In the modern times, Cheques have
become an essential part of financial life as they are used in almost all
transactions, like guarantee of loans, rent agreements, tenders, payment of
salary to employees, payments of bills etc. Cheques have also become an
integral ingredient of business transactions as they ensure evidence of
transactions. Due to this wide spread use of cheques, legislature enacted the
Negotiable Instruments Act, 1881 which provide regulations for matters relating
to the use of cheques.
Section 6 of the Indian
Negotiable Instruments Act, 1882 defines the term 'cheque' as a bill of
exchange not payable otherwise than on demand, drawn on a specific banker. The
person being paid is known as the payee or drawee and the person paying through
cheque is known as the drawer or payer.
"A cheque is an unconditional order in writing, signed by the person
giving it, requiring the bank to whom it is addressed to pay on demand a
certain sum of money to, or to the order of, a specified person or to bearer".
Dishonour of Cheque (Cheque Bounce):
Chapter XVII of the Negotiable
Instruments Act i.e., Sections 138 to 147, deal with the subject of dishonour
of cheque and provides the remedies and penalties in case of dishonour of
cheque. Dishonour of a Cheque is a criminal offence under Section 138 of the
Negotiable Instruments Act, 1881.
A cheque is said to be
dishonoured, commonly termed as cheque bounce, when it is refused to be paid or
returned unpaid when presented to the bank. It has been defined in Section 138
Negotiable Instruments Act, 1881, as any cheque drawn by a person in payment to
another person, which is returned to the bank unpaid because the amount exceeds
the prescribed limit or there are insufficient funds in the account.It can be
described as a situation where a person paid in the form of a cheque is unable
to cash the cheque.
The Black's Law Dictionary
defines dishonour as: "An instrument is dishonoured
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; or presentment is excused and the instrument is not duly accepted or
A communication slip is attached
to the dishonoured cheque called the 'return memo' which states the reasons for
the dishonour of cheque. A Cheque may be dishonoured by the banker for varied
reasons, such as -
Non-Applicability of Funds
Alterations in the Cheque
The drawer of a dishonoured cheque
can only be legally prosecuted by the payee if the amount stated in the cheque
is for clearance of a debt or any other liability of the drawer towards payee. The
drawer cannot be sued if the cheque was granted as a gift, for
a loan,or for any unlawful purposes.
When a cheque is dishonoured, the
payee generally has two remedies:
civil suit for recovery of money
criminal complaint under Section 138
The complainant is not barred
from filing a civil suit for recovery of cheque amount even after launching
prosecution against or obtaining conviction of drawer under Section 138 of
Negotiable Instruments Act. The drawer can even be prosecuted under sections 417
and 420 of IPC in cases involving cheating. The offence under Section 138 of
the Act and Section 420 of the IPC are different in nature, therefore conviction
of offence under one provision does not bar prosecution under the other.
Section 138 of Negotiable Instruments Act, 1881:
Following are ingredients of
Section138 of the Actwhich are necessary to amount an offence under the Section:
Cheque must be issued for the discharge of any
debt or other liability.
The cheque must be presented within the period
of 6 months (now 3 months - RBI Guidelines) or within the period of its
validity, whichever is earlier.
3. The payee should, within 30 days of receiving
information from the bank concerning dishonour of the cheque, issue a notice to
the drawer in writing about the same and to make the payment within 15 days.
When the party entitled to notice cannot, after due search be found, the notice
of dishonour is not necessary.
The drawer must fail to make the payment of the
cheque amount within 15 days of receiving notice from the payee.
A complaint must be filed before a Metropolitan
Magistrate or a Judicial Magistratenot below the rank of a Judicial Magistrate
of First Class, within 1 month of the date of expiry of the time of fifteen
days on non-payment of the amount due on the dishonoured cheque by the drawer.
The court may take cognizance of a complaint even after the prescribed period,
if the Court is satisfied that the complainant had sufficient cause for not
making a complaint within prescribed period.
The offence under the Act is compoundable
for dishonour of cheque may vary from imprisonment for a term up to two years
or with fine up to twice the amount of the cheque, or both.
Dishonour of Cheque by Company:
A company runs through its
directors and officers who are in charge of the conduct of the commerce of the
company as it is an unnatural person created by law. The company becomes
criminally liable for dishonour of cheque when a cheque drawn by the company is
dishonoured, but because of the company being an artificial person, this
liability is extended to the company's officers as well. The offence must
actually be committed by the company for the officers of the company to be held
The offence of dishonour of cheque
by companies is regulated by Section 141 of the
Negotiable Instrument Act,1881
The directors of a company are
the persons employed to manage and control the business of the company, they may
be designated as director or by any other name. Section 141(2)(a) of Negotiable
Instruments Act 1881 also includes the partners of a firm as directors for the
purpose of this section.
The rule of vicarious liability
is often applied in cases concerned with criminal liability, which says that no
one is to be held criminally liable for an act of another. Vicarious liability is
put on natural person who have some nexus with the crime under section 141 of
Black's Law Dictionary defines
the term 'vicarious liability'as:
"The imposition of liability on one person for the actionable conduct
of another, based solely on a relationship between the two persons. Indirect or
imputed legal responsibility for acts of another, for example, the liability of
an employee for the acts of an employer, or, a principal for torts and
contracts of an agent."
Section 141 of the Negotiable Instrument Act,1881:
The following persons, in
addition to the Company,are held liable for dishonour of cheque by a Company:
- All persons who were in-control of and accountable
to the company for running the business of the company at the time the
offence was committed;
- All Directors, Managers, Secretaries and other officers
of the company with whose consent and connivance, the offence was committed;
Directors, Managers, Secretaries and other officers of the company whose
negligence led to the offence being committed by the company.
Note: A director who was not
responsible or in charge of the company at the time of the offence would not be
liable even if he is named director of the company.
The Director will not be held
liable for dishonour of cheque by the company if:
The offence occurred without his knowledge
He exercised due diligence in order to avoid the
The Court, in the case of SMS
Pharmaceuticals v. Neeta Bhalla and Anrheld
The complaint must specify that at the time the
cheque was issued, the director was in-charge of the company.
The director must actually be responsible for
running the company and would not be liable for simply being designated as a
The signatory of the cheque will also be held
In Saroj Kumar Poddar v.
State (NCT of Delhi) the court
adjudged that the circumstances of the offence and reasons for holding director
vicariously liable must be specified in the complaint, emphasizing that there
must be strict construction of Section 141 of the Act.
In the case of SMS
Pharmaceuticals v. Neeta Bhalla,the court
observed that only the directors who were in charge of the business of the
company when the cheque was drawn up would be held liable if there are a large
no. of directors in a company. Other directors cannot be held liable simply
for being directors if they do not take any part in the offence.
The court, in the case of K.K.
Ahuja v. V.K. Vora &Anr., held that the Managing
Directors of a company can be assumed to be liable for dishonour of cheque
simply by the nature of their office, as they are responsible for the
day-to-day affairs of the company.
A person cannot be held guilty in
case of dishonour of cheques just because he is the director of the Company.
Section 141 of the Act, makes all the people connected with the company
vicariously liable, thus a precise case should be constructed against the
person who is sought to be made liable in the complaint. In order to hold the
director liable, the complainant must prove that the director is in control of the
functioning of the daily affairs of the company. In case of lack of specific
allegations in the complaint no director is liable under section 138 and 141 of
the Act, other than a Managing Director or Joint Managing Director or a
signatory to the Cheque.
The director can
prove his innocence in two ways, either by going through the trial before the
Magistrate Court in which the complaint is filed or he can seek abashment of
the proceedings against him by approaching the High Court under section 482 at
the earliest before the commencement of the trial establishing that he is not
connected to the proceedings initiated before the Magistrate Court.