Introduction
A new layer has been added to the commercial and corporate world with the introduction of checks into the market. In the past, individuals preferred to carry and execute a tiny piece of paper known as a check rather than carry cash equivalent to the check’s value. In addition to banking, check transactions are important and necessary, but also for the economy, trade, and industry of the country. However, the rise in check transactions has coincided with a surge in the practice of writing checks with no intention of honouring them. Checks are used for almost all transactions, such as loan payback, salary payments, bill payments, fee payments, etc.
What is Cheque?
A negotiable instrument is a written document that gives the proprietor the right to receive money (or sometimes commodities). According to the Negotiable Instruments Act, this includes promissory notes, bills of exchange, and checks. According to Section 6 of the Negotiable Instruments Act of 1881, a “cheque” is a type of bill of exchange. Someone (the drawer) writes it and sends it to a bank with instructions to pay a certain amount to the payee (the person indicated on the check) or the bearer (the person carrying the check). Checks can be made in electronic or physical formats, including digital copies of scanned checks.
The vast majority of checks are processed and cleared by banks each day. Checks are intended to gather proof of cash. However, checks remain a reliable method of payment for a large number of people. Nonetheless, it is typically advised to send crossed “Account Payee Only” checks to avoid misuse.
Types of Cheque
- Bearer Check: A check that can be cashed in the envelope by the bearer if it is signed. These checks are risky because, in the event that they are misplaced, anyone could withdraw the entire amount.
- Crossed Check: A crossed check is a bearer check with two parallel lines drawn in the upper-left corner. The funds may only be moved to the bank account of the individual whose name is on the cheque.
- Self-Check: This kind of check is used to physically cash money from the branch where the account holder holds it, as the name suggests.
- Post-Dated Check: A check that is valid for three months after a future date that is written on it. It is commonly used in business transactions or for impending payments.
- Banker’s Check: A check issued by the bank itself that guarantees payment. It is commonly used for secure transactions.
- Traveler’s Check: This kind of check allows for safe cash withdrawals while on the road without needing the carrying of large amounts of cash. Foreign currency can be cashed in nations that accept it.
What is Dishonour of Cheque?
Dishonour of check is the term used when a bank refuses to honour the payment of a check that the payee has presented. This circumstance, commonly known as a “bounced check,” arises for several reasons, including:
- Insufficient Funds: The drawer’s account does not contain the sum required to cover the check.
- Mismatch in Signatures: The cheque has a different signature based on the bank’s information.
- Expiration Date of Validity: Checks typically remain valid for three months following their issuance.
- Stop Payment: The drawer instructs the bank to stop payment.
Things like overwriting or missing information on the check are examples of technical faults.
Legal Framework Governing Dishonour of Cheques in India
Check dishonour is regulated by Section 138 of the Negotiable Instruments Act, 1881. According to this law, it is illegal to return a check for insufficient funds or for an amount greater than the agreed-upon amount.
Section 138 — Overview
138. Check dishonour as a result of inadequate account balances, etc. A check that is dishonoured due to insufficient funds or because the amount exceeds the agreed-upon amount to be paid from the account is described in this section. The conditions under which a check returned unpaid can be viewed as an offense are explained in this section.
Here is an overview of its key points:
- Contempt due to insufficient funds or exceeding the agreement: If the check is returned unpaid due to insufficient cash or because it exceeded the terms agreed upon with the bank, the individual who wrote it is considered to have committed an offense.
- The punishment for the violation:
- Dishonouring the cheque carries a potential penalty of two years in prison.
- A fine that might be double the amount of the check.
- Maybe a prison sentence as well as a fine.
Conditions for Applicability
This section states that certain conditions must be met in order for the offense to be committed:
Check Presentation
- Presentation of cheque: The check must be handed to the bank within six months of the date it was drawn or during the validity period, whichever comes first.
Notice of Dishonour
- Written demand: The payee or holder of the check must send a written demand to the drawer (the person who wrote the check) within 30 days of receiving notification from the bank that the check was returned unpaid.
Failure to Pay
- Payment period: The drawer is required to pay the amount to the payee within 15 days of receiving the notice from the payee or check holder.
Explanation of “Debt or Other Liability”
The term “debt or other liability” refers to a legally enforceable obligation or debt. This shows that the person writing the check has a clear, legally recognized duty to the payee.
Significant Clauses
Notice of Dishonour: The payee must give the drawer a written notice of dishonour within 30 days of receiving information from the bank.
Response Time: The drawer has 15 days from the date of notice to make the payment.
Legal Complaint: If the drawer does not comply, the payee has 30 days from the conclusion of the notification period to file a complaint in court.
Penalties: Section 138 imposes penalties that include two years in prison, a fine double the amount of the check, or both.
Relevant Legal Judgments
Dashrath Rupsingh Rathod v. State of Maharashtra (2014): In order to address jurisdictional issues, this ruling mandated that cases be filed in situations where the cheque was returned.
Makwana Mangaldas Tulsidas v. State of Gujarat (2023): The Supreme Court emphasized the importance of prompt judicial proceedings for cases involving check dishonour and encouraged short trials to avoid procedural delays.
Offence by a Company (Section 141 of NI Act, 1881)
A business or partnership firm may also be liable for the dishonour of a check under Section 138.
Who’s in the Position of Command?
The following individuals are held accountable under Section 141 in the event that a company’s cheque bounces:
- The company itself (as the main offender).
- Those in charge of the business’s operations when the violation occurred.
- Other key personnel, including managers, directors, and secretaries, if the crime was carried out with their consent, knowledge, or negligence.
Exceptions
- A person will not be punished if they can show that they were not aware of the offense or that they took all appropriate precautions to avoid it.
- Government-selected directors are exempt from prosecution.
Key Legal Case: SMS Pharmaceuticals v. Neeta Bhalla
A Supreme Court ruling states that a complaint must specifically state how the accused person was responsible for the act. Simply holding a position (like director) does not establish liability.
Steps to Handle Dishonour of Cheque
If a check is returned unpaid, take the following actions:
- Communicate with the Drawer: Get in touch to find out what caused the dishonour in order to try to resolve it peacefully.
- Keep Records Up to Date: Keep copies of the rejected check, the bank memo, and the communication records.
- Send a Notice of Demand: Send a formal note to the drawer asking for payment within 15 days.
- Take Legal Action: If the drawer fails to make payments, seek legal advice and file a Section 138 complaint.
Preventing Dishonouring Checks
When checks are returned, financial transactions are interrupted and relationships are damaged. The following are some preventive measures:
- The Drawer: Before writing a check, confirm all the information and ensure that there are enough funds available.
- The Payee: Should verify the drawer’s validity and check details prior to receiving the check.
Conclusion
Dishonouring a check is a serious violation under the Negotiable Instruments Act of 1881, which ensures the validity of financial transactions. The law provides harsh penalties and legal action to protect the payee’s rights.
Understanding the various check types, legal requirements, and obligations helps prevent check dishonour and maintain financial discipline.
Key Takeaway: Always issue checks intelligently, ensure there are sufficient funds, and be mindful of the possible legal consequences in order to avoid legal problems. References
- https://www.ijcrt.org/papers/IJCRT2109207.pdf
- https://www.scribd.com/document/364392926/Dishonour-of-Cheque
- https://www.bankofbaroda.in/banking-mantra/savings/articles/what-is-a-dishonoured-cheque
- https://cdnbbsr.s3waas.gov.in/s3ec0369f268fb2ba1068615b3219c6e8f/uploads/2024/09/2024092355.pdf
- https://blog.ipleaders.in/dishonour-of-cheque/
- https://www.scribd.com/document/105876058/Dishonour-of-Cheques
- https://cdnbbsr.s3waas.gov.in/s3ec03333cb763facc6ce398ff83845f22/uploads/2024/09/2024091181.pdf
- https://www.indiacode.nic.in/bitstream/123456789/15327/1/negotiable_instruments_act%2C_1881.pdf
- https://indiankanoon.org/doc/41019885/
- https://indiankanoon.org/doc/100995424/
