Banking Law Final Draft

DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

BANKING LAW FINAL DRAFT ON DISHONOUR OF CHEQUES

SUBMITTED TO-

SUBMITTED BY:

DR. SHASHANK SHEKHAR

AKASH JAIN

ASSISTANT PROFESSOR

160101018

RMLNLU

INDEX 1. ACKNOWLEDGEMENT 2. INTRODUCTION 3. REQUIRMENTS AND INGREDIENTS FOR DISHONOUR UNDER S.138 NEGOTIABLE INSTRUMENTS ACT 4. PENALTIES AND LIABILITIES UNDER S.138 5. POSITION OF COMPANIES 6. PROCEDURE TO FILE COMPLAINT 7. CONCLUSION 8. BIBLIOGRAPHY

ACKNOWLEDGEMENT I would like to extend a very genuine vote of thanks to my subject teacher, Ms. Shashank shekhar, for being the infinite source of support and guidance for whatever was needed in the completion of this assignment. Her active support and help has helped me a great deal in gathering data, and understanding the topic in every manner. I’d also like to thank my friends and family for the aid of gathering usable data for me whenever I felt the dearth thereof.

INTRODUCTION Advent of cheques in the market have given a new dimension to the commercial and corporate world, its time when people have preferred to carry and execute a small piece of paper called Cheque than carrying the currency worth the value of cheque. Dealings in cheques are vital and important not only for banking purposes but also for the commerce and industry and the economy of the country. But pursuant to the rise in dealings with cheques also rises the practice of giving cheques without any intention of honouring them. Before 1988 there being no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision of punish them in the vent of such cheque not being honoured by their bankers and returned unpaid. Of course on dishonour of cheques there is a civil liability accrued. However in reality the processes to seek civil justice becomes notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To ensure promptitude and remedy against defaulters and to ensure credibility of the holders of the negotiable instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 which were further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002. S.138 to 142 are incorporated in Negotiable Instruments Act, 1881 with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument.

REQUIREMENTS OF DISHONOUR UNDER S.138 NEGOTIABLE INSTRUMENTS ACT The ingredients which are to be satisfied for making out a case under S.138 of the Act are: 1. The cheque is drawn on a bank for the discharge of any legally enforceable debt or other liability. This means that the cheque must have been drawn for payment of money to a person other than the drawer for the full or partial discharge of any legally enforceable debt or liability. Thus what we see here is that if a cheque was given merely as a security, then a suit cannot be filed upon that and S.138 will not be attracted. Also to bring it under the ambit of this section, a cheque should have presumably been issued and not merely drawn for payment in discharge of a debt. 2. The cheque so dishonoured must have been presented to the drawee/ 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.1 3. The cheque is returned by the bank unpaid. 4. The cheque is returned unpaid because the amount available in the drawer’s account is insufficient for paying the cheque. 5. The payee has given a notice to the drawer claiming the amount within 15 days of the receipt of the information from the bank. 6. The drawer has failed to pay within 15 days from the date of the receipt of notice. 7. The offence under this section is not complete till a statutory opportunity is offered to the drawer of the cheque for making the default good within 15 days of the receipt of notice to that effect. It is only the failure of the drawer to avail of this opportunity and meet the demand for the amount of the cheque that becomes the cause of action under the S.138. This position was laid down in Mahalakshmi Enterprises v. Sri Vishnu

1

Rajesh Gupta, Dishonour of Cheques (Law &Practise), 1st ed ( New Delhi; Bharat Law House Pvt. Ltd, 1996) at 47.

Trading Co.2 and has been deemed to be one of the essential ingredients of this section. 8. The payee has a limitation period of 30 days, within which he can file a complaint.

PENALTIES AND LIABILITIES UNDER S.138 Dishonouring of cheques can be rightfully done or wrongfully done depending on the nature of the action taken upon the cheque. Here we shall see the various entities which may fall liable upon the dishonour of a cheque subject to it being a rightful dishonour or a wrongful one: Liability of the drawer to the payee: S.30 of the Act lays down that the drawer is bound to compensate the payee/ holder in case of dishonour by the acceptor/ drawee. Thus what we see here is that the liability of the drawee/ bank is the primary liability and only when the bank fails to honour the cheque, the holder can then proceed against the drawer. The bank is under a legal obligation to honour the cheque as long as the drawer has sufficient funds lying in his account in the bank. However it must be noted that in the event of non-compliance by the bank, the payee cannot enforce any obligation upon it, this is because there is no privity of contract between them, nor any trust created so as to make the payee a beneficiary there under. Liability of the banker to the drawer: The drawee of a cheque is usually a banker and the legal relation between him and the drawer, that is to say, between the banker and the customer is that of a creditor and a debtor. The banker who is holding the money of his customer owes a debt to him to the extent lying in the customer’s account and the drawee/banker is therefore under an obligation to honour the cheques of the customer so long as he can meet them from such funds as exist in the customer’s account. Thus what we see here is that the drawee’s liability is towards the drawer and not the payee. This is simply because there is no privity of contract between the drawee and the payee and The Act only provides for the liability of the drawee in favour of the

2

(1993) 77 Comp Cas 249

drawer of the cheque as he is an account holder of the drawer and thus there exists a contract inter se. The idea was laid down clearly in jagjivan Mavji v. Ranchhodas Maghaji3, which says that there is no provision as such which makes the drawee liable on the instrument, with the exception of S.31 of the Act where the drawee must pay if there is sufficient funds in the account of the drawer. Such a liability arises out of breach of contract in between the banker and the customer and in the case of wrongful dishonouring of the cheque, the party in breach of the contract must pay damages which flow from such breach. It must be noticed that the liability of the drawee however is conditional upon his having in his hands funds of the drawer sufficient to pay the cheque amount. Apart from this there are various other situations whereby the banker can rightfully dishonour the cheque and if he dishonours the cheque for these reasons liability will not fall upon him. In case of wrongful dishonor the customer can sue for damages. However quantification of damages depends largely on the creditworthiness of the customer. This is important because dishonour of a cheque impacts largely the reputation and integrity of a person, more so if the customer is a well known trader. In almost every case the drawer can recover substantial damages from the drawee on the basis of the above factors of loss of credit, etc., however it maybe difficult to award pecuniary damages in such a situation. Thus we see the civil remedies available in case of dishonouring of cheques, however such civil remedies do not exclude criminal action as is laid down in the amended chapter of the Act. Liability in case of forgery: A banker/drawee has no obligation to pay if the signatures of the customer on the cheque are forged and has a right to dishonour the cheque on this ground. The bank has the specimen signature of his customer and it is the duty of the bank to compare the signatures, thus in doing so if he finds that the signature is inconsistent , then the bank should not honour the cheque. There remains a possibility that the cheque presented for payment is not the customer’s cheque at all but a forgery, or that this signature is forged, or signed without his authorization. A banker paying a cheque under these circumstances is not entitled prima 3

AIR 1954 SC 544

facie, to debit the customer’s account. The law is that a cheque with the drawer’s signature forged is a mere nullity. A landmark case which lays down the law in India is Canara Bank v. Canara Sales Corporation and ors4, The court held that whenever a cheque purporting to be by a customer is presented before a bank it carries a mandate to the bank to pay. If the cheque is forged then there is no such mandate. The bank can escape liability only if it can prove knowledge on the part of the customer. Thus keeping in view the fact that the banker is bound to know his customer’s signature and compare the same, the paying banker will thus have no statutory protection if he pays a cheque on which the customer’s signature is forged.

POSITION OF COMPANIES The drawer of a cheque, whether a natural person or a body corporate or even a firm, can be prosecuted under S.141 of the Act. In order that a company may be bound by a negotiable instrument purporting to have been issued on its behalf two conditions must be satisfied: (i) the instrument must be drawn, made, accepted or endorsed in the name of or by or on behalf of or account of the company, (ii) and the person who makes, draws, endorses or accepts the instrument must have the authority given to him by the company on their behalf. Prosecution of the company is not sine qua non for the prosecution of the directors, and merely because company is not made an accused in the proceedings is no ground to quash it. Thus the in a decided case the Supreme Court held that officers of the company who may be held liable falling under S.141 other than the directors, fall into the following categories: (1) Those who are in charge of the company and responsible for the conduct of its business; and (2) Persons other that those falling in the above category, who is a mere director, manager or secretary, etc of the company.

4

AIR 1987 SC 1603

(3) Any other person who is a director or a manager or a secretary or officer of the company with whose connivance or due to whose neglect the company has committed the offence. However a person who proves that the offence was committed without his knowledge and that he had exercised due diligence in the conduct of his business is exempted from becoming liable by operation of the proviso to Sub-section (1). The burden in this regard will have to be discharged by the accused. The managing director may also be attached with liability and the essentials for such action is: (1) He has to be in-charge and responsible in case, (2) There should be his consent and connivance for which there should be averments in complaint or prima facie proof of it. The section being penal has to be strictly construed. In the absence of basic facts being pleaded in the complaint, vicarious liability cannot be imputed. in case of an action under S.138, the MD of a company on behalf of whom the dishonoured cheque has been issued, cannot plead that he did not participate in the day to day administration of the company and therefore is not criminally liable because normally, by definition the MD is supposed to be in-charge of managing the company. Neither can an MD pass the blame onto the directors of the company, imputing liability onto the directors for a dishonoured cheque issued by the MD is a matter of facts and evidence.5 Lastly, a managing director can only be sued in his official capacity and not as an individual.6 Firm: In the case of a firm, if the receipt of the notice is by one partner who is habitually acting for the business of the firm, it shall be deemed to be notice to the firm. Having understood the substantive aspects of dishounour of a cheque, the researcher will now discuss the procedural aspects in the subsequent chapter. Once the drawee establishes to the payee that there has occurred a dishonour to the cheque, then the payee goes through a series 5 6

Sharda Aggarwal v. Additional Chief Metropolitan Magistrate, (1993) 78 Comp Cas 123 D. Chandra Reddy v. Gowrisetty Prabhakar Rao, (1996) 6 Andh LD 281 (AP).

of procedural aspects so as to claim his money back and if all else fails then the payee will finally file a complaint against the drawer.

PROCEDURE TO FILE COMPLAINT The offence under S.138 is a non-cognizable offence by virtue of S.142 of the Act on account of the non-obstante clause as comprised in section 142 of the Act, the magistrate must proceed immediately on complaint. For a complaint however, first a statutory notice must be sent to the drawer and if the drawer does not reply accordingly within 15 days, it opens itself for prosecution. Notice: A notice is one of the essential characteristic of S.138. The period for cause of action is to be counted from the date of receipt of notice by the accused. Notice has to be sent to the drawer within 30 days of the receipt of information from the bank about the dishonour. As regards liability of dishonour of cheques it is essential to prima facie show that after 15 days of receipt of notice, the accused failed to pay the amount. In the case of Padmini Polymers Ltd v. Unit Trust of India,7 it has been held that a notice is must and mandatory. Unless and until the intention is clear on the part of the part of the person giving notice that the payment by the drawer of the cheque should be made within 15 days of receipt thereof, any communication between the parties insisting for making the payment cannot be termed as notice under S.138 of the Act. Otherwise the purpose of presenting the cheque time and again during the period of validity would have no meaning. So far as the question of giving notice is concerned, it is stated that every person who becomes liable upon an action for dishonour of the instrument and only by such dishonour either the holder thereof or some party thereto who remains liable thereon may give notice to such parties as entitled to immediate notice. But the holder may give notice to such parties as he desires to charge; but he cannot by giving notice make a person liable who is not otherwise liable under law, e.g., drawee in the case of dishonour of cheques. Serving the notice: 7

(2002) 101 Delhi LT 376.

An important question that arises here is that when is a notice deemed to be served and upon who is the burden of proving service? The problem that arises is that the section does not only say delivery of notice, but ‘receipt of the notice’, such wordings in the section can be put to numerous interpretations. The question is if ‘receipt of notice, postulates actually delivery, then the drawer can easily preempt action against him by deliberately staying away from his premises and the likes. It would be inequitable that such a person be let off the hook, while another drawer who stays on and accepts the notice would subject himself to prosecution. In the case of V.Raja Kumari v. P.Subbarama Naidu and Anr8 the question that came up was what is meant by a proper notice and if there is no proper would the complaint be quashed. “In Clause (c) of the proviso the drawer of the cheque is given fifteen days from the date of receipt of said notice for making payment. This affords clear indication that ‘giving notice’ in the context is not the same as receipt of notice. Giving is the process of which receipt is the accomplishment. The payee has to perform the former process by sending the notice to the drawer in his correct address, if receipt or even tender of notice is indispensable for giving the notice in the context envisaged in Clause (b) an evader would successfully keep the postal article at bay at least till the period of fifteen days expires. Law shall not help the wrong doer to take advantage of his tactics. Hence the realistic interpretation for the expression ‘giving notice’ in the present context is that, if the payee has dispatched notice in the correct address of drawer reasonably ahead of the expiry of fifteen days, it can be regarded that he made the demand by giving notice within the statutory period. Any other interpretation is likely to frustrate the purpose for providing such a notice.” Thus from here we see that there can be deemed notice even where actual notice has not been given. However this is a rebuttable presumption and its for the complainant to prove that the notice was served and that the person either refused to accept the notice or was unavailable. Though this is the popular position yet, many courts differ in opinion and it has been held that where the delivery is done by post, then reading S.138 with S.27 of the General Clauses Act Ingredients: 8

MANU/SC/0937/2004

Though no form of notice is prescribed, the requirement is that the notice shall be given in writing within fifteen days (now thirty with the amendment). Secondly when a notice is served, it must demand the “said amount” i.e. the cheque amount in it. If no such demand is made the notice falls short of legal requirement. However if apart from the “said amount” other amounts by way of interest, costs, etc is mentioned, such a notice would be a valid notice under the Section. The legislative intent of the Section is quite clear, the drawer of the cheque will be liable for conviction if the demand is not met within 15days of the receipt. Thus if the cheque amount is paid within the statutory period or before a complaint is filed the legal liability under S.138 will cease and for recovery of additional costs, a civil suit will lie. Also the stating of the cheque number, though seems essential so that the drawer should know of which cheque the notice relates to, yet it has been held that S.138 does not lay down any such condition and if the cheque number is absent or wrong, depending on the facts and circumstances, the notice will deemed good or bad in law. Burden of proof: Under this law all presumptions are made against the drawer of such cheques and thus the onus of proof is left on the accused rather than the prosecutor.

CONCLUSION Though insertion of the penal provisions have helped to curtail the issue of cheque arising out of its dishonour either honestly or with dishonest intention and the trading community now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonoured cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine, the only option left with the complainant is to file civil suit. The provisions of the Act do not permit any other alternative method of realization of the amount due to the complainant on the cheque being dishonored for the reasons of “insufficient fund” in the drawer’s account. The proper course to be adopted by the complainant in such a situation should be by filing a suit before the competent civil court, for

realization/ recovery of the amount due to him for the reason of dishonoured cheque which the complainant is at liberty to avail of if so advised in accordance with law. Thus what we see is that the section is not full proof, however there is no denying that this provision has done away with the rigorous and time consuming methods of criminal law. In support of this we can see that the section also provides for summary proceedings, making the issue penalty a lot simpler, because if a cheque gets dishonoured today and proceedings go on as usual, then the person may only get relief after say three or four years, this defeats the purpose of a cheque which is meant for immediate acceptance and distribution of cheque amount.

BIBILIOGRAPHY 

Avtar Singh, Negotiable Instruments, 4th ed ( Lucknow; Eastern Book Company, 2005).

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http://www.legalserviceindia.com

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http://www.pnbrscmbi.com/When%20dishonour%20of%20cheque%20constitutes%20an%2 0offence.pdf

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http://www.caclubindia.com/articles/critical-study-of-dishonour-of-cheques-undernegotiable-instruments-act-1881-10283.asp