CHEQUES

Definition of a Cheque:

Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as under:

“A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed

to be payable otherwise than on demand.”

A cheque is a bill of exchange drawn upon a specified banker and payable on

demand and includes the electronic image of a truncated cheque and a cheque

in the electronic form.

Thus, a cheque is a kind of bill of exchange. It is always drawn on a bank or a

banker, and is payable immediately on demand. A cheque requires no

acceptance apart from prompt payment. It is presented for payment only.

A cheque is a species of a bill of exchange; but it has the following two additional

qualifications, viz.

(1) It is always drawn on a specified banker, and

(2) It is always payable on demand.

All cheques are bills of exchange, but all bills of exchange are not cheques. A

cheque must have all the essential requisites of a bill of exchange. It must be

signed by the drawer. It must contain an unconditional order on a specified

person. But it does not require acceptance as it is intended for immediate

payment.

The person who issues or draws the cheque is known as drawer, and the person

in whose favour it is drawn is called ‘payee’. The banker on whom the cheque is

drawn is known as drawee. Thus there are three parties to a cheque.

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The usual form of a bank cheque is as follows:

CROSSING OF CHEQUES

A crossed cheque is one on which two parallel transverse lines with or without

words ‘& Co.’ are drawn. The payment of such cheque can be obtained only

through a banker. Thus crossing is a direction to the drawee banker to pay the

amount of money on a crossed cheque generally to a banker so that the party

who obtains the payment can be easily traced. This mode of payment is

considered to be very safe.

TYPES OF CROSSING: There are two types of crossing, viz.,

(1) General crossing, and

(2) Special crossing.

Another type of crossing known as ‘restrictive crossing’ has developed out of

business usage.

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No… Date… 200PUNJAB NATIONAL BANK

(H.O. Parliament Street , New Delhi- 110 001)

Pay……………………………………………………or bearer

the sum of Rs……………………………………………………….. Rs. ………………………………

A/c No………………………………

PUNJAB NATIONAL BANKRace Course road, Mumbai-400016 Sd/-

400016 121323445 9

(1) GENERAL CROSSING

A cheque is said to be crossed generally when it bears across its face an

addition of –

(i) The words ‘& Co.’ between two parallel transverse lines, either with or

without words ‘not negotiable’; or,

(ii) Two parallel transverse lines simply, either with or without the words ‘not

negotiable’ (Sec. 123 of Negotiable Instruments Act, 1881).

When a cheque is crossed generally, the drawee banker shall not pay it, unless it

is presented by a banker (Sec 126, Para 1, Negotiable Instruments Act, 1881).

Specimens of general crossing:

i)

The above cheque bears an abbreviation “& Co,” between two parallel

transverse lines.

ii)

The above cheque has two parallel lines marked across its face.

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iii)

The above cheque bears the words “not negotiable” between two parallel

transverse lines.

(2) SPECIAL CROSSING

When a cheque bears across its face an addition of the name of a banker, either

with or without the words ‘not negotiable’, the cheque is deemed to be crossed

specially (Sec. 124 of the Negotiable Instruments Act, 1881).

Transverse lines are not necessary in case of a special crossing. The payment of

a specially crossed cheque can be obtained only through the particular banker

whose name appears across the face of the cheque or between the transverse

lines, if any.

Where a cheque is crossed specially the banker on whom it is drawn shall pay it

only to the banker on whom it is crossed, or his agent for collection (Sec.126,

Para 2 of the Negotiable Instruments Act, 1881).

Specimens of special crossing:

i)

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The above cheque bears across its face an addition of the name of the

banker viz. “HDFC bank.”

ii)

The above cheque bears across its face the banker viz. “HDFC bank” in

addition to the words “Not Negotiable.”

iii)

The above cheque bears across its face the name of the banker viz.

“HDFC bank” in addition to an abbreviation “& Co.”

(3) RESTRICTIVE CROSSING

In addition to the two statutory types of crossing discussed above, there is

another type which has been adopted by commercial and banking usage. In this

type of crossing the words ‘A/c Payee’ are added to the general or special

crossing.

The words ‘A/c Payee’ on a cheque are a direction to the collecting banker that

the amount collected on the cheque is to be credited to the account of the payee.

If he credits the proceeds to a different account, he is prima facie guilty of

negligence and will be liable to the true owner for the amount of the cheque. It

should however be noted that ‘A/c Payee’ cheques are negotiable.

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Specimens of Restrictive crossing:

i)

The above cheque bears the words “A/c Payee” in between two parallel

transverse lines.

ii)

The cheque bears the words “A/c Payee” and “Not Negotiable” between two

parallel transverse lines.

* Not negotiable crossing (Sec. 130 of the Negotiable Instruments Act, 1881).

The effect of the words ‘not negotiable’ on a crossed cheque is that the title of the

transferee of such a cheque cannot be better than that of its transferor. The

addition of the words ‘not negotiable’ does not restrict the further transferability of

the cheque.

It only takes away the main feature of negotiability, which is, that a holder with a

defective title can give a good title to a subsequent holder in due course. Anyone

who takes a cheque marked ‘not negotiable’ takes it at his own risk.

The object of crossing a cheque ‘not negotiable’ is to afford protection to the

drawer or holder of the cheque against miscarriage or dishonesty in the course of

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transit by making it difficult to get the cheque so crossed cashed, until it reaches

its destination.

DISHONOUR OF CHEQUES

Dishonour of cheque for insufficiency of funds in the account

(Sec. 138 the Negotiable Instruments Act, 1881)

Ingredients and requirements of the penal provisions:

Section 138 creates an offence for which the mental elements are not necessary.

It is enough if a cheque is drawn by the accused 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 discharge in whole or in part, of any debt or other liability

due. Therefore, whenever the cheques are on account of insufficiency of funds or

reasons referable to the drawer’s liability to provide for funds, the provisions of

Section 138 of the Act would be attracted, and for this offence, he shall, be

punished with imprisonment for a term which may extend to two years, or with a

fine which may extend to twice the amount of the cheque or with both, provided

the following conditions are satisfied:

1. Existence of a live account:

Existence of a "live account" at the time of issue of cheque is a condition

precedent for attracting penal liability for the offence under this section. A cheque

cannot be issued de hors an account maintained by its drawer with the banker.

When the bank returns the cheque unpaid because of the account of money

standing to the credit of the cheque, to make demand for payment as provided

for payment as indicated in clause (b) of the proviso. The words "that account" in

the section denote to the account in respect of which the cheque was drawn. No

doubt if any person manages to issue a cheque without an account with the bank

concerned its consequences would not snowball into the offence described under

Section 138 of the Act. For the offence under Section 138 of the Act there must

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have been an account maintained by the drawer at the time of the cheque was

drawn.

2.  Issue of Cheque in discharge of a debt or liability:

The cheque issued unpaid by the bank must have been issued in discharge of a

debt or other liability wholly or in part. Where a cheque is issued not for the

purposes of discharge of any debt or other liability, the maker of the cheque is

not liable for prosecution under Section 138 of the Act. A cheque given as a gift

or for any other reasons and not for the satisfaction of any debt or other liability,

partly or wholly, even if it is returned unpaid will not meet the penal

consequences.

If the above conditions are fulfilled, irrespective of the mental conditions of the

drawer he shall be deemed to have committed an offence, provided the other

three requisites are fulfilled:

a) Presentation of the cheque within six months or within the period of its validity:

The cheque must have been presented to the bank within a period of six months

from the date on which it is drawn or its period of validity, whichever is earlier.

Thus if a cheque is valid for three months and is presented to the bank within a

period of six months the provisions of this section shall not be attracted. However

if the period of validity of the cheque is not specified or prescribed the cheque is

presented within six months from the date the cause of action can arise. The six

months are taken from the date the cheque was drawn.

b) Return of the cheque unpaid for reason of insufficiency of funds:

The cheque must be returned either because the money standing to the credit of

that account is insufficient to honour the cheque or that it exceeds the

arrangement made to be paid from that account by an agreement with the bank.

Even if the cheque is returned with the endorsement "account closed" Section

138 is attracted [15].

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c) Issue of the notice of dishonour demanding payment within thirty days of

receipt of information as to dishonour of the cheque:

The payee or the holder in due course of the cheque has to give a notice in

writing making a demand for payment of the said amount of money to the drawer

of the cheque. Such notice must be given within 30 days [16] of information from

the bank regarding the return of cheque as unpaid [17].

d) Failure of the drawer to make the payment within fifteen days of the receipt of

the payment:

After the receipt of the above notice the drawer of the cheque has to make

payment of said amount of money to the payee or to the holder in due course of

the cheque within 15 days of the receipt of the notice. If the payment is not made

after the receipt of the notice within stipulated time, a cause of action for initiating

criminal proceedings under this section will arise.

FAQs

Q1. What can I do when a cheque is dishonoured for the reason of insufficient

funds? What legal action I can take to get the amount cleared?

A. On the dishonour of a cheque, one can file a suit for recovery of the cheque

amount along with the cost & interest under order XXXVII of Code of Civil

Procedure 1908 (which is a summary procedure and) can also file a Criminal

Complain u/s 138 of Negotiable Instrument Act for punishment to the signatory of

the cheque for haring committed an offence. However, before filing the said

complaint a statutory notice is liable to be given to the other party.

Q2. I have got my cheque dishonoured few months back. It was issued by a

Company. What can I do now?

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A. On the dishonour of cheque by the company you can file a suit for recovery of

the amount under Order XXXVII of CPC. As you have stated that cheques were

dishonoured few months back and you have issued no notice to the company

bringing to their knowledge the dishonour of cheques and the life of the cheque is

still valid which is usually six months from the date of issue. You please present

the cheque again and on receipt of the information about the dishonour of the

cheque you immediately issue notice within 15 days from the receipt of the

information of dishonour of cheque to the company. If the company does not pay

the amount within 15 days from the receipt of the notice, you can file complaint

under Section 138 of the Negotiable Instrument Act. The said complaint is to be

filed within one month on the expiry of 15 days period of notice.

Q4. I have a cheque dishonoured. I have informed the person in writing, but no

response, what should be done to register a case of cheating, and which place it

should be filed? The place of the bank, where the cheque was dishonoured or

the place where the cheque was handed?

A. When you have informed the person about the dishonour of the cheque, in

case the information is given within 15 days from the dishonour of the cheque,

you can file a Complaint under Section 138 of Negotiable Instrument Act within

one month after the expiry of notice period of 15 days. The Complaint for

cheating is not maintainable legally. However, in certain cases the police have

been registering cases of cheating against the accused.

Q5. I have blank cheques given to me by a partnership firm, since they owe me

some money which I had given to them as a loan. Besides the cheques and the

statement of accounts, I do not have anything else. Suppose one day, I suddenly

get to know that they have closed the partnership firm and dissolved it, can I

deposit the cheques now and legally raise a claim on them? How?

A. You should fill the cheques and present for encashment. The partnership Firm

as well as partners are personally liable and even after dissolution also the firm

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and partners are liable. Once the cheques are dishonoured you have to file a suit

for recovery of the said amount under the summary procedure provided in Order

37 of Code of Civil Procedure, 1908. You should also file a complaint under

Section 138 of the Negotiable Instruments Act. For this you will have to first give

a notice, within 15 days of the dishonouring of the cheques. Then if payment is

not made within 15 days of receipt of notice a complaint has to be filed within 30

days thereafter.

CASE STUDIES

CASE STUDY 1

2000-(099)-COMPCAS -0517 -DEL 

GYAN CHAND KOTIA v/s INDIAN RENEWABLE ENERGY DEVELOPMENT

AGENCY LTD.

IN THE DELHI HIGH COURT 

JUDGMENT 

M. S. A. SIDDIQUI J. - By this petition under section 482 of the Criminal

Procedure Code, 1973, the petitioner seeks quashing of the order dated January

4, 1999, passed by the Metropolitan Magistrate, New Delhi, directing issue of

process against him. 

The cheque No. 371664 dated March 31, 1998, for Rs. 4.46 lakhs was issued by

Marson's Finance Ltd. in favour of the respondent-company. When the cheque

was presented for encashment, it was dishonoured on the ground that sufficient

funds were not available. A notice was served on Marson's Finance Ltd., but

despite its service, the respondent-company did not make payment. This was

followed by a complaint in the court of the Metropolitan Magistrate, New Delhi.

On the complaint being filed, process was also issued against the petitioner.

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Aggrieved thereby, the petitioner has come up before this court under section

482 of the Criminal Procedure Code. 

Referring to section 141 of the Negotiable Instruments Act, 1881 (for short "the

Act"), learned counsel for the petitioner contended that the complaint against the

petitioner is not maintainable as at the relevant time he was not in charge of and

responsible to Marson's Finance Ltd. for the conduct of its business. Learned

counsel has invited my attention to the averments made in paras. Nos. 2 and 6 of

the complaint which are as under : 

"2. That accused No. 1, namely, Marson's Finance Ltd. is a public limited

company, registered under the Companies Act, 1956, having its registered office

at 4, Chandni Chowk Street, Calcutta 700 072; accused No. 2, Shri Akhilesh

Kotia and accused No. 3 Shri Gyan Chand Kotia are the directors of accused No.

1 and as such responsible for taking all decisions for and on behalf of accused

No. 1; and accused No. 4 Shri Gaurav Jain is the manager of accused No. 1 and

as such responsible for all the acts of accused No. 1. 

6. That as submitted hereinabove, accused Nos. 2 and 3 are the directors and

accused No. 4 is the manager of accused No. 1, i.e., Marson's Finance Limited

having its registered office at 4, Chandni Chowk Street, Calcutta 700 072. The

cheque No. 371664 was duly issued by and on behalf of accused No. 1, as per

the decision and instructions of accused Nos. 2 and 3, and accused No. 4 being

the manager is responsible for the conduct of the business of accused No. 1, and

hence accused Nos. 2 to 4 are jointly and severally liable for the acts of accused

No. 1 in terms of the provisions contained under section 141 of the Negotiable

Instruments Act." 

A bare reading of the aforesaid paragraphs of the complaint would show that

there is specific allegation in the complaint that the petitioner was also

responsible for taking all the decisions of behalf of the offending company,

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namely, Marson's Finance Ltd., and further the cheque in question was issued on

behalf of the said company under the instructions of the petitioner. From these

averments, a reasonable inference can be drawn that the petitioner could also be

vicariously liable for the offence under section 138 of the Act alleged to have

been committed by the offending company. In my opinion, the ratio decidendi of

the decision of the Supreme Court in State of Haryana v. Brij Lal Mittal [1998] 93

Comp Cas 329; [1998] 2 Comp LJ 1, does not govern a case like that in hand. In

that case it was found that except a bald statement in the complaint that the

respondents were directors of the manufacturers, there was no other allegation

to indicate, even prima facie, that they were in charge of the company and also

responsible to the company for the conduct of its business. On these facts, it was

held that simply because a person is director of the company it does not

necessarily mean that he would be vicariously liable for the offence committed by

the company. In the instant case, as noticed earlier, there is specific allegation

against the petitioner that the cheque in question was issued by the offending

company under his instructions. In this view of the matter, the learned magistrate

has not committed any illegality in taking cognisance of the offence under section

138/ section 141 of the Act against the petitioner.

CASE STUDY 2:

Any complaint made prematurely, that is before the expiration of the period of

fifteen days within which the defaulting drawer is allowed to pay, is liable to be

quashed. Any complaint, in order to be filed, must be made within a period stated

as ‘one month’ in Sec. 142 of the Act for filing complaint refers to the English

calendar month and not to thirty days vide Sec. 3(35) General Clauses Act, 1897.

Now let us look at the following case from this point of view.

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D Ramamoorthi v/s K J Duraiswamy

( [1998] 93 Comp Cas 538)

In the above mentioned case, D Ramamoorthi v/s K J Duraiswamy, it so

happened that a cheque was first presented to and returned unpaid by the

drawee bank on 21st August, 1992. It was re-presented to the bank and again

dishonoured on 19th October, 1992. The payee’s statutory notice was received by

the drawer on 28th October, 1992, and on non payment by the drawer, the payee

filed a complaint under Sec. 138 under the Act on 1st December, 1992. The

complaint was returned by the magistrate for rectifying an omission to mention

the age of the accused in the complaint. The rectified complaint was re-

presented to the magistrate on 14th September, 1993. It was held that the

material date was that on which the complaint was initially filed, and that, once a

complaint is filed, it is deemed to be in the custody of the court, although it is

returned for rectification of a defect noticed therein.

The Honorable Court said: Since the notice of the demand was received by the

drawer on 28th October, 1992, it should have been complied with on or before

13th November, 1992 and that the cause of action arose on and from 14th

November, 1992 and the complaint should have been filed within one month from

13th November, 1992.

CASE STUDY 3:

Altaf Ahmed v/s Minerals and Metal Trading Corp.

([1997] 89 Comp. Cas 837)

In the above mentioned case, Altaf Ahmed v/s Minerals and Metal Trading Corp.,

it so happened that in an action under Sec. 138 of the Act, the court awarded

sentence of imprisonment to the drawer for non payment of dues, and the drawer

petitioned for waiver of award stating that the payee was in possession of

sufficient collateral security by which to recover his dues through a civil action.

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The Hon. Court rejected the petition stating that Sec. 138 of the Act envisages

criminal, as distinct from civil, action against an errant drawer, and provides for

levy of a fine on the drawer up to twice the amount of the dishonoured cheque,

with or without a sentence of imprisonment of the drawer up to one year, but

does not speak of payment of compensation to the complainant.

However, Sec. 357 of Cr. PC says

(1) When a court imposes a sentence of fine or a sentence (including a

sentence of death) of which fine forms a part, the Court may, when

passing the judgment, order the whole or any part of the fine recovered to

be applied:-

(a) in defraying the expenses properly incurred in the prosecution;

(b) in the payment to any person of compensation for any loss or injury

caused by the offence, when compensation is, in the opinion of the

court, recoverable by such person in a civil court.

(3) At the time of awarding compensation in any subsequent civil suit relating

to the same matter, the Court shall take into account any sum paid or

recovered as compensation under this section.

The Supreme Court emphasized the importance of Sub-section 3 of the

above section of the code and lamented the ignorance of its objects on the

part of the courts.

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MEMORANDUM

BIBLIOGRAPHY

Mercantile Law – N. D. Kapoor

Business Law – Wadhwani

Tannan Banking, Law & Practice – M. L. Tannan

www.vakilno1.com

www.legalservice.com

THE END

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