You are on page 1of 5

CHAPTER I: THEORETICAL BACKGROUND

Introduction:
The law relating to negotiable instruments is not the law of one country or of one
nation, it is the law of the commercial world in general, for, it consists of “certain principles
of equity and usages of trade which general convenience and commonsense of justice had
established to regulate the dealing of merchants and mariners in all the commercial
countries of the civilized world.” Even now the laws of several countries in Europe are, at
least so far as general principles are concerned, similar in many respects. Of course, on
questions of detail, different countries have solved the various problems in different ways,
but the essentials are the same, and this similarity of law is a pre-requisite for the vast
international transactions that are carried on among the different countries. 1
The Negotiable Instruments Act, 1881 was basically introduced to define the law
relating to the various aspects of the different negotiable instruments like Promissory
Notes, Bills of Exchange and Cheques. But the increasing use of these negotiable
instruments necessitated the introduction of a number of amendments in the Negotiable
Instruments Act with the main aim of making the use of the negotiable instruments easy.
Amongst all the amendments made in the Negotiable Instruments Act the amendment
responsible for the insertion of the Chapter XVII into the Act can be considered to be the
most important one as it helped in bringing about a revolutionary change with respect to
the use of cheques. Prior to this amendment the scope of misuse of the power to issue
cheques was on a rise in spite of the available civil remedy and the criminal remedy under
Sec 420 of the Indian Penal Code. And the cheques being a part and parcel of the
commercial transactions people started losing faith in the cheque system at large. So there
was a need to curb down such misuse of the power to issue cheques and the insertion of
the Chapter XVII by the Banking, Public Financial Institutions and Negotiable Instruments
Laws ( Amendment) Act, 1988 (66 of 1988) was blessing in disguise for the payee, the

1 The Negotiable Instrument Act- Bhashya & Adiga, 13th Ed. p. 1


people who were the worst affected in case of such misuse. Chapter XVII as a whole deals
with Penalties in case of Dishonour of Certain Cheques for insufficiency of funds in the
accounts of the drawer of the cheques. This chapter consists of a total of ten sections
amongst which Section 138 is of utmost importance. Section 138 speaks of dishonour of
cheques for insufficiency, etc. of funds in the account of the drawer. This section imposes
criminal liability on the person who is responsible for issuing a cheque to another person
for the fulfilment of his liability without having sufficient funds in his account. This section
actually forces a person to think twice before issuing a cheque if he has minimal funds in
his accounts as because such issuance of cheques may land the drawer of the cheque in jail
even if he had no dishonest intention to cheat the payee.

1.1 Concept of cheques and importance in Commercial World:


The word cheque is a very well-known concept and every individual who operates an
account in a bank is familiar with the concept of cheques. It is a very famous negotiable
instrument which is very much essential in world of commerce. In simple words cheque
can be said to be a written order instructing a financial institution which is a bank to pay a
certain sum of money to a particular person on demand. Cheque as a negotiable instrument
is a piece of paper which promises to pay its owner the amount written over it either on
demand or as per the date mentioned on it. So the cheque can be said to be a negotiable
instrument which is negotiable by delivery. It is generally presumed that once the cheque
is delivered to the payee by the drawer of the cheque the payment of money to the payee
will be made in due course of time and so the date on which the cheque is delivered is
considered to be the date on which the payment is made irrespective of the fact as to when
the cheque is presented for payment.
The cheques play a vital role in the commercial world as because it relieves the
businessmen from the burden of carrying currency notes to each and every place they go
to carry on their business. From this public can understand that cheques actually have
undertaken the function of money. Cheques have actually oiled the wheels of commercial
transactions by faciliating quick and prompt commercial transactions. In a developing
Country like India cheques have really helped in the development of the economy by
faciliating quick commercial transactions which would not have been possible in case of
absence of cheques. The importance of cheques in the commercial world can be understood
from the fact of introduction of electronic cheques by Negotiable Instruments (Amendment
and Miscellaneous Provisions) Act, 2002. The concept of electronic cheque is defined as a
cheque which contains the exact mirror image of a paper cheque and is generated, written
and signed in a secured system ensuring the minimum safety standards with the use of
digital signature (with or without biometric signature and asymmetric crypto system).The
Electronic Cheques are valid as a paper cheque itself. These cheques are safer and secure
in comparison to the paper cheques and these cheques do not even require the payee to
personally approach the banker to pay the debt of the drawer. These cheques are basically
sent by mail to the person to whom the drawer has an intention to make the payment in
order to fulfill his debt or liability and that person deposits the same with the banker. On
deposition of such cheque with the banker the banker is obliged to make a transfer of
payment from the account of the drawer who actually issued the cheque into the account
of the person to whom the cheque was credited. This process of cheque transfer makes
process of commercial transactions quite easy and feasible. So we can say that the
introduction of cheques is actually a blessing in disguise for the commercial trade.
A Negotiable Instrument is a document guaranteeing the payment of a specific amount
of money, either on demand, or at a set time. According to the Negotiable Instruments Act,
1881 in India there are just three types of negotiable instruments i.e. promissory note, Bill
of exchange and cheque. Cheque also includes Demand Draft.
A cheque drawn by the drawer is presented for payment with the banker by the
payee and the banker refuses to satisfy the claim of the payee then such a process is known
as dishonour of cheques. The dishonour of cheque or refusal to satisfy the claim of the
payee by the banker may be due to varied type of reasons like insufficiency of funds in the
drawers account, closure of the account of the drawer due to any legal reasons etc. This
process of dishonour of cheque gives a right to the person in whose name the cheque is
issued to take the issuer of the cheque to the Court of Law for not being able to discharge
his debt or liability either due to insufficiency of funds or due to closure of account.
Prior to the introduction of Section 138 by the Banking, Public Financial Institutions
and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988) all the issues
relating to dishonour of cheque and the consequent non-payment of the debt vested a right
to the holder of cheque to approach the civil courts for recovery of the amount which was
due. The legal machinery relating to the dishonour of a cheque comes into motion for the
protection of cheque holder if cheque is dishonoured.
The Code of Criminal Procedure states that every offence shall ordinarily be enquired
into and tried by Court within whose local jurisdiction it was committed. The complaint
can be filed in a Court within the jurisdiction of which the cheque has been drawn or the
place where the cheque is presented for collection and received an endorsement about the
dishonour of the cheque or the place where the cheque is dishonoured.
After the issue of notice to the drawer of the dishonour of his cheque petitioner filed a
civil suit denying his liability to pay and, therefore, contending that Section 138 was not
attracted and obtained an interlocutory injunction retraining the payee of the cheque from
proceeding under Section 138. The grant of the injunction was held to be illegal. Civil and
criminal proceedings are simultaneously possible.
It is settled law that pendency of the criminal matter would not be an impediment to
proceed with the civil suits. The criminal Court would deal with the offence punishable
under the Act. On the other hand, the Courts rarely stay the criminal cases and only when
the compelling circumstances require the exercise of their power.
The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial
Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new
Chapter XVII was incorporated for penalties in case of dishonour of cheques due to
insufficiency of funds in the account of the drawer of the cheque. These provisions were
incorporated with a view to encourage the culture of use of cheques and enhancing the
credibility of the instrument which have been found deficient in dealing with dishonour of
cheques. Not only the punishment provided in the Act has proved to be inadequate, the
procedure prescribed for the Courts to deal with such matter has been found to be
cumbersome which resulted delay in disposing the cases.

You might also like