Cheque bounce – what are your legal options?

Except for the time when a cheque bounces due to lack of funds or due to loss in a lot of cases, it is used by the drawer to escape his debt or liability. In such a situation it is an instrument of deception and should have been made punishable offense; however, even the 1988 amendment in Section 138 of Negotiable Instruments Act does not talk about it. In lack of any provision for this, it has to be seen what are the cases and judgments that deliver some points on how to deal with stopped payments.

A landmark case regarding the stopped cheque came to the Punjab and Haryana High Court in the case of Abdul Samod v. Satya Narayan Mahavir wherein the court analyzed section 138 of the Act. In the case the honorable Mr. Justice A.P. Chowdhury stated that there are 5 ingredients, which must be fulfilled.

According to him,

  • Firstly, the cheque is drawn on a bank for the discharge of a legally enforceable debt or other liability;
  • Secondly, the cheque has returned by the bank unpaid;
  • Thirdly, the cheque is returned unpaid because the amount available in that account is insufficient for making the payment of the cheque;
  • Fourthly, the payee gives a notice to the drawer claiming the amount within 15 days of the receipt of the information by the Bank and;
  • Finally, the drawer fails to make payment within 15 days of the receipt of notice.

The Punjab and Haryana High Court also gave a landmark judgment in the case of M. M. Malik v. Prem Kumar Goyal wherein it elaborated and analyzed the section 198 of the Negotiable Instrument Act. The honorable court held that the cause of action will be complete when the drawer of the cheque fails to make payment within 15 days of the receipt of the notice contemplated by proviso (b) and that the offence shall be deemed to have been committed only from the date when the notice period expires.

After analyzing the sections 138 and 142, which were introduced by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988), the court had construed the endorsement “refer to drawer” as the bankers inability to honor the cheque for want of funds in the account of the drawer. Moving further the honorable court observed that as far as the jurisdiction was concerned, the principle that the ‘debtor has to find the creditor” would apply and that the court within whose jurisdiction the creditor is located will have jurisdiction to entertain the complaint.

Stop payment of cheque could be punishable under Section 138 of the Negotiable Instruments Act, 1881 : The latest decision from the Bombay High Court’s Aurangabad bench says that even stop payment of cheque could be punishable under Section 138 of the Negotiable Instruments Act, 1881. Thus, it looks the silence that was seen in the section 138 has been given voice as Justice TV Nalawade observed while citing a Supreme Court verdict that if due to stopping of payment a cheque is dishonored, that case is also covered under Section 138 of the Negotiable Instruments Act, if other requirements of that Section are complied with. This according to him is a settled position of law now.

The case was from Hemant Chemicals against Riverside Industries and its four directors wherein petitioner Swapnil Jakhete of Hemant Chemicals had appealed that he was duped by the defendants. He wanted relief under the Negotiable Instruments Act (dishonor of cheque for insufficiency of funds in the accounts) and Section 420 (cheating and dishonestly inducing delivery of property) of IPC.

According to his plea Riverside Industries directors had approached him for supply of goods and issued him a cheque before it was stopped and despite his several requests from the accused directors nothing fruitful came out. However, as has been mentioned above there is no punishment for the willful stopping of the cheque, the lower court held that as payment was stopped and the cheque was not dishonored for insufficiency of funds, the provision of Section 138 of the Act is not attracted.

However, now that the Bombay High Court has turned the case on its head and held that the order made by trial court of setting aside order of issue process in respect of offence punishable under Section 138 of the Act cannot sustain in law, a lot of victims are going to have a relief. In situations you are facing similar issues wherein the drawer of the cheque has stopped the cheque willfully; you can file a case under section 138 of the Negotiable Instruments Act and seek the relief as it is very much a part of the section.

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