ANALYSIS OF THE LIABILITY OF DRAWER AND DRAWEE OF CHEQUE WITH RESPECT TO THE NEGOTIABLE INSTRUMENTS ACT, 1881 BY - ANITA PRAKASH PATIL
ANALYSIS
OF THE LIABILITY OF DRAWER AND DRAWEE OF CHEQUE WITH RESPECT TO THE NEGOTIABLE
INSTRUMENTS ACT, 1881
AUTHORED BY - ANITA PRAKASH PATIL
ACADEMIC YEAR 2022-23
LL.M. 2ND YEAR
MODERN LAW COLLEGE,
GANESHKHIND, PUNE, MAHARASHTRA 411007
ABSTRACT
Section
Thirty of the Negotiable Instruments Act, 1881 defines the liability of the
drawer wherein the drawer is required to compensate the holder of cheque in
case of dishonour by the drawee. In this case, it is the drawer’s but not the
drawee’s fault. Section Thirty-One of the Negotiable Instruments Act, 1881
defines the liability of the drawee wherein drawee is required to pay the
obligated amount of money to the holder of cheque when there are sufficient
funds in the drawer’s account applicable to the payment of the cheque. If the
drawee fails to pay the requisite amount without any lawful justification, in
this case, it is the drawee’s but not the drawer’s fault.
In other
words, laws cannot be read literally because they are open to judicial
interpretation due to the subjectivity of the cases that are brought before the
Judiciary. Similarly, Section Thirty and Thirty-One of the Negotiable
Instruments Act, 1881 is linked to various provisions majorly being Section
Six, Seven, Eight, Thirty-Five, Eighty-Seven, Ninety-One, Ninety-Two, One
Hundred Thirty-Eight and One Hundred Forty-One of the Negotiable Instruments
Act, 1881. Liability of the drawer is subject to dishonor of cheque. Dishonor
of cheques as mentioned in Section 138 of the Negotiable Instruments Act, 1881
is due to insufficient funds in the drawer’s account or due to the amount
mentioned in the cheque exceeds the amount that can be paid by the bank under
an arrangement between the bank and the drawer of the cheque. However, there
are also other reasons for dishonor of cheques - Account Closed, Stop Payment
Instructions, Refer to Drawer and Not A Clearing Member - that are not
explicitly mentioned. The need for the present study is the fact that these
intricacies of the Negotiable Instruments Act, 1881 are not widely available in
academia, and the author aims to consolidate such interpretations clubbed along
with his interpretation and make it available to the wider mass.
I. CRITICAL
ANALYSIS AND INTERPRETATION OF LIABILITY OF DRAWER OF CHEQUE
Transformation
Section Thirty of the Negotiable Instruments Act, 1881 is read as follows:
“The drawer
of a bill of exchange or cheque is bound, in case of dishonor by the drawee or
acceptor thereof, to compensate the holder, provided due notice of dishonor has
been given to, or received by, the drawer as hereinafter provided.”[1]
For the
purpose of this Section, Drawer is a person who makes the bill of exchange;
Drawee is a person who is directed to pay a certain amount of money - to the
payee or Holder of Bill of Exchange - to discharge a debt, and the drawee
becomes the Acceptor of Bill of Exchange once he has signed the Bill of
Exchange or communicated the same to the Holder or a person representing the
holder; Payee or Holder of Bill of Exchange is the person who is in the
possession of the Bill of Exchange (in his own name), and is entitled to
recover the due amount from the other party;
Dishonour of Cheque is defined in a two-fold manner in the Negotiable
Instruments Act, 1881: Dishonour by Non-Acceptance refers to a situation wherein the Drawee is
incompetent to contract[2]
or the acceptance is qualified defeating the provisions of the Indian Contract
Act, 1872, and Dishonour by Non-Payment refers to a situation wherein the
drawee of the cheque makes a default in payment, i.e. fails to pay the
requisite amount to the payee or holder of cheque when duly required to do so.
A debt is an amount owed to another person which is legally enforceable.
The primary
liability is that of the drawee of the cheque to pay the holder of the cheque
or the payee. In order for this to succeed, the cheque has to be presented to
the drawee bank. In case the drawee bank fails to make the obligated payment,
there is an implied assumption, promise and liability of the drawer that he
will compensate the drawee for the default in payment. This default in payment,
as explicitly written in the Negotiable Instruments Act, 1881 may arise due to
two facts: Firstly, it might be due to the insufficiency of funds in the
drawer’s account. Secondly, it might be due to the amount mentioned on the
cheque that has exceeded the agreement made between the bank (drawee) and the
drawer. In this context, agreement refers to a situation wherein due to
insufficiency of funds in the drawer’s account, he has utilized the overdraft
(credit) facility given by his bank called as “Exceeds Arrangement”. However,
this credit facility has a certain permissible limit. In an arrangement wherein
the cheque amount has exceeded the permissible overdraft limit amount, the
cheque is said to be dishonoured. Considering other side of the spectrum, in
case where the overdraft facility has been completely utilized by the drawer
after the agreement but before the cheque is honoured, the cheque is said to be
dishonoured . The expressions “insufficiency of funds” and “exceeds
arrangement” are technically different but essentially same: Bottomline being
the funds in the drawer’s account are incapable and insufficient to honour the
cheque. However, there are other causes of dishonour of cheque - not explicitly
mentioned in the Negotiable Instruments, 1881 - that are as follows –
a. “Stop
Payment or Instructions for the Stoppage of Payment -” The Supreme Court of
India observed that in case of notice to the payee, before presentment for
payment, to not to issue the cheque for payment, and after the aforesaid
notice, the cheque is presented even after the drawer’s instructions, the
cheque is said to be dishonoured that attracts liability under Section 138 of
the Negotiable Instruments Act, 1881.[3]
b. “Bank
Account Closed -” It refers to a situation wherein the drawer has closed his
account even though it was operational while the cheque was issued. This
situation is called as “Account Closed”.
It shows that the drawer has no intention to honour the cheque and it
attracts liability under Section 183 of the Negotiable Instruments Act, 1881.
c. “Refer
to the Drawer -” It is a courteous way, adopted by the drawer’s bank, intimated
to the holder of cheque or the payee, that the cheque cannot be honoured to
insufficient funds in the drawer’s account. The payee or the holder of cheque
is asked to approach the drawer for the same.
d. “Post
Dated Cheques - ” A “Post-Dated Cheque” is a bill of exchange which is drawn or
made. This Bill of Exchange becomes a “Cheque” when it is payable on demand, i.e.,
a debt when demanded to be paid by the payee . When such a bill of exchange
becomes a cheque, only then the liability under Section 138 of the Negotiable
Instruments Act, 1881 is attracted.
Before all
the aforesaid causes of dishonour of a cheque are taken into consideration, one
needs to ensure the following –
a. The
cheque was presented to the bank by the payee or the holder of the cheque at
the payee’s bank or the drawer’s bank , within six months from the date on
which it was drawn or its validity period, whichever is earlier;
b. The
payee or the holder of the cheque sends a notice of dishonour to the drawer,
within thirty days, after receipt of information from the bank regarding the
cheque being dishonoured;
c. The
drawer fails to make payment of the requisite amount within fifteen days after
receipt of such notice.
Therefore,
cause of action arises when the offence is committed. And with respect to
dishonour of cheque, the offence is committed when the drawer omits to pay the
requisite amount within fifteen days after receipt of such notice.[4]
A person
can be held liable for issuing a cheque on behalf of another when the
complainant is pressing for payment. A son can issue a cheque for a debt due to
his father. In the aforementioned scenario, the father was the maker of cheque
that makes him the principal debtor and the son as his surety by way of Section
Thirty-Seven of the Negotiable Instruments Act, 1881. If a cheque is given by a
way of gift or present, the drawer cannot be held liable for dishonour. In case
the Managing Director of a Company issued a cheque on his personal account to
discharge the liability of the Company, the Company and the Managing Director
can be made liable for dishonour of the cheque because every person who is
in-charge and responsible for the conduct of the Company shall be made liable
and accused alongside the Company he is responsible for. It is a requirement
that the Company is also made liable for dishonour of cheque in order to hold
the makers of cheque, i.e. person(s) who is in-charge and responsible for the
conduct of the Company liable. The person(s) who is in-charge and responsible
for the conduct of the Company liable is not the drawer of cheque but the
Company. It was also held that the notice served to the Company is sufficient
and no notice is required to be served to the person(s) who is in-charge and
responsible for the conduct of the Company.
The basic requirement to hold the person(s) who is in-charge and
responsible for the conduct of the Company’s business and affairs, there needs
to be some evidence to indicate that the person(s) was is in-charge and
responsible for the conduct of the Company. Taking this into consideration, the
person(s) who is in-charge and responsible for the conduct of the Company
becomes the surety of the drawer of cheque, i.e., the Company by the provision
of Section Thirty-Seven of the Negotiable Instruments Act, 1881 because the
essential feature of the provision is that the Drawer of Cheque is the
principal debtor and other parties are liable as sureties for the Drawer of
Cheque.
By taking
into consideration that the Drawer must receive a notice of dishonour from the
Payee or the Holder of the Cheque, the scenario is variable in American Law. If
the Payee or the Holder of Cheque is able to prove the fact that there was no
prejudice caused to the Drawer for omitting the dispatch of the notice, an
action upon the drawer is still maintainable. In English Law, notice to the
drawer is not necessary in case of insufficient funds because the Drawer had no
right to draw and could not be negatively affected upon non-receipt of the
notice for dishonour which is defeated by
Section 140 of the Negotiable Instruments Act, 1881.
The Drawer
remains liable to the Payee or the Holder of the Cheque unless it is proved
contrary to the presumption that the Drawer did not issue the cheque to pay a
debt or discharge a liability. The Drawer is liable for compensation that is
twice the value of the Cheque value. The
principle of vicarious liability is not applicable for the liability of the
drawers because one cannot be held criminally liable for the act of another.
Both the Joint Account Holders can be prosecuted under Section 138 of the
Negotiable Instruments Act, 1881 if both of them had signed the cheque.
However, if only one of the Joint Account Holder had signed the cheque, only
that person, considered as the Drawer, will be held liable. There arise two
types of remedies with the Payee: Civil and Criminal. The payee can file a
Civil Suit against the Drawer for recovery of the money. Or, the payee can file
a Criminal Suit against the Drawer for cheating.
II.
CRITICAL ANALYSIS AND INTERPRETATION OF LIABILITY OF DRAWEE OF CHEQUE
Section
Thirty-One of the Negotiable Instruments Act, 1881 is read 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.”
The Drawee
bank is bound to pay the payee’s cheque provided there are sufficient funds in
the account of the Drawer and the cheque is properly drawn. If it wrongfully
dishonours the cheque, it would be liable to compensate the Drawer for any loss
or damage to the credit or the reputation or the integrity of the Drawer. The
Customer has a right to claim damages because the relationship between the
Banker (Drawee) and the Customer (Drawer) is not a debtor creditor
relationship. The Banker has certain rights and duties one of it being paying
the money from the customer’s bank account as and when directed without any
demur or protest as it is as an equitable relationship of trust.[5]
In case of a non-trader, nominal damages shall be awarded when there is no
proof of special loss or damages sustained. But in the case of a trader,
substantial damages shall be awarded in the absence of such aforementioned
proof for special loss or damage. Mere expression of regret by the Drawee Bank
is not a solution to discharge it of its liability. It is expected of the
Drawee bank to honour the cheque when sufficient funds are available in the
drawer’s account. But if it fails to do so, the drawee bank will be liable to
compensate the drawer. It is a fact and an established principle that the
Drawee Bank will be brought under the tortious concept of “Strict Liability”
for negligently honouring a forged cheque.
On the
other hand, there can be certain situations wherein the Drawee bank may
rightfully dishonour the cheque such when a Drawer closes his bank account
immediately after the issue of cheque and before the presentment of cheque,
dishonest intention on the part of the drawer can be inferred wherein this dishonest intention secures the
Drawee from any kind of liability under dishonour of cheque because the drawer
is at fault; If the amount standing credit to the account of the drawer is
insufficient to meet the amount written in the cheque, the Drawee Bank is not
held liable; When there exists an overdraft arrangement between the Drawer and
the Drawee Bank, the Drawee Bank is liable to pay the cheque to the Payee; When there is a stale cheque, i.e. presented
after the payment date, the cheque is returned and dishonoured; Therefore, any
act, that is lawfully and appropriately carried out by the Drawee Bank, causes
dishonour of cheque, due to the Drawer’s fault, will purge Drawee’s Liability
under Section 138 of the Negotiable Instruments Act, 1881, and is deemed as
“rightful dishonour”.
Section
Eighty-Five sub-clause One and Two provides protection to the drawee against
order cheque and bearer cheque by discharging his liability by payment in due
course. Section Eighty-Nine sub-clause One provides protection to the drawee -
who has paid the amount for the materially altered cheque – by not allowing his
payment to be in question and discharging his liability through such a payment.[6]
In case of an electronic image of a truncated cheque, the clearing house is
responsible to verify the same from the party that the image transmitted and
received by the clearing house is the same that was approved by the other
party.
III.
SUGGESTIONS
a. The
definition of a “Company” in Section 141 of the Negotiable Instruments Act,
1881 is restricted to anybody corporate and includes a firm or other
association of individuals. This definition can be further expanded to all
Companies that are incorporated in India or abroad, other Foreign Bodies
Corporate, Public and Private Financial Institutions, Nationalized Banks, and
Cooperative Societies. Furthermore, the term “Association of Individuals”
should also include Clubs, Trusts, Hindu Joint Family, etc.
b. It was held
that the sole proprietary concern is outside the purview of Section 141 of the
Negotiable Instruments Act, 1881, i.e., it is not a company within the meaning
of “Company” as defined in the explanation of the section. However, Sole
Proprietary concern forms a major business chain in India, and it should be
separately and explicitly added in the Negotiable Instruments Act, 1881 for
better transparency and uniformity by avoiding non compliance with law.
c. Section
Eighty-Nine allows the Drawee to escape his liability in cases of materially
altered cheques. This flexibility in terms of law needs to be restricted
because if it is one of the duties of the Drawee Bank to know the Customer’s
Signature, then it casts upon a higher sense of duty on the Drawee Bank to
avoid cases of material alteration through verification with the Drawer. This
might widen the time gap and further perplex the situation, but it will help in
avoidance of unwarranted escape of liability by the Drawee Bank. Or, the Drawee
Bank can mandate an undertaking of Bona Fide from the Drawer every time he
draws a cheque in order to ensure the fairness of the Negotiable Instrument.
IV. BIBLIOGRAPHY
1. R.N.
Choudhary, Banking Laws, (3rd Ed. 2014).
2. K.C
Shekar., Banking Theory and Practice, (20th Edition, 2007).
3. Gunjan
Bhagtan & Jhanvi Pandya, Contemporary Legal Issues in Indian E Banking System,
Volume 2, Issue 1, JBIL, 38-48, 2019.
[1]
The Negotiable Instrument Acts, 1881 s. 30, No. 26, Acts of Parliament, 1881
(India)
[2]
The Indian Contract Act, 1872 s. 11, No. 09, Acts of Parliament, 1872 (India)
[3]
Modi cements Ltd. v. Kuchil Kumar Nandi, AIR 1998 SC 1057. See also, M/s M. M.
T. C. Ltd. v. M/s Medchl Chemicals and Pharma (P) Ltd, AIR 2002 SC 182; M/s
Electronic Trade & Technology Development Corporation Ltd. v. M/s Indian
Technologist and Engineer (Electronic) Pvt. Ltd, AIR 1996 SC 2339
[4]
Amar Jothi Spinning Mills Ltd. v. B.R.B Garments, (2003) 117 CompCas 224 (Mad)
[5]
Shakuntala Devi v. Punjab National Bank, (1995) ISJ Banking 115 (MP)
[6]
The Negotiable Instrument Acts, 1881 s. 89, No. 26, Acts of Parliament, 1881
(India).