LIABILITY FOR DISHONOR OF CHEQUES PROJECT ASSIGNMENT
BANKING LAW
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CERTIFICATE
Certified that the project report on liability for dishonour of cheques is my original work and that it complies with all the formalities prescribed in the regulations. ID No.
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TABLE OF CONTENTS
1. Rese Resear arch ch Meth Method odol olog ogy y 2. Intr ntroduc oducttion ion 3. Dishono Dishonour ur of Cheques Cheques – Mean Meaning ing 4. Dishonour Dishonour of Cheque Cheque - Interpretat Interpretation ion of Section Section 138 138 5. Dishono Dishonour ur of Cheque Cheque – Offen Offence ce By Drawer Drawer 6. Procee Proceedin dings gs agains againstt Dishon Dishonour our of of Cheque Cheque 7. Offenc Offences es - Chea Cheatin ting g and and Forg Forgery ery 8. Liabil Liability ity for Stopped Stopped Paymen Paymentt 9. Drawer Drawer’s ’s Liabi Liabilit lity y for Disho Dishonour nour of of Cheque Cheque 10. Drawee’s Liability Liability for Dishonour of Cheque 11. Dishonour Dishonour of Cheque - Liability Liability of a Company 12. International Law on Liability for Dishonour of Cheques 13. Laws of other Countries on Liability Liability for Dishonour Dishonour of Cheques 14. Conclu Conclusio sion n 15. Biblio Bibliogra graphy phy
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TABLE OF CASES AND STATUTES Table of Cases
1. Om Prakash Prakash Maniy Maniyar ar v. Swati Swati Bhide Bhide [1992 [1992 Mah Mah LJ 302 at 304] 2. Medical Medical Chemical Chemicalss & Pharma Pharma P Ltd v. Biological Biological E Ltd Ltd 3. Pankaj Pankajbhai bhai Nagjib Nagjibhai hai Patel Patel v. State State 4. Keshav Keshavji ji Madhav Madhavji ji v. Emper Emperor or [AIR [AIR 1930 Bom Bom 179] 5. Baijna Baijnath th Sahay Sahay v. v. Empero Emperorr [AIR [AIR 1933 Pat Pat 183] 183] 6. Abdul Abdul Samo Samod d v. Saty Satyaa Naray Narayan an Mahav Mahavir ir 7. Mrs. Mrs. R. Jayala Jayalaxmi xmi v. Mrs Mrs.. Rashi Rashida da 8. Mrs. Rama Gupta Gupta v. Bakesman’s Bakesman’s Home Product Product Limited Limited Patial Patialaa 9. Calcut Calcutta ta Sanit Sanitary ary Ware Waress v. C. T. Jacob Jacob 10. M. M. Malik v. Prem Prem Kumar Goyal Goyal 11. Rakesh Menkumar Menkumar Porwal Porwal v. Narayan Narayan Dhondu Joglekar Joglekar 12. M/s. Electronics Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s. Indian Technologists & Engineers (Electronics) Pvt. Ltd. and another 13. New Central Central Hall v United Commercial Commercial Bank Bank Ltd. 14. Jogendra Nath Chakrawarti v. New Bengal Bank Limited [AIR 1939 Cal. 63] Table of Statutes
1. Negoti Negotiabl ablee Instr Instrume uments nts Act, Act, 1881 1881
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2. Civi Civill Proc Proced edur uree Code Code,, 1908 1908 3. Code Code of Crimi Criminal nal Proced Procedure ure,, 1973 1973 4. Indi Indian an Pena Penall Code Code,, 186 1860 0
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RESEARCH METHODOLOGY Aims and objectives
The project aims at studying the various aspects related to dishonour of cheques and liability arising therefrom. It begins by defining the concept of dishonour of cheques and then proceeds to the liability arising out of such dishonour and the laws related thereto. The The ulti ultima mate te objec objecti tive ve is to unde unders rsta tand nd the the liab liabil ilit ity y and and the the penal penal prov provis isio ions ns for for dishonour of cheques and then to understand its application in the Indian context. Scope
The scope of the project has been restricted to the broad topics like the laws applicable and the procedures followed. The author has limited the scope to a very conceptual and theoretical understanding of dishonour of cheques and liability arising therefrom. Method of writing
The researcher has endeavored to use a combination of descriptive and analytical styles of writing throughout this project and has cited various case laws for better understanding of the topic. More emphasis has been placed on the descriptive style of writing. Sources of Data
The main sources have been textbooks, articles and web-search.
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INTRODUCTION
Advent of cheques in the market have given a new dimension to the commercial and corporate world, its time when people have preferred to carry and execute a small piece of paper called cheque than carrying the currency worth the value of cheque. Dealings in cheques are vital and important not only for banking purposes but also for the commerce and industry and the economy of the country. But pursuant to the rise in dealings with cheques, the practice of giving cheques without any intention of honoring them has also risen. In case a cheque is issued by a person in liquidation of his debt or liability, and same is dishonoured, then it not only creates a bad taste, but can also result in harassment and can cause damages to the person to whom the cheque may have been issued. Since business activities have increased, the attempt to commit crimes and indulge in activi activiti ties es for making making easy easy money money have have also also increa increased sed.. Thus Thus beside besidess civil civil law, law, an important important development development both in internal and external trade is the growth of crimes crimes and it has been found that the banking transactions and banking business is every day being confronted with criminal actions and this has led to an increase in the number of criminal cases relating to or concerned with the banking transactions. In India, cheques are governed by the Negotiable Instruments Act, 1881, which is largely a codification of the English Law on the subject. Before 1988 there was no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent stringent provision provision to punish them in the event of such cheque not being honoured by their bankers and returned unpaid. Although, on dishonour of cheques there is a civil liability accrued, however in reality the processes to seek civil justice becomes notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To ensure prompt remedy against defaulters and to ensure credibility of the holders of the negot negotia iabl blee inst instru rume ment nt a crim crimin inal al reme remedy dy of pena penalt lty y was was inse insert rted ed in Negot Negotia iabl blee Inst Instru rume ment ntss Act, Act, 1881 1881 in form form of the the Banki Banking ng,, Publ Public ic Fina Financ ncia iall Inst Instit itut utio ions ns and and Negotiable Negotiable Instruments Instruments Laws (Amendment) (Amendment) Act, 1988 which were further further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002[3].
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Of the ten sections comprising chapter XVII of the Act, section 138 creates statutory offence offence in the matter of dishonour of cheques on the ground of insufficienc insufficiency y of funds in the account maintained by a person with the banker. Section 138 of the Negotiable Instruments Act, 1881 is a penal provision wherein if a person draws a cheque on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part of any debt or other liability, is returned by the bank unpaid, on the ground either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence. Section 138 of the Act can be said to be falling in the acts which are not criminal in real sense, but are acts which in public interest are prohibited under the penalty or those where although the proceeding may be in criminal form, they are in reality only a summary mode of enforcing a civil right. Normally in criminal law existence of guilty intent is an essential ingredient of a crime. However the Legislature can always create an offence of absolute liability or strict liability where ‘mens rea’ is not at all necessary. This paper deals with the various aspects of dishonour of cheques and then, proceeds towards the liability arising out of such dishonour.
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DISHONOUR OF CHEQUES – MEANING
Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as "a bill bill of excha exchang ngee draw drawn n on a spec specif ifie ied d banke bankerr and and not expres expresse sed d to be paya payabl blee otherwise than on demand". "Dishonour" means "to refuse or neglect to accept or pay when duly presented for payment of a bill of exchange or a promissory note or draft on a banker .1 Black’s Law Dictionary2 defines the term "Dishonour" as "to refuse to accept or pay a draft or to pay a promissory note when duly presented. An instrument is dishonored 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; Reference to the term 'dishonour' has been made in Section 91 and Section 92 of the Negotiable Instruments Act, 1881. Section 91 - Dishonor by non- acceptance "A bill of exchange is said to be dishonored by non-acceptance when the drawee, or one of several drawee not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. Where the drawee is incompetent incompetent to contract, or the acceptance is qualified qualified the bill may be treated as dishonored". Section 92- Dishonour by non-payment "A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same". same". 1
Vide Wharton’s Law Lexicon, 1978 Ed. p. 335
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Vide Rakesh Porwal v. Narayan Joglekar, 1993 Cr LJ 680 p. (688) (Bom).
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Thus if on presentation the banker does not pay, then dishonour takes place and the holder acquires at once the right of recourse against the drawer and the other parties on the cheque. Dishonour of cheque has been considered as a criminal offence under Section 138 of the Negotiable Instruments Act, 1881. According to Section 138 whenever any cheque for discharge of any legally enforceable debt or other liability is dishonoured by the bank for want of funds and the payment is not made by the drawer despite a legal notice of demand, it shall be deemed to be criminal offence.
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DISHONOUR OF CHEQUE - INTERPRETATION OF SECTION 138 Section 138 of the Negotiable Instruments Act, 1881
Dishonour of cheques is considered as an offence under Section 138 of the Negotiable Instruments Act, 1881. Section 138 deals with Dishonour of cheque for insufficiency of funds in the accounts. The Section reads as follows: "Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficie insufficient nt to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to two year, or with fine which may extend to twice the amount of the cheque, or with both. Provided that nothing contained in this section shall apply unless(a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. (b) The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer, of the cheque, chequ e, within thirty days of the receipt of information by him from the bank regarding the return of the cheques as unpaid, and (c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice". notice". Object of Section 138
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The object of Section 138 is to make drawer of the cheque subject to penalty when the cheque bounces on the ground of insufficient funds. The plain reading of Section 138 of the Negotiable Instruments Act makes it clear that, the words, "either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account…" have been specifically used. It would, therefore, mean that only two contingencies are contemplated and as such, the words-"either-or" have been used. It is, therefore, clear that the cheque should be dishonoured either for the insufficiency of the amount or, because it exceeds the amount arranged to be paid from that account. No third contingency or eventuality has been contemplated and the specific clear wording of Section 138 eliminates any third contingency than mentioned in the Section itself. The cheques can be dishonoured for many other reasons and there may be so many eventualities in which the payee is denied payment by the bank, the reasons such as mentioning the date incorrectly or some corrections not initialed or the difference in between the amount mentioned in figures and words, are certain other contingencies in which the cheques will be definitely dishonoured and would be returned as unpaid, however it is not in respect of any of these contingencies that he dishonour of a cheques has been made penal under Section 138 of the said Act. In Om Prakash Maniyar v. Swati Bhide3, the submissions on behalf of the petitioners to the effect that the dishonour because of the closure of the account should be held as penal, was not accepted by the court. Section 138 was introduced with a laudable public policy behind it. It is intended to prevent or curtail a mischief which is likely to affect financial transactions, and thereby trade and business and ultimately, economy of the country. Exclusion of Mens Rea 4
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1992 Mah LJ 302 at 304
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Mens Rea, a guilty mind – Although prima facie and as a general rule there must be a mind at fault before there can be a crime, it is not an inflexible rule, and a statute may relate to such subject-matter and may be so framed as to make an act criminal, whether there has been any intention to break the law or otherwise to do wrong or not. There is a large body of Municipal law at the present day which is so conceived – Wills R. v. Tolson, (1889) 23 Q.B.D 173 (vide Wharton’s Law Lexicon 14 th Ed., Fifth Imp., 1992).
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For committing an offence under Section 138 of the Act "mens rea" is not an essential ingredient5. Section 138 of the Negotiable Instruments Act, 1881, excludes mens rea by creating strict liabil liabilit ity y and this is explicit explicit from the words 'such person person shall shall be deemed deemed to have committed an offence'. The returning of the cheque by the bank either because he amount of money standing to the credit of the drawer of the cheque is insufficient or the amount covered by the cheque is in the excess of the amount arranged to be paid from that account by an agreement with the bank are the two necessary conditions creating strict liability. Ingredients and requirements of the penal provisions
Section 138 creates an offence for which the mental elements are not necessary. It is enough if a cheque is drawn by the accused on an account maintained by him with a banker for payment of any amount of money to another another person from out of that account for discharge in whole or in part, of any debt or other liability due. Therefore, whenever the cheques are on account of insufficiency of funds or reasons referable to the drawer’s liability to provide for funds, the provisions of section 138 of the Act would be attracted, provided the following conditions are satisfied: 1. Cheque drawn on a bank account
Section 138 requires, that a cheque, to be caught by the section, should be 'drawn by a person on an account maintained by him with the banker for payment of any amount of money'. Existence of a "live account" at the time of issue of cheque is a condition precedent for attracting penal liability for the offence under this section. The cheque is returned by the bank unpaid either because of the insufficiency of the amount or, because it exceeds the amount arranged to be paid from that account. The words "that account" in the section denote to the account in respect of which the cheque was drawn. No doubt if any person manages to issue a cheque without an account with the bank concerned its consequences would not snowball into the offence described under section 138 of the 5
Mahendra A.Dadia V. State of Maharashtra (2000) (1) Civil Court Cases 438 (Bom.)
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Act. For the offence under section 138 of the Act there must have been an account maintained by the drawer at the time of the cheque was drawn. 2. Issue of Cheque in discharge of a debt or liability
The cheque unpaid by the bank must have been issued in discharge of a debt or other liability wholly or in part. Where a cheque is issued not for the purposes of discharge of any debt or other liability, the maker of the cheque is not liable for prosecution under section 138 of the Act. A cheque given as a gift or for any other reasons and not for the satisfaction of any debt or other liability, partly or wholly, even if it is returned unpaid will not meet the penal consequences. If the above conditions conditions are fulfilled, fulfilled, irrespective irrespective of the mental conditions of the drawer he shall be deemed to have committed committed an offence, offence, provided the other four requisites requisites are fulfilled: a) Presentation of the cheque within six months or within the period of its validity
The cheque must have been presented to the bank within a period of six months from the date on which it is drawn or its period of validity, whichever is earlier. Thus if a cheque is valid for three months and is presented to the bank within a period of six months the provisions of this section shall not be attracted. However if the period of validity of the cheque is not specified or prescribed the cheque is presented within six months from the date the cause of action can arise. The six months are taken from the date the cheque was drawn. b) Return of the cheque unpaid for reason of insufficiency of funds
The cheque must be returned either because the money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the arrangement made to be paid from that account by an agreement with the bank. c) Issue of the notice of dishonour demanding payment within thirty days of receipt of information as to dishonour of the cheque.
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The payee or the holder in due course of the cheque has to give a notice in writing making a demand for payment of the said amount of money to the drawer of the cheque. Such notice must be given within 30 days of information from the bank regarding the return of cheque as unpaid. d) Failure of the drawer drawer to make the the payment payment within fifteen fifteen days of of the receipt receipt of the payment
After the receipt of the above notice the drawer of the cheque has to make payment of said amount of money to the payee or to the holder in due course of the cheque within 15 days of the receipt of the notice. If the payment is not made after the receipt of the notice within stipulated time, a cause of action for initiating criminal proceedings under this section will arise. Scope and applicability of Section 138
Accor Accordi ding ng to the the Sect Sectio ion n 138 138 whene wheneve verr any any chequ chequee for for disc discha harg rgee of any lega legall lly y enforceable debt or other liability is dishonoured by the bank for want of funds and the payment is not made by the drawer despite a legal notice of demand, it shall be deemed to be a criminal offence. Where a cheque is issued not for the purpose of discharge of any debt or other liability, the maker of the cheque is not liable for prosecution. For example, if the cheque is given by way of a gift or present and an d if it is dishonoured by the bank, the maker of the cheque is not liable for prosecution6.
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Mohan Krishna (B) v Union of India 1996 Cri LJ 636 (AP)
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DISHONOUR OF CHEQUE – OFFENCE BY DRAWER
The word 'offence' is not defined in the Negotiable Instruments Act, 1881. According to section 3(38) of the General Clauses Act it means any act or omission made punishable by any law for the time being in force. As noticed in the previous topic, what is made an offence is not the drawing of cheque alone. It must have been drawn in discharge, in whole or in part, of a legally enforceable debt or other liability. It must have been duly presented in time and dishonoured. There must be a written demand for the amount within a specified time, followed by failure to make payment within another specified time. It becomes an offence only on such failure which is an illegal omission7. It is the person who draws and issues a cheque that falls within the ambit of Section 138 of the Negotiable Instruments Act, 1881. The maker of cheque (who signs the cheque) is called the `drawer'. When a person is aware of the fact that there are no funds in one's bank account if he issues cheque to a trader for goods purchased, the bank will return the cheque for insufficiency of funds. By issuing a cheque under such circumstance, drawer commits an offence under Section 138 of o f the Negotiable Instruments Act. On the cheque being dishonoured, the payee in terms of Section 138 of the Act can call upon the guilty to pay the money covered by the returned cheque within 30 days from the date of return, only after serving a notice of dishonour to the drawer. If the drawer does not pay the amount despite the notice within 15 days from the receipt thereof, the drawer commits an offence under Section 138 13 8 of the Negotiable Instruments Act, 1881. Notice of Dishonour
Notice of Dishonour is a formal communication of the fact of dishonour of cheque. Subsection (b) of Section 138 of the Negotiable Instruments Act requires the payee or the holder in due course to issue a notice in writing to the drawer of the cheque within 15 7
Anto (K S) v Union of India (1993) 76 Comp Cas 105 (Ker).
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days of the receipt of the information by him from the bank regarding the return of the cheque as unpaid. The sub-section further provides that the drawer has to comply with the demand within 15 days da ys of the receipt of the said notice. The demand notice envisaged in section 138 is in effect a notice of dishonour to the drawer combined with a demand on him to pay the amount of the dishonoured cheque within the time allowed by the statute. It serves as a warning to the person to whom the notice is given that he could now be made liable. If the holder fails to give this notice to the drawer, except in cases when notice of dishonour may be excused, all prior parties liable thereon are discharged of their liability. Cause of Action
Cause of action for prosecution under section 138 of the Negotiable Instruments Act does not arise by mere presentation of the cheque in bank and by its dishonour. A division bench of the Kerala High Court8, after considering the ambit and scope of Sections 138 and 142 of the Negotiable Instruments Act, has held that the prosecution for such an offence would only be maintainable when the period of 15 days from the receipt of the notice by the drawer of the cheque has elapsed. The court observed that the dishonour of he cheque by itself does not give rise to a cause of action because payment can be made on receipt of the notice of demand contemplated in clause (b) of Section 138 and in that event, there is no offence, nor any attempt to commit the offence nor even a preparation to commit the offence. Failure to pay the amount within fifteen days of receipt of notice alone is the cause of action that would permit a prosecution and nothing else. Written Complaint
A complaint is required to be filed by the payee or the holder in due course of the dishonoured cheque.
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N.C. Kumaresan v. Ameerappa 1991 (1) KLT 797
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Section 142 (a) of the Negotiable Instruments Act, makes it clear that only upon a complaint in writing made by the payee or the holder in due course of the cheque, the court can take cognizance of the offence. If the payee or the holder in due course does not file a complaint, the drawer cannot be prosecuted. Cognizance of Offence
In terms of Section 142 of the Negotiable Instruments Act, 1881, no court shall take cognizance of any offence punishable under section 138 except upon a written complaint made by the payee or the holder in due course of the dishonoured cheque and filed within one month of the date on which the cause of action arose. No court inferior to that of a metrop metropoli olitan tan magist magistrat ratee or a firstfirst-cla class ss judici judicial al magist magistrat ratee can try an offenc offencee under under section 138. Section 142 states that the cognizance of an offence can be taken under Section 138 upon a complaint in writing which must be made within one month by the payee or holder in due course from the date on which the cause of action arises under clause (c) of the proviso to section 1389. In substance we can say that when a drawer, served with a notice within 30 days from the date on which the payee or the holder in due course has come to know about the return of the cheque and the drawer does not make the payment as demanded, the complaint shall have to be filed within 30 days from the date on which the 15 days time expires. The Negotiable Negotiable Instrument Instrumentss (Amendment (Amendment and Miscellane Miscellaneous ous Provisions Provisions)) Act, 2002 has intr introd oduce uced d a provi proviso so to Sect Sectio ion n 142 142 permi permitt ttin ing g the the cour courtt to take take cogni cognizan zance ce of a complaint after the prescribed period if the complainant satisfies the court that he had sufficient cause for not making a complaint within such period. It would thus be within the the disc discre reti tion on of the the court court to condo condone ne the the delay delay,, depe dependi nding ng upon upon the the caus causat ativ ivee circumstances.
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Kody Elecot Ltd v. Down Town Hospital
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PROCEEDINGS AGAINST DISHONOUR OF CHEQUE
Prior to the incorporation of chapter XVII in the Negotiable Instruments Act in 1988, to deter and penalize the issue of worthless cheques, it was only under the provisions of the Indian penal Code 1860 (IPC) that the drawer of a cheque could be criminally prosecuted if it could be shown that he cheated someone by issuing the cheque. Even after the introduction of the specific provisions in the Negotiable Instruments Act, a drawer can be prosecuted under IPC for cheating, but he cannot be prosecuted and punished for the same same offenc offencee under under both both the enactment enactments. s. Mens Mens rea or dishone dishonest st intent intention ion must must be established to prove cheating, but it is not an essential element of an offence under section 138 of the Negotiable Instruments Act. Criminal Proceeding – Chapter XVII of the Negotiable Instruments Act
Chapter Chapter XVII XVII insert inserted ed by the Bankin Banking, g, Publi Publicc Financ Financial ial Instit Instituti utions ons and Negoti Negotiabl ablee Instruments Laws (Amendment) Act, 1988 provides for penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts or for the reason that the amount exceeds the arrangement made by the drawer. As per the penal provisions under the Act, the drawer, committing an offence under Section Section 138, is liable to be punished punished with imprisonment imprisonment for a term which may extend to two years, or fine which may extend to twice the amount of the cheque or both. Summary Proceeding - Order 37 of the Code of Civil Procedure
When a cheque is dishonoured, the holder or payee of the cheque can sue the drawer or endorser for the recovery of amount alongwith interest. Besides a civil suit for recovery of the amount, proceeding in a summary manner can be initiated under Order 37 of the Code of Civil Civil Proce Procedur dure. e. The advant advantage age of suing suing under under chapter chapter XXXVII XXXVII of Civil Civil Procedure Code is that the defendant is not allowed in such cases to defend the suit without leave obtained from Court and it is provided further that a decree passed under the said Order, may be executed forthwith. If no such leave is applied for or granted ,the allegations in the plaint shall be deemed to be admitted, and the plaintiff is entitled to a
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decree for the principal sum and also the interest as calculated under Section 9 and 80 of the Negotiable Instruments Act, 1881. Criminal prosecution under section 138 does not bar a civil action against the drawer on the dishonoured cheque. In Medical Chemicals & Pharma P Ltd v. Biological E Ltd. , the Supreme Court said: "Both criminal law and civil law remedy can be pursued in diverse situations. As a matter of fact, "they are not mutually exclusive but clearly co-extensive and essentially differ in their content and consequence". In addition to the remedies available under the Act the payee can also resort to remedies availabl availablee under under Civil Civil Proced Procedure ure Code Code and Consum Consumer er Protec Protecti tion on Act. Act. In Pankajbhai In Pankajbhai Nagjibhai Patel v. State, State, it has been held that in view of the limit of fine as prescribed in Section 29(2), Code of Criminal Procedure, the Magistrate who thinks it fit that the complainant must be compensated for loss can resort to section 357(3) of the code and can award compensation to the complainant for which no limit is prescribed in Section 357(3). The power of Courts to award compensation is not ancillary to other sentences but it is in addition thereto.
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OFFENCES - CHEATING AND FORGERY
Cheating being an offence is defined under Section 415 of the Indian Penal Code as follows: "Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to "cheat". Explanation. A dishonest concealment of facts is deception within the meaning of this section." In order to order to bring the case within the definition of Cheating under section 415 of the IPC, it has to be shown by the prosecution that there was some inducement on the part of the accused persons and the said inducement was made fraudulently or dishonestly with a view to deceive the complainant. It is further to be shown by the prosecution that due to deception practiced by the accused persons, the person so deceived had delivered the property to the accused persons or had given consent that the accused person shall retain that property. To hold a person guilty of the offence of cheating it has to be shown that his intention was dishonest at the time of making the promise. Whenever a cheque issued with dishonest intentions is dishonoured, the drawer of the cheque can be proceeded against under sections 417 & 420 of the IPC by the payee or holder in due course of the cheque. ji Madhavji v. Emperor [AIR Emperor [AIR 1930 Bom 179] it was observed that ‘it was for In Keshav In Keshavji the prosecution to establish facts which point prima facie to the conclusion that the failure to meet the cheque was not accidental but a consequence expected and therefore, intended by the accused. It will then be for the accused to establish any facts that may be
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in his favour which are specially within his knowledge and as to which the prosecution could not be expected to have any information’. A mere allegation that a cheque issued by the accused to the complainant had been dishonoured is not sufficient to establish the offence of cheating under section 415 of the IPC. Emperor [AIR 1933 Pat 183] it was observed that the act of drawing In Baijnath In Baijnath Sahay v. Emperor [AIR a cheque implied at least three elements: (a) that the drawer has an account with the bank in question; (b) that he has authority to draw on it for the amount shown on the cheque; (c) that the cheque as drawn, is valid order for the payment of the amount, or that the present state of affairs is such that in the ordinary course of events, the cheque will on future presentment be dishonoured. Drawing of a cheque does not imply a representation that the drawer already had the money in the bank to the amount shown on the cheque, for he may either have authority to overdraw, or have an honest intention of paying in the necessary money for before cheque can be presented. Thus mere dishonour for lack of funds does not amount to cheating; for cheating to be established a mental element to deceive is necessary. Cheating by Personation
Section 416 of IPC defines cheating by personation as follows: "A person is said to cheat by personation if he cheats by pretending to be some other person, or by knowingly substituting one person for another, or representing that he or any any othe otherr per person son is a pers person on othe otherr than han he or such uch othe otherr pers person on reall eally y is.
Explanation. -The offence is committed whether the individual personated is a real or imaginary person. person." The personation referred to in this section may be either by words or by conduct. The offence under section 416 of IPC owes its gravity to the fact that it affects not only the person deceived but also the person personated.
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Offence of cheating by personation is punishable under section 419 of IPC whereas general cheating is punishable under section 417 and section 417 of IPC. Forgery
Section 463 of IPC defines forgery as: "Who "W hoeve everr make makess any any fals falsee docum document entss or elec electr tron onic ic reco record rd part part of a docum documen entt or electronic record with, intent to cause damage or injury, to the public or to any person, or to support any claim or title, or to cause any person to part with property, or to enter into any express or implied contract, or with intent to commit fraud or that fraud may be committed, commits forgery." Section 464 of IPC deals with making a false document and provides as under: A person is said to make a false document or false electronic recordFirstly -Who dishonestly or fraudulently makes, signs, seals or executes a document or part of a document document or makes or transmits transmits any electronic electronic record or part of any electronic electronic record record,, affixe affixess any digita digitall signat signature ure on any electr electroni onicc record record,, or makes makes any mark mark denoting the execution of a document or the authenticity of the digital signature, with the intention of causing it to be believed that such document or part of document, electronic record or digital signature was made, signed, sealed, executed, transmitted or affixed by or by the authority authority of a person by whom or by whose authority he knows that it was not made, signed, sealed, executed or affixed; or Secondly- Who, without lawful authority, dishonestly or fraudulently, by cancellation or otherwise, alters a document or an electronic record in any material part thereof, after it has been made, executed or affixed with digital signature either by himself or by any other person, whether such person be living or dead at the time of such alteration; or
Thirdly- Who dishonestly or fraudulently causes any person to sign, seal, execute or alter a document or an electronic record or to affix his digital signature on any electronic record knowing that such person by reason of unsoundness of mind or intoxication
23
cannot, or that by reason of deception practised upon him, he does not know the contents of the document or electronic record or the nature of the alterations. Explanation 1 – A man’s signature of his own name may amount to forgery. Explanation 1 – The making of a false document in the name of a fictitious person, intending it to be believed that he document was made by a real person, or in the name of a deceased person, intending it to be believed that the document was made by the person in his lifetime, may amount t forgery. Punishment for Forgery
Whoever commits commits forgery forgery shall be punished punished with the imprisonment imprisonment of either either for a term which may extend to two years or with fie or with both.10 Banker’s liability for payment made on forged cheques
Relationship between a banker and his customer is that of a debtor and creditor. When a cheque cheque with with a forged forged signat signature ure is presen presented ted,, the banker has no author authority ity to make make payments on it, and if he does make such payment he would be acting contrary to the law and would be liable to the customer for the said amount. A bank in such cases can escape liability only if it can show that the customer is not entitled to make a claim on account of adoption, estoppel or ratification. The rule of law in this regard can be stated as follows: When a cheque duly signed by a customer customer is presented before before a bank with whom he has an account there is a mandate on the bank to pay the amount covered by the cheque. However, However, if the signature signature on the cheque is not genuine, genuine, there is no mandate on the bank to pay. The bank when makes payment payment on such a cheque, cannot resist the claims claims of the customer with the defence of negligence on its part, such as leaving the cheque book carelessly so that the third parties could easily get hold of it. This is because a document in cheque form, on which the customers name as drawer is forged, is a mere nullity. The bank can succeed only when it establishes adoption or estoppel. 10
Section 465 of Indian Penal Code
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LIABILITY FOR STOPPED PAYMENT
A stopped stopped payment is usually usually requested if the cheque has been declared declared missing or lost. lost. But many a times the drawer, to escape his debt or liability has used it as an instrument of deception. The 1988 amendment in Section 138 of Negotiable Instruments Act is also silent about Stopped Payment. As discussed earlier, the contract between the customer and the bank is defined as a debtor- creditor relationship. This contract requires the bank to honor all valid and proper orders of the customer to pay amounts from his account with the bank, for as long as funds remain available in the customer's account. The customer's order, however, remains executory and can be rescinded until the bank makes payment. One of the reasons on account of which the banker can refuse to make the payment of a cheque is that the payment has been stopped by the drawer. Upon receipt of a timely stop payment order, the bank ceases to have authority to pay the item. A customer thus, has a right to give notice to his Bankers to stop payment of a cheque which he has issued. Generally a written notice, signed by the drawer is sufficient to stop the payment. A stopped payment is usually requested if the cheque has been declared missing or lost. In India, while there is as such no express provision relating to stop payment of cheques. However there are various various judgments regarding regarding this aspect. Indian Courts have covered covered this facet in Section 138 of Negotiable Instruments Act, which is related to dishonour of cheques. The discussion relating to stop payment has assumed importance in view of the amendment to the Negotiable Instruments law by the amendment in 1988. Prior to this amendment, people issued cheques knowing well that the cheque is not going to be honored on presentation, and they tried to create circumstances in which the bank would return the cheque with such endorsements as "stopped payment", "refer to drawer" or "A/C closed". These were some of the tricks used by the drawer to escape the penal liability, which was attached to Section 138 o f Negotiable Instruments Act.
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The question that arises is whether a drawer who stops the payment having insufficient funds in his account can be held liable under Section 138 of the Negotiable Instruments Act? In this regard various judgments of High Courts and the Supreme Court have been reviewed in order to find out a solution to the abovementioned issue. Views taken by various High Courts Abdull Samod Samod v. Satya Satya Naray Narayan an Maha Mahavi vir r High In Abdu High Cour Courtt of Punj Punjab ab and and Harya Haryana na thoroughly analyzed section 138 of the Act. Hon’ble Mr. Justice A.P. Chowdhury stated that there are five ingredients, which must be fulfilled. These are as follows: 1. The cheque cheque is drawn drawn on a bank for the the dischar discharge ge of a legally legally enforc enforceab eable le debt or other liability. 2. The cheq cheque ue has return returned ed by the bank bank unpa unpaid. id. 3. The cheque cheque is returne returned d unpaid unpaid because because the amount avail availabl ablee in that that account account is insufficient for making the payment of the cheques. 4. The payee payee gives a notice notice to the drawer drawer claimin claiming g the amount amount within within 15 days days of the the receipt of the information by the Bank and 5. The drawer drawer fails fails to make make payment payment within within 15 days days of the the receipt receipt of notice. notice. In this case the respondent respondent filed a complaint complaint with the allegations allegations that the accused accused had, inter alia, alia, issued a cheque dated June 9, 1989, for Rs. 22,000 in connection with an amount which had become due on account of purchase of some raw material by him. The cheque was returned unpaid by the bank with the remarks "Payment stopped by the drawer". The complainant sent the requisite notice, but the accused failed to make the payment. It was stated by the Hon’ble Justice B.M. Thulasidas that:
26
"The allegations in the complaints, in my view, do make out a prima facie case against the petitioners. Before filing the complaints, the respondent ha d taken care to abide by the relevant legal provisions. Indeed, it is not the case of the petitioners that no amount is due to the respondent. The issuance of cheques and their dishonour, followed by notices of demand and failure to pay are not matters which had been challenged. That the payment was countermanded by a stop memo is of no consequence. That hardly affects the right of the respondent to initiate proceedings under the Act. It has the same effect as closing the account as far as he is concerned. The object of the provision cannot be allowed to be defeated by such ingenuous action". Similarly, in Mrs. R. Jayalaxmi v. Mrs. Rashida and as per the Punjab and Haryana Court in Mrs. Rama Gupta v. Bakesman’s Bakesman’s Home Home Product Limited Patiala, Patiala, it has been held that if a cheque was returned with an endorsement “refer to drawer” and "payment countermanded by the drawer" then it was not an offence. Thus relying on this it was held that when the respondent stopped the payment of the cheques in question, there was no question of facts constituting an offence punishable under section 138 of the Negotiable Instruments Act. However, it is significant to note, what is relevant for the purpose of determining an offence under section 138 of the Negotiable Instruments Act is whether the drawer of the cheque had arranged for payment or had made the payment of the amount covered by the cheque within the period of 15 days prescribed under said section and not the reason for which cheques were dishonored by the Bank. The above laid proposition has been supported by various High Courts. Kerala High Jacob, where the court was Court in the case of Calcutta Sanitary Wares v. C. T. Jacob, considering a situation whereby the cheque was initially dishonoured on the basis of a stop-payment memo. The court held that "the object of the provision cannot be allowed to be defeated by such ingenious action". The court took the view that dishonour presupposes non-payment as the funds in question were not forthcoming and that in these circumstances also, the failure to pay the amount within 15 days of the notice of demand
27
would still constitute an offence as any other view would defeat the specific provisions of section 138. M. M. Malik v. Prem Kumar Goyal , The Punjab and Haryana High Court in the case of of M. analysed the aforesaid sections and held that the cause of action will be complete when the drawer of the cheque fails to make payment within 15 days of the receipt of the notice contemplated by proviso (b) and that the offence shall be deemed to have been committed only only from from the the date date when when the the noti notice ce peri period od expi expire res. s. The The court court had had cons constr true ued d the the endorsement "refer to drawer" as the bankers inability to honour the cheque for want of funds in the account of the drawer and further held that as far as the jurisdiction was concerned, the principle that the ‘debtor has to find the creditor” would apply and that the court within whose jurisdiction the creditor is located will have jurisdiction to entertain the complaint. Rakesh h Menkumar Menkumar Porwal v. In the Division Bench decision of Bombay High Court in in Rakes Narayan Dhondu Joglekar , one of the issues was regarding the correct manner in which the time-frame as is prescribed in sections 138 and 142 of the Negotiable Instruments Act should be computed. The Hon’ble Court held that "A clear reading of section 138.....If, for instance, the closure of an account or the stoppage of payment or any other of the commonplace reasons for dishonour were to be justifiable, then, the Legislature would have set these out in the section as exceptions not constituting an offence. No such intention can be read into section 138, as none exists. The solitary exception made by the Legislature is with regard to the drawer being offered a final opportunity of paying up the amount within 15 days from the receipt of notice which, in other-words, provides a last opportunity to prove one's bona fides. It is obvious, that having regard to the widespread practice of issuing cheques which are dishonoured and the many ingenious methods of avoiding payment that are practiced, the Legislature has opted for a non-nonsense situation. The possibility has not been overlooked whereby an account any inadvertently be overdrawn or a dishonour may be for technical reasons or where a genuine mistake has occurred and the grace period provided for by the Legislature after service of notice on the drawer is in order to afford an opportunity to the
28
drawer to rectify these. Undoubtedly, even when the dishonour has taken place due to the dishonesty of the depositor, the drawer is still given a last chance to act otherwise. Consequently, the reasons for dishonour even if they be very valid as was sought to be pointed out in this case, should not and cannot be taken into account by a Magistrate when such a complaint is presented" The above mentioned case-laws supports the preposition that while holding any drawer liable under Section 138, the Court should first see that whether payment was made to the within 15 days of notice or not. The reason for dishonour is immaterial because if the drawer is bonafide then he may make the payment of the amount due under the cheque within the grace period i.e 15 days. Views of the Supreme Court
Hon’ble Supreme Court has narrated four key Judgments where the drawer was held liable for Stop payment of cheques. However there is only one judgment which deals with the above laid preposition. In M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s. Indian Technologists & Engineers (Electronics) Pvt. Ltd. and another , a cheque was presented by the complainant on 28-1-1990, through their bankers M/s. Hyderabad Bank for realisation, with the promise by the accused, that the same will be honoured when presented. However, the said cheque was dishonoured with the banker's endorsement dated 29-11-1990 which stated "(i) refer to drawer, (ii) instructions for stopping payment and (iii) (iii) stamped stamped exceeds arrangements arrangements." ." Appellant Appellant filed filed complaints complaints under Section Section 138 of the Negotiable Instruments Act, 1881 for dishonour of cheque for insufficiency of funds in the accounts of the accused. It was held by the Hon’ble Supreme Court that: “It would thus be clear that when a cheque is drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person out of the amount for the discharge of the debt in whole or in part or other liability is returned by the bank with the endorsement like (1) in this case, "I refer to the drawer" (2) "instr "instruct uction ionss for stoppa stoppage ge of paymen payment" t" and (3) "stamp "stamp exceeds exceeds arrang arrangeme ement" nt",, it
29
amounts to dishonour within the meaning of Section 138 of the Act. On issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied". The position of Law in this regard has changed dramatically from the 1990’s till date, due to the amendment amendment that has been brought into the section. A close look on the judgments judgments of various High Courts shows that the Courts relied on the presumption that the offence referred to in Section 138 can be made out only on bouncing of a cheque on the ground of inadequate balance in the account concerned. Where the cheque is returned unpaid on other grounds, the same has not been made an offence or where the payment was countermanded then it was without an offence. Courts during that time seemed to be more in favour of the drawer. However, after the recent judgments of the Supreme Court, the burden has now shifted to the drawer and a presumption has to be drawn in favour of the holder of the cheque. As explained earlier, a plain reading of section 138 of the Negotiable Instruments Act makes it clear that the words "either because of the amount standing to the credit of that account is sufficient or that it exceeds the amount ..." have been specifically used. It would, therefore, mean that only two contingencies are contemplated and as such, the words "... either .... or" have been used. It is, therefore, clear that the cheque should be dishonoured either for the insufficiency of the amount or, because it exceeds the amount arranged to be paid from that account. No third contingency or eventuality has been conte contemp mpla late ted d and and the the spec specif ific ic clea clearr word wordin ing g of sect sectio ion n 138 138 elim elimin inat ates es any any thir third d contingency other than what is mentioned in the section itself. It need not be stated that a cheque can be dishonoured dishonoured for so many reasons and there may be so many eventualiti eventualities es in which the payee is denied payment by the bank. For example, mentioning the date incorrectly or some corrections not initialled or the difference in between the amount mentioned in figures and words are certain other contingencies in which the cheque will be certainly dishonoured and would be returned as unpaid. It is not in respect of any of
30
these contingencies that the dishonour of a cheque has been made penal under section 138 of the said Act. Section 138 of the Negotiable Instruments Act is a penal provision wherein if a person draws a cheque on an account maintained by him with a banker for payment of any amount of money to another another person from out of that account for the discharge, discharge, in whole or in part of any debt or other liability, is returned by the bank unpaid, on the ground eith either er becau because se of the the amou amount nt of money money stan standi ding ng to the the cred credit it of that that acco account unt is insufficie insufficient nt to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence. However with regard to "Payment stopped by the drawer" this section does not mention anything specifically. Whatever may be ground or reason on the basis of which the cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or "signature differ" or any other ground, an offence under the section is made out and the drawee has full right to initiate proceedings u/s 482 CrPC. It is also important that the time restriction given in Section 138 (c) also get attracted in case of stop payment when a notice as required by the provision is sent to the drawer. It is seen that there are manifold reasons for the dishonor of cheques by banks but there is statutory mandate upon the payee under Section 13 (b) of Negotiable Instruments Act for giving a notice demanding the payment of the amount of said cheque, within 15 days from the date of the information as to bouncing of the said cheque from the drawer of the cheque and upon failure to make payment of the amount by the drawer within 15 days, offence under section 138 is deemed to have been committed. Moreover the decision of the Supreme Court in Electronics Trade & Technology Development Corporation Ltd is explicit and has decided all sorts of controversies in relation to bouncing of the cheque due to payment stopped by the drawer. It has expressly held that if on issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay
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the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied. It can be concluded that whatever may be the ground or reason on the basis of which the cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or "signature differ" or any other ground the offence under the section is made out and the drawee has full right to initiate proceedings and while deciding the case the Court should see that whether payment has been bee n made by the drawer within 15 1 5 days of notice issued by the drawee after the dishonour of cheque.
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DRAWER’S LIABILITY FOR DISHONOUR OF CHEQUE
Section 30 of the Negotiable Instruments Act, 18 81 reads as follows: "the drawer of a bill of exchange or a cheque is bound, in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by, the drawer". Section 30 makes it imperative that the notice of dishonour should of necessity be served on to the drawer of such cheque. It is clear that the drawer shall be bound to compensate the payee or the holder, as the case may be, if only he has been served with the notice of dishonour. Section 138 of the Negotiable Nego tiable Instruments Act requires that the payee or the h older in due course of the cheque to issue a notice in writing to the drawer making a demand for payment of the cheque amount. Such notice must be given within 30 days of information from the bank regarding the return of cheque as unpaid. The requirement of giving of notice is mandatory. There is no mode prescribed under section 138 for serving the notice. It is sufficient that the notice in writing is served on accused. Where no notice making demand for payment was served upon the drawer as contemplated under clause (b) and clause (c) of Section 138, which would mean that no demand has been made within the specified time from the date of dishonour of cheque in question, conviction will not be sustainable11. Consequence of part payment by drawer after issue of notice
Section 138 clearly shows that in the event of the drawer of the cheque failing to make the the payme payment nt of the the said said amoun amountt of mone money, y, a pros prosec ecut utio ion n can can be main mainta tain ined. ed. The The expression expression "said amount of money" can only denote the amount for which the cheque is drawn and cannot relate to a part of it. Even where part payment is made by the drawer after issue of statutory notice, the prosecution can no t be quashed12.
11
Adhikari (B) v. Ponraj 1996 Cri LJ 180 (Mad)
12
Ruby Leather Exports v. Venu (K) (1995) 82 Comp Cas 776 (Mad).
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Liability of drawer after deposit of entire amount during trial
As stated by the Supreme Court once the offence is committed, any payment made subsequent thereto will not absolve the accused of the liability of criminal offence, though in the matter of awarding of sentence, it may have some effect on the court trying the offence. But by no stretch of imagination, a criminal proceeding could be quashed on account of deposit of money in the court or that an order of quashing of criminal proceeding, which is otherwise unsustainable in law, could be sustained because of the deposit of money in this court. The deposit of money by the drawer, therefore, during the trial is of no consequence13. Death of Drawer
The criminal liability can not be fastened to the heirs and the legal representatives of the person who is said to have been guilty of the offence in question. The cheque presented for realization by the complainant was returned on the ground of insufficient funds. The notice sent was returned returned with postal endorsement endorsement 'party expired'. expired'. Wife and daughters daughters of the drawer of the cheque cannot be prosecuted for the offence under Section 138 of the Act for the alleged failure of the drawer in meeting the liability to pay the amount covered by the cheque which was dishonoured in response to the notice sent by the complainant14. Drawer declared insolvent
The drawer cannot escape from the criminal liability by putting forward he plea that he is not bound bound to discha discharge rge the liabilit liability y mentio mentioned ned in the complain complaintt as he was already already declared as an insolvent, especially when there is section 139 permitting the court to presume that there is an existing liability and the issuance of the cheque was made towards the discharge of the said liability.
13
Rajneesh Aggarwal v. Amit J. Bhalla 2001 Cri LJ 708 (SC)
14
Bhupinder Lima v. State (2000) 99 Comp Cas 424 (AP)
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DRAWEE’S LIABILITY FOR DISHONOUR OF CHEQUE Rightful Dishonour - when bank may refuse to honour
When there is the relationship of banker and customer between the parties, the banker is under an obligation to pay cheques when a mandate to pay is received from the customer, or when a cheque is issued. Howev However er,, ther theree may may be a number number of circ circum umst stan ance cess when when the the bank bank has has no other other alternative but to return the cheque and in all such cases the bank is fully justified in returning the cheque. These are the cases which may be termed as a countermand from the customer which means an order to revoke the former instructions and annulling the former mandate given by the customer to the bank to honour the cheques and it also means the situations resulting from the closure of account by the customer, prohibitory 'garnishees' orders having been received from the court or orders for payment having been received from the court or orders for payment having been received under Section 226 (3) of the Income-Tax Act, 1961 and similarly it also means the situation when there is a restrained order from the court, notice of death of the customer, lunacy of the customer, notice of loss of cheque or forged signatures on the cheque. Wrongful dishonour of cheque – Drawee/ bank’s liability to pay damages
In case all the conditions which are necessary for the payment of a cheque are present and have been fulfilled then if the bank dishonours a cheque it will amount to a breach of contract for which the banker is liable to pay damages. The liability of drawee of cheque in case of a wrongful dishonour has been dealt with under Section 31 of the Negotiable Instruments Act, 1881. Section 31 states as follows: "the drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default".
35
The position of law has also been made clear in a number of authoritie authorities. s. Reference may be made to the following: In New Central Hall v United Commercial Bank Ltd. the Madras High Court held that where a banker having sufficient funds of a customer in his hands fails, even by mistake to honour cheque issued by the customer, the customer has a right to claim damages. In Jogendra Nath Chakrawarti v. New Bengal Bank Limited 15, it was held, "where the banker, being bound to honour his customer’s cheque, has failed to do so, he will be liable in damages. If, special damage, naturally ensuing from the dishonour, is proved, it will be properly taken into account in assessing the amount of the damages. If the customer be a trader, the court may properly award substantial damages, in the absence of proof of special damages. In other cases the customer will be entitled to such damages as will reasonably compensate him for the injury which, from the nature of the case, he has sustained. All loss flowing naturally from the dishonour of a cheque may be taken into account in estimating the damages. Compensation for wrongful dishonour
Wrongful dishonour of a cheque exposes the drawee bank to statutory liability to the drawer to compensate him for 'any loss or damage cause by such default'. de fault'. The principle of awarding compensation to the drawer of a cheque is reparation for the injury sustained or likely to be sustained by reason of dishonour. In almost every case the drawer can recover substantial damages against the drawee on the basis of injury to his credit, although he may not be able to prove that he had suffered actual pecuniary loss through the dishonouring of the cheque16. However, there appears to be a distinction between a trader and a non-trader in this respect, while a trader is always entitled to substantial damages for dishonouring of his cheque, a non-trader will be entitled only to nominal damages in the absence of an allegation and proof of substantial damages17.
15 16 17
AIR 1939 Cal. 63 Sridhar v Tyrwitt, (101) A.W.N. 113; Rolin v. Steward (1854) 4 C.B. 595 Gibbons v. Westminster Bank (1939) 3 All E.r. 577
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The General General rule follow followed ed by the courts courts in awardi awarding ng damage damagess is that that damages damages are awarded for foreseeable foreseeable and actual loss suffered suffered and the quantum of damages is usually based on the principle of ‘restitutio ‘restitutio in intgegram’ intgegram’ i.e. restoring the person to the position he would have been in if he had not suffered a damage. But in case of trademan’s cheque the damages awarded are inversely proportional to the amount on the cheque. Thus, smaller the amount of the dishonoured cheque, greater are the damages paid. The reason behind this rule is, businessman’s loss of reputation or status or goodwill is once again inversely proportional to the amount of the cheque.
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DISHONOUR OF CHEQUE - LIABILITY OF A COMPANY
Sinc Sincee a comp compan any y is an arti artifi fici cial al pers person on it is incap incapab able le of commi committ ttin ing g any any crim crimee personally personally.. However, However, if certain certain crimes crimes are committed committed by its officials officials in the name of the company then in such circumstances a company is said to have committed these crimes. So far as the punishment is concerned, its liability can be only in terms of fine. The company shall be responsibl responsiblee for the acts of commission commissionss and omissions of the persons persons working for the company. Section 141 (1) of the Negotiable Nego tiable Instruments Act, 1881 reads as follows: "If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and proceeded against and punished accordingly; Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence". Thus, Sub-section (1) of Section 141 (1) provides that if a person committing an offence under the section is a company, every person who, at the time when the offence was committed, was in charge of, and responsible to, the company for conduct of its business, as well as the company shall shall be deemed to be guilty of the offence and shall be liable liable to be proceeded against and punished accordingly. The offender in Section 138 is the drawer of the cheque. However, if the person provides that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission commission of such offence, he shall not be liable to punishment under this Section. SubSub-se sect ctio ion n (2) (2) furt further her prov provid ides es that that wher wheree any any offe offence nce unde underr this this Act Act has been been committed by a company and it is proved that the offence has been committed with the
38
consent or connivance of, or is attributable to, any neglect on the part of, any director, Manager, secretary, or other office of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. In case of a company the day to day functions are not carried out by all the directors but the board delegates the powers to one or two directors or officers of the company like the Manager, Secretary, etc. Besides the Manager there are a number of other officers or persons who are liable for the affairs of the company. Similarly, all the partners in the partnership firm, Karta of the HUF, a Secretary of the Trust, Club, Co-operative Society for the purpose of the present section are to be considered as in charge of the company and in case any cheque is drawn by these persons then the company is liable irrespective of the fact that such a person may not be holding due powers of issuing a cheque. Where the cheques were issued by the authorized signatory will not preclude prosecution of directors18. The Vicarious liability of a person for being prosecuted for commission of an offence by the company arises if at the time when the offence is alleged to have been committed, he was in charge of and was responsible to the company for the conduct of its business. It is necessary that there have to be averments in the complaints that the petitioners were in charge of and were also responsible to the company for the conduct of its business of the company19. Thus, we can conclude that three categories of persons can be discerned from the said provision who are brought within the purview of the penal liability through the legal fiction envisaged in the section. They are: (1) The company, the principal offender, o ffender, which committed committed the offence; (2) Every one who was in charge of and was responsible responsible for the business of the company; (3) Any other person who is a director or a manager or a secretary secretary or officer of the company, company, with whose connivance or due to whose neglect the company has committed the offence20. 18
Ashok Muthanna v. Wipro Finance Ltd. (2001) 105 Comp Cas 203 (Mad).
19
Gyan Chand Kotia v. Indian Renewable Energy Development Agency Ltd. (2000) 99 Comp Cas 517 (Del).
20
Anil Hada v. Indian Acrylic Ltd. (2000) 99 Comp Cas 36 (SC)
39
However, in case an employee of the company proves that the offence was committed without his knowledge or that he had exercised all due diligence, then he may not be prosecuted under the Act. In case he proves that after due diligence he could not prevent the commission of the offence, it may provide a valid defence. Only the person can be set free but not the company because the scope is limited to Section 141(1) only. This is because under Section 138 the company is a drawer 21. Winding up proceedings pending
A company cannot escape from a penal liability under section 138 of the Act on the premise that a petition for winding up of the company has been presented and was pending during the relevant time. The Company cannot avert its liability on the mere ground that the winding petition was presented prior to the company being called upon by a notice to pay the amount of the cheque. There is no provision in the Companies Act, 1956 which prohibits enforcement of the debt due from the company. When a company goes into liquidation, enforcement of debt due from the company is only made subject to the conditions prescribed therein. But that does not mean that the debt has become unenforceable altogether 22.
21
Sivakami (M) v Bharat Ginning & Oil Mill Factory 2000 Cri LJ 1043 (Guj)
22
Pankaj Mehra v State 2000 Cri LJ 1781 (SC)
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INTERNATIONAL LAW ON LIABILITY FOR DISHONOUR OF CHEQUES
A cheque may be drawn in one country and payable in another country and in such cases, Sections 134 to 137 of the Negotiable Instruments Act provide the legal rules, which are discussed below. The Law governing the liability of the parties
According to Section 134 of the Negotiable Instruments Act, "in the absence of a contract to the contrary, the liability of the maker of drawer of a foreign foreign promissory promissory note, bill of exchange exchange or cheque is regulated in all essential essential matters matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and endorser by the law of the place where the instrument is made payable". The liability of the maker of a cheque under the Indian law is governed by the law of the place of drawing, which is the place of payment so far the drawer is concerned concerned which is in accordance with the International Law. In case of an acceptor, his liability is governed by the place of the payment, and in this respect Indian law follows the International law. The measure of damages and the rate of interest are governed by the law of the place where the bill is payable in the case of the acceptor 23, and by the law of the place where the drawing is made in the case of the drawer 24. Dishonour of Foreign Instrument
According to Section 135 of the Negotiable Instruments Act, "Where a promissory note, bill of exchange or cheque is made -payable in a different place from that in which it is made or endorsed, the law of the place, where it is made paya payabl blee deter determi mines nes what what cons consti titu tute tess dish dishono onour ur and what what noti notice ce of dish dishon onour our is sufficient".
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Cooper v. Waldegrave (1840) 2 Beav 282
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Gibbs v Fremont (1853) 9 Ex 25and
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Section 135 is an application of the maxim of international law locus regit actum, The obligation incurred by accepting a bill of exchange is measured by the law of the place where it is payable, that is, the manner of enforcing the obligation and the mode of performanc performancee of the obligation obligation are governed by the law of the place of performance performance.. The duties of the holder too are determined by the law of the place of performance. The time or the date of the performance of the obligation and the allowance of the days of grace are determined by the law of the place of payment. By English Law, days of grace are allowed allowed on bills bills payable after date, but by French French law, they are not allowed. So, when a bill was drawn in England payable in Paris three months after date, and when by the law of France the maturity of all the bills was postponed for a month it was held that it will be governed by the law of France where it was payable. The proper time for payment and for the notice of dishonour is that fixed by the law of the country where the payment is to have been made. Though the present section refers only to dishonour and notice of dishonour, demand at the proper time by the holder is necessary in order to constitute dishonour. Thus, it is to be inferred that the time when a bill becomes payable is to be determined by the law of the place of payment. The law of the place where a bill is made payable determines what constitutes dishonour and what notice of dishonour will be sufficient. The section applies only to a case where the instrument is made payable at a place different from that in which it is made, but the rule is the same in the case of instrument payable in the same place where it is made, because that place itself being the place of payment, the law of that place determines the incidents relating to dishonour. Since the drawer of a bill of exchange are sureties for the due performance of the obligations incurred by the acceptor or maker, the law of the place where the bill is payable indirectly affects their obligation also. This is the reason why the necessity and sufficiency of a demand or a notice of dishonour in order to charge any other party is to be determined by the law of the place of performance. Instrument made out of India but according to Indian law
According to Section 136 of the Negotiable Instruments Act,
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"If a negotiable instrument is made, drawn accepted or endorsed outside India, but in accordance with the law of India the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or endorsement made thereon within India". A negotiable instrument generally does not embody a single contract but contains a series of contracts. Though prior agreements on it are invalid by the law of the country where they were entered into, any subsequent agreement on it created by acceptance in India is valid, and can be enforced against persons who become parties to it in India. This section seems to have been taken from Article 85 of the German Bills of Exchange Act, which is also embodied in the English Bills of Exchange Act, section 72, clause (1). The invalidity of an instrument under foreign law does not affect the liability between persons who subsequently become parties to it in India. The section would not apply to the cases where the person sought to be charged had become a party previous to the acceptance in India. Presumption as to Foreign Law
According to Section 137 of the Negotiable Instruments Act, "The law of any foreign foreign countr country y regard regarding ing promis promissor sory y note, note, bills bills of exchang exchangee and cheques shall be presumed to be the same as that of India, unless and until the contrary is proved". Courts of India do not take judicial notice of foreign law. Any person relying on such law must prove it by evidence and in the absence of such evidence, the courts shall presume the law of any foreign country to be the same as that of our country. In India, proof of foreign law may be given in three ways: (a) (a) By means means of law law books books,, prin printe ted d and publis publishe hed d unde underr the the author authorit ity y of the the government of the foreign country, and the reports of rulings of the courts of such country contained in a book purporting to be a report of such rulings.
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(b) By oral testimo testimony ny of expert. expert. But the evidence evidence given must be that of a person person specially skilled in such foreign law. The evidence of a person who has merely studied foreign law is not permissible, because the word 'skilled' shows that he must have had some practice in the application of the principles of that foreign law. (c) By the opinion opinion of foreign courts. courts. By the Statute Statute of 24 Vict, Ch II, Courts Courts in His Majesty’s dominions are empowered to state a special case to a superior court of any country in order to ascertain the law of that country and the certified copy of the opinion of the foreign court upon the case submitted to it shall be admitted to prove the foreign law.
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LAWS OF OTHER COUNTRIES ON LIABILITY FOR DISHONOUR OF CHEQUES Laws of Australia - Cheques and Payment Orders Act 1986
Section 69 of Cheques and Payment Orders Act 1986 defines dishonour as "A cheque is dishonoured if the cheque is duly presented for payment and payment is refused by the drawee bank, being a refusal that is communicated by the drawee bank to the holder or the person who presented the cheque on the holder's behalf." Section 70 of Cheques and Payment Orders Act 1986 provides for the liability of the drawer or indorser for dishonour of cheque. "A person who is the drawer or an indorser of a cheque that has been dishonoured is liable on the cheque whether or not the person is given notice by any person of the dishonour." As per section 71, subject to sub-section 17(1), section 59 and sub-section 60(1) of Cheques and Payment Orders Act 1986, the drawer of a cheque, by drawing the cheque, undertakes(a) that, on due presentment for payment, the cheque will be paid according to its tenor as drawn; and (b) that- (i) if the cheque is dishonoured when duly presented for payment; or (ii) if presentment of the cheque for payment is dispensed with by virtue of paragraph 59(a) and the cheque is unpaid after its date has arrived, the drawer will compensate the holder or an indorser who is compelled to pay the cheque.
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Laws of United Kingdom – Bills of Exchange Act, 1882
The Bills of Exchange Act 1882 codifies for the United Kingdom the law relating to bills of exchange, promissory notes and cheques. A cheque "is a bill of exchange drawn on a banker payable on demand".25 For the most part the rules of law applicable to bills payable on demand apply in their entirety to cheques. But there are certain peculiar rules relating to the latter which arise from the fact that the relationship of banker and customer subsists between the drawer and drawee of a cheque. For example, when a person has an account at a bank he is, as an inference of law, entitled to draw on it by means of cheques. The holder of a bill has special duties which he must fulfil in order to preserve his rights against the drawers and indorsers. They are not absolute duties; they are duties to use reasonable diligence diligence.. When a bill is payable after sight, presentment for acceptance is necessary necessary in order to fix the maturity of the bill. Accordingly Accordingly the bill must be presented presented for acceptance within a reasonable time. When a bill is payable on demand it must be presented for payment within a reasonable time. When it is payable at a future time it must be presented on the day that it is due. If the bill is dishonoured the holder must notify promptly the fact of dishonour to any drawer and indorser he wishes to charge. If, for example, the holder only gives notice of dishonour to the last indorser, he could not sue the drawer unless the last indorser or some other party liable has duly sent notice to the drawer. When a foreign bill is dishonoured the holder must cause it to be protested by a notary notary public. public. The bill must be noted for protest on the day of its dishonour. If this be duly done, the protest, i.e. the formal formal notarial certificate certificate attesting attesting the dishonour, dishonour, can be drawn up at any time as of the date of the noting. A dishonoured inland bill may be noted, and the holder can recover the expenses of noting, but no legal consequences attach thereto. In practice, however, noting is usual usually ly accep accepte ted d as show showin ing g that that a bill bill has has been been duly duly pres presen ente ted d and and has been dishonoured. Sometimes the drawer or indorser has reason to expect that the bill may be dishonoured by the drawee. In that case he may insert the name of a "referee " referee in case of 25
Section 73 of the Bills of Exchange Act 1882
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need." But whether he does so or not, when a bill has been duly noted for protest, any person may, with the consent of the holder, intervene for the honour of any party liable on the bill. If the bill has been dishonoured by non-acceptance it may be "accepted for honour supra protest". protest". If it has been dishonoured dishonoured by non-payment non-payment it may be "paid supra protest". When a bill is thus paid and the proper formalities are complied with, the person who pays becomes invested with the rights and duties of the holder so far as regards the party for whose honour he has ha s paid the bill, and all parties antecedent to him. him.26 Laws of New Zealand on Dishonour of Cheques
The Bills of Exchange Act 1908 codifies for the New Zealand laws relating to bills of exchange, promissory notes and cheques. In this Act, the provisions relating to dishonour of cheques are not separately dealt with under the chapter related to cheques in the Act and therefore it can be assumed that the provisions of dishonour of bills only apply in case of dishonour of cheques. Section 42 of the Bills of Exchange Act 1908 deals with dishonoured by non-acceptance "Where a bill is duly presented for acceptance and is not accepted within the customary time, the person presenting it must treat it as dishonoured by non-acceptance. If he does not, the holder shall lose his right of recourse against the drawer and indorsers". Section 43 of the Bills of Exchange Act 1908 further deals with the consequences of dishonour by non-acceptance "A bill is dishonoured by non-acceptance(a) Where it is duly presented for acceptance, and such an acceptance as is prescribed by this Act is refused, or cannot be obtained; or (b) Where presentment for acceptance is excused and the bill is not accepted. acce pted.
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Section 65 to 68 of the Bills of Exchange Act, 1882
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(2) Subject to the provisions of this Act, when a bill is dishonoured by non-acceptance an immediate right of recourse against the drawer and indorsers accrues to the holder. And, no presentment for payment is necessary." Section 42 of the Bills of Exchange Act 1908 deals with dishonoured by non-payment, it reads as follows "A bill is dishonoured by non-payment(a) Where it is duly presented for payment and payment is refused, or cannot be obtained; or (b) Where presentment is excused and the bill is overdue and unpaid. (2) Subject to the provisions of this Act, where a bill is dishonoured by non-payment an immediate right of recourse against the drawers or indorsers accrues to the holder." Section 48 of the Bills of Exchange Act 1908 deals with notice of dishonour. The section reads as follows: Subj Subjec ectt to the the provi provisi sions ons of this this Act, Act, wher wheree a bill bill has been been dish dishono onour ured ed by nonnonacceptance or by non-payment, notice of dishonour must be given to the drawer and each indorser, and any drawer or indorser to whom such notice is not given is discharged: Provided that(a) Where a bill is dishonoured dishonoured by non-acceptan non-acceptance ce and notice of dishonour dishonour is not given, the rights of a holder in due course subsequent to the omission shall not be prejudiced by the omission: (b) Where a bill is dishonoured by non-acceptance and due notice of dishonour is given, it shall not be necessary to give notice of a subsequent dishonour by non-payment unless the bill has in the meantime been accepted. Section 55 of the Bills of Exchange Act 1908 deals with the liability of drawer or indorser-
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(1) The drawer of a bill, by drawing it,(a) Engages that on due presentation presentation it shall be accepted accepted and paid according according to its tenor, and that if it is dishonoured he will compensate the holder or my indorser who is compelled to pay it, provided that the requisite proceedings on dishonour until duly taken; (b) Is precluded from denying to a holder in due course the existence of the payee and his then capacity to indorse. (2) The indorser of a bill, by indorsing it;(c) Engages that on due presentment presentment it shall be accepted accepted and paid according according to its tenor, and that if it is dishonoured he will compensate the holder or a subsequent indorser who is compelled to pay it, provided that the requisite proceedings on dishonour are duly taken; (d) Is precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawer's signature and all previous indorsements: (e) Is precluded from denying to his immediate or a subsequent indorsee that the bill was at the time of his indorsement a valid and subsisting bill. and that he had then a good title thereto. A comparative analysis of Indian laws and laws of the countries mentioned above, on liability for dishonour of cheques. Australian Laws
As seen above, the laws of other countries relating to the dishonour of cheques and the liability arising therefrom are more or less similar to the laws laid down in the Negotiable Instruments Act, 1881. However there are certain variations in laws of these countries relating to dishonour of cheques and are discussed below.
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As per Australian laws Section 70 of Cheques and Payment Orders Act 1986, in case of dishonour of a cheque a person who is the drawer or an indorser, of such cheque, is liable on the cheque whether or not the person is given notice by any person of the dishonour. In India demand notice is mandatory. Sub-section (b) of Section 138 of the Negotiable Instruments Act requires the payee or the holder in due course to issue a notice in writing to the drawer of the cheque within 15 days of the receipt of the information by him from the bank regarding the return of the cheque as unpaid. This implies that unlike required in the Negotiable Instruments Act, 1881 there is no need for the issue of demand notice to the drawer and the liability of the drawer or the indorser, as the case may be, shall arise as soon as the cheque has been dishonoured by the bank. UK Laws
Indian Laws and the UK Laws are very similar with respect to the provisions relating to the dishono dishonour ur of cheque chequess and the liabil liability ity arisin arising g theref therefrom rom.. As requir required ed under under the Nego Negoti tiab able le Inst Instru rume ment ntss Act, Act, 1881 1881 for for esta establ blis ishi hing ng the the liab liabil ilit ity y of the the draw drawer er for for dishonour of cheque, the holder must notify the drawer, of that fact of such dishonour of cheque. cheque. Similarl Similarly y in UK Laws, Laws, under under Bills Bills of Exchang Exchangee Act, Act, 1882, 1882, if a cheque cheque is dishonoured, the holder is required to notify the fact of dishonour to the drawer. New Zealand Laws
Under the Bills of Exchange Act 1908 Section 42 requires that when a cheque is duly presented for acceptance and is not accepted within the customary time, the person presenting it must treat it as dishonoured by non-acceptance. However, if he does not, the holder will lose his right of recourse against the drawer and indorsers. Further, Section 48 of the Bills of Exchange Act 1908 deals with notice of dishonour. The section states that if a cheque has been dishonoured by non-acceptance or by non payment, notice of dishonour must be given to the drawer and each indorser. However,
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any drawer or indorser to whom such notice is not given shall be discharged from his liability. CONCLUSION
The law relating to Negotiable instruments is the law of the commercial world which was enacted to facilitate the activities in trade and commerce, making provision of giving sanctity to the instrument of credit which would be deemed convertible into money and easily passable from one person to another. In the absence of such instruments, the trade and commerce activities were likely to be adversely affected as it was not practical for the trading community to carry on with it the bulk of currency in force. The main object of the Act is to legalise the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods. Chapter XVII was inserted in the Act 1988 with a view to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques. However the chapter is not comprehensive and lacks to cover the various aspects of the commercial transactions especially in view of the emerging ways of payment through the Internet and other electronic means. Section 138 also does not specifically cover the aspects such as where the payment has been stopped by the drawer or where the account has been closed prior to the endorsement endorsement of the cheque. These provisions provisions no doubt have served their purpose but they could be more elaborate in solving the dispute rather than merely relying on the Court judgments. Though insertion of the penal provisions have helped to curtail the issue of cheque lighth lighthear earted tedly ly or in a playfu playfull manner manner or with with a dishone dishonest st intent intention ion and the trading trading community now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonoured cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine, the only option left with the complainant is to file civil suit. The provisions of the Act do not permit any other
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alternative method of realization of the amount due to the complainant on the cheque being dishonored for the reasons of "insufficient fund" in the drawer’s account. However, the processes to seek civil justice is notoriously dilatory and recover by way of a civil suit may take inordinately long time therefore if the Government of India could establ establish ish a tribu tribunal nal to deal deal with with the dishon dishonour our of cheques cheques and the liabil liability ity arising arising therefrom, it could make the process of recovery of damages faster for the aggrieved part party. y. For For examp example le,, the the Debt Debtss Recov Recover ery y Trib Tribuna unals ls have have been been esta establ blis ished hed by the the Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial institutions. Establishment of a similar tribunal to deal with the cases of dishonour of cheques could perhaps provide a faster relief to the aggrieved party.
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BIBLIOGRAPHY
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Articl Articlee by T.N Pandey Pandey,, Disho Dishonour nour of chequ cheques: es: whethe whetherr all all direc director torss of a
company can be prosecuted in case of dishonour of cheques.
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