Definition of Cheque

The Negotiable Instrument Act, 1881 defines the term Cheque as under:
“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on a demand.”[1]

The above provision has been substituted by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, as under:
“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”

According to Black’s Law Dictionary
“Cheque means a draft that is drawn upon a bank and payable on demand signed by the maker or drawer, containing an unconditional promise to pay a sum certain in money to the order of the payee.[2]”

What is dishonoring of cheque?

There can be many reasons for the dishonoring of cheques but the major reason to understand is due to insufficient funds or balance in the drawer’s account. Under section 138 of Negotiable Instruments Act, 1881, Act of dishonoring of cheque by the reason of insufficiency of funds or the balance is a penal offence. In case of such dishonor, the drawee bank issues a ‘cheque return memo’to the banker of the payee.

In 1988, the criminalization of writing cheques, having insufficient balances in the one’s bank accounts was introduced in India. Such amendment of criminalization was added to the old British law known as the Negotiable Instruments Act of 1881. Due to the endemic quandary of dishonoring of cheques led this amendment. Before this amendment, it was becoming difficult for undergoing transactions where payment and delivery didn’t happen simultaneously. Because of this muddle only, cash transactions was being encouraged which was furthermore enhancing the consequent problems of counterfeiting, cost of storing and moving cash. Dr. Rajamannar based upon the report of the committee on banking laws suggested, inter alia, to penalize such an act which involves relentless dishonoring of cheques.[3]

Generally, for the fast disposal of the matters of under Section 138, the time period prescribed is 6 months (Section 143 of Negotiable Instruments Act, 1881). The reason, the courts are flooded with matters, unfortunately it is not becoming possible for the courts to dispose of the matters within the said timeframe. For a trial to get ended in a cheque bounce case, the minimum time period stated is 2-3 years. To the estimation, there are around 4-5 million pending cases that revolves around the offence of cheque bounce in the country.[4]

According to the report of National Mission for Delivery of Justice and Legal Reform titled “Towards Timely Delivery of Justice to All” have cited cases mostly under Section 138 of Negotiable Instruments Act, 1881, which is observed as the one of the top bottle neck bunging up the Indian Judicial system.

Criminalizing of cheque bounces have proved to be partly successful in acting as a deterrent for future dishonoring of cheques. But somehow, the criminalization of cheque bounce cases have at least deterred some to only to give cheques that they actually in a position to honor.

Section 138 of Negotiable Instruments Act, 1881

For the offence to fall under section 138 of Negotiable Instruments act, 1881, following conditions need to be fulfilled:
# The first and the foremost condition to be satisfied is the ‘Existence of a live account’ in order to attract the provisions of section 138 of the act, which is a necessary requisite and which should be in existence at the time at which the cheque is issued.

# The second condition to be satisfied is that the drawer should have given the cheque in discharge of a legally enforceable debt, whether in whole or in part.

# The third condition to be satisfied is that the holder of the cheque should have presented the cheque within six months from the date mentioned on the same. But as per the latest direction of the Reserve Bank of India, such time period is reduced to three months.

# The fourth condition to be satisfied is that the bank should return the cheque with the statement that the money in the account of the drawer is insufficient, or exceeds the credit arrangement so extended by the bank to the drawer.

# The fifth condition to be satisfied is that the holder of the cheque or the payee from the date of return of the unpaid cheque, as the case may be, must within thirty days make a demand on the drawer for the amount of cheque in writing.

# The sixth to be fulfilled is that the drawer should fail to make the payment of the amount of the cheque to the payee, within a period of fifteen days (after the amendment) from the receipt of the above mentioned demand.

# The seventh condition to be fulfilled is that it is mandated for the holder of the cheque to file a criminal complaint in writing within a period of one month from the expiry of fifteen years mentioned above.[5]

Effective Remedies
Endemic problem of bouncing or dishonoring of cheques have led to the criminalization of this issue with some effective remedies i.e. civil and criminal remedies.

# Civil remedy
Usually, civil remedy available to the payee in case of bouncing of cheque is to file a civil suit for the recovery of money. Such plea is maintainable according to the Bombay High Court. In contrast, criminal remedy pushes the defaulter to be punished and there is no recovery of dues in criminal suit. Talking about the jurisdiction, civil suit for the recovery of money can be files at a place where that person resides or where the cheque was earlier deposited which becomes easy for the victim in the duration of the legal recourse. Before the act of 1988, dishonoring of cheque, dishonoring of cheque could not be criminalized.[6]

Criminal remedy
Bouncing or dishonoring of cheque is a criminal offence according to section 138 of Negotiable Instruments Act, 1881 and this applies to the cases where the cheques are bounced due to the reason of insufficiency of balance not due to any other technical default on the part of the drawer.[7]

There are two sections in Indian Penal Code under which the drawer can be prosecuted for the dishonor of cheque. The aggrieved party has the option to initiate criminal proceedings against the drawer under sections 406 (criminal breach of trust) and section 420 (cheating).

In the case of Sangeetaben Mahendrabhai Patel v. State of Gujarat[8],it was held by the court that the proceedings can be initiated under both IPC and Negotiable Instruments Act, 1881.

Civil remedy is initiated by a giving a written notice to the drawer and this should be done within thirty days from the date of return of cheque memo. The objective behind sending this notice is to give ultimatum to the drawer to pay the due money within the period of fifteen days else a criminal suit will be filed against him.[9]

But even if after the expiry of the said period, due money is not paid then the payee has the option to initiate a criminal suit against the drawer before the jurisdiction of Judicial Magistrate of first class or the Metropolitan Magistrate and such complaint made, must accompany with an affidavit.

After the checking of the requisite documents, summons will be served to the drawer to appear before the court for the summary trial. An opportunity is given to the drawer to present his defense in the summary trial before the magistrate.

After hearing both the sides, if the drawer is found guilty of the offence under the act, he shall be punished with imprisonment of two years or fine five thousand or both.[10]

Other Remedies
Mandatory Alternative Dispute Resolution or Arbitration
Section 89 of Code of Civil Procedure, 1908 has made compulsory for the parties to resolve cheque bounce disputes through alternative dispute redressal mechanisms.

Powers to the Bank

For the dishonoring of cheques due to insufficient balance, banks should be authorized to take following actions:
# Banning repeat offenders from issuing cheques
It seems to be an ideal option for India for banning repeat offenders from issuing cheques. The repeat offenders should not be issued cheque book on repeat of insufficiency of funds in their bank accounts. This banning should not be limited to large amounts.

# Proportionate penalties
In India, penalty imposed by banks is too small to serve as deterrent. An ad valorem penalty should be imposed by the banks to make it deterrent.

# Freezing the bank account
Another option available to the bank is to freeze the account of the holders of bank accounts until they have enough money to pay their debt.[11]

Conclusion
Criminalizing of cheque bounces have proved to be partly successful in acting as a deterrent for future dishonoring of cheques. But somehow, the criminalization of cheque bounce cases have at least deterred some to only to give cheques that they actually in a position to honor.

End-Notes
[1] See Section 6 of the Negotiable Instruments Act, 1881.
[2] 5 th Edn., at 215 (1973).
[3] http://easeofdoingbusiness.org/sites/default/files/resources/criminalizing-cheque-bounce-cases.pdf.
[4] Ibid.
[5] Ibid.
[6] https://blog.finology.in/Legal-news/Civil-and-Criminal-Remedies-available-in-Cheque-Bounce-Cases.
[7] Ibid.
[8] (2012) 7 SCC 621.
[9] Supranote 7.
[10] Ibid.
[11] http://easeofdoingbusiness.org/sites/default/files/resources/decongesting-cheque-bounce-cases.pdf.

Written by: Shubham Mongia