The Negotiable Instruments Act, 1881 is an Act to define the law relating to promissory notes, bills of exchange and cheques. According to Section 6 of the Negotiable Instruments Act, a “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and cheque in the electronic form.
Chapter XVII with sections 138- 142 of the Act deals with penalties in case of Dishonour of certain Cheques for Insufficiency of funds in the accounts. These provisions instil faith in the efficiency of banking operations and gives credibility to the use of negotiable instruments employed in business transactions.
What constitutes dishonour of cheque?
There are two methods of dishonouring a cheque by the paying banker, i.e., rightful dishonour of cheque and wrongful dishonour of cheque[i]. Circumstances where a cheque is rightfully dishonoured doesn’t incur any liability whereas if a cheque is wrongfully dishonoured then it attracts consequences which shall be legally redressed.
Rightful dishonour of cheque
The following are some of the circumstances where the paying banker is justified in dishonouring a cheque.
- Insufficient funds– Where there are no sufficient funds to meet the requirement in the cheque or when the amount to the customer’s credit is insufficient to meet the whole amount of the cheque, such an instrument may be dishonoured.
- Particulars not duly filled in– A banker can dishonour a cheque if all the required particulars of the cheque is not in order. The date, name of the payee, the amount written in both words and numbers, signature of the drawer, account number etc., is to be filled in properly, if not the banker can refuse to dishonour the cheque.
- Not properly presented– If the cheque is not properly presented, that is to say that the cheque is presented at a branch where the customer doesn’t have an account or is presented after banking hours or is not presented within a reasonable time, the banker may refuse to honour the cheque.
- Death of the customer– Upon the death of the customer, the balance in that account is vested with their legal representatives and once the banker receives notice of the customer’s death, he may refuse to honour any cheques that were issued by the drawer before his death, because the amount in the account now belongs to his legal representatives.
In the case of Tate vs. Hilbert[ii], it was held that if a banker honours the cheque after the death of the drawer but before the notice of his death, he is justified in doing so.
- Insolvency of the customer- When a customer is declared an insolvent by a competent court then all of his assets are vested with the assignee and hence a banker may refuse to honour such cheques.
- Forgery- if a cheque is forged then the Banker can dishonour it.
- Court orders- In situations where a Court passes any attachment order, judgements or garnishee orders against persons under section 39 of the Civil Procedure Code, 1908 or under the Specific Relief Act, 1963, then the Banker may refuse to honour a cheque.
There are several other grounds such as when the customer countermands payment, closing of the drawer’s a/c, attachment under the Income Tax Act, breach of trust, defective title, post-dated cheque, mutilation of the cheque etc., that may justify dishonouring of a cheque.
Wrongful dishonour of a cheque
In lieu of a healthy banker-customer relationship, a banker has a statutory obligation to honour his customer’s cheques unless he has valid reasons to dishonour it. If dishonouring of a cheque is due to the mistake or negligence of the Banker or any of his employees, then he attracts liability. This is referred to as wrongful dishonour of a cheque and the banker who dishonours the cheque intentionally without any valid reason or by mistake or due to negligence is liable to compensate for the loss suffered by the customer.
Section 31 of the Negotiable Instruments Act, 1881 states that when a customer had sufficient balance in his account, the banker is bound to honour such a cheque and if he fails to do so, he shall compensate the drawer for any loss or damage caused by such default.
In Marzetti vs. Williams[iii], the customer Marzetti had an account with the Williams bank and Marzetti had 69 pounds in his account, later on the same day 40 pounds was paid into his account. A couple of hours later, Marzetti drew a cheque for 87 pounds and the same was presented before the bank. However, the bank didn’t take due notice of the additional 40 pounds that was credited into Marzetti’s account and dishonoured the cheque for insufficient funds. The Court held that the bank was liable for damages as a couple of hours was sufficient for the banker to calculate the amount in the customer’s account and it is injurious to the customer especially if he is a person in trade to have such a small amount of payment having been refused for payment.
Consequences of dishonour of cheque:
- Notice- According to section 93 of the Negotiable Instruments Act, 1881, “when a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment, the holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been so dishonoured to all other parties whom the holder seeks to make severally liable thereon, and to some one of several parties whom he seeks to make jointly liable thereon.”
- Compensation- According to section 117 of the Negotiable Instruments Act, 1881, the compensation payable in case of dishonour of promissory note, bill of exchange or cheque, by any party liable to the holder or any endorsee, shall be determined by the following rules:
- the holder is entitled to the amount due upon the instrument together with the expense properly incurred in presenting, noting and protesting it;
- when the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places;
- an endorser who, being liable, has paid the amount due on the same is entitled to the amount so paid with interest at 31[eighteen per centum] per annum from the date of payment until tender or realization thereof, together with all expenses caused by the dishonour and payment;
- when the person charged and such endorser reside at different places, the endorser is entitled to receive such sum at the current rate of exchange between the two places;
- the party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill.
- Liability of banker for negligently dealing with bills presented for payment- According to section 77 of the Act when a bill of exchange, accepted payable at a specified bank, has been duly presented there for payment and dishonoured, if the banker so negligently or improperly keeps, deals with or delivers back such bill as to cause loss to the holder, he must compensate the holder for such loss.[iv]
Criminal liability of Drawer of a cheque on dishonour:
According to section 138 of Negotiable Instruments Act, 1881, where any cheque that was duly presented to the bank is returned unpaid either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank, such person shall be deemed to have committed an offence, and shall be imprisoned for a term which may be extended up to two years, or with fine which may extend to twice the amount of the cheque, or both.[v]
There are also three conditions specified in the section to attract the operation of this section.
In the case of Kusum Ingots and Alloys Ltd. vs. Pennar Peterson Securities[vi], the SC held that, “The object of bringing section 138 on statute is to inculcate faith in the efficiency of banking operations and credibility in transacting business on negotiable instruments.”
Edited by Pushpamrita Roy
Approved & Published – Sakshi Raje
[i]Dr.S.R.Myneni, Law of Banking, 2ndEdn. 354.
[ii] (1973) 2 ves. 111
[iii] (1830) 109 ER 842
[iv]S.77 of Negotiable Instruments Act, 1881.
[v]S.138 of Negotiable Instruments Act, 1881.
[vi][(2000) 2 SCC 745]
