Question and Answers on Cheque Bounce

Question: What legal action can be taken against the cheque bounce/dishonour of cheque?

Answer: The payee/holder of the cheque can file criminal case under section 138 of Negotiable Instrument Act against the drawer of the cheque and simultaneously can also file a civil case for recovery.

Question: What will be the procedure for filing of criminal case against the drawer of the cheque?

Answer: Firstly the holder of the cheque/payee has to send a demand notice within 30 days, after receiving   the information from its bank regarding the cheque bounce, to the drawer of the cheque either individually or through lawyer asking to make the payment of the cheque amount within 15 days from the receipt of the intimation/demand notice with respect to dishonor of the cheque. Secondly if the drawer fails to make the payment within the said 15 days from the receipt of the intimation/demand notice with respect to dishonor of the cheque, the holder of the cheque/payee can move onto filing a criminal complaint in the court.

Question: Whether cheque bounce is a criminal offence?

Answer: Yes, Cheque Bounce is a criminal offence.

Question: Whether cheque bounce is punishable offence?

Answer: Yes, cheque bounce is punishable offence and the drawer/signatory of the cheque can be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

Question: Whether criminal and civil case can be filed simultaneously?

Answer: Yes, criminal and civil case can be filed simultaneously.

Question: Where a cheque has been given only as a security and not as repayment of a loan, whether an offence under Section 138 of Negotiable Instruments Act is made out for dishonour of cheque when this cheque is dishonoured?

Answer: This question came before the Hon’ble Supreme Court of India for consideration “WHETHER A POST-DATED CHEQUE GIVEN AS “SECURITY” AND MENTIONED IN THE LOAN AGREEMENT IS COVERED BY SECTION – 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 OR NOT?”.

The following observations were made:-

The agreement recorded that post-dated cheques towards payment of installment of loan (principal and interest) were given by way of security.

Contention of the appellant in support of his case was that the cheques were given by way of security as mentioned in the agreement and that on the date the cheques were issued, no debt or liability was due. Thus, dishonour of post-dated cheques given by way of security did not fall under Section 138 of the Act.

The Hon’ble Judges of the Supreme Court of India are of the view that the question whether a post-dated cheque is for “discharge of debt or liability” depends on the nature of the transaction. If on the date of the cheque liability or debt exists or the amount has become legally recoverable, the Section is attracted and not otherwise. Though the word “security” is used in the agreement but the moment the loan was disbursed and installments have fallen due on the date of the cheque as per the agreement, dishonour of such cheques would fall under Section 138 of the Act.

Question: Whether A cheque issued from the account of guarantor as a security also would fall within the purview of Section 138 Of NI Act or not?

Answer: The security cheques also would fall within the purview of the Section 138 of NI Act and a person could not escape his liability, as such, when there is existence of debt on the date of presentation of the cheque and the security cheques issued are dishonoured, the accused would be liable under Section 138 of NI Act.

Question: In what circumstances cheque bounce does not amount to an offence?

Answer: The circumstances in which a cheque bounce does not amount to an offence are numerous in number. Some of the instances are:

• When the cheque is given as an advance.
• When the cheque is given as a security.
• The disparity in amount stated in words and figures.
• Alternations in cheques require attestation by the drawer.
• If the cheque is found mutilated.
• When a cheque is issued to a charitable trust as a gift or donation.

Question: In what circumstances cheque bounce amounts to an offence?

Answer: Firstly when the cheque is issued against a legal liability. Secondly when the cheque in question is dishonored with the reasons either insufficiency of funds, account closed, payment stopped by the drawer and similar other reasons. Thirdly despite receiving of the demand notice the drawer of the cheque fails to make the payment within 15 days from the receipt of the notice.

Question: Whether the Court can close the proceedings of cheque bounce and discharge the accused on satisfaction that the cheque amount with assessed costs and interest is paid?

Answer: Yes, as per the principle laid down by the Hon’ble Supreme Court of India in the matter of M/s Meters and Instruments Pvt. Ltd. Versus Kanchan Mehta decided on 5.10.2017 where the cheque amount with interest and cost as assessed by the Court is paid by a specified date, the Court is entitled to close the proceedings in exercise of its powers under Section 143 of the Negotiable Instrument Act read with Section 258 Criminal Procedure Code.

Question: How should the proceedings for an offence under Section 138 of the Act be regulated where the accused is willing to deposit the cheque amount? Whether in such a case, the proceedings can be closed?

Answer: The question for consideration before the Supreme Court in M/S. METERS AND INSTRUMENTS PRIVATE LIMITED & ANR. VERSUS KANCHAN MEHTA was a situation where if the accused is willing to deposit the cheque amount can the proceedings be closed under such circumstances.

The Hon’ble Supreme Court held that where the Accused is ready to pay the cheque amount along with interest and cost as assessed by the Court by a specified date, the Court is entitled to close the proceedings in exercise of its powers under Section 143 of the Act read with Section 258 Code of Criminal Procedure.

It has been further held that in every summons that would be issued to the accused it may be mentioned that if the accused deposits the specified amount by a specified date, having regard to the cheque amount and interest/cost which would be assessed by the Court, the accused need not appear unless required and proceedings may be closed provided there is no valid objection by the complainant. If the accused complies with such summons and informs the Court and the complainant by e-mail, the Court can ascertain the objection, if any, of the complainant and close the proceedings unless it becomes necessary to proceed with the case.

It is further explained by the Supreme Court that the nature of offence under Section 138 primarily related to a civil wrong and the 2002 amendment specifically made it compoundable. The intention of the provision was to ensure that the complainant received the amount of cheque by way of compensation. The complainant could be given not only the cheque amount but double the amount so as to cover interest and costs. In view of the above scheme, this Court held that the accused could make an application for compounding at the first or second hearing in which case the Court ought to allow the same. If such application is made later, the accused was required to pay higher amount towards cost etc. This Court has also laid down that even if the payment of the cheque amount, in terms of proviso (b) to Section 138 of the Act was not made, the Court could permit such payment being made immediately after receiving notice/summons of the court.

Question: What happens to a cheque bounce case when the accused is ready to deposit the cheque amount?

Answer: The Hon’ble Supreme Court held that where the Accused is ready to pay the cheque amount along with interest and cost as assessed by the Court by a specified date, the Court is entitled to close the proceedings in exercise of its powers under Section 143 of the Act read with Section 258 Code of Criminal Procedure.

Question: Whether the Court has power to close the proceedings of a cheque bounce case without the consent of the Complainant?

Answer: Yes the Court has the power to close the proceedings of a cheque bounce case without the consent of the Complainant.

It is further explained by the Supreme Court that the nature of offence under Section 138 primarily related to a civil wrong and the 2002 amendment specifically made it compoundable. The intention of the provision was to ensure that the complainant received the amount of cheque by way of compensation. The complainant could be given not only the cheque amount but double the amount so as to cover interest and costs. In view of the above scheme, this Court held that the accused could make an application for compounding at the first or second hearing in which case the Court ought to allow the same. If such application is made later, the accused was required to pay higher amount towards cost etc. This Court has also laid down that even if the payment of the cheque amount, in terms of proviso (b) to Section 138 of the Act was not made, the Court could permit such payment being made immediately after receiving notice/summons of the court.

Question: What happens to the money receivable by the Complainant in the form of Compensation in a cheque bounce case when the Accused has served the jail term, in default of the compensation, Under such circumstances is the Compensation still recoverable by the Complainant?

Answer: The question that arose before the Hon’ble Supreme Court of India was that what happens to the money receivable by the Complainant in the form of Compensation in a cheque bounce case when the Accused undergoes jail term, in default of the compensation, Under such circumstances is the Compensation still recoverable by the Complainant?

The Hon’ble Supreme Court observes that in a cheque bounce case the gravity of offences under the Negotiable Instruments Act cannot be associated with offences under the provisions of the Penal Code, 1860 or other criminal offences. An offence with respect to dishonor of a cheque under Section 138 of NI Act is in the nature of a civil wrong which has been given criminal implications.

The statutory remedy for cheque bounce under Negotiable Instrument Act appears to be both punitive as well as compensatory in nature.

The punishment for cheque bounce under Section 138 of NI Act is not merely seeking retribution, but it is more a means to ensure payment of money to the holder of the Complainant as his interest lies largely in recovering the money rather than seeing the drawer of the cheque behind bars.

In the matter of Kumaran versus State of Kerela & Anr the Hon’ble Supreme Court has held that “so long as compensation has been directed to be paid under Section 357(3), Section 431, Section 70 IPC and Section 421(1), even though a default sentence has been suffered, yet, compensation would be recoverable in the manner provided under Section 421(1). This would, however, be without the necessity for recording any special reasons.”

Question: Whether a single complaint is maintainable for dishonour of several cheques?

Answer: Yes, a single Complaint is maintainable for dishonour of several cheques under Section 220 of Criminal Procedure Code, 1908 but it is desirable as per the requirements of Sections 218 and 219 of the Code of Criminal Procedure to file separate complaints for dishonour of several Cheques.

Question: Whether complaint under Section 138 of Negotiable Instrument Act for dishonour of cheque be amended?

Answer: Yes, the Hon’ble High Court of Rajasthan in the matter of Oswal Finlease Private Limited Vs. State of Raj & Anr held that no person could be penalised for his bonafide mistake, hence Complaint under Section 138 of the NI Act can be amended.

Question: Can accused be discharged in a cheque bounce case if the cheque amount is deposited by him in the bank account of the Complainant?

Answer: Yes, the Accused can be discharged in a cheque bounce case if the cheque amount is deposited by him in the bank account of the complainant.

The Hon’ble Supreme Court in M/S Meters And Instruments Pvt Ltd. vs Kanchan Mehta Citation: AIR 2017 SC 4594,2018(4) MHLJ 1, held as under:

“…16. It is, thus, clear that the trials under Chapter XVII of the Act are expected normally to be summary trial. Once the complaint is filed which is accompanied by the dishonored cheque and the bank’s slip and the affidavit, the Court ought to issue summons. The service of summons can be by post/e-mail/courier and ought to be properly monitored. The summons ought to indicate that the accused could make specified payment by deposit in a particular account before the specified date and inform the court and the complainant by e-mail. In such a situation, he may not be required to appear if the court is satisfied that the payment has not been duly made and if the complainant has no valid objection. If the accused is required to appear, his statement ought to be recorded forthwith and the case fixed for defence evidence, unless complaintant’s witnesses are recalled for examination.”
“20. In every complaint under Section 138 of the Act, it may be desirable that the complainant gives his bank account number and if possible e-mail ID of the accused. If e-mail ID is available with the Bank where the accused has an account, such Bank, on being required, should furnish such e-mail ID to the payee of the cheque. In every summons, issued to the accused, it may be indicated that if the accused deposits the specified amount, which should be assessed by the Court having regard to the cheque amount and interest/cost, by a specified date, the accused need not appear unless required and proceedings may be closed subject to any valid objection of the complainant . If the accused complies with such summons and informs the Court and the complainant by e-mail, the Court can ascertain the objection, if any, of the complainant and close the proceedings unless it becomes necessary to proceed with the case. In such a situation, the accused’s presence can be required, unless the presence is otherwise exempted subject to such conditions as may be considered appropriate. The accused, who wants to contest the case, must be required to disclose specific defence for such contest. It is open to the Court to ask specific questions to the accused at that stage. In case the trial is to proceed, it will be open to the Court to explore the possibility of settlement. It will also be open to the Court to consider the provisions of plea bargaining. Subject to this, the trial can be on day to day basis and endeavour must be to conclude it within six months. The guilty must be punished at the earliest as per law and the one who obeys the law need not be held up in proceedings for long unnecessarily.”

Question: Whether a Complaint for cheque bounce is maintainable if the cheque is issued in terms of a compromise entered between the parties?

Answer: The Hon’ble Supreme Court of India in Lalit Kumar Sharma And Anr vs State Of U.P. & Anr held that, since the cheque issued against the settlement does not create a new liability therefore, the second cheque that was issued in terms of the compromise did not create a new liability, hence the same cannot be said to have been issued towards payment of debt.

Question: Can an offence of dishonour of cheque be made out if the cheque in question was given as a gift or in charity?

Answer: No, an offence of dishonour of cheque cannot be made out if the cheque in question was given as a gift or in charity.
This issue was addressed by the Hon’ble Andhra High Court in the matter of Uplanche Mallikarjun And Ors. vs Rat Kanti Vimala And Anr 1997 (2) APLJ 389 as stated below:-

“…Thus it is clear that the cheque should be issued by the drawer in discharge of the full or part of the debt or liability and if the said cheque was dishonoured due to insufficient funds, etc., then only S. 138 of the Act gets attracted, if other conditions are complied with. On a perusal of the averments of the complaint, there is no averment that the cheque was issued by the petitioners in discharge of any legally enforceable debt or other liability. I am fortified in my conclusion by the decision of Division Bench of this Court in B. Mohan Krishna v. Union of India , wherein this Court, in para 51 (of Andh LT) : (para 50 of Cri LJ) of its judgment, observed as under :-

“……… Where a cheque is issued not for the purpose of discharge of any debt or other liability, the maker of the cheque is not liable for prosecution. For example, if the cheque is given by way of a gift or present and if it is dishonoured by the bank, the maker of the cheque is not liable for prosecution. Unless the two conditions set out in S. 138 are satisfied, no criminal liability can be fastened. ……”

Therefore, in the light of the foregoing discussion, I hold that the complaint is not maintainable and the petitioners are entitled to quash the proceedings.”

Question: Whether a Director of a Company be held liable for dishonour of a Cheque even though at the time of commission of the offence the said Director was not in charge of and responsible for the conduct of the business of the company?

Answer: No, a Director of a Company cannot be held liable for dishonour of a Cheque if at the time of commission of the offence the said Director was not in charge of and responsible for the conduct of the business of the company. In this regard it is submitted that Section 141 of the Negotiable Instrument Act states that:

141 Offences by companies:

1. If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:

[Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.]

2. Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation: For the purposes of this section:

a. “company” means any body corporate and includes a firm or other association of individuals; and

b. “director”, in relation to a firm, means a partner in the firm.

Question: Whether a Director of a Company be held liable for dishonour of a Cheque under Section 138 of the Negotiable Instrument Act in the absence of specific allegations in the Complaint with respect to the involvement of the said Director in a case of dishonour of cheque?

Answer: This question came before the Hon’ble Supreme Court of India in S.M.S. Pharmaceuticals Ltd vs Neeta Bhalla & Anr decided on 20 February, 2007 for consideration and the Hon’ble Supreme Court held that:

Section 141 of the Negotiable Instrument Act does not say that a Director of a Company shall automatically be vicariously liable for commission of an offence on behalf of the Company. What is necessary is that sufficient averments should be made to show that the person who is sought to be proceeded against on the premise of his being vicariously liable for commission of an offence by the Company must be incharge and shall also be responsible to the Company for the conduct of its business.

Question: Whether the signatory of a cheque is responsible for the Dishonour of the Cheque?

Answer: The Hon’ble Supreme Court of India in the matter of S.M.S. Pharmaceuticals Ltd vs Neeta Bhalla & Anr decided on 20 February, 2007 held that the Signatory of the Cheque which is dishonoured is clearly responsible for the incriminating act and will be covered under sub- section (2) of Section 141 of the Negotiable Instrument Act, which states as under:

141 Offences by companies:

1. If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:

[Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.]

2. Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation: For the purposes of this section:

a. “company” means any body corporate and includes a firm or other association of individuals; and

b. “director”, in relation to a firm, means a partner in the firm.