Open Access Research Article
ANALYSIS OF DISHONOUR OF CHEQUES AND LEGAL PROVISIONS IN INDIA: A COMPREHENSIVE STUDY BY: PRAVIN VISHNU GOTAKE
Published Paper
Article Details
ANALYSIS OF
DISHONOUR OF CHEQUES AND LEGAL PROVISIONS IN INDIA: A COMPREHENSIVE STUDY
AUTHORED BY: PRAVIN VISHNU
GOTAKE
LL.M. 2NDYR. 2023-2024
Abstract:
The dishonour of cheques poses significant challenges to the financial
ecosystem in India, affecting
businesses, individuals, and the overall economy. This paper provides a
comprehensive analysis of the dishonour of cheques and the legal provisions
surrounding it in India.The study explores the various reasons behind cheque
dishonour, including insufficient funds, account closure, and mismatched
signatures. It examines the impact of dishonoured cheques on businesses, financial institutions, and the legal
system, emphasizing the need for effective mechanisms to address such
occurrences.
Furthermore, the article delves into the
legal framework governing dishonoured cheques in India, primarily focusing on the
Negotiable Instruments Act, 1881, and subsequent amendments. It discusses the procedural aspects involved in
initiating legal action against cheque dishonour, including the issuance of
legal notices, filing complaints, and pursuing legal remedies.Moreover, the
study highlights the role of alternative dispute resolution mechanisms, such as
arbitration and mediation, in resolving cheque dishonour cases expediently and
cost- effectively. It also evaluates the challenges and limitations encountered
in the enforcement of legal
provisions related to cheque dishonour and suggests potential reforms to
enhance the efficacy of the existing
framework.
Through a synthesis of legal analysis, case studies, and empirical
evidence, this paper contributes to a deeper
understanding of the dynamics
surrounding cheque dishonour and provides
valuable insights for policymakers, legal practitioners, and stakeholders in
the Indian financial ecosystem. Ultimately, it underscores the importance of
fostering a conducive environment for commercial transactions and upholding
the integrity of negotiable instruments in India.
Keywords: Dishonour
of Cheque, Amendments in Negotiable Instrument Act, Penalties
Introduction:
India's cheque system has British ancestry. It is well known that the
first bankers in England were the London Gold Smiths, and that the practice of
paying with Cheques for cash dated back to the seventeenth century. Whether one
is a layperson, a business magnate, an industrialist, a banker, or a member of
the bench or bar, the cheque system affects them all. The Supreme Court's
decision regarding BALCO and contract
labor clearly shows that our judiciary
is very aware of economic reforms. As a result, regardless of rulings regarding
the concept of dishonour of cheque, there is an underlying concern about
developing a sound banking system in India that complies with international
norms.
In the intricate web of financial transactions, the dishonour of cheques stands
as a significant legal issue with far-reaching consequences. In India, where cheques remain a
prevalent mode of payment across various sectors, understanding the legal
framework surrounding dishonoured cheques is imperative for businesses, individuals, and legal
practitioners alike.The dishonour of a cheque occurs when the issuer's bank
refuses to honour the cheque due to insufficient funds, alterations, or other
reasons specified under the Negotiable Instruments Act, 1881. Such instances
not only disrupt financial stability but also entail legal repercussions for
both parties involved.This article delves into the multifaceted aspects of
dishonoured cheques within the Indian legal context, exploring the pertinent
provisions, procedures, and implications associated with them. From
understanding the legal definition of dishonour to navigating the recourse
available to aggrieved parties, we aim to provide comprehensive insights into
this crucial aspect of financial law.
Firstly, we will elucidate the various grounds leading to the dishonour
of cheques as outlined under the
Negotiable Instruments Act, shedding light on factors such as insufficient
funds, signature mismatch, post-dated cheques, and more. Understanding these
grounds is fundamental for both cheque issuers and beneficiaries to mitigate
risks and uphold financial integrity.
Secondly, we will delve into the procedural intricacies involved in
dealing with dishonoured cheques, including the requisite legal notices,
timelines, and avenues for recourse available to affected parties. This section
will offer practical guidance on navigating the legal framework to seek
redressal and enforce contractual obligations.
Furthermore, we will examine recent judicial pronouncements and
legislative amendments aimed at streamlining the adjudication process and
enhancing the efficacy of legal remedies concerning dishonoured cheques. The
evolving legal landscape underscores the dynamic nature of cheque dishonour
cases and underscores the importance of staying abreast of recent developments
in this domain.
Lastly, we will explore the broader implications of dishonoured cheques
on business operations, financial credibility, and investor confidence. Beyond
the legal ramifications, dishonoured cheques
can significantly impact commercial relationships, necessitating proactive
measures to prevent and address such occurrences.
Through a comprehensive understanding of the legal provisions, procedural
mechanisms, and broader implications, we aim to foster greater
transparency, reliability, and integrity in India's financial ecosystem, thereby
contributing to a more robust and equitable business environment.
Definition of Cheque:
After the development of Information Technology as well as the
Globalization, the Government decided to bring the definition of cheque by addition
of the new sentence to previous definition. Parliament enacted the Negotiable
Instruments Act, 2002 to the Principal Act Negotiable Instrument Act, 1881.
Definition after 2002 amendment
to the Act:
Section 6: “Cheque” – A “Cheque” is a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand and
it includes the electronic image of a truncated cheque and a cheque in the
electronic form.[1]
A "Cheque" comprises an electronic image of a truncated Cheque
as well as a Cheque in electronic
form. It is a bill of exchange drawn on a designated banker and not further
stated to be payable other than on demand. Explanation I: For the purposes of
this section, a "electronic Cheque" is one that is created, written,
and signed using a secure system that ensures the minimum amount of fraud. It also contains
the exact mirror image of a paper
Chequeand is created, written, and signed using an
asymmetric cryptosystem and digital signature (either with or without a biometric signature) on a
secure system that guarantees the very minimum safety standards. b) A truncated
Cheque is one that is cut short during
a clearing cycle, either by the bank or the clearing house,
depending on who is receiving or paying, as soon as an electronic picture is
created for transmission, replacing the remaining portion.
The Negotiable
Instrument Act, 1881 Section 138 to 147:
The Banking, Public Financial Institutions and Negotiable Instruments
Laws (Amendment) Act, 1988 introduced sections 138 to 147 of the Act, a
criminal remedy of penalty, to ensure promptitude and remedy against defaulters
and to ensure credibility of the holders of the negotiable instrument. The Negotiable Instrument Act (Amendment
and Miscellaneous Provisions) Act, 2002 further modified the Act.
Sections 138 through 147 of the Act address dishonour of cheques and
outline remedies and several types of penalties for such acts. The Act's
section 138 addresses dishonouring a Cheque due to insufficient money in the
account, among other things. It stipulates that the offender will face
penalties.for two years in prison and a fine if the bank returns the Cheque
that the drawer issued without payment. The Cheque must be written off in full
or in part as payment for any obligation or debtKapadvanj pupils Co. Bank Ltd.
V JaintbhaiTalasgiMarwadi[2]
DISHONOR OF NEGOTIABLE INSTRUMENT:
If the person drawing the bill of exchange, the person receiving the bill of exchange, or the
person cashing the Cheque defaults
on the payment when it is due, the promissory note, bill of exchange, or Cheque is deemed in default. Promissory
notes, bills of exchange, and Cheques are
the three categories of instruments that are covered by section 92, in contrast
to section 91. When a banker to whom a Cheque is drawn, the maker of a note,
the acceptor of a bill of exchange,
the drawee in case of necessity, the acceptor of a bill (above), or any of
these individuals neglects to pay the
amount against the instrument when it is presented to them on the due date, the
dishonour is complete.[3]
NECESSITY OF NOTICE OF DISHONOR:
Sections 91 through 93 would not have been required at all if
notification of rejection was required
each and every time a bill of exchange was not paid. Sending a letter of
disgrace was already possible under Section 30, which would have sufficed to
accomplish the aforementioned goals. Upon careful consideration of each
component, we can state the following: Bills of exchange payable after sight are required by law to be presented for
acceptance (A); but, if a bill of
exchange is due on a specific date, the user is free to present it for
acceptance at any time prior to that day.You are required to submit a notice of
dishonour if it is provided for acceptance and later rejected; (C) a bill of exchange payable at sight is not
legally required to be presented only for
acceptance. Rather, upon being submitted for payment, it is deemed to have been
31 Times of Economics. Budget 2017: A new watchdog for payment systems and
harsher penalties for dishonoured Cheques: February 1, 2017 51 were offered for
payment as well as acceptance. If it isn't paid, the Act's sections 91 through
93 would apply, and a notice of humiliation would be required in accordance
with those sections.[4]
Sections 91 through 93 would not have been required at all if
notification of rejection was required
each and every time a bill of exchange was not paid. Sending a letter of
disgrace was already possible under Section 30, which would have sufficed to
accomplish the aforementioned goals. Upon careful consideration of each
component, we can state the following: Bills of exchange payable after sight are required by law to be presented for
acceptance (A); but, if a bill of
exchange is due on a specific date, the user is free to present it for acceptance
at any time prior to that day. If it is presented
for approval(C) that a
bill of exchange payable at sight is not
required by law to be provided just for acceptance; if a bill of exchange is
accepted and then rejected, you will need to send a notice of dishonor. Rather,
it is deemed to have been submitted for both acceptance and payment when it is
made available for payment. Sections 91 to 93 of the Act would apply if it isn't paid, and a notice of shame would be required in accordance with those sections.
However, the Bombay High Court has held that constructive notice is shown
favourably by a return receipt of recognition. ii) How we communicate with one
another According to Section 94 of the Negotiable Instruments Act, the person
to whom the notice of dishonour is due may do so through a duly authorized
agent, his or her legal representative in the event of the person's death, or his or her assignee in the case of a
declared bankrupt. It may be delivered
verbally, in writing, or by mail if
it is written. It doesn't matter how it looks; it only needs to identify the
recipient. If the notification is
correctly sentDespite being addressed and mailed, if the notice is misplaced
during transit, it still has value.
The Madras High Court has upheld its previous ruling, which stated
that registered mail is not required for the
delivery of the written notice of dishonour required under Section 138(b).
It might be delivered via telegram or even just a standard letter. The same High Court decided that it is legal to issue a warning
requesting the payment of Cheques and other debts within a specific amount of
time. The mere fact that the Cheque was returned does not give rise to a
complaint under Section 138 of the Negotiable Instruments Act. Rather, a
complaint can only be made following notice of demand for the Cheque's value
from the payee or holderCheque, and the Cheque drawer failed to settle the
balance within 15 days of the notice being served to him or received by him.34
On the other hand, the Madras High Court stated that the letter could be the
basis for a complaint. The amount of times the cash can be used to pay for
items is unlimited. Thus, within the allotted six months, any one of these
instances may be selected for notice and prosecution. It adhered to the decision
it had already taken in this instance.
In a different instance, the judge ruled that the date the Cheque was
written might come up during the trial. Since
the Cheque hasn't been paid for the first time,none of the actions recommended
in Section 138(b) and (c) of the Act have been done by the payee.
WAYS TO FILE A COMPLAINT –
There is no definition of a complaint in the Act. Rather, it states that after 15 days of receiving
the news from the bank, a notice of complaint must be made with the Magistrate
1st Class, who has jurisdiction over
the issue, if a Cheque isn't paid. The term "complaint" is defined as
"any claim made orally or in writing to a magistrate that someone, known
or unknown, has broken the law and wants the magistrate to act" in Section
2(d) of the Code of Criminal Procedure, 1973. A. Private Complaint: Only
private lawsuits may be brought, according to Section 142's clause (a).
This
clause does not state that the complaint should not be forwarded to the police
for an investigation in accordance with clause 156(3) of the Code of Criminal
Procedure by the judge hearing the case. The magistrate's decision to file
charges based on a police report was declared invalid by the Andhra Pradesh
High Court. The same High Court ruled in another case that the Magistrate
lacked authority to refer the case to the police.
BAR OF LIMITATION:
By making frivolous and delayed prosecutions years beyond the date the case of action began, the time limit on prosecutions is
intended to deter persons from misusing the legal system. The objective of
these regulations is obviously consistent with the notion of a fair trial,
which is enshrined in Article 21 of the Indian Constitution. Therefore, it is
crucial that every prosecution adhere to the letter of the law; otherwise, the
prosecution may be dismissed on the grounds that the statute of limitations has passed. Therefore, the date the letter was sent to the drawer is
crucial information for a complaint of this kind.As a result, the basis for
bringing a complaint of this kind
depends heavily on the sender's knowledge
of the date the drawer got the notice. Because
the Postal Department is responsible for returning the A/D card to the sender
of the registered notice, the sender
(the complainant) will never be aware
of the exact time the notice was received when it is sent by registered post
A/D. A/D cards are frequently not returned to the sender at all or in a timely manner.
This implies that the sender must communicate with the Postal Department regarding the registered notice's delivery or service, as well as the date of
such delivery or service, which may take some time. In these circumstances, the
Postal Department's mistakes or delays are more likely to cause a comparable
complaint to be unsuccessful than the complaint itself. According to Clause (b)
of the relevant provision, the phrase
"within 15 days of the receipt of the said notice" should refer to
the date on which the sender discovers that the notice he sent was received,
since it's crucial for fair play and natural justice that the sender knows when
it was received. If someone has a deadline for obtaining a remedy, such
deadline shouldn't begin before the
wronged party actually became aware of the date the cause of action
began to accrue.
If not, there's a chance that the
legislation will be applied in an
absurd manner. If the drawer failed
to make payment within 15 days of the complainant learning that the drawer had
received the notice, then, on a reasonable and just interpretation, the complainant would be entitled
to sue the drawer. A. Statute of Limitations: According to a ruling
by the Madras High Court, a complaint
needs to be submitted no later than 45 days after the drawer received notice of
disrespect. It is still possible to file the complaint on the following working
day if the 45-day deadline expires on a holiday.
Judicial Perspective on Dishonour
of Cheque:
The Supreme Court also has very strong penalties for anyone who present
themselves before a bank to make a payment and are found to be at fault for a
dishonored Cheque. The constitutional legitimacy of the Act, specifically Section 138, was confirmed by our judiciary.
The court held in B. Ventak Narendra Prasad vs. State of
A.P.[5]
that the Act's proviso section 138 stipulates that in order for this
section to be applied, the payee must demand payment of the stated amount, the
drawer must fail to make payment within days of receiving notice, and the
Cheque must be present within three
months. Only when those prerequisites are met does section 138's principal
enacting clause become operational.
Recent Developments in the Law:
The
Bombay High Court has ruled that Lok Adalats established under the Legal
Services Authority Act, 1985 have the
authority to hear issues involving cheque bouncing, and their decision is final
in these situations.
Five ingredients of the offence under Section
138:
Only the combination of several acts can constitute the offense under
Section 138 of the Act. The acts listed below are parts of the aforementioned
offense:
Following are the acts, which are components of the said offence:
1. Drawing of the
Cheque,
2. Presentation
of the Cheque to the Bank,
3. Returning the
Cheque unpaid by the drawee bank,
4. Giving notice
in writing to the drawer of the cheque demanding payment of the cheque amount.
5. Failure of the
drawer to make payment within 15 days of the receipt of notice.
All five of the aforementioned activities have to have taken place in the
same area. Every one of those five acts might be performed in any one of those
five locations. However, in order for the offense to be completed
under Section 138 of the Act, all five of the aforementioned requirements must be met.
Recent Amendments in the Act:[6]
The amendment was enacted to guarantee that the defaulter would be
prosecuted in a criminal court if there was deliberate fraud. The intention was
to require sincerity in the Cheque issuance process as well as a certain amount
of accountability from the Cheque drawer. Block payments and the repudiation of a Cheque for a signature inconsistency
were later added to the list of restrictions. However, it was found that cases
of Cheques bouncing are handled similarly to other civil concerns, nearly
thirty years after the amendment making cheque dishonour a serious
offense was passed. It has been observed recently that the legitimacy of
criminal prosecutions involving Cheque bounces is declining. In corporate
operations, the payment of invoices via Cheques is crucial.
Even with the availability of other payment methods, Cheques continue to
be the most widely used form of
payment. The NIA of 1881 has undergone numerous revisions to guarantee, among
other things, a prompt determination in cases involving Cheque dishonour. In
spite of this, the Central Government began receiving a number of lawsuits about the prevalence of Cheque failure
cases from the general public, particularly the trade network. Due of the ease
with which dishonest Cheque drawers can allege difficult circumstances and
request a suspension of litigation,
the equal can be linked to the delaying strategies they employ.
These
delays call into question the legitimacy of the Cheque operations. This amended
act incorporated Section 143 A and Section 148. Section 143A Section 143-A of
the Act gives the court the authority to order the drawer of a Cheque to
provide the aggrieved party with interim compensation. According to this Act,
the compensation cannot be more than 20% of the original amount on the Cheque.
The court may additionally require the drawer to give the desired compensation
within the next 30 days, in addition to this 60-day term being followed by
another 30 days. The court may
further order the drawer to deliver the requested compensation within the
following thirty days if it finds that the delay created by the drawer's
refusal to provide the requested compensation was not justified.
Under Section 421 of the CrPC, 1973, the interim damages owed under this
clause may also be reclaimed as a penalty. The temporary payments paid or
reclaimed will thereafter reduce the maximum penalties imposed under Section
138 of the NIA or the amount of damages awarded under Section 357 of the CrPC
(Amendments to the Negotiable Instruments Act, 2018). Section 143 does not,
however, apply in the past. Section 148 According to Section 148, the court may
order the corporation to deposit money to start the appeals process if the
person who drew the Cheque is found guilty of a crime. This sum cannot be more
than twenty percent of the fine or award that the magistrate court has already
granted. The court may further order the drawer to deliver the requested
compensation within the following thirty days if it finds that the delay created by the drawer's refusal to provide
the requested compensation was not justified.
The Hon'ble Supreme Court of India explained the retrospective
application of the Act's Section 148 changes in its most recent ruling.
All criminal complaints made under Section
138 of the NIA before the NI Amendment Act was passed are covered by
the new Section 148 of the Act. The
Supreme Court has acknowledged the significance of amending Section 148 of the
NIA in order to do away with the unjust and ineffective practice of the drawer holding
off on recognizing the value of the dishonour
Cheque. The court observed that victims of fraud have had to spend a lot of time in court
due to the delay in paying their compensation.
The
court clarified that the dishonour Cheque's impact on the transaction's integrity stems from the drawer's delayed recognition of it. To resolve this issue,
the Parliament decided to propose an amendment
to the Act. The court further stated that all court appeals,
including those involving
criminal complaints that were not filed prior to the Act's enactment, shall be
subject to the modifications made under Section 148 of the Act.
Conclusion:
There has been dissatisfaction with the length of time that cases
involving the allegation of cheque
dishonour have remained unresolved, even though the act has been updated
multiple times to facilitate the prompt resolution of such matters. The
public's confidence in Cheques as a model for everyday payment is deteriorating
as a result of the delay. In addition, the payee experiences unfair treatment
since they have to spend money and time in court to get the
full value of the Cheque back. In response, the aforementioned rules were
passed, allowing the harmed parties
to have a little period of time until the court issues a final ruling, so
averting a pointless lawsuit.
In addition, they would support the use of electronic fund transfers and
offer assistance to those who have been wrongfully sued in pointless and
frivolous cases. The suggested changes would also boost the economy's trade and
commerce sectors and increase the dependability of Cheques. Nearly 20% of all
litigation cases involve a Cheque bounce, according to the 213th Law Commission
Report, and the Indian judicial system is now handling a large backlog of
cases. Consequently, the recently passed laws will give the long-dormant
sections of the N.I. Act 1881 new vitality.The
terms of the speedy trial are still
in effect, and the charge is now bailable, making cheque fraud cases more
like civil disputes even if they are criminal in character and lead to a
criminal conviction. According to this strategy, the recently passed
regulations would be a positive step toward guaranteeing reliability.
SUGGESTIONS:
1. The
concepts of the Dashrath Rupsingh Rathore Case proved to be highly advantageous
for both the courts and the borrowers in the resolution of their issues. But
it's clear that the 2015 revisions approved by the parliament are detrimental
to the welfare of the average citizen. As a result, corporations and other
organizations are gathering enormous sums of money from individuals throughout
India and mailing Cheques to distant locations for deposit at the appropriate
location.
2. The trial
must be finished within six months of the complaint's filing, per Section
143(3) of the Act. This law is completely contradictory, though, as the accused
has sixty days to pay the debt back, and the court may also grant the accused a
further thirty days to do so. This indicates that the study would take a very
lengthy time, and its completion in six months would not be feasible.
3. In order to
enforce cases of Cheque dishonour, the Reserve Bank of India may open a center.
Additionally, a database will be established so that banks can record the
information of their clients who owe more than five lakh rupees. No more
Cheques should be written out to these customers until the whole amount has
been cleared.
4. Instead of
using the outdated technique of mentioning the drawer or the payment halted,
the drawee bank should now include a justification for the return of an unpaid
Cheque. Additionally, since the Cheque may have exceeded the terms of the
agreement, banks ought to be more open about why it was not honored. This would
expedite the resolution of the complaints and assist the bank and the client in
avoiding needless litigation. In order to increase transaction transparency, it
is also critical that the Reserve Bank of India or a consortium of banks
implement the appropriate modifications to banking procedures.
Bibliography:
Negotiable Instrument Act, 2002 amendment
2013 (1) DCR 270 (Guj.)
Kanneganti Venkatasubbayya v. PR Rao Tobacco Co. AIR 1972 AP 72
Decriminalising bounced cheques
will nullify their sanctity, says CAIT to Fin Min". The Economic Times.
Retrieved 22 July 2020
B. Ventak Narendra Prasad vs. State of A.P
www.kalaharijournals.com/resources/84_MARCH20ISSUE.pdf
Websites: www.wikipedia.com
Books:
Act: Negotiable Instrument
Act, 1881 R.K. Bangia
[1]
Negotiable Instrument Act,
2002 amendment
[2] 2013
(1) DCR 270 (Guj.)
[3]
Kanneganti Venkatasubbayya
v. PR Rao Tobacco Co. AIR 1972 AP 72
[4]
Decriminalising
bounced cheques will nullify their sanctity, says CAIT to Fin Min". The
Economic Times. Retrieved 22 July 2020
[5]
B. Ventak Narendra Prasad
vs. State of A.P
Article Information
ANALYSIS OF DISHONOUR OF CHEQUES AND LEGAL PROVISIONS IN INDIA: A COMPREHENSIVE STUDY BY: PRAVIN VISHNU GOTAKE
Authors: PRAVIN VISHNU GOTAKE
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/03/24
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.