough.

DATING THE CHEQUE A cheque can not be paid before the date which is put on it The cheque is valid only for six months from the date its drawn A cheque dated March 6, 1998 was deposited in the bank on September 5, 1998

DATING THE CHEQUE Contd

The cheque reached the paying bank on September 7, 1998.The six months had elapsed. Hence the cheque was returned. Such cheques are known as stale cheques.

What happens if you put an impossible date on the cheque? For example, November 31, 2000? The bank will treat the date as 1st December 2000.

AMOUNT IN WORDS

Why do you have to write the amount in figures (numerals) and in words? To make it difficult for people to alter the amount

AMOUNT IN WORDS Contd In most cases, if the amount in words and figures do not match, then the bank will return the cheque. However, if the bank does not suspect an alteration, then the bank can pay the amount in words.

STOP PAYMENT If the cheque is not already paid, you can ask the bank to stop payment. For doing this, you should issue the instructions in writing. Take an acknowledgement. Some foreign banks also accept the instructions on phone. Take the instructions number.

STOP PAYMENT Contd The stop payment remains effective for six months. If the cheque is paid due to an oversight by the bank, the bank will bear the loss. For issuing the instructions, you must give the correct cheque number, payees name, amount and date.

DISHONOR OF CHEQUES Section 138 of the NIA provides that the dishonor of a cheque for the reasonsa) "insufficiency of funds" or b) the amount covered by the cheque was not arranged for

DISHONOR OF CHEQUES Contd The said provision was incorporated into the NIA to enhance the acceptability of cheques. The said section would apply only when the cheque is presented for payment within the period of its validity

WHEN DISHONOUR OF CHEQUE IS AN OFFENCERefer: K. Bhaskaran v. Sankaran Vaidhyan Balan 1999 ALL MR (Cri) 1845 (SC)= 1999 (4) ALL MR452 (SC) 1. Ingredients of the offence under s. 138 a) Drawing of the cheque b) Presentation of the cheque to the bank

WHEN DISHONOUR OF CHEQUE IS AN OFFENCE Contdc) Returning the cheque unpaid by the drawee bank d) Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount e) Failure of the drawer to make payment within 15 days of the receipt of the notice

DRAWING OF A CHEQUE Cheque should have been drawn by the drawer in payment of a legal liability to discharge the existing debt. The words any debt or any other liability appearing in section 138 make it very clear that it is not in respect of any particular debt or liability. The presumption which the Court will have to make in all such cases is that there was some debt or liability once a cheque is issued

DRAWING OF A CHEQUE Contd It will be for the accused to prove the contrary i.e., there is no debt or any other liability The Court shall statutorily make a presumption that the cheques were issued for the liability indicated by the prosecution unless contrary is to be proved

PRESENTATION OF CHEQUE The presentation of cheque should be within its validity period i.e. six months The question arises as to which bank the cheque should reach within the validity period, is it that of drawers bank or it is enough if the cheque is presented by the payee to his bank before the validity periods.

PRESENTATION OF CHEQUE Contd The courts are divided on the issue. But common sense demands that the cheque should reach the drawer bank within the period of validity as it is that bank that either pays or rejects payment as per the situation existing on that day.

RETURNING OF THE CHEQUE UNPAID Lot of controversy had arisen on the issue What reasons are relevant to hold the drawer of the cheque criminally responsible for bouncing of a cheque

It is not what the bank says in its return memo that is relevant but the actual position as on the date when the cheque reaches the drawer bank

Case Laws

J. Veeraraghavan v. Lalith Kumar 1995 CRI L J 1882 Any reason for dishonour is an offence. The Marginal Note of S. 138 of the NIA states Dishonour of cheque for insufficiency etc. of funds in accounts" addition of word "etc." cannot be considered to be an accident

Case Laws ContdModi Cements v. Shri Kunchil Kumar Nandi (1998 2 JT SC 198) Even if notice is issued stopping payment before the payee deposited the cheque in his bank, offence is complete.

Case Laws ContdNepc Micon Ltd. And Others, Appellants V. Magma Leasing Ltd. Respondent. 1999-(086)AIR -1952 SC When the cheque is returned by a bank with an endorsement account closed", it would amount to returning the cheque unpaid because "the amount of money standing to the credit of that account is insufficient to honour the cheque" as envisaged in s. 138 of the Act"

Case Laws ContdIf the cheque is dishonoured because of stop payment" instruction to the bank, Section 138 would get attracted. It also amounts to dishonour of the cheque within the meaning of Section 138 when it is returned by the bank with the endorsement like (i) in this case, "referred to the drawer" (ii) "instructions for stoppage of payment" and stamped (iii) "exceeds arrangement".

Case Laws ContdSasseriyil Joseph v. Devassia [2001 Cri. L. J (Ker)] A cheque issued for the time barred debt, if dishonoured, the drawer cannot be convicted under Section 138 of NIA as debt was not legally recoverable

Case Laws ContdShri Sai Steel v. State [2002 Cri. L. J 3193 (AP)] The cheques were issued by X in favour of Y. Y discounted the cheques with a Bank. The cheques when deposited were dishonoured. The Bank, holder in due course cannot file complaint against X.

NOTICE It is the non-payment of dishonoured cheque within fifteen days from the receipt of the notice that constitutes an offence. Issuing of a cheque and its dishonour is not an offence. Any demand made after the dishonour of cheque will constitute a notice.

NOTICE Contd It is not necessary that the notice should be sent by Registered Post alone, it could be sent even by fax. It is not necessary that the notice should be in any particular form or style. It is held by the Supreme Court that while the cheque could be presented at any number of times however there shall be only one Notice.

ISSUEWhether dishonour of the cheque on each occasion of its presentation gives rise to a fresh cause of action within the meaning of Sec. 142 (b) of NIA?

No - A competent court can take cognizance of a written complaint of an offence u/s138 if it is made within 1mth of the date on which the cause of action arises u/s142 (c) gives it i