Top Ten Legal Problems and Solutions with respect to Cheque Bounce Cases under the Negotiable Instruments Act of 1881: Lawyers Advice

With the expansion of the markets, instruments used in order to transfer money are being used more than ever. One of the most common instruments used is the ‘Cheque’ which may be used in various transactions such as the payment of bills, fees, transfer of money from one person to another among several others. It is important to ensure that this negotiable instrument as defined by Section 6 of the Negotiable Instruments Act, 1881 is not misused. Therefore, Section 138-142 of the Negotiable Instruments Act, 1881 provides for the penalties in the case of dishonour of the cheques or non-fulfilment of the obligations that one undertakes when issuing a cheque.One such default while dealing with cheques is known as ‘Cheque Bounce’ and it means that the cheque cannot be processed as the account holder has non-sufficient funds and therefore the bank will not honour them.

There are various cases in which a dishonoured cheque or a bounced cheque have to be dealt with, some of the important ones are listed as follows-

1. Outdated Cheque: A cheque is valid for a period of three months from its date of issue after which it expires or becomes valueless. According to Section 138 of the Negotiable Instruments Act, 1881 one of the conditions in order for the act will not be criminal unless the cheque is presented to a bank within a period of 6 months (the Reserve Bank of India vide its circular dated 4th November, 2011 changed the default period within which a cheque may be presented for payment to 3 months from date of the instrument) from the date of its drawing or within the period of its validity, whichever comes first.
   In Ansh Chugh vs Pradeep Gupta [CRL.M.C. 2973 of 2018], the court quashed the proceedings under Section 138 of the Negotiable Instruments Act,1881 as it was presented to the bank after a period of 3 months from the date of issue.
3. Cheque issued by a third person and not the debtor: When a cheque issued by the borrow cannot be honoured, he can be held liable for the bouncing of the cheque, however what happens in cases where the cheque may be issues by a third party such as a guarantor.
   In the case of I.C.D.S. Ltd. v. Beena Shabeer [Supreme Court Criminal Appeal No. 797 of 2002], the Supreme Court held that the cheque issued by guarantor, despite being a security cheque, when dishonoured, fell under the ambit of Section 138 of the Negotiable Instruments Act, 1881 as the act is clear that “any cheque” and “other liability” apply in the case at hand and any other interpretation of the statute would be against the legislative intent. The court held that if there is any dishonour of the cheque there should be no embargo or restriction on the application of Section 138 of the Negotiable Instruments Act, 1881. A third party can therefore be held liable for in case a cheque drawn by him is dishonoured or a bounced cheque.
4. Limitation Period: According to Section 138 (c) of the Negotiable Instruments Act, 1881, one of the conditions required in order for a person to be tried under the said provision is that drawer fails to make the payment to the payee within a period of fifteen days from the receipt of notice from the payee which was to be sent within a period of thirty days of receiving information that the cheque was dishonoured by the bank.
   The court in MSR Leathers v. S. Palaniappan [Supreme Court Criminal Appeal Nos. 261-64 of 2002] held that in order for a person to be held criminally liable for the bouncing of a cheque, it is essential that all conditions laid down in Section 138 of the Negotiable Instruments Act, 1881 be fulfilled, proviso (c) of the section being equally important. Additionally, in C.C. Alavi Haji v. Palapetty Muhammed [Supreme Court Criminal Appeal No. 767 2007], the court held that any drawer claiming that he/she had not received a notice for payment within fifteen days, can, within fifteen days of receipt of the summons from the court with respect to the complaint made under Section 138, make the payment of the amount of the cheque and submit proof of the same to the court. In such cases the complaint will be rejected as per the courts satisfaction that the drawer has fulfilled his obligation.
5. Signature Mismatch: In cases where the signatures on the cheque do not match, what is the way forward? The Supreme Court of India in Laxmi Dyechem v. State of Gujarat [Supreme Court Criminal Appeal Nos. 1870-1909 of 2012], held that the words “amount of money … is insufficient”, mentioned in Section 138 of the Negotiable Instruments Act, 1881 is to be interpreted broadly and as it is a category or genus under which reasoning’s of default like “payment stopped”, “account closed”, etc. fall as they are species of the genus. The court stated that the mismatch of signatures constitutes as dishonour under the meaning of Section 138 as much as dishonour on the grounds of the account being closed.
6. Usage of different inks on the same cheque: Section 87 of the Negotiable Instruments Act, 1881 provides for the effect of material alteration and says that any material alteration of negotiable instruments such as cheques renders it void against all parties at the time of making the alteration, that do not consent to said alteration unless it is done in the common interest of the original parties. The Madras High Court in the case of Mrs. M. Mallika vs Mr. Kasi Pillai [S.A. No. 740 of 2015], held that the use both green and blue ink used on the same negotiable instrument, qualifies as material alteration and therefore, the instrument is to be considered void and therefore no one can be held liable.
7. The bank account from which the cheque was issued has been closed: If the drawer of the cheque closes his account before the amount can be encashed by or transferred to the bank account of the payee, it qualifies for criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881 for dishonouring the cheque. In the case of NEPC Micon Ltd. v. Magma Leasing Ltd. [Supreme Court Criminal Appeal No. 481 of 1999], the court held that a case where a cheque is dishonoured due to the insufficiency of funds in the account is similar to a case wherein the cheque is returned as the drawer of the cheque closes the account. Therefore, in such cases a person can be held liable under Section 138 of the Negotiable Instruments Act, 1881 as long as the requirements in its provisos are met.
8. The person who has given the cheque is not traceable/available: If the drawer of a dishonoured or bounced cheque absconds, is not traceable or available, what is the remedy available to the payee? The payee in such matters must first send a legal notice to the drawer at his last known address within a period of thirty days from the receipt of notice of the unpaid cheque from the bank. Thereafter, if the drawer does not respond within a period of fifteen days from the thirtieth day of the notice, a criminal case may be filed under the provisions of Section 138 of the Negotiable Instruments Act, 1881 as the conditions mentioned in its provisos are met as was ruled in MSR Leathers v. S. Palaniappan [Supreme Court Criminal Appeal Nos. 261-64 of 2002]. The court can also issue a bailable warrant for the drawer and if despite this the drawer is still absconding or unavailable, a non-bailable warrant may be issued at the police station where the absconded drawer resides.
9. If Cheque is issued against unwritten contract: In cases where an oral agreement between two or more parties fulfils certain essentials, their validity cannot be questioned. Section 10 of the Indian Contracts Act, 1872 lays down the essentials of a valid agreement turning into a contract. In the case of Alka Bose vs. Parmatma Devi & Ors [CIVIL Appeal No(s). 6197 OF 2000], the court held that an oral agreement is valid and enforceable in the court as long as it fulfils the requirements of Section 10 of the Indian Contracts Act, 1872. In Nanda v. Nandkishor [Bombay High Court Criminal Appeal No. 467 of 2009], the court held that the cheque must be received against a legally enforceable debt or liability and as oral agreements are legally enforceable, the liability of the drawee of the cheque is enforceable as well. therefore, in cases where a cheque is issued against an oral contract or agreement, the drawee will be held liable for the in case the cheque issued by him is dishonoured.
10. If cheque is presented for encashment more than once: In the landmark case of MSR Leathers v. S. Palaniappan [Supreme Court Criminal Appeal Nos. 261-64 of 2002], the court held that a payee may present the cheque to the bank for encashment any number of times during its period of validity, i.e. three months from its date of issue. A dishonour, whether on the second or any later presentation of the cheque for encashment will qualify as dishonour within the ambit of Section 138 of the Negotiable Instruments Act, 1881.
11. Alternative Remedies Available: In Kaushalya Devi Massand Appellant vs Roopkishore Khore [Supreme Court Criminal Appeal No. 723 of 2011], the court held that it is not necessary for the defaulting person to be imprisoned in matters of cheque bouncing.
    Two of the most important alternate forms of remedy are as follows-
    • Mediation- In Dayawati v. Yogesh Kumar Gosain [(2017) DLT (Cri) 164 (DB)], the court considered the question of whether an offence under Section 138 of the Negotiable Instruments Act, 1881 be settled by mediation, despite being a criminally compound case. The court held that while the legislature does not specifically provide for such matters to be referred to alternate dispute resolution mechanisms. According to Section 89 of the Code of Civil Procedure, 1908 there is no restriction on utilising alternate dispute resolution mechanisms for settling disputes falling under the ambit of offences covered under Section 320 of the Criminal Procedure Code, 1973. It also drew a distinction between cases under Section 138 of the Negotiable Instruments Act, 1881 and regular criminal cases as it is majorly a civil wrong which has been given a criminal overtone and therefore, offences under this section can be referred to mediation.
    • Money Suit– As per Order 37 of the Code of Civil Procedure, 1908, the payee may also file a civil suit in the form of a simple money or money suit for the recovery of the amount of the bounced or dishonoured cheque within a period of three years from the date of issue of the bounced cheque.

It is therefore visible that there are several instances in which a case for the dishonour of a cheque or bounced cheque can be brought through Section 138 of the Negotiable Instruments Act, 1881 in addition to a few alternate remedies. It is essential that laws related to this topic remain dynamic, as they always have. Due to globalisation of the market the number of transactions is at a very high level and therefore cases related to cheque bouncing are extremely common. It is therefore essential to be informed of the law related to this.

Authored By: Adv. Anant Sharma & Suvigya Buch