Dishonor of Cheque for Insufficiency of Funds

Section 138, Negotiable Instruments Act, 1881, deals specifically with the offense of dishonor of a cheque for insufficiency of funds in the account or drawer or if it exceeds the amount arranged to be paid by the drawer’s account.

As per Section 138, “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 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 offense and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both.”

Thus as per Section 138:

1. Account must be in the name of the drawer of the cheque.
2. Account must be maintained with a Banker
3. Payment shall be for discharges of any debt or other liabilities, in full or in part.
4. The cheque must be returned unpaid by the Bank either because of insufficient balance in the account or it exceeds the arranged funds in the account
5. Punishment will be either imprisonment for a term up to two years or fine up to twice the amount of the cheque or both

Provisions of Section 138 apply if the following conditions are fulfilled:

• 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.

• The payee or the holder in due course of the cheque, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within thirty days* of the receipt of information, regarding the return of the cheque as unpaid. *(within fifteen days w.e.f. 06-02-2003)

• The drawer of such cheque fails to make the payment of the said amount of money to the payee or to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. 
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There are some other related Sections of the NI Act as under:

Section 139 of the Negotiable Instruments Act, 1881 states that if a cheque is returned unpaid, it is presumed that the cheque was issued for the discharge of any debt or other liability. This presumption is in favour of the holder of the cheque and the burden of proof is on the accused. But if the accused proves, by presenting evidentiary proof, that they are innocent, then the burden of proof shifts to the respondent. 

 Section 140 of the Negotiable Instruments Act, 1881 states that it is not a valid defense that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. In other words, the drawer of the cheque cannot claim that they had no knowledge of the insufficiency of funds in their account at the time of issuing the cheque as a defense in a prosecution under section 138.

Section 141 of the Negotiable Instruments Act, 1881, is a crucial provision that deals with the liability of a Company or a Corporate entity in cases of offenses committed under Section 138 of the Act. Under Section 141, every person who, at the time the offense was committed, was in charge of, and was responsible to the company for the conduct of business, as well as the company itself, shall be deemed to be guilty of the offense. This includes directors, managers, secretaries, or any other officer of the company who was responsible for its business operations.

Section 142 provides that

1. Courts can take cognizance of any offense under section 138, only upon a complaint, in writing, to be made by the payee or the holder in due course of the cheque
2. Such complaint is to be made within one month of the date on which the cause of action arises 
3. Cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period
4. Courts presided by a Metropolitan Magistrate or a Judicial Magistrate of the first class or higher only can try any offense punishable under section 138.
5. The offense under section 138 shall be inquired into and tried only by a court within whose local jurisdiction it falls. 
   1. If the cheque is delivered for collection through an account, the place branch of the bank where the payee or holder in due course maintains the account, will be the place of jurisdiction. 
   2. If the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, will be the place of jurisdiction.
   3. 
      

There are good number of Law Cases related to Section 138. A few of them are briefed here below:

1. K. Bhaskaran v. Sankaran Vaidhyan Balan:

This case is significant as it laid down guidelines for determining the liability of a drawer in cases of dishonor of cheques. It emphasized that the drawer’s liability arises only when the cheque is presented during its validity period or within six months from the date it was drawn. 

2. Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd.: 

In this case, the Supreme Court held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque.

3. Hiten P. Dalal v. Bratindranath Banerjee:

In this case, the Supreme Court held that the drawer’s knowledge of insufficiency of funds is a crucial element for establishing the offense under Section 138. Mere issuance of a cheque without such knowledge is not sufficient to attract the penal provisions.

4. M.S. Narayana Menon v. State of Kerala:

This case dealt with the issue of whether a complaint under Section 138 could be filed against a company and its directors. The court held that if the drawer is a company, every person who was in charge of the conduct of the business of the company at the time of the offense would be deemed liable. 

5. P. Vijayan v. Rajendran:

In this case, the Supreme Court highlighted that the offense under Section 138 is a strict liability offense, and the intention of the drawer is not relevant. The drawer can be held liable even if the cheque was issued as a security and not for the discharge of a debt.

6. N. Harihara Krishnan v. J. Thomas:

The Supreme Court, in this case, clarified that the drawer’s liability under Section 138 arises only when the cheque is presented to the bank within the period of its validity or within six months from the date it was drawn, whichever is earlier. 

7. Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd.: 

In this case, the Supreme Court held that the dishonour of a cheque due to “stop payment” instructions from the drawer of the cheque would not absolve the drawer of his liability under Section 138 of the NI Act. The court, in this case, clarified that the holder of the cheque must prove that the cheque was issued for the discharge of a debt or liability. If the holder fails to establish this, the drawer may escape liability.

8. Deena Dayalu v. Ram Kishan Rohtagi:

This case highlighted the importance of strict compliance with the statutory requirements for sending a legal notice under Section 138, emphasizing that even minor deviations can render the notice invalid. 

9. Lalitha Ramesh v. M. Sriram:

In this case, the Supreme Court clarified that the notice of demand under Section 138 must be sent to the drawer within 30 days from the date on which the drawer receives the information regarding the dishonor of the cheque.

10. A.C. Narayanan Nair v. State of Maharashtra:

This case emphasized that the offense under Section 138 is a criminal offense, and the drawer’s liability is not extinguished merely by making payment after the filing of a complaint. The drawer must also pay compensation to the payee.

11. Dashrath Rupsingh Rathod v. State of Maharashtra : 

This case emphasized that the territorial jurisdiction for filing a complaint under Section 138 is determined by the place where the cheque is dishonored. In this case, the Supreme Court also held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque.

12. M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta: 

In this case, the Supreme Court held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque. 

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Stolen cheques encashed: District Consumer Disputes Redressal Commission directed this Bank to refund ₹5.5 lakh

 

The District Consumer Disputes Redressal Commission has directed Axis Bank to refund Rs.5.5 lakh, fraudulently withdrawn from a man’s bank account through stolen cheques.

The complainant, Shiv Parshad, of Gulmohar Colony in Kharar, had submitted that his landlord’s son stole eight leaves of his chequebook and withdrew Rs.5.5 lakh from his salary account in Axis Bank, Phase 7 on various dates in August and September 2018.

Parshad, who works as a gardener for PUDA, Phase 8, alleged that the bank did not verify the signatures on the cheques or take any precautions while disbursing the claimed amount.

Disposing of the complaint, commission president Sanjiv Dutt Sharma directed the bank to refund Rs.5.5 lakh to the complainant, along with interest at 9% per annum from the dates of withdrawal till actual payment. Besides, the bank was directed to pay Rs.1 lakh as compensation to the complainant for carelessness, lack of duty and negligence on their part.

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RBI enhances security features for cheques above ₹50,000: How it will work

Reserve Bank of India (RBI) today announced that it plans to introduce a mechanism called 'Positive Pay' in order to enhance safety features of cheques of value ₹50,000 and above.

The announcement by RBI Governor Shaktikanta Das came in order to keep consumer safety in focus and to lower the cases of fraud and abuse with respect to cheque payment.

Under the mechanism all cheques will be processed for payment by the drawee bank based on information passed on by its customer at the time of issuance of cheque.

Operational guidelines in this regard will be issued separately, Das said.

“Positive Pay is essentially an automated fraud detection tool. Very simply, it matches specific information related to the cheque presented for clearing, such as the cheque number, cheque date, payee name, account number, amount, and other details against a list of cheques previously authorized and issued by the issuer. Unless all the specified components of the cheque match exactly, the cheque will not be cleared," 

How will sitive Pay Mechanism work?

Under the Positive Pay system, an account holder shares the details of issued cheque to bank like Cheque Number, Cheque date, Payee name, Account number, Amount etc along with an image of the front and reverse side of the cheque, before handing it over to the beneficiary.

When the beneficiary submits the cheque for encashment, the cheque details are compared with the details provided to the bank through Positive Pay. If the details match, the cheque is honoured.

This will cover approximately 20% and 80% of total cheques by volume and value, respectively, RBI said in a statement.

On the other hand, ICICI Bank already offers this feature since 2016 via its iMobile application.

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Mistakes which you make while writing Cheque’s – Dont do it !

One of the most common ways to pay money to someone is through cheque’s. Cheque’s give you the flexibility to make payments to someone at some later date (post dated cheque) by writing it now at this moment. Writing a cheque seems to be such a simple task, but do you know that there are many weak links in writing cheques which can create a big problem for you.

If you are not careful while writing a cheque, it can be misused by someone else and potential of monitory loss to you along with unwanted headache. Today’s generation is very causal when it comes to writing  the cheques. In this article, I will cover 6 must know points which you should always practice writing the cheque’s . You can see these 6 points as a step by step recipe to write cheques. Lets see them one by one

1. Do not leave spaces between words or numbers

Its a no-brainier. When you write numbers and words in the cheque, be it Name or amount, never leave a space or gaps between them, because that gives a chance to add some alphabet or number and change the whole cheque.

Imagine you issue a cheque to “ANKIT SHARMA” , but put sufficient space between “ANKIT” and “SHARMA” and it looks like “ANKIT    SHARMA” . One can add an additional “A” after “ANKIT” and the name can become “ANKITA SHARMA” . However if you just leave exact one small space between “ANKIT” and “SHARMA” , its going to be tough to add another alphabet in between.

2. Make sure you cross the cheque saying “A/C Payee” 

If you are going to pay to some person and want to force that the payment should go to the same person bank account, in that case, you should be putting a double cross line on the left-top corner of cheque and write “A/C Payee” or “Account Payee“, which ensures that the money will get credited only to a bank account and not be handed over to someone as CASH over the counter.

A lot of people forget to do this, and if the cheque is misplaced or lost, someone can pose himself as the target person and take the money from bank, I hope you know how easy it is to steal someone’s identity and misuse the documents.

3. Add a line after the name and amount till the end 

I recently learned this point, where you add a running line like —————————- after the name and the amount in the cheque, which ensures that one cant add anything after the name and amount and misuse it .

4. Cancel the word “Bearer”

If you look at your cheque closely, in the “Pay” section, there is space for the name and then on the right corner it ends with “Or Bearer” , which means that either the person whose name is written in the cheque or anyone else who is bearing the cheque can encash it , provided the “A/C Payee” is added to cheque as mentioned in 2nd point above. So you should always cancel the word “Bearer” from the cheque, unless you really want it. This ensures additional safety of the cheque.

5. Add a sign of “/-” after the amount”

Now this might sound so small, but this has lots of wisdom inside this simple trick . There is huge difference between Rs 37,000 and Rs 37,000/- . In first option of Rs 37,000 , you can add more numbers at the end and can make it Rs 37,00000 if there is enough space ahead of it, but in case of Rs 37,000/- , You cant do anything . Below is a simple example of how it can be misused.

6. Keep the details of Cheque’s issued, even if it sounds boring !

And finally, when you give a cheque to someone, write down the cheque number, account name, amount and the date when it was issued or dated, because you might need this information incase you want to cancel the cheque. A lot of times, it happens that you need to cancel the payment, but do not remember the details. Having recorded this information would be handy at times and will help you to act faster.

Some more tips :-

• Generally, while giving a cheque, i also make a point to use a cello tape on the name and amount, so that no one can change these
• In the present era of mobile phones, when most of us have camera enabled cell phone, it is better idea to get a snapshot of Cheque before handing over. This way all your details will be maintained.

Use these 6 things everytime you issue a cheque

Next time you write a cheque, just make sure you have done all these 6 things, and the chances of misuse of your cheque will be close to ZERO because each and every step add a security layer. Let me know if you have any tips on writing cheque  in correct manner or any real life experience on this issue.

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Forged Cheques Encashed, Supreme Court Orders PSB to Pay Rs 50 Lakh

The Supreme Court has ordered UCO Bank to pay Rs 50 lakh to a publishing firm for negligently clearing two cheques bearing forged signatures.

A bench of Justices Adarsh K Goel and Uday U Lalit observed that the public sector bank could not wriggle out of its liability in view of a departmental inquiry and a report by a handwriting expert, which pointed out that the fraud took place because of bank officials’ negligence.

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Government has no such intentions to withdraw Bank Cheque Book Service

Refuting an earlier report that cheque book facility would be withdrawn to push digital transactions, the Ministry of Finance on Thursday clarified that there is no such proposal under consideration. To recap, just last week, Confederation of All India Traders (CAIT) Secretary General Praveen Khandelwal said, “In all probability, the Centre may withdraw the cheque book facility in the near future to encourage digital transactions.”

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Next big move by Modi Government – Centre may withdraw the Bank Cheque Book facility

A senior functionary of industry body CAIT today said the Centre may withdraw the bank cheque book facility in the “near future” to encourage digital transactions.

A senior functionary of industry body CAIT today said the Centre may withdraw the bank cheque book facility in the “near future” to encourage digital transactions.

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Different modes of Payment

As the commerce and economy expand, volume and variety of transactions expand where there is a need to exchange the money. Using cash for each of these transactions is neither feasible nor practically possible. There are concerns regarding security and transportation of cash in cases where large amounts of money are involved. Banks support ease and velocity in such cases by offering various payment systems as solutions.

What are Payment Systems?

A Payment System is a mechanism that facilitates transfer of value between a payer and a beneficiary by which the payer discharges the payment obligations to the beneficiary. Payment Systems are the medium to transfer funds from one person to another that facilitate businesses and economies. Payment system enables two-way flow of payments in exchange of goods and services in the economy. Payment systems help consumers to transfer funds to each other. Cash is the traditional and most widely used payment instrument that consumers use in their daily lives to purchase goods and services. Banking channels also provide other payment instruments through different platforms and these are also widely used in commerce. Payment systems comprises of instruments through which payments can be made, rules, regulations and procedures that guide these payments, institutions which facilitate payment mechanisms and legal systems etc. that are established to facilitate transfer of funds between different participant institutions. Payment systems are used by individuals, banks, companies, governments, etc. to make payments to one another.

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About cheques

What is a Cheque ?

Cheque is an important negotiable instrument which can be transferred by mere hand delivery. Cheque is used to make safe and convenient payment. It is less risky and the danger of loss is minimized.

Definition of a Cheque 

"Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."

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