1

LEGAL PROTECTION FOR DISHONOR OF CHEQUES

(Assignment on Law Relating to Banking and Negotiable Instruments)
Submitted by:
ABHISHEK CHOUDHARY
Roll No. 2011SVII063
Regd. No. - 1141844003
Batch - 2011-2016

SOA NATIONAL INSTITUTE OF LAW

SIKSHA O ANUSANDHAN UNIVERSITY,

BHUBANESWAR

TABLE OF CONTENTS

Sl. No.

Contents

Page

Acknowledgement

ii

Preface

iii

Declaration

iv

Guide Certificate

Introduction

vi

Legislative Provisions

19

vii

Judicial analysis

20

viii

Conclusion

22

ix

Bibliography

23

ACKNOWLEDGEMENT

Apart from the efforts of me, the success of any Assigned work depends largely on
the encouragement and guidelines of many others. I take this opportunity to express my
gratitude to the people who have been instrumental in the successful completion of this
Assignment work.
I would like to show my greatest appreciation to Prof. (Dr) Jayadev Pati, Dean,
SNIL. I cant say thank you enough for his tremendous help and support. I feel motivated
and encouraged every time I attend his lectures. Without his encouragement and guidance
this assignment would not have materialized.
My special thanks to Mrs. (Dr.) Madhubrata Mohanty, the Faculty-in-charge; for
extending her support and guidance without whom the completion of this Assigned Work
would have been a more difficult task. She has taken pain to go through the assignment and
make necessary correction as and when needed.
Thanks and appreciation to the helpful people at SOA National Institute of Law, for
their support. I would also like to thank my friends without whom this assigned work would
have been a distant reality. I also extend my heartfelt thanks to my family and well wishers.
I hope that this research project will prove to be a breeding ground for the next
generation of students and will guide them in every possible way. My special thanks go to
the Almighty without whom anything is next to impossible.

ABHISHEK CHOUDHARY
5 years Integrated B Sc LLB (VIIth Semester)
Reg. No. 1141844003
SOA National Institute of Law (SNIL)
SOA University, Odisha, India

PREFACE

It gave me an immense pleasure to write a preface on my assigned work titled LEGAL

PROTECTION FOR DISHONOR OF CHEQUES
First chapter of this Assignment is completely based on introduction to the topic ie
dishonor of cheques, along with a little introduction to Negotiable Instruments.
In the second chapter various legislative provisions regarding the legal protection for
dishonor of cheques.
In the third chapter, after Statutory laws various judge made laws are discussed in chapter
three where various cases the related provisions are explained well.
Whereas the last chapter is concluded with suggestions and appraisals.
I have tried my best to explain the subject matter in a best possible way and had tried to
omit the errors, if found any, I request the student reading this research work, and the teacher
who are honoring me by using the same, to let me know those errors and omissions, so that I can
rectify the omissions in my next research work. Needless to say such suggestions will be
gratefully received and acknowledged!

ABHISHEK CHOUDHARY
5 years Integrated B Sc LLB (VIIth Semester)
Reg. No. 1141844003
SOA National Institute of Law (SNIL)
SOA University, Odisha, India

DECLARATION

I certify that the assignment on the topic LEGAL PROTECTION FOR

DISHONOR OF CHEQUES for the academic session 2014-15, has been prepared by me
under the guidance of Mrs. (Dr.) Madhubrata Mohanty, Faculty-in-charge, SNIL and I
declare that the same has not been submitted for evaluation elsewhere.

ABHISHEK CHOUDHARY
5 years Integrated B Sc LLB (VIIth Semester)
Reg. No. 1141844003
SOA National Institute of Law (SNIL)
SOA University, Odisha, India

GUIDE CERTIFICATE

This is to certify that Mr. Abhishek Choudhary of B.Sc. LLB course has
successfully completed his Law Relating to Banking and Negotiable Instruments
assignment on the topic LEGAL PROTECTION FOR DISHONOR OF CHEQUES as
provided by the institution for the session 2014-15.

FACULTY-IN-CHARGE

DEANS SIGNATURE

CHAPTER 1
INTRODUCTION
Advent of cheques in the market have given a new dimension to the commercial and
corporate world, its time when people have preferred to carry and execute a small piece of

paper called cheque than carrying the currency worth the value of cheque. Dealings in
cheques are vital and important not only for banking purposes but also for the commerce and
industry and the economy of the country. But pursuant to the rise in dealings with cheques,
the practice of giving cheques without any intention of honoring them has also risen. In case
a cheque is issued by a person in liquidation of his debt or liability, and same is dishonored,
then it not only creates a bad taste, but can also result in harassment and can cause damages
to the person to whom the cheque may have been issued.
Since business activities have increased, the attempt to commit crimes and indulge in
activities for making easy money have also increased. Thus besides civil law, an important
development both in internal and external trade is the growth of crimes and it has been found
that the banking transactions and banking business is every day being confronted with
criminal actions and this has led to an increase in the number of criminal cases relating to or
concerned with the banking transactions.
In India, cheques are governed by the Negotiable Instruments Act, 1881, which is largely
codification of the English Law on the subject. Before 1988 there was no effective legal
provision to restrain people from issuing cheques without having sufficient funds in their
account or any stringent provision to punish them in the event of such cheque not being
honored by their bankers and returned unpaid. Although, on dishonor of cheques there is a
civil liability accrued, however in reality the processes to seek civil justice becomes
notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To
ensure prompt remedy against defaulters and to ensure credibility of the holders of the
negotiable instrument a criminal remedy of penalty was inserted in Negotiable Instruments
Act, 1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments
Laws (Amendment) Act, 1988 which were further modified by the Negotiable Instruments
(Amendment and Miscellaneous Provisions) Act, 2002.
Of the ten sections comprising chapter XVII of the Act, section 138 creates statutory offence
in the matter of dishonor of cheques on the ground of insufficiency of funds in the account
maintained by a person with the banker. Section 138 of the Negotiable Instruments Act, 1881
is a penal provision wherein if a person draws a cheque 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 debtor other liability, is returned by the
bank unpaid, on the ground 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.

Section 138 of the Act can be said to be falling in the acts which are not criminal in real
sense, but are acts which in public interest are prohibited under the penalty or those where
although the proceeding may be in criminal form, they are in reality only a summary mode of
enforcing a civil right. Normally in criminal law existence of guilty intent is an essential
ingredient of a crime. However the Legislature can always create an offence of absolute
liability or strict liability where mens rea is not at all necessary.

DISHONOUR OF CHEQUES MEANING

Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as "a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on demand"."

Dishonor" means "to refuse or neglect to accept or pay when duly presented for payment of a
bill of exchange or a promissory note or draft on a banker 1 .
Blacks Law Dictionary2:
Defines the term "Dishonor" as "to refuse to accept or pay a draft or to pay a promissory note
when duly presented. An instrument is dishonored when a necessary or optional presentment
is duly made and due acceptance or payment is refused, or cannot be obtained within the
prescribed time, or in case of bank collections, the instrument is reasonably returned by the
midnight deadline;
Reference to the term 'dishonor' has been made in Section 91 and Section 92 of the
Negotiable Instruments Act, 1881.
Section 91 - Dishonor by non-acceptance "A bill of exchange is said to be dishonored by
non-acceptance when the drawee, or one of several drawee not being partners, makes default
in acceptance upon being duly required to accept the bill, or where presentment is excused
and the bill is not accepted.
Where the drawee is incompetent to contract, or the acceptance is qualified the bill may be
treated as dishonored".
Section 92- Dishonor by non-payment - "A promissory note, bill of exchange or cheque is
said to be dishonored by non-payment when the maker of the note, acceptor of the bill or
drawee of the cheque makes default in payment upon being duly required to pay the same.
Thus if on presentation the banker does not pay, then dishonor takes place and the holder
acquires at once the right of recourse against the drawer and the other parties on the cheque.
Dishonor of cheque has been considered as a criminal offence under Section 138 of the
Negotiable Instruments Act, 1881. According to Section 138 whenever any cheque for
discharge of any legally enforceable debt or other liability is dishonored by the bank for want
of funds and the payment is not made by the drawer despite a legal notice of demand, it shall
be deemed to be criminal offence.

DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138

Section 138 of the Negotiable Instruments Act, 1881
1 Vide Whartons Law Lexicon, 1978 Ed. p. 335
2 Vide Rakesh Porwal v. Narayan Joglekar, 1993 Cr LJ 680 p. (688) (Bom).

10

Dishonor of cheques is considered as an offence under Section 138 of the Negotiable

Instruments Act, 1881. Section 138 deals with Dishonor of cheque for insufficiency of funds
in the accounts. The Section reads as follows:
"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
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 without prejudice to any other provisions of this Act, be punished with
imprisonment for a term which may extend to two 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 thirty days of the receipt of information by him from the bank regarding
the return of the cheques 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.
Object of Section 138:
The object of Section 138 is to make drawer of the cheque subject to penalty when the
cheque bounces on the ground of insufficient funds.
The plain reading of Section 138 of the Negotiable Instruments Act makes it clear that, the
words, "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" have been specifically used. It would, therefore, mean that only two
contingencies are contemplated and as such, the words-"either-or" has been used.
It is, therefore, clear that the cheque should be dishonored either for the insufficiency of the
amount or, because it exceeds the amount arranged to be paid from that account. No third

11

contingency or eventuality has been contemplated and the specific clear wording of Section
138 eliminates any third contingency than mentioned in the Section itself.
The cheques can be dishonored for many other reasons and there may be so many
eventualities in which the payee is denied payment by the bank, the reasons such as
mentioning the date incorrectly or some corrections not initialed or the difference in between
the amount mentioned in figures and words, are certain other contingencies in which the
cheques will be definitely dishonured and would be returned as unpaid however it is not in
respect of any of these contingencies that he dishonor of a chequesh as been made penal
under Section 138 of the said Act. In Om Prakash Maniyar v. Swati Bhide 3, the
submissions on behalf of the petitioners to the effect that the dishonor because of the closure
of the account should be held as penal, was not accepted by the court.
Section 138 was introduced with a laudable public policy behind it. It is intended to prevent
or curtail a mischief which is likely to affect financial transactions, and thereby trade and
business and ultimately, economy of the country.
Exclusion of Mens Rea4:
For committing an offence under Section 138 of the Act "mens rea" is not an essential
ingredient5.
Section 138 of the Negotiable Instruments Act, 1881, excludes mens rea by creating strict
liability and this is explicit from the words 'such person shall be deemed to have committed
an offence'. The returning of the cheque by the bank either because he amount of money
standing to the credit of the drawer of the cheque is insufficient or the amount covered by the
cheque is in the excess of the amount arranged to be paid from that account by an agreement
with the bank are the two necessary conditions creating strict liability.

3 1992 Mah LJ 302 at 304

4 Mens Rea, a guilty mind Although prima facie and as a general rule there must be a mind
at fault before there can be a crime, it isnot an inflexible rule, and a statute may relate to
such subject-matter and may be so framed as to make an act criminal, whether therehas
been any intention to break the law or otherwise to do wrong or not. There is a large body of
Municipal law at the present daywhich is so conceived Wills R. v. Tolson, (1889) 23 Q.B.D
173 (vide Whartons Law Lexicon 14th Ed., Fifth Imp., 1992).

5 Mahendra A.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases 438 (Bom.)

12

PROCEEDINGS AGAINST DISHONOUR OF CHEQUE

Prior to the incorporation of chapter XVII in the Negotiable Instruments Act in 1988, to deter
and penalize the issue of worthless cheques, it was only under the provisions of the Indian
penal Code 1860 (IPC) that the drawer of a cheque could be criminally prosecuted if it could
be shown that he cheated someone by issuing the cheque. Even after the introduction of the
specific provisions in the Negotiable Instruments Act, a drawer can be prosecuted under IPC
for cheating, but he cannot be prosecuted and punished for the same offence under both the
enactments. Mens rea or dishonest intention must be established to prove cheating, but it is
not an essential element of an offence under section 138 of the Negotiable Instruments Act.
Criminal Proceeding Chapter XVII of the Negotiable Instruments Act
XVII inserted by the Banking, Public Financial Institutions and Negotiable Instruments Laws
(Amendment) Act, 1988 provides for penalties in case of dishonor of certain cheques for
insufficiency of funds in the accounts or for the reason that the amount exceeds the
arrangement made by the drawer. As per the penal provisions under the Act, the drawer,
committing an offence under Section 138, is liable to be punished with imprisonment for a
term which may extend to two years, or fine which may extend to twice the amount of the
cheque or both.
Summary Proceeding - Order 37 of the Code of Civil Procedure
When a cheque is dishonored, the holder or payee of the cheque can sue the drawer or
endorser for the recovery of amount along with interest. Besides a civil suit for recovery of
the amount, proceeding in a summary manner can be initiated under Order 37 of the Code of
Civil Procedure. The advantage of suing under chapter XXXVII of Civil Procedure Code is
that the defendant is not allowed in such cases to defend the suit without leave obtained from
Court and it is provided further that a decree passed under the said Order, may be executed
forthwith. If no such leave is applied for or granted, the allegations in the plaint shall be
deemed to be admitted, and the plaintiff is entitled to a decree for the principal sum and also
the interest as calculated under Section 9 and 80 of the Negotiable Instruments Act,
1881.Criminal prosecution under section 138 does not bar a civil action against the drawer
on the dishonored cheque.

13

LIABILITY FOR STOPPED PAYMENT

A stopped payment is usually requested if the cheque has been declared missing or lost. But
many a times the drawer, to escape his debt or liability has used it as an instrument of
deception. The 1988 amendment in Section 138 of Negotiable Instruments Act is also silent
about Stopped Payment.
The contract between the customer and the bank is defined as a debtor- creditor relationship.
This contract requires the bank to honor all valid and proper orders of the customer to pay
amounts from his account with the bank, for as long as funds remain available in the
customer's account. The customer's order, however, remains executory and can be rescinded
until the bank makes payment. One of the reasons on account of which the banker can refuse
to make the payment of a cheque is that the payment has been stopped by the drawer. Upon
receipt of a timely stop payment order, the bank ceases to have authority to pay the item.
A customer thus, has a right to give notice to his Bankers to stop payment of a cheque which
he has issued. Generally a written notice, signed by the drawer is sufficient to stop the
payment. A stopped payment is usually requested if the cheque has been declared missing or
lost.
In India, while there is as such no express provision relating to stop payment of cheques.
However there are various judgments regarding this aspect. Indian Courts have covered this
facet in Section 138 of Negotiable Instruments Act, which is related to dishonor of cheques.
The discussion relating to stop payment has assumed importance in view of the amendment
to the Negotiable Instruments law by the amendment in 1988. Prior to this amendment,
people issued cheques knowing well that the cheque is not going to be honored on
presentation, and they tried to create circumstances in which the bank would return the
cheque with such endorsements as "stopped payment", "refer to drawer" or "A/C closed".
These were some of the tricks used by the drawer to escape the penal liability, which was
attached to Section 138 of Negotiable Instruments Act.

14

DRAWERS LIABILITY FOR DISHONOUR OF CHEQUE

Section 30 of the Negotiable Instruments Act, 1881 reads as follows:
"the drawer of a bill of exchange or a cheque is bound, in case of dishonor by the drawee or
acceptor thereof, to compensate the holder, provided due notice of dishonor has been given
to, or received by, the drawer". Section 30 makes it imperative that the notice of dishonor
should of necessity be served on to the drawer of such cheque. It is clear that the drawer shall
be bound to compensate the payee or the holder, as the case may be, if only he has been
served with the notice of dishonor.
Section 138 of the Negotiable Instruments Act requires that the payee or the holder in due
course of the cheque to issue a notice in writing to the drawer making a demand for payment
of the cheque amount. Such notice must be given within 30 days of information from the
bank regarding the return of cheque as unpaid. The requirement of giving of notice is
mandatory. There is no mode prescribed under section 138 for serving the notice. It is
sufficient that the notice in writing is served on accused. Where no notice making demand
for payment was served upon the drawer as contemplated under clause (b) and clause (c) of
Section 138, which would mean that no demand has been made within the specified time
from the date of dishonor of cheque in question, conviction will not be sustainable. 6
Consequence of part payment by drawer after issue of notice
Section 138 clearly shows that in the event of the drawer of the cheque failing to make the
payment of the said amount of money, a prosecution can be maintained. The expression "said
amount of money" can only denote the amount for which the cheque is drawn and cannot
relate to a part of it. Even where part payment is made by the drawer after issue of statutory
notice, the prosecution cannot be quashed.7
Liability of drawer after deposit of entire amount during trial
As stated by the Supreme Court once the offence is committed, any payment made
subsequent thereto will not absolve the accused of the liability of criminal offence, though in
the matter of awarding of sentence, it may have some effect on the court trying the offence.
But by no stretch of imagination, a criminal proceeding could be quashed on account of
deposit of money in the court or that an order of quashing of criminal proceeding, which is
6 Adhikari (B) v. Ponraj 1996 Cri LJ 180 (Mad)
7 Ruby Leather Exports v. Venu (K) (1995) 82 Comp Cas 776 (Mad).

15

otherwise unsustainable in law, could be sustained because of the deposit of money in this
court. The deposit of money by the drawer, therefore, during the trial is of no consequence 8.
Death of Drawer
The criminal liability cannot be fastened to the heirs and the legal representatives of the
person who is said to have been guilty of the offence in question. The cheque presented for
realization by the complainant was returned on the ground of insufficient funds. The notice
sent was returned with postal endorsement 'party expired'. Wife and daughters of the drawer
of the cheque cannot be prosecuted for the offence under Section 138 of the Act for the
alleged failure of the drawer in meeting the liability to pay the amount covered by the cheque
which was dishonoured in response to the notice sent by the complainant 9
Drawer declared insolvent
The drawer cannot escape from the criminal liability by putting forward he plea that he is not
bound to discharge the liability mentioned in the complaint as he was already declared as an
insolvent, especially when there is section 139 permitting the court to presume that there is
an existing liability and the issuance of the cheque was made towards the discharge of the
said liability.
DRAWEES LIABILITY FOR DISHONOUR OF CHEQUE
Rightful Dishonor - when bank may refuse to honor
When there is the relationship of banker and customer between the parties, the banker is
under an obligation to pay cheques when a mandate to pay is received from the customer, or
when a cheque is issued. However, there may be a number of circumstances when the bank
has no other alternative but to return the cheque and in all such cases the bank is fully
justified in returning the cheque. These are the cases which may be termed as a countermand
from the customer which means an order to revoke the former instructions and annulling the
former mandate given by the customer to the bank to honor the cheques and it also means the
situations resulting from the closure of account by the customer, prohibitory 'garnishees'
orders having been received from the court or orders for payment having been received from
the court or orders for payment having been received under Section 226 (3) of the IncomeTax Act, 1961 and similarly it also means the situation when there is a restrained order from
the court, notice of death of the customer, lunacy of the customer, notice of loss of cheque or
forged signatures on the cheque.
8 Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)
9 Bhupinder Lima v. State (2000) 99 Comp Cas 424 (AP)

16

Wrongful dishonor of cheque Drawee/ banks liability to pay damages

In case all the conditions which are necessary for the payment of a cheque are present and
have been fulfilled then if the bank dishonors a cheque it will amount to a breach of contract
for which the banker is liable to pay damages. The liability of drawee of cheque in case of a
wrongful dishonor has been dealt with under Section 31 of the Negotiable Instruments Act,
1881. Section 31 states as follows:"the drawee of a cheque having sufficient funds of the
drawer in his hands properly applicable to the payment of such cheque must pay the cheque
when duly required so to do, and, in default of such payment, must compensate the drawer
for any loss or damage caused by such default".
Compensation for wrongful dishonor
Wrongful dishonor of a cheque exposes the drawee bank to statutory liability to the drawer to
compensate him for 'any loss or damage cause by such default'. The principle of awarding
compensation to the drawer of a cheque is reparation for the injury sustained or likely to be
sustained by reason of dishonor. In almost every case the drawer can recover substantial
damages against the drawee on the basis of injury to his credit, although he may not be able
to prove that he had suffered actual pecuniary loss through the dishonoring of the cheque 10
However, there appears to be a distinction between a trader and a non-trader in this respect,
while a trader is always entitled to substantial damages for dishonoring of his cheque, a nontrader will be entitled only to nominal damages in the absence of an allegation and proof of
substantial damages11,
The General rule followed by the courts in awarding damages is that damages area warded
for foreseeable and actual loss suffered and the quantum of damages is usually based on the
principle of restitutio in intgegram i.e. restoring the person to the position he would have
been in if he had not suffered a damage. But in case of trademans cheque the damages
awarded are inversely proportional to the amount on the cheque. Thus, smaller the amount of
the dishonored cheque, greater is the damages paid. The reason behind this rule is,

10 Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 595
11 Gibbons v. Westminster Bank (1939) 3 All E.r. 577

17

businessmans loss of reputation or status or goodwill is once again inversely proportional to

the amount of the cheque.

DISHONOUR OF CHEQUE - LIABILITY OF A COMPANY

Since a company is an artificial person it is incapable of committing any crime personally.
However, if certain crimes are committed by its officials in the name of the company then in
such circumstances a company is said to have committed these crimes. So far as the
punishment is concerned, its liability can be only in terms of fine. The company shall be
responsible for the acts of commissions and omissions of the persons working for the
company.
Section 141 (1) of the Negotiable Instruments Act, 1881 reads as follows:"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 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".
Thus, Sub-section (1) of Section 141 (1) provides that if a person committing an offence
under the section is a company, every person who, at the time when the offence was
committed, was in charge of, and responsible to, the company for conduct of its business, 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. The offender in Section 138 is the drawer of the
cheque.
However, if the person provides that the offence was committed without his knowledge, or
that he had exercised all due diligence to prevent the commission of such offence, he shall
not be liable to punishment under this Section. Sub-section (2) further provides that 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 office of the company, such

18

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.

LIABILITY FOR DISHONOR OF CHEQUES - A COMPARATIVE ANALYSIS OF

INDIAN LAWS AND FOREIGN LAWS:
Australian Laws:
As per Australian laws Section 70 of Cheques and Payment Orders Act 1986, in case of
dishonor of a cheque a person who is the drawer or an endorser, of such cheque, is liable on
the cheque whether or not the person is given notice by any person of the dishonor.
In India demand notice is mandatory. Sub-section (b) of Section 138 of the Negotiable
Instruments Act requires the payee or the holder in due course to issue a notice in writing to
the drawer of the cheque within 15 days of the receipt of the information by him from the
bank regarding the return of the cheque as unpaid.
This implies that unlike required in the Negotiable Instruments Act, 1881 there is no need for
the issue of demand notice to the drawer and the liability of the drawer or the endorser, as the
case may be, shall arise as soon as the cheque has been dishonored by the bank.
UK Laws:
Indian Laws and the UK Laws are very similar with respect to the provisions relating to the
dishonor of cheques and the liability arising there from. As required under the Negotiable
Instruments Act, 1881 for establishing the liability of the drawer for dishonor of cheque, the
holder must notify the drawer, of that fact of such dishonor of cheque. Similarly in UK Laws,
under Bills of Exchange Act, 1882, if a cheque is dishonored, the holder is required to notify
the fact of dishonor to the drawer.
New Zealand Laws:
Under the Bills of Exchange Act 1908 Section 42 requires that when a cheque is duly
presented for acceptance and is not accepted within the customary time, the person
presenting it must treat it as dishonored by non-acceptance. However, if he does not, the
holder will lose his right of recourse against the drawer and endorsers. Further, Section 48 of
the Bills of Exchange Act 1908 deals with notice of dishonor. The section states that if a
cheque has been dishonored by non-acceptance or by non- payment, notice of dishonor must

19

be given to the drawer and each endorser. However, any drawer or endorser to whom such
notice is not given shall be discharged from his liability.

CHAPTER 2
LEGISLATIVE PROVISIONS
STATUTORY PROVISIONS FOR LEGAL PROTECTION FOR DISHONOR OF
CHEQUES:
Chapter XVII Of penalties in case of dishonor of certain cheque for insufficiency of
funds in the accounts
Section 138- Dishonor of cheques for insufficiency, etc. of funds in the account.
Section 139- Presumption in favor of holder.
Section 140- Defence which may not be allowed in any prosecution under section 138.
Section 141- Offences by companies.
Section 142- Cognizance of offences
Section 143- Power of Court to try cases summarily.
Section 144- Mode of service of summons.
Section 145- Evidence on affidavit.
Section 146- Banks slip prima facie evidence of certain facts.
Section 147- Offences to be compoundable.

20

CHAPTER 3
JUDICIAL ANALYSIS
1. Abdul Samod v. Satya Narayan Mahavir12, High Court of Punjab and Haryana
thoroughly analyzed section 138 of the Act. Honble Mr. Justice A.P. Chowdhury
stated that there are five ingredients, which must be fulfilled. These are as follows:
1. The cheque is drawn on a bank for the discharge of a legally enforceable debt or
other liability.
2. The cheque has returned by the bank unpaid.
3. The cheque is returned unpaid because the amount available in that account is
insufficient for making the payment of the cheques.
4. The payee gives a notice to the drawer claiming the amount within 15 days of the
receipt of the information by the Bank and
5. The drawer fails to make payment within 15 days of the receipt of
notice.
2. New Central Hall v United Commercial Bank Ltd.13, the Madras High Court
held that where a banker having sufficient funds of a customer in his hands fails,
even by mistake to honor cheque issued by the customer, the customer has a right to
claim damages.
3. Jogendra Nath Chakrawarti v. New Bengal Bank Limited 14, it was held, where
the banker, being bound to honor his customers cheque, has failed to do so, he will
be liable in damages. If, special damage, naturally ensuing from the dishonor, is
proved, it will be properly taken into account in assessing the amount of the damages.
12 PLR 1990(2) 269
13 AIR 1959 Mad 153
14 AIR 1939 Cal. 63

21

4. Calcutta Sanitary Wares v. C. T. Jacob 15, where the Court was considering a
situation whereby the cheque was initially dishonored on the basis of a stop-payment
memo. The Court held that the object of the provision cannot be allowed to be
defeated by such ingenious action. The Court took the view that dishonor presupposes non-payment as the funds in question were not forthcoming and that in these
circumstances also, the failure to pay the amount within 15 days of the notice of
demand would still constitute an offence as any other view would defeat the specific
provisions of Section 138.
5. Sadanandan Bhadran v. Madhavan Sunil Kumar16, A cheque can be presented any
number of times during the period of its validity- Whether dishonor 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 the act - Held No. - A competent court can take cognizance
of a written complaint of an offence u/s.138 if it is made within one month of the date
on which the cause of action arises under clause c of Sec.142 gives it is a restrictive
meaning - it is the failure to make payment within 15 days from date of receipt of
notice which will give rise to cause of action - Cause of action within meaning of Sec.
142 (c) arises and can arise only once - impediments which negate concept of
successive causes of actionHeld.: On each presentation of the cheque and its dishonour a fresh right and not
cause of action - accrues in his favour. He may, therefore, without taking pre-emptory
action in exercise of his right under clause (b) of Section 138, go on presenting the
cheque so as to enable him to exercise such right at any point of time during the
validity of the cheque. But, once he gives a notice under clause (b) of Sec. 138 he
forfeits such right for in case of failure of the drawer to pay the money within the
stipulated time he would be liable for the offence and the cause of action for filing the
complaint will arise. Needless to say, the period of one month for filing the complaint
will be reckoned from the day immediately following the day on which the period of
fifteen days from the date of the receipt of the notice by the drawer expires.

15 1991 (1) KLT 269

16 (1998 (4) SCALE SC

22

6. N.E.P.C Mecon Ltd. V. Magma Leasing Ltd., 17 the Supreme Court observed that the
object of bringing Section 138 on Statute appears to inculcate faith in the efficacy of
banking operations and credibility in transaction in business on negotiable instrument
and to promote the efficacy of the banking operation and to ensure credibility in
transacting business through cheques.
7. M/S Modi Cements Ltd v. K K Nandi,18 the Supreme Court while explaining the
object of Chapter XVII Of penalties in case of dishonor of certain cheque for
insufficiency of funds in the accounts, is to promote the efficacy of banking
operations and to ensure credibility in transacting business through cheques.

CHAPTER 4
CONCLUSION
The law relating to Negotiable instruments is the law of the commercial world which was
enacted to facilitate the activities in trade and commerce, making provision of giving sanctity
to the instrument of credit which would be deemed convertible into money and easily
passable from one person to another. In the absence of such instruments, the trade and
commerce activities were likely to be adversely affected as it was not practical for the trading
community to carry on with it the bulk of currency in force.
The main object of the Act is to legalize the system by which instruments contemplated by it
could pass from hand to hand by negotiation like any other goods.
Chapter XVII was inserted in the Act 1988 with a view to promote the efficacy of banking
operations and to ensure credibility in transacting business through cheques. However the
chapter is not comprehensive and lacks to cover the various aspects of the commercial
transactions especially in view of the emerging ways of payment through the Internet and
other electronic means. Section 138 also does not specifically cover the aspects such as
where the payment has been stopped by the drawer or where the account has been closed
prior to the endorsement of the cheque. These provisions no doubt have served their purpose
but they could be more elaborate in solving the dispute rather than merely relying on the
Court judgments.
17 AIR 1999 SC 1952
18 AIR 1998 SC 1057

23

Though insertion of the penal provisions have helped to curtail the issue of cheque
lightheartedly or in a playful manner or with a dishonest intention and the trading community
now feels more secured in receiving the payment through cheques. However there being no
provision for recovery of the amount covered under the dishonored cheque, in a case where
accused is convicted under section 138 and the accused has served the sentence but, unable
to deposit amount of fine, the only option left with the complainant is to file civil suit. The
provisions of the Act do not permit any other alternative method of realization of the amount
due to the complainant on the cheque being dishonored for the reasons of "insufficient fund"
in the drawers account.
However, the processes to seek civil justice is notoriously dilatory and recover by way of a
civil suit may take inordinately long time therefore if the Government of India could
establish a tribunal to deal with the dishonor of cheques and the liability arising there from, it
could make the process of recovery of damages faster for the aggrieved party.

BIBLIOGRAPHY
1. R N Chaudharys Banking laws
2. R.K Suri; Dishonour
Publishers,Hyderabad;

of

Cheques-

Prosecution

&

Penalties,

ALT

3. R. Swaroop, Cases on Dishonour of cheques (Under Section 138 to Section142 of

the Negotiable Instruments Act), Law Aid Publications, Madras;
4. Bhashyam & Adiga, The Negotiable Instruments Act, Bharat Law House, New
Delhi;
5. Law of Banking by S R Myneni