Understanding Cheque Bounces: Their Legal And Financial Impact

KEY TAKEAWAYS:

1)    Cheque bounce is a criminal offence as per section 138 of the Negotiable Instruments Act of 1881. It was a civil offence prior to the 1988 amendment to the same act.

2)    It requires that the bounced cheque be drawn for the purpose of fulfilling a debt or liability and that the reason for the dishonour be either insufficient funds in the account or that it exceeded the amount that was agreed to be paid by the bank from the account of the drawer as per some agreement between them.

3)    When a cheque is dishonoured by a bank, it will charge a penalty from the drawer of the cheque, the amount of which varies with the reason for the dishonour and also varies from bank to bank.

4)    Recent Supreme Court judgements clarified that dishonour of a cheque on the grounds of the account being closed or a signature mismatch shall also attract penal liability under section 138 of the Negotiable Instruments Act.

5)    Cheque bounce is a bailable offence that does not attract punishment more than two years of imprisonment or twice the amount given on the cheque. Therefore the provisions related to cheque bounce cases were created with the intention of a speedy and efficient trial that does not take more than six months.

INTRODUCTION

The piece of paper we call a cheque today has been in existence for longer than we can imagine. It was a product of the efforts to eliminate the need to carry around large sums of currency, often gold, when one had to purchase some goods or services. Not only were these easy to carry around and execute, they also provided protection from robbery and possible hurt for the people who carried them, since a cheque could only be drawn by an identified person. There is evidence of the use of an instrument similar to a cheque even in the Mauryan empire, known as “adesha”. It served as an order for a banker to pay the amount prescribed in it to a third person.

Not only in India, several instruments similar to a cheque were found in many regions across the world. From the Roman empire to regions in Persia, all used such instruments to avoid carrying around large sums of currency with them. The advantages offered by them were of great importance for the efficient conduct of trade throughout the world. The convenience and safety that cheques offered made them a chosen instrument for all kinds of business transactions. Cheques could therefore be called as a major catalyst in the development of humankind through the enhancements they offered in trade and business.

By the 17th century, cheques were used for domestic transactions in England. These handwritten notes began to evolve significantly from this point. In 1717, the Bank of England pioneered the use of a pre-printed form of a cheque. The idea behind it was to prevent fraud, and was therefore printed on a special kind of paper known as “cheque paper”. After their introduction in India in 1770 by the Bank of Hindustan, cheques began to see significant improvements in the field of security since they were merely just a piece of paper that could be forged by someone to deceive a layman. In 2013, the RBI brought forward the Cheque Truncation Scheme, significantly improving the security of a cheque.

Although modern day cheques are mostly fool proof and therefore cannot be used to gain money, cheques are still used to cheat people by writing an amount that is not available in the bank account or by forging a signature and so on. The victims learn about this when the cheques are returned unpaid by the bank, and by that time the culprits would have escaped. To protect such victims, laws have been implemented that punish the culprits and compensate for the losses suffered by these victims. Such an act is the Negotiable Instruments Act of 1881, that, as the name suggests, pertains to the laws for negotiable instruments, like cheques.

 WHAT IS A CHEQUE BOUNCE?

A cheque is a kind of negotiable instrument, and therefore is a document that guarantees the payment of a certain sum of money to the person mentioned in the said document on demand. Usually, when a cheque is presented in a bank, the bank upon accepting it, transfers the said amount of money from the payer to the payee, i.e. the person mentioned in the cheque.

However, there are certain situations when the bank refuses to accept or honour this cheque. Such a situation is known as the bouncing of a cheque. If that happens, the bank will fine the payer of the cheque for a certain amount of money that is determined by the reason that caused the cheque to bounce. This reason also determines whether the payer has to face legal consequences or not.

Some of the reasons that may cause a cheque to bounce are as follows:

1)    Insufficient funds in the payer’s bank account.

2)    The signature in the cheque does not match the signature in the bank’s records.

3)    The cheque was torn or damaged.

4)    The account numbers failed to match.

5)    The cheque had expired.

6)    The issuer has stopped the payment.

While several such reasons could cause a cheque to bounce, the reasons that attract legal action are specific. The Negotiable Instruments Act of 1881 governs these laws and prescribes the punishments for the same. It defines a cheque bounce and the punishments for the same in its section 138, and goes on to explain the procedures and defences for the same in further sections till section 147.

A cheque bounce according to the Negotiable Instruments Act of 1881 is as follows: When any cheque drawn by an individual on an account they maintain with the banker for the purposes of fulfilling or discharging any debt or liability, is returned unpaid by the bank either because of insufficient funds in the account or because it exceeded the amount that was agreed to be paid by the bank from the account as per some agreement with the bank, it is called as a cheque bounce.

    CHEQUE BOUNCE VS CHEQUE DISHONOUR

There are certain times when you present a cheque that has been given to you by someone who owes you money to the bank, and then the bank refuses to process that cheque. A bank may refuse to “honour” or process a cheque for a variety of reasons. It could be because the cheque has expired, or because there is some issue with the date of issue of the cheque. It could also be because the presented cheque is torn or damaged. But insufficient funds in the account is usually the reason why a cheque is not honoured by a bank.

This process of the bank refusing to accept or “honour” your cheque is called a cheque dishonour. If a cheque is not honoured because of insufficient funds in the account, it comes under the ambit of cheque bounce. This is because the Negotiable Instruments Act of 1881 defines cheque bounce as when a bank refuses to honour a cheque either of insufficient funds in the account or because the amount exceeded the amount that was agreed to be paid by the bank from that account. Therefore, cheque dishonour is a superset of cheque bounce.

Therefore, although cheque bounce and cheque dishonour are two terms that can be used interchangeably, when taken strictly in the legal sense, cheque bounce would prima facie mean a dishonoured cheque due to insufficient funds in the bank account of the drawer. At the same time, a dishonoured cheque could mean a cheque rejected or dishonoured due to any of the previously mentioned reasons.

WHAT HAPPENS WHEN A CHEQUE BOUNCES?

A cheque may bounce or get dishonoured by the bank due to several reasons. It could be due to issues like torn or damaged cheque, signature mismatch, expired cheque, problem with the date of issue on the cheque, or due to insufficient funds. Whatever the reason for the bank to dishonour the cheque may be, a dishonoured or bounced cheque always invites consequences. This could be a penalty from the bank, legal action, or both. The penalty issued by the bank on the issuer of the cheque is determined by the reason due to which the cheque was dishonoured. This penalty also varies with the bank, but is usually higher if the reason is insufficient balance, followed by legal action from the payee.

The Negotiable Instruments Act of 1881, specifically section 138, gives the meaning of a cheque bounce along with the procedures to be followed and the punishment to be given if it happens. It defines a cheque bounce as when a cheque drawn by a person on an account he maintains with a banker, for the purposes of fulfilling or discharging any debt or liability, is returned unpaid by the bank, either because of insufficient funds in the account or because it exceeded the amount that was agreed to be paid by the bank from the account as per some agreement with the bank. Thus the two most important points that must be complied with to constitute a cheque bounce are that it should be to fulfil any debt or liability and that the cheque should have bounced due to insufficient funds in the account.

When a cheque bounces or gets dishonoured by a bank, it is followed by a penalty from the bank against the issuer of the cheque. If the cheque was dishonoured due to insufficient funds in the account, not only will the issuer of the cheque be penalized by the bank, the payee can also file a criminal suit against them for the same if they refuse to rectify their mistake and complete the transaction. The procedure for the same is mentioned in section 138 of the Negotiable Instruments Act of 1881. They are as follows:

1)    The cheque must have been presented to the bank within six months from its date of issue or before its expiry, whichever comes first;

2)    After the bank notifies them that the cheque has bounced, the payee or the holder of the cheque may issue a legal notice in writing to the drawer of the cheque within thirty days from the day they learned about the bounced cheque, demanding them to complete the transaction.

3)    If the drawer of the cheque, after receiving this notice, fails to reply to it within fifteen days of receiving this notice by completing the payment, the payee may move to court.

CAN A CHEQUE BOUNCE DUE TO A SIGNATURE MISMATCH?

A signature mismatch is considered a valid ground for a cheque to be dishonoured. The Supreme Court has even stated that a signature mismatch is a serious offence and can be considered to come under section 138 of the Negotiable Instruments Act of 1881. In that case, the punishments for cheque bounce shall also apply here.

LANDMARK JUDGEMENTS

M/S Laxmi Dyechem vs State Of Gujarat & Ors (2012)

FACTS: 

1)    The appellants were into the business of producing and manufacturing chemicals, and were supplying the respondents with Naphthalene Chemicals for a few years. The respondents had a standing account of INR 4,91,91,035 (Rupees Four Crore Ninety One Lakh Ninety One Thousand and Thirty Five) with the appellants.

2)    The respondents therefore issued several cheques with signatures of authorised signatories towards the sum payable to the appellant. Out of these cheques, 117 of them were returned dishonoured by the bank stating that the signatures on them were either incomplete or did not match with the bank records.

3)    When the appellants received this notice, they issued a notice under section 138 of the Negotiable Instruments Act of 1881 to the respondents demanding the completion of payment of the due amount. The respondents later replied with a letter asking them to return the old cheques in exchange for new ones, but when that condition was fulfilled by the appellants, the respondents failed to issue new cheques stating that the cheques were subject to account settlement due to new bank mandates.

4)    The respondents not fulfilling their payments led to the appellants filing forty different complaints against them under section 138 of the Negotiable Instruments Act of 1881.

5)    When the High Court Acknowledged the offence and issued summons to the respondents, they presented themselves before the court and filed Special Criminal Applications with prayers to end the trial against the accused signatories. They contended that the signature being incomplete or mismatching with the bank records does not come under the ambit of section 138 of the Negotiable Instruments Act, 1881.

6)    The High Court of Gujarat agreed to this view and ruled in favour of the appellants of the Special Criminal Applications.

7)    A case was initiated before the High Court of Gujarat to exercise powers under section 482 of the Code of Criminal Procedure, and an order was passed in favour of the accused signatories. The High Court, after going through the Negotiable Instruments Act, concluded that the signatures being inconsistent does not come under the ambit of section 138.

8)    This led to the appellants filing an appeal in the Supreme Court of India, wherein the Supreme Court accepted the appeal and revoked the order of the High Court and dismissed the Special Criminal Application filed by the respondents. The Court also ordered the trial court to proceed with the lawsuit filed against the respondents by the appellants.

ISSUES: 

Whether the dishonour of the cheque by the bank on the basis of the signatures being inconsistent with those in the bank records would constitute an offence and come under the ambit of section 138 of the Negotiable Instruments Act of 1881?

RESPONDENT’S ARGUMENTS: 

The appellants argued that the cheques were being dishonoured merely due to the change in the mandate and nothing else. It claimed that it had offered to issue new cheques and even pay a substantial amount to settle the dues. It also claimed that the cheques were dishonoured after the signatories had resigned from their respective positions. The counsel argued that an incomplete or inconsistent signature does not come under the ambit of Section 138 of the Negotiable Instruments Act of 1881.

JUDGEMENT: 

1)    The Supreme Court allowed the appeal and disposed of the orders of the High Court of Gujarat and dismissed the Special Criminal Applications filed by the respondents. 

2)    It ordered the Trial Court to continue with the lawsuit filed by the appellants. 

3)    The Supreme Court also held that as the dishonour of a cheque on the grounds of an account being closed attract penal liability as per section 138, dishonour on the grounds that ‘signatures are inconsistent’ shall also constitute a dishonour under section 138 of the Negotiable Instruments Act of 1881, as dishonour is a ‘genus’ and inconsistent signature is ‘specie’.

DOES A CHEQUE BOUNCE AFFECT YOUR CIBIL SCORE?

A CIBIL score is a three digit score between 300 and 900 that is used to assess the repayment capacity and trustworthiness of an individual while applying for loans. A higher CIBIL score means that loans are approved faster and the terms and conditions of the loan might even be highly beneficial to the borrower. This unit of measurement was created by the Credit Information Bureau (India) Limited, who are one of the four credit information companies licensed by the Reserve Bank of India. They are part of the American transnational group TransUnion.

The Credit Information Bureau (India) Limited thus maintains the credit records of all individuals. A credit report is essentially a record of your credit history from multiple sources like credit card companies, collection agencies, governments, etc., all of which are compiled by a mathematical algorithm to determine how trustworthy you are. A higher CIBIL score might help an individual in getting loans sanctioned faster as it works as a first impression to the banks when they are lending you money. 

Generally, the most common reason for a bounced cheque is insufficient funds. Although the bouncing of one cheque due to insufficient funds might not affect the CIBIL score, if multiple cheques are bounced, this information will be present in your credit report. Therefore repeated instances of cheque bounces will affect your CIBIL score in the long run as such information will be present in your credit report which will be assessed by banks to determine whether a loan should be sanctioned to you or not.

IS CHEQUE BOUNCE A CRIMINAL OFFENCE?

A cheque drawn by an individual might get rejected or ‘dishonoured’ by the bank for a variety of reasons, like torn or damaged cheque, expired cheque, problem with the date of issue of the cheque, the drawer stopping the cheque, signature mismatch, or insufficient funds. Out of all these reasons, the Negotiable Instruments Act of 1881 prescribes that a cheque bounce is a criminal offence when it is because of insufficient funds standing in the account.

Section 138 of the Negotiable Instruments Act of 1881 defines a cheque bounce as when a person draws a cheque on an account maintained by them with the banker for the purpose of fulfilling some debt or liability, is returned by the bank unpaid, either because of insufficient funds in the account or because it exceeded the amount that was agreed to be paid by the bank from the account as per some agreement with it.

Prior to 1988, cheque bounce was treated as a civil offence and therefore an individual guilty of doing so was not punished. Due to the increase in instances of cheque bounce that lowered the credibility of issuing cheques to discharge liabilities, the legislators had to introduce the 1988 amendment to the Negotiable Instruments Act which appended the sections 138 to 142 on the act that criminalised the offence of cheque bounce and prescribed punishments for the same.

WHERE SHOULD CHEQUE BOUNCE CASES BE FILED?

If a cheque drawn by an individual is returned by the bank unpaid due to insufficient funds in the account, it is known as a bounced cheque. It is a criminal offence for which the punishment is prescribed in the Negotiable Instruments Act of 1881. Section 138 of the same act prescribes that a person guilty of cheque bounce can be imprisoned for up to two years or fined for an amount not exceeding double that of the amount given in the cheque, or both.

The case can be filed in court only after the payee has issued a notice to the drawer demanding full payment of the due amount in the bounced cheque within thirty days of receiving the information from the bank about the bounced cheque. If the drawer fails to reply to the notice by completing the payment within fifteen days of receiving the notice, the drawee may move the case to court by filing a complaint in writing to the court of appropriate jurisdiction.

Section 142(c) of the Negotiable Instruments Act of 1881 prescribes that no court inferior to that of a Metropolitan Magistrate or a First Class Judicial Magistrate can try a case pertaining to the offence of cheque bounce given in section 138 of the Negotiable Instruments Act. The same section also prescribes the jurisdiction of the courts on this matter as follows:

(1)    If the cheque is deposited in the drawee’s account, the jurisdiction shall be the place where the branch of the bank where the drawee maintains their account is situated.

(2)    If the cheque is presented directly by the drawee or the holder in due course to the drawer’s bank, then the place where the branch of the bank where the drawer maintains their account is situated.

Therefore, the complaint for a case of cheque bounce can be filed in the Court of Metropolitan Magistrate or the Court of the First Class Judicial Magistrate, whose jurisdiction is determined by the place where the branch of the bank where the drawee presents the cheque is situated.

LANDMARK JUDGEMENTS

    Dashrath Rupsingh Rathod v. State of Maharashtra and Anr. (2014)

FACTS

1)    The jurisdiction of a Court in cases pertaining to cheque bounce have been debated in multiple cases. In the case of Bhaskaran v. Sankaran Vaidhyan Balan (1999), the Court had held that the jurisdiction to try an offence under section 138 of the Negotiable Instruments Act could not be determined solely by reference to place where the cheque was dishonoured, as the act of the cheque being dishonoured by itself is not an offence under this act, and that only when the drawer fails to repay the amount within fifteen days of receiving the notice does the offence take place. It therefore held that any court within whose jurisdiction any of the above acts took place had jurisdiction.

2)    The Court in the case of Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd. (2009), held that what would constitute an offence under section 138 of the Negotiable Instruments Act is stated in its main provision and that the appended provision only imposes certain further conditions to be fulfilled before the cognizance of the offence can be taken by the courts. In this case the Supreme Court highlighted the issue of territorial jurisdiction being rampantly misused.

3)    The decision of the three judge bench in the case of Shri Ishar Alloy Steels Ltd. v. Jayaswals Neco Ltd. (2001) that for criminal liability to be attracted, the subject cheque has to be presented on which it is drawn within the prescribed period, which although had significantly lowered the decision in the Bhaskaran case, did not overrule it and therefore the Bhaskaran case was still being applied in a majority of cases although the Ishar Alloy case was ruled by three judge bench compared to the two judge bench in the Bhaskaran case, which should be binding over the lower courts.

4)    The Supreme Court therefore noted that the issue of territorial jurisdiction was being abused in a majority of the cases and that the ruling in the Bhaskaran case had to be changed and a stricter interpretation of the statute was necessary.

JUDGEMENT

1)    Section 20 of the Civil Procedure Code states that a suit must be instituted in a court within the local limits of whose jurisdiction the defendant actually and voluntarily resides, or carries on business, or works for personal gain, or where the cause of action wholly or in part arises. This gives a multitude of options for the place where the case can be instituted as businesses might have subordinate offices all over the country. But if the place where the cause of action arises also has the subordinate office of the business run by the defendant, then that place should no doubt be the place where the suit is instituted.

2)    The concept of “cause of action” in civil law which empowers the court at the place where the crime has been committed with the jurisdiction over that case is taken into account by the Court. The decision in the Bhaskaran case has led to confusion in the High Courts regarding the territorial jurisdiction of the courts in every case. Courts are vested with the responsibility to interpret the law and remove any ambiguity that is present in it, and provide justice to the aggrieved without harassing the culprit with tiring proceedings. Therefore, clarity regarding the territorial jurisdiction of a court in a case pertaining to cheque bounce cases is necessary.

3)    Section 178 of the CrPC explicitly states that every offence shall ordinarily be inquired into by the court under whose jurisdiction the crime was committed. Also, no specific provision in the Negotiable Instruments Act can be found that states in any way that the court under whose jurisdiction the offence took place shall not have the jurisdiction over it. 

4)    Although the Court agrees with the views expressed in the Bhaskaran case that the provisos appended to the main provision is necessary as it needs to be met along with the actual commission of the offence to start a prosecution. Although the provisos themselves are not the actual offence, they act as conditions that need to be fulfilled to begin prosecution. But the Court views that the provisos have no role to play in the constitution of the offence.

5)    If section 138 is read in conjunction with section 177 of the CrPC, it can be seen that the dishonour of the cheque by the drawee bank alone constitutes the offence and therefore indicates the place where the offence is committed. It is only logical to assume that the court under whose jurisdiction the drawee bank is located shall have the jurisdiction over this case.

6)    Therefore the territorial jurisdiction is restricted to the Court within whose jurisdiction the offence was committed, which in this context will be the bank where the cheque was drawn and subsequently dishonoured. Since this would result in the change of jurisdiction of lakhs of cases pending across various courts all over the country, it might seem better to give a prospective effect to this order. But since doing so would mean that a lot of accused/respondents would have to travel long distances to a Court that does not actually have jurisdiction over their case, doing so would not be right. Instead, the Supreme Court held it was better to let those cases where the stage of summoning and examining the accused have finished and the stage of recording evidence as mentioned in section 145(2) of the Negotiable Instruments Act has started to continue the trial at that place. This order shall have a retrospective effect on all other cases.

  WHO PAYS THE CHEQUE BOUNCE CHARGES?

The Negotiable Instruments Act of 1881 defines a cheque bounce under its section 138 as when a person draws a cheque from a bank where he maintains an account, for the purpose of fulfilling any debt or liability, which is then returned by the bank unpaid, either because of insufficient funds in the account or because the amount exceeded the amount that was agreed to be paid by the bank as per some agreement with the bank by the drawer.

Although this is the most common reason due to which cheques are dishonoured, there are a host of other reasons which can result in cheques getting rejected or dishonoured. Some of them include expired cheque, problems with the date of issue of the cheque, torn or damaged cheque, signature mismatch, mismatch of the amount written in the cheque, etc. All these reasons can result in the cheque getting dishonoured by the bank.

When a cheque is dishonoured, the bank returns the cheque along with the reason due to which it was rejected or dishonoured. The bank will also penalize the drawer of the cheque for the bounce. This penalty is determined by the reason which caused the cheque to bounce, and also varies with each bank, but it is the drawer who has to pay the penalty for the dishonour of the cheque.

 WHAT IS THE PROCEDURE FOLLOWED IN A CHEQUE BOUNCE CASE?

When a cheque is presented to a bank by the drawee, it might get rejected or dishonoured by the bank for a variety of reasons like expired cheque, torn or damaged cheque, problem with the date of issue, signature mismatch, insufficient funds in the account, etc. When a cheque is bounced or dishonoured this way, the bank issues a penalty to the drawer of the cheque for the dishonour. This penalty or fine is determined by the reason that caused the cheque to be dishonoured, and also varies from bank to bank.

The bouncing of cheque due to insufficient funds in the account is a criminal offence in India as per the Negotiable Instruments Act of 1881. It defines a cheque bounce in its section 138 as when a person draws a cheque on an account he maintains with a banker, for the purposes of fulfilling a debt or liability, is returned unpaid by the bank, either due to insufficient funds in the account or because it exceeded the amount that was agreed to be paid by the bank from the account as per some agreement, constitutes a cheque bounce in the legal sense.

Once a cheque bounces, section 138 of the same act also lists out the procedures to be followed before filing a case in court. It states that the cheque must have been presented within six months from the date of its issue or before its expiry, whichever comes first. Once the knowledge of the dishonour of the cheque is received from the bank, the drawee must issue a legal notice in writing within thirty days to the drawer demanding full payment of the due amount. If the drawer fails to reply to the notice by completing the payment within fifteen days of receiving this notice, the drawee may file a complaint in the court of appropriate jurisdiction.

Section 142 of the Negotiable Instruments Act also prescribes which courts have jurisdiction on this matter. Section 142(c) states that no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class can try any case pertaining to cheque bounce as per section 138 of the same act. The location of the court that shall have jurisdiction over this matter is also clarified in the same section as the location of the branch of the bank where the drawee presents the cheque to be drawn or deposited.

As per sections 145 and 146 of the same act, the appellant may file their evidence as an affidavit which shall be read as evidence in any enquiry, trial, or other proceedings subject to the Code of Criminal Procedure. The Court may at its discretion summon any person to give evidence in an affidavit as to the facts of the case upon an application by the appellant or the accused. The Court shall treat the Bank’s slip or memo having on it the official mark and pertaining to the dishonour of the cheque as prima facie evidence of such dishonour, until and unless such fact is disproved.

As per section 144 of the Negotiable Instruments Act, a Magistrate issuing a summons to an accused or a witness may direct that the copy of the summons be served at the place where the accused or the witness ordinarily resides, conducts business, or personally works for gain, by speed post or any such courier services as approved by the Court of Sessions. When the acknowledgement of the accused or the witness signing the delivery of the summons or the acknowledgement from the postal department about the accused or witness refusing to take delivery of the summons has been received, the Court will consider the summons as duly served.

Cheque bounce cases shall be tried summarily just like any other offence with a maximum punishment not exceeding three years, as mentioned in section 143 of the same act. In case of any conviction in a summary trial under this section, the Magistrate may pass a sentence of imprisonment for a term of one year and an amount of fine not exceeding five thousand rupees. If the Magistrate at the commencement of or during the summary trial feels that the punishment to be given shall exceed one year of imprisonment, may after hearing the parties, record an order pertaining to the same and recall any witness who may have been examined and proceed to hear or rehear the case as per the Code of Criminal Procedure.

The same section also mandates that Courts shall conduct the trial of the case as consistently as possible on a day to day basis, unless the Court finds the adjournment of the case beyond the following day necessary and may express the reasons for the same in writing. The Courts shall also endeavour to conduct the trial as efficiently as possible and complete the trial within six months from the date of filing the complaint.

The Courts shall also be vested with the power to direct interim compensation from the accused to the appellant during the summary trial or a summons case where he pleads not guilty to the accusation made against him, or in any other case upon framing of the charge, as per section 143A of the Negotiable Instruments Act. This interim compensation shall be an amount not exceeding twenty percent of the amount on the cheque. Upon the acquittal of the accused, the court may order the complainant to repay the amount of interim compensation along with interest at the bank rate as published by the RBI within sixty days of receiving such order.

Courts may also recover the amount payable as interim compensation as if it were a fine under section 421 of the Code of Criminal Procedure. The courts may also reduce the amount of fine payable under section 138 or compensation awarded as per section 357 of the Code of Criminal Procedure from the amount paid or recovered as interim compensation.

Section 147 of the Negotiable Instruments Act also allows every offence punishable under it to be compoundable, meaning that the appellant may drop the charges against the accused at any time and proceed towards a compromise between them. This compromise, however, shall be made with a bona fide intention and not for any compensation that the complainant is not entitled to. 

If the drawer of the cheque files an appeal against their conviction, the Court may, according to section 148 of the Negotiable Instruments Act, direct the appellant to deposit an amount not less than twenty percent of the fine or compensation awarded by the trial court. Such an amount must be deposited within sixty days of receiving the order. The appellate court may direct the release of this amount at any time during the pendency of the appeal. If the appellant is acquitted after this appeal, the court shall direct the complainant to repay the amount so released along with interest at the bank rate published by the RBI within sixty days of receiving such order.

 LANDMARK JUDGEMENTS

Two landmark judgements relating to cheque bounce that paved the way to ensuring an expeditious trial are:

M/S Meter & Instruments Private Ltd. v. Kanchan Mehta (2017)

FACTS

1)    The respondent Kanchan Mehta had filed a complaint alleging that the appellants were to pay a monthly amount to her under some agreement between them. The appellants in pursuance of the same issued a cheque in March 2016 for an amount of 29,319 INR to discharge the legal liability they had. The same cheque was dishonoured by the bank when presented before it citing the reason for the same as insufficient funds. Although the respondent served them a legal notice, the appellants failed to respond to it and therefore committed the offence of cheque bounce under section 138 of the Negotiable Instruments Act.

2)    After considering the complaint and the preliminary evidence, the Magistrate summoned the accused in August 2016. In November 2016, the Magistrate passed an order stating that the case cannot be tried summarily as a sentence of more than one year may have to be passed and therefore be tried as a summons case. When one of the appellants declared that they were ready to make the payment of the cheque amount, the complainant refused to accept the demand draft. The Magistrate after considering the judgement issued by the Supreme Court in the case of JIK Industries Ltd. v. Amarlal dismissed this application as the judgement had ordered that the consent of the complainant was required for compounding. The High Court upheld the view of the Magistrate and therefore an SLP was filed in the Supreme Court.

JUDGEMENT

1)    After hearing both parties and the views of the amicus, the court held that the objective behind introducing section 138 and other sections under Chapter XVII of the Negotiable Instruments Act was to enhance the acceptability of cheques in the settlement of liabilities. It had safeguards to protect honest drawers and punish those with malicious intention. The 2002 amendment to this act had simplified the procedure to deal with these matters, and made the offence compoundable, along with mandating summary trial and adding the provision to serve summons through Post/Courier.

2)    The Court noted that the whole objective of these amendments was to smoothen the functioning of business transactions. Since dishonour of cheques cause significant loss to the drawee, the drawer was liable to compensate the drawee for these losses, as mentioned in the Act, either through a fine not exceeding twice the amount on the cheque or through compensation. Although imprisonment is also a punishment for this offence as per section 138, the offence itself is of primarily a civil nature, and the object behind these provisions can be described as both punitive and compensatory.

3)    This court had in its previous judgments held that the accused could make an application for compounding free of charge at the first or second stage of the hearing. If the application is made at a later stage, they might have to pay a fee. This court had also held that the accused can make the payment of the defaulted amount upon receiving the notice/summons from the court after its permission. This court also held compounding cannot be done without consent from both the parties.

4)    Although these provisions were given to increase the credibility of payments done through cheque, it has become a burden to the courts. A significant amount of pending cases in Indian courts pertain to cheque bounce. The Court observed that Magistrates should make an effort to expedite the trial process and encourage the compounding of cases.

5)    The object behind the provisions of the 2002 amendment can be interpreted as if the accused is ready to pay the due amount along with reasonable cost of litigation and interest charges, the Magistrate has the implied power to dispose of the case by allowing such compensation if it is satisfied by it. Magistrates must understand that the object behind the legislature is to ensure speedy trial and access to justice so as to increase the credibility of cheque transactions. If the conduct of the drawer is reasonable or if the compensation they are ready to pay meets the ends of justice, then such compensation should be allowed without looking at the stubbornness of the complainant against the compounding of the case.

6)    In a case of cheque bounce under section 138, the burden of proof lies on the drawer. Such cases must be tried summarily to the maximum extent and only if that is not possible should it be tried with summons. The objective is primarily compensatory, and therefore the punitive element is only to ensure that the primary element of compensation is enforced. Although consent from both parties is required for compounding, the court may at its discretion permit such compounding even in the absence of consent from one of the parties in the interests of justice. The accused must be encouraged to choose the option of compounding at the initial stage, and should be permitted even at the later stages.

7)    The cases must be tried summarily as much as possible, and the right of the Magistrate to try the case through summons if the imprisonment to be awarded is more than one year should be exercised only after considering that the primary objective is compensation and therefore only in special cases should this right be exercised where compensation alone is not enough to meet the ends of justice.

8)    With regard to its previous judgements and the provisions given in the act, the Supreme Court reiterated the following:

1)    The complainant may furnish their bank account number and if possible, the email id of the accused in a case pertaining to section 138. 

2)    In every summons issued to the accused, it should be specified that if the accused is ready to deposit a specific amount determined by the court, they need not appear before it and the proceedings can be closed subject to any valid objections from the complainant.

3)    The trial, if necessary to be conducted, must go on on a day to day basis and an endeavour must be made to complete it within six months from the date of filing of the complaint. The guilty must be punished at the earliest as per the law and those who obey the law need not be held up in long unnecessary proceedings.

    Indian Bank Association & Ors. v. Union of India and Anr. (2014)

FACTS

The petitioner is a voluntary association of banks with 174 banks/financial institutions as its members. They function as a think tank for banks in matters that concern the whole banking industry. The petitioners raise the issue that the banking industry has been put to a considerable disadvantage due to the delay in disposing of cases pertaining to the Negotiable Instruments Act of 1881. The member banks find it difficult to expeditiously recover huge amounts of public funds which are blocked in cases pertaining to section 138. They contend that despite the fact that several amendments have been made to the Negotiable Instruments Act of 1881 in order to enhance the acceptability of cheques in settlement of liability by making the drawer of the cheque liable for its dishonour due to insufficient funds in the account, this objective has not yet been achieved.

JUDGEMENT

1)    The legislature realized that the 1988 amendment to the Negotiable Instruments Act did not help it in achieving its desired goals, and they therefore introduced the 2002 amendment to this act for speedy disposal of cases pertaining to this act through summary trials and also made the offence compoundable. But most Magistrate courts in the country do not practice these provisions, as a result of which the goal and intention of these amendments have failed.

2)    Chapter XVII of the Negotiable Instruments Act was added when cheques, as a bill of exchange, started losing their credibility because of multiple instances of cheque dishonours and appropriate action not being taken against the drawers who did it to fraud the payees, to deter them from committing this offence. Prior to this amendment, cheque bounce was a civil offence, which was made a criminal offence with the 1988 amendment.

3)    This amendment brought about the sections 138 to 142 of this act, which criminalised cheque bounce and prescribed the punishments for the same while ensuring that genuine bank customers were not punished by providing safeguards for the same, like mandating that the complaint be made in writing by the payee or holder of the cheque, that the complaint be filed within one month of the date on which the cause of action arises, and that no court inferior to the courts of a Metropolitan Magistrate or Judicial Magistrate of the first class can try a case pertaining to section 138.

4)    Since even after the advent of the 1988 amendment a large number of cases pertaining to cheque bounce were pending, a Working Group was constituted which made recommendations as to the necessary changes in section 138 so as to more effectively achieve the purpose of that section. This brought about the 2002 amendment to the Negotiable Instruments Act which added the section 143 to 148, thus forming the Negotiable Instruments Act that we have today.

5)    This amendment added more provisions to help with the speedy disposal of trial pertaining to this section, including that the cases be tried summarily and that the complainant can give his evidence by way of an affidavit so that this affidavit can be read in any trial instead of re-examining the complainant every time.

6)    In judgments like that of Damodar S. Prabhu v. Sayed Babalal H. (2010) the Supreme Court had laid down certain guidelines and provisions to encourage litigants to choose compounding during the early stages of the trial. This step was to reduce the burden of the courts so that they can focus on more important and serious cases.

7)    Similar procedures and guidelines were issued by the High Courts in various cases, which in the view of the Supreme Court, are worthy of emulation by the Criminal Courts all over the country. 

8)    The Supreme Court thus gave the following directions to be followed by all the Criminal Courts across the country in cases pertaining to section 138 of the Negotiable Instruments Act:

1)    On the day a complaint pertaining to section 138 is received, the Metropolitan Magistrate/Judicial Magistrate (MM/JM) shall scrutinize the complaint, and if it is accompanied by any affidavit or documents, they too shall be scrutinized by the Magistrates to decide whether to take cognizance and direct the issuance of summons.

2)    The MM/JM should adopt a pragmatic and realistic approach when issuing summons. If the email address is received from the complainant, the summons must be issued with the proper address and to this email address. If necessary, the Court can take assistance from the police as well as the nearby Court. A short date should be fixed when serving a summons and if it is returned unserved, strict action should be taken against them.

3)    The summons issued by the Court may indicate that if an application for compounding is made during the first hearing of the case, the Court may pass appropriate orders at the earliest.

4)    The Court must direct the accused when he appears to furnish a bail bond to ensure his appearance during trial.

5)    The Court must ensure that the examination-in-chief, cross-examination, and re-examination of the complainant must be conducted within three months of assigning the case. The Court may also accept the affidavit of witnesses for both the accused and the complainant instead of summoning them in Court, but must ensure that these witnesses are available for cross-examination when required.

WHEN IS THE BOUNCING OF A CHEQUE NOT AN OFFENCE?

The Negotiable Instruments Act of 1881 defines a cheque bounce as when a cheque is drawn by a person on an account they maintain with the banker, for the purposes of discharging or fulfilling any debt or liability, is returned unpaid by the bank, either due to insufficient funds in the account or because it exceeded the amount that was agreed to be paid by the bank from the account as per some agreement by the drawer with the bank.

Therefore, a cheque bounce is an offence when the reason behind it was insufficient funds in the account or because it exceeded the amount that was agreed to be paid by the bank as per some agreement by the drawer with the bank. In all other cases, cheque bounce is not an offence. But it must be noted that in the case of M/S Laxmi Dyechem vs State Of Gujarat & Ors (2012), the Supreme Court held that the dishonour of a cheque on the grounds of an account being closed or because of any signature mismatch shall attract penal liability as per section 138 of the Negotiable Instruments Act.

As long as the dishonour of the cheque due to any other reason was not intentional and without any malicious intention, they will not constitute an offence. The reasons that will not constitute an offence under section 138 of the Negotiable Instruments Act are:

1)    Expired cheque;

2)    Problem with the date of issue;

3)    Torn or damaged cheque;

4)    Mismatch between the amounts mentioned in the cheque, etc.

It must also be noted that all the reasons mentioned above that attract penal liability are stated on the assumption of a debt or liability existing between the drawer and the drawee for whose discharge was the now dishonoured cheque issued. Therefore if a legally enforceable debt or liability does not exist between the two parties, Negotiable Instruments Act is not attracted and therefore the drawer shall not have any penal liability.

 WHAT IS THE TIME LIMIT TO FILE A CHEQUE BOUNCE CASE?

Once a cheque is dishonoured by a bank due to insufficient funds, the bank will penalise the drawer of the cheque for the same. The drawee also may file a criminal suit against the drawer. For the same, the drawee must issue a legal notice in writing within thirty days of receiving the information of the cheque being dishonoured from the bank, demanding the full repayment of the due amount. If after receiving the said notice, the drawer fails to reply to the notice by repaying the whole amount within fifteen days of receiving the notice, then the drawee may file a suit in court. This suit must be filed within thirty days after the fifteen day period given to the drawer for a reply.

 CAN A CHEQUE BOUNCE LEAD TO IMPRISONMENT?

Cheque bounce is a criminal offence in India as per the Negotiable Instruments Act of 1881. It defines a cheque bounce in its section 138 as when a cheque is dishonoured by the bank for reasons of insufficient funds in the account or because it exceeded the amount that was agreed to be paid by the bank from the account as per some agreement by the drawer with the bank. Only in these cases can a cheque bounce constitute an offence, along with when the cheque was dishonoured due to a closed account or a signature mismatch, as mentioned in recent Supreme Court judgements.

The same section 138 also prescribes the punishments in case of a conviction of the accused in a case of cheque bounce. It prescribes that the convict be imprisoned for a term not more than two years or fined for an amount not exceeding twice the amount mentioned on the cheque, or both. Cheque bounce is a bailable offence in India, and therefore if the only offence given in the complaint is cheque bounce, the accused may get a bail under section 437 of the CrPC. 

 WHAT IS THE PUNISHMENT FOR A CHEQUE BOUNCE CASE?

A cheque bounce is defined under the Negotiable Instruments Act of 1881 under its section 138 as when a cheque is drawn by a person on an account he maintains with the banker, with the intention of fulfilling any debt or liability, is returned unpaid by the bank, citing reasons of insufficient funds in the account maintained by the drawer or because it exceeded the amount that was agreed to be paid by the bank as per some agreement made by the drawer with the bank.

Therefore cheque bounce is an offence only when the reason that caused the cheque to be dishonoured is insufficient funds in the bank account or because it exceeded the amount that was agreed to be paid by the bank from the account as per some agreement with the bank. Also, the account being closed or a signature mismatch is also an offence under section 138 as per recent Supreme Court judgements.

Section 138 also prescribes the punishments to be served to a convict in a case of cheque bounce. It prescribes that a convict can be sentenced for imprisonment for a maximum term of two years or fined for an amount not more than double the amount mentioned on the cheque, or both. Since the maximum term for imprisonment is two years, a case of cheque bounce is a bailable offence in India.

 WHAT ARE SOME OF THE RECENT JUDGEMENTS ON CHEQUE BOUNCE CASES?

 M/s Gimpex Private Limited v. Manoj Goel (2022)

FACTS

1)    The appellant entered into three High Seas Sale Agreements with Aanchal Cement Limited, upon whose request the appellant transferred almost 15 crores in order to clear the goods on behalf of ACL, which they promised to repay with interest. It has been alleged that though the appellant supplied goods, ACL failed to make payments. Later, in August 2012, ACL issued 18 cheques totalling an amount of 9 crores to partly discharge their outstanding debt. Fifteen days later when they were presented before the bank, they were dishonoured with the reason being “Payments stopped by drawer” or “Insufficient funds”. 

2)    The appellant issued legal notice against ACL and its directors under section 138 of the Negotiable Instruments Act of 1881. The appellant filed criminal complaints against them when the notices were not replied to. This is the first set of complaints filed by the appellant.

3)    The Crime Branch arrested one of ACL’s directors Mr. Manoj Goel, after which he filed a bail application. During the pendency of the bail application, ACL approached the appellant to settle the matters and reach a compromise. They created a compromise deed upon whose basis Mr. Manoj Goel was granted bail. Anticipatory bail was also given to some other directors. 

4)    Later, ACL and one of its directors filed a suit in court claiming that this compromise deed was illegal, null, and void, and demanded the return of the cheques which were given for the compromise deed. Initially an interim injunction was issued and the cheques were replaced but later on the interim application was rejected and ACL’s claim of the compromise being forced and illegal was deemed untrustworthy. An appeal against this judgement was withdrawn.

5)    The Madras High Court dismissed the proceedings initiated by Sitaram Goel, one of ACL’s directors, to quash the first set of complaints registered against him. The cheques that were issued as per the compromise deed were also dishonoured by the bank which led to a second set of complaints being filed against them.

6)    ACL and its directors further initiated two separate proceedings seeking to quash the first and second set of cases against them respectively. The Madras High Court dismissed the first proceeding seeking to quash the first set of complaints. This resulted in the ACL filing a special leave petition against the judgement of the High Court. On a later SLP, the Supreme Court granted the respondent to raise the issue of two simultaneous prosecutions of the two sets of cases.

ARGUMENTS

1)    The appellants argued that the order of the High Court dismissing the first set of charges against the respondents was not correct as once a trial was instituted, as trial must go on, since the compromise deed that was entered into was defaulted by the respondents. It contended that the mere pendency of a suit seeking to challenge a deed of compromise is not valid ground to quash the criminal complaint given against them.

2)    The respondents argued that the whole basis of the law of cheque bounce is that there must exist a debt or liability that must be fulfilled. There cannot be two prosecutions for the same liability. It claimed that the liability in the first set of cheques was replaced following the compromise deed that led to the second set of cheques. They contended that the Indian Contract Act allowed the appellants to repudiate the contract or continue with its performance upon breach by the other party. Since they repudiated the deed of compromise by failing to withdraw the criminal complaint, the appellant can only enforce liability on the first set of cheques.

JUDGEMENT

1)    The Supreme Court held that the intent of the Negotiable Instruments Act was to ensure credibility of transactions that are done through negotiable instruments. Its objective is to do right to the victim rather than punishing the perpetrator.

2)    It observed that the prolonged pendency and multiplicity of cases were against the intent of the act and diminishes the ease of doing business in India. The Court held that a complainant cannot be allowed to pursue two proceedings, one emanating from the original complaint and the other from the compromise agreement between the two. It stated that if the first proceedings were allowed to continue, it would render the issue of fresh cheques and any payment towards compromise as useless.

3)    Two complaints against the accused would force them to undergo two trials for the same liability, which also increases the burden on the courts. The Court held that when two parties enter into a compromise agreement, both of them are also aware of the risks that are associated with the failure to meet the terms and conditions of that agreement. Therefore neither of the parties can be allowed to reverse the effects of the compromise and file new complaints along with it.

4)    The Court therefore decided that non-compliance of the terms of a settlement agreement and the subsequent dishonour of the issued cheques would result in a fresh new cause of action under Section 138 of the Negotiable Instruments Act as well as other civil and criminal remedies. Therefore, a complainant cannot be allowed to pursue two proceedings where one emanates from the original complaint and the other from the compromise agreement between the two.

Makwana Mangaldas Tulsidas vs The State Of Gujarat (2020)

FACTS

This is a case where the Supreme Court took suo motu cognizance as a case pertaining to the Negotiable Instruments Act was pending for over fifteen years. This case pertains to two cheques worth 1,70,000 INR issued in the year 2005 which got dishonoured. When a case of cheque bounce was filed, the case remained pending in the trial court for over seven years, and then at the High Court, totalling fifteen years, which forced the Supreme Court to take suo motu cognizance of it and decide it as quickly as possible while addressing the issue of cases like these which should have been decided a long time ago. In the Negotiable Instruments Act of 1881, it is expressly stated that cases pertaining to this act must be decided within six months, and the proceedings must be conducted expeditiously to avoid a situation of relatively minor cases like these pending up in courts becoming a burden to it.

JUDGEMENT

1)    Cheque dishonour was criminalised in the year 1988 through an amendment to the Negotiable Instruments Act of 1881, as a way to ensure faith in the efficacy of banking operations and their credibility when transactions were conducted through cheques.

2)    The intent behind criminalising what was once a civil wrong was to deter the high incidence of dishonour of cheques and ensure that the complainant receives proper compensation. Subsequent amendments to the act also point toward the fact that it was always perceived that these cases would be speedily disposed of to ensure that it stayed true to the idea behind the criminalisation of this act.

3)    Even after such strong steps to ensure expeditious trial, as per a recent study, more than fifteen percent of the criminal cases pending in district courts are cheque bounce cases. The Supreme Court had in its previous judgements in the cases of Indian Bank Assn. v. Union of India and Meters & Instruments (P) Ltd. v. Kanchan Mehta issued guidelines to ensure the conduct of expeditious trials in cases pertaining to cheque bounce. It had mandated that:

a)    In cases that relate to section 138 of the NI Act, the trial must be of a summary nature unless there exists any specific reason that calls for a summons trial.

b)    The evidence of the complainant must be conducted within three months of assigning the case.

c)    An endeavour to conclude the trial within six months from the date of filing of the complaint must be made.

d)    The trial must be conducted on a day to day basis as much as possible.

4)    The Court noticed that the major reason for the high pendency of cheque bounce cases was the delay in ensuring the presence of the accused before the court of trial. The Supreme Court had mandated in the case of Indian Bank Assn. that the magistrate must adopt a pragmatic and realistic approach while issuing summons and must take the assistance of the police or the nearby court when necessary. The Court also noted that since it is a bailable offence, the Police is also sometimes the reason for this delay.

5)    The Court realizes the need to evolve a system of service/execution of process issued by the court and ensure the presence of the accused and the cooperative efforts of the police, bank, etc. The Court had issued one such direction in the case of Meters & Instruments (P) Ltd., by directing banks to furnish the email ID of the accused to the complainant or payee of the cheque if it is available with the bank.

6)    The Court realized the importance of banks in cases of cheque bounce and issued the order that banks must provide a print out of information pertaining to the drawer if a cheque bounces which includes information like email ID, registered mobile number, address, etc. It also mandated that a separate software based mechanism be developed to track and ensure the service of process on the accused in cases relating to section 138 of the NI Act.

7)    It also directed the Reserve Bank of India to develop cheques that include information like the purpose of payment so as to prevent frivolous litigations because of the misuse of cheques.

8)    With regard to the accused not being present on the court of trial, the Supreme Court directed the lower courts to develop a mechanism to ensure the presence of the accused, and use coercive measures if necessary. The courts can issue various fines and interim compensations and even attach the property of the accused. The banks may facilitate mechanism for the transfer of requisite funds from the bank account of the accused to that of the holder.

9)    The Supreme Court also put emphasis on developing pre-litigation settlement mechanisms in these cases. An award passed by a Lok Adalat is the same as a decree passed by a civil court. Therefore the National Legal Services Authority may develop schemes to settle disputes relating to cheque bounce through the process of Alternative Dispute Resolution, which will help reduce the burden on the lower courts.

10)    In High Courts that have a high amount of pending cases relating to cheque bounce, exclusive courts may also be set up to deal with these cases. The Supreme Court also directed that decriminalisation of dishonour of a cheque of a small amount can be considered, so that it can be left with the civil courts.

 CONCLUSION

A cheque could be dishonoured by a bank when presented due to multiple reasons. The cheque might have expired, the signatures might not be matching, the date of issue might be wrong, the amounts written on the cheque might be inconsistent, the cheque could be torn or damaged, or the drawer might not have sufficient funds in his bank account. Whatever the reason may be, banks will charge a penalty from the drawer of the cheque for the dishonour. This amount varies with the reason for the dishonour and also with the banks.

Although banks might penalise the drawer for the dishonoured cheque, if the cheque was dishonoured due to insufficient funds in his account, then the drawee can also file a criminal suit against the drawer for the dishonoured cheque. The laws and procedures pertaining to the same are the contents of the Negotiable Instruments Act of 1881. Chapter XVII of the same act prescribes the penalties for the dishonour of cheques due to insufficient funds.

Sections 138 to 148 contain these laws and procedures. It defines a cheque bounce as when a cheque drawn by a person who maintains an account with a banker, purpose of discharging any debt or liability, is returned unpaid by the bank due to insufficient funds in the account or because it exceeded the amount that was agreed to be paid by the bank from the account of the drawer as per some agreement between them.

If a cheque bounces due to insufficient funds in the account, the payee can issue a legal notice in writing to the drawer within thirty of receiving the information of the dishonour demanding full payment of the due amount, and if the drawer does not reply by completing the payment within fifteen days, the drawee may file a criminal complaint in a court not inferior to the Metropolitan Magistrate or the Judicial Magistrate of the first class.

Cheque bounce was criminalised and these provisions were given in the act to ensure the efficacy and credibility of everyday business transactions through cheques. It was intended to deter people from filing frivolous cases which burden the justice system. The legislative intent behind adding some of the later provisions in the act was to ensure that the trial procedure is conducted expeditiously. But this intent has not yet been fulfilled and the lower courts are still burdened with these cases, although the Supreme Court has in its recent judgments raised this issue and provided guidelines to reduce this burden and handle cases more effectively.