Cheque Bounce Case
Cheque Bounce Case
Organisation July 28, 2019 839
In 1988, The Negotiable Instruments Act, 1881, was amended and Section 138 was inserted making the bouncing of cheques a punishable offence amounting to a punishment of imprisonment of a term extendable to 2 years, or with fine extendable to double the amount of the cheque or both. The main objective of incorporating Section 138 in the act by amendment in 1988 was to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments to prevent issuance of dishonest cheques by the drawer. The ingredients required for complying with Section 138 as defined in Kusum Ignots and Alloys ltd. v Pennar Peterson Securities Ltd.are as follows:
- A person (will be drawer of the cheque) should have a legally enforceable debt or other liability towards another person (will be payee or holder of the cheque, as the case may be) and a cheque is drawn to discharge the debt or liability
- Cheque is returned due to insufficient funds or exceeds the amount agreed upon to be paid by the bank
- Cheque is to be presented within six months (now three months) from date of its drawn or till its validity, whichever being earlier
- A written notice within 30 days is sent to the drawer along with the receipt of information from bank about failure of payment of cheque
- The payee or holder doesn’t receive the payment within 15 days of the receipt of send written notice to the drawer
In M. S. Narayana Menon v State of Keralaand Sudhir Kumar Bhalla v Jagdish Chand,the Supreme Court expounded that cheques issued for security purposes would not come under the purview of the Section 138 as the provision only attracted liability for dishonour of cheques which were drawn for discharging debt or liability. Whereas, the cheques drawn to discharge the drawer’s liability as a surety, self-addressed chequeand pay order being closer to a bill of exchange, were considered under the ambit of this section.
The main objective of the Section 138 was to discourage persons dishonestly issuing cheques. Thus, except dishonouring of cheques based on insufficient funds, there are other acts which would amount to the commencement of the offence.
Majority of High Courts held that stoppage of payment by drawer will be covered under Section 138. Supreme Court also confirmed that cases where drawer with dishonest intention instructed bank for stoppage of payment to payee would also come under the preview of Section 138 of the Act. But mere notice to stop payment will not always be counted as an offence under Section 138. In M.M.T.C Ltd. v Medhel Chemicals and Pvt. Ltd., Supreme Court drew out the distinction test and stated that if there was sufficient fund in the account of drawer and the cheque payment was stopped due to some other valid reasons that would not amount to an offence mentioned under Section 138. Supreme Court validating on the reasons did not consider as commencement of offence when done before the due date of payment.
CLOSER OF BANK ACCOUNT:
Another scenario in which the Courts applied Section 138 is closure of bank accounts. As closure of bank accounts cause the standing amount to be nil leading to dishonour of cheques by the bank. Therefore, the closure of bank account also attracted the punishment for the commencement of the offence defined under Section 138.
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