Dishonour of Cheque and its relationship with Indian Contract Act,1872

Updated: Jan 20


DISHONOUR OF CHEQUE


Abstract

The article deals with Dishonour of Cheque as per Negotiable Instrument act and its relationship with Indian Contract Act. Although both acts are different in many ways but both acts share few things in common and considered as sharing few common grounds which might establish a direct or indirect relationship between them.


Introduction

Cheques is a negotiable instrument. Cheques has made the monetary transactions easier and are used in almost all the transactions such as bills, re-payment of loan, fees, payment of salary, etc. As nowadays Instead of carrying bundles of notes people find carrying cheques much easier. But when somethings have advantages then it has some disadvantages as well as when the cheque system arrived the problem of bouncing and dishonouring of cheque also started.


What is Dishonour of Cheque?

When there is non-payment or due to insufficiency of funds, signature mismatch, overwriting, etc a cheque is said to be bounced or dishonoured. And many people face this problem in their day to day life.

When the cheque gets dishonoured or bounce the drawee bank issues a ‘Cheque Return Memo’ mentioning the reason of non-payment and gives the cheque and memo to the payee. Payee within 3 months can go to the bank again and submit the cheque because sometimes there are errors and to recheck as they believe it can be honoured this time but if second time also cheque gets dishonoured then payee can take the matter in the court and solve it legally. Earlier there was only civil liability as the payee gets compensated but after the insertion of Section 138 under Negotiable Instrument Act,1881 the civil liability converted into the criminal offence and it was inserted to make the person criminally liable also for its lack of responsibility.


But there are 3 conditions that has to be satisfied by the payee to take the case in the court-

1) The cheque has to be presented to the bank within the time limit and when the time is not specified then the maximum time is 6 months from the date of which it is drawn.

2) When the bank will let you know that the cheque is dishonoured then within the period of 15 days payee has to give notice to the drawer that cheque has been dishonoured and within that period drawer has to do the payment.

3) When drawer fails to do the payment within 15 days to the payee or holder in due course then payee can make a complaint in writing within 1 month from the date on which the payee faced the problem and the cause of action arose.

Then the court will issue the summon to the drawer when they will receive the complaint.


Parties in Dishonor of Cheque

Drawer- The person who makes the cheque and signs it and from whose account the money goes.


Drawee (Bank)-The name which is on the cheque and money will go from that bank.


Payee-The person who will receive the amount or on whose account the credit will come or transfer.


Punishment for Dishonour of Cheque

Punishment for the drawer if found guilty under Section 138 of Negotiable Instrument Act is Imprisonment of up to 2 Years and fine of twice the amount of cheque that is bounced or both. The court can also grant compensation under Section 357 of the Code of Criminal Procedure,1973 and there is no limit mention for the amount of compensation.


Section – 143A : Under this section the court has power to order Interim compensation to the complaint. If the case is pending in the court for dishonour of cheque then court can demand drawer to pay interim compensation that cannot exceed up to 20% of the amount of cheque and is has to be paid within 60 days of the date of that judgement.

As per section 142 of NI, Act, the offence of dishonour of cheque punishable under section-138 can be deal by only the court of a Magistrate or Judicial Magistrate of first class and no other court.


How Dishonour of Cheque as per NI,ACT is related to Indian Contract Act?

A negotiable instrument is also a type of “contract” which are used for payment of money whether it is a promissory note, bills of exchange or cheques. They are in the form of written contracts whose benefit can be passed by one person to a new person. Cheque is considered as a valid consideration as it is in monetary term and when in an agreement there is consideration it becomes a contract between the two parties and here when the cheques gets bounced or dishonoured then payee can sue drawer and drawer will have to compensate payee as there civil liability will arise. But after insertion of section 138 in NI, Act drawer can be criminally liable as well and dishonour of check becomes a criminal offence. But before this amendment there was only civil liability which arises because there was agreement between drawer and payee and when the cheque gets dishonoured then it is breach of agreement and that contract is said to be void. So, there is a direct or indirect relation between Negotiable Instrument Act and Indian contract Act.

As we can also draw the relationship between Negotiable Instrument Act and Indian Contract Act from the following case laws of dishonour of cheque -


Daya Shankar vs. Piyush Saini(23 May, 2012)[1]

Facts

In this case there was an agreement between the parties that the convict will arrange an appointment for job in Haryana Police for complainant in return of money and a cheque of Rs. 80,000 was given but the convict/appellant was not able to secure the job as per agreement. And his cheque also got dishonoured when he tried to drew it for return. And hence he was charged for dishonour of cheque.


Issue

In this case issue was whether there was dishonour of cheque and it falls under Section-138 of NI, Act?

Judgement

In this case while allowing the appeal high court observed that the execution of the cheque is not sufficient to constitute an offence punishable under section 138 of NI, Act, unless it is proved that the debt or other liability is a legally enforceable one.And here his complaint under section 138 of NI, Act was dismissed because the contract between the parties for arranging job for money was a ‘void contract’ under section 23 of the Indian Contract Act and such amount does not come under ‘legally recoverable debt’ under section 138 of Negotiable Instrument Act.

Nand Kishore vs. Dinesh Kumar [2]( 19 July, 2013)

Facts

In this case accused made a promise to complainant that he will secure a government job for him and for the same accused got sum of Rs. 1,20,000 dishonestly from complainant and accused promised that he will repay the money if he will fail to arrange the job. And accused was not able to arrange the job for complainant and in order to pay his liability he issued two cheques which were dishonoured because of insufficiency of funds in the bank account. Complainant also served the legal notice to the accused but then also accused was not able to pay the amount to the complainant within the given period. And hence the matter was brought by the complainant in the court.


Issue

In this case, issue was

1) Whether the accused should be charged under section 138 of NI, Act?

2) Whether there was a valid contract between the parties?


Judgement

In this case the court observed that the dishonour of cheque issued for repayment of the sum received by the drawer is illegal gratification for securing a job for the complainant's nephew in Haryana police and after analysing the provisions of section-138 of the NI Act and of Sections 2(g), 10, 23 and 65 of the Indian Contract Act, 1872, High Court decided that such a cheque cannot be said to have been issued in discharge of any legally enforceable liability within the meaning of Section 138 of the NI Act as the contract was not valid between the parties it was void.


As per section 2(g) of Indian Contract Act, 1872, Void agreement are agreements which in not enforceable by law and they are not terms as ‘contract’. And as per section 23 of Indian Contract Act the consideration and object of an agreement should be lawful and the similar thing is in section 138 of Negotiable Instrument Act that the payments through cheque must be done for legally enforceable debt or liability when it is issued by the drawer. So, there is a direct relationship between both the acts that when the cheque is considered to be used for unlawful reasons then the drawer and payee was in a void contract as per section 23 of Indian Contract Act and the same cannot be considered legally enforceable under section-138 of NI, Act and therefore no cause of action will arise.


Conclusion

For proving criminal offence under section-138 of negotiable Instrument Act and to make a person liable for dishonour of cheque the provisions of Indian Contract Act are also important to be considered as both acts have a direct or indirect relation and have some similar provisions and even before the insertion of section-138 in NI, Act the payee whose cheque gets bounced or dishonoured is able to ask compensation from drawer because there was agreement between the two and cheques as an consideration makes it a contract and when there is breach of that contract that is cheque gets dishonoured then payee can take the matter in court. So, we can say that dishonour of cheque is related to Indian Contract Act and hence both are important to be considered together.


Reference


1. Pragyaaishwarya; on dishonour of cheques; available at legal services https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwi6moa7y5juAhXbbn0KHRqsD4oQFjALegQIIBAC&url=http%3A%2F%2Fwww.legalservicesindia.com%2Farticle%2F236%2FDishonour-Of-Cheques.html&usg=AOvVaw0IDThW8X6jGIU4vtuTPlKt

2. Dr. R.K. Bangia, Indian Contract Act ( Allahabad law agency, fifteenth edition, 2016)

3. Sh. S.S. Rathi, Daya Shankar vs. Piyush Saini case; available on Indian Kanoon

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwi97NqlzZjuAhXFZCsKHR5yC-UQFjAAegQIBRAC&url=https%3A%2F%2Findiankanoon.org%2Fdoc%2F21020514%2F&usg=AOvVaw0H9VqZTTGt_ygKK4yqytix

4. Sh. Arun Kumar, Nand Kishore vs Dinesh Kumar case; available on Indian Kanoon

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjnuKWHrpbuAhV-6XMBHWCXAlIQFjAAegQIAxAC&url=https%3A%2F%2Findiankanoon.org%2Fdoc%2F172480951%2F%3Ftype%3Dprint&usg=AOvVaw0vWTVr6ulQ4My86UgJtwoN

[1]Daya Shankar vs. Piyush Saini on 23 May, 2012CR NO: 37/2012 CC NO: 6145/2011 PS RAJINDER NAGAR U/s 138 NI ACT ,DATED: 23.05.2012 [2] Nand Kishore vs Dinesh Kumar on 19 July, 2013 CC NO: 1538/12

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