By Eashaan Agrawal
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In the last article in the series on Negotiable Instruments we discussed issues like what is a cheque; we also tried to understand some basic terms like drawer, drawee, payee and clearing house. The cheques and other negotiable instruments form a very important part of economic transactions and it is thus important that people retain trust in such instruments otherwise their usage will be limited thereby defeating the purpose of negotiable instruments, i.e. to replace cash as a means of transferring money and funds. There are subsequently laws to ensure that in the case of dishonour of these instruments there are consequences.
It is
important to understand that according to the Negotiable Instruments Act 1881
the negotiable instruments might be dishonoured due to non-acceptance or
non-payment under Sections 91 and 92 of the Negotiable Instruments Act 1881
respectively. However, in this article, our primary focus is to understand the
implications of dishonour of cheque in case of insufficiency of funds as
specified under Section 138 of the Negotiable Instruments Act.
What happens in case of dishonour of cheque?
According
to Rule 6 of the RBI’s Uniform Regulations and Rules for Bankers’ Clearing
Houses (URRBCH), the bank has to send back the cheque along with an ‘objection
slip’ or ‘cheque dishonour memo’ as soon as the instrument or cheque is
dishonoured. The objection slip must meet the following criteria,
1.
It should be signed or
initialled by the Bank[1]
2.
The date of return of the
instrument[2]
3.
The Cheque Number
4.
Amount to be paid through the
instrument
5.
The slip should also mention the
reason for the return of the instrument, as specified in Annexure D of RBI’s URRBCH.
This is
the protocol followed by the banks in case of dishonour of cheque. After the
cheque gets dishonoured, the payee cannot directly approach the court. The
payee has to re-present the cheque within 3 months from the date of issue of
the cheque. However, if the cheque gets dishonoured again or the drawer fails
to make the payment the payee can initiate legal actions against the drawer.[3]
Legal Implications
The legal
action against the drawer of the cheque can be taken under Section 138 of the
Negotiable Instruments Act, 1881. Before filing a case under Section 138,
however, the following conditions need to be met,
1.
The cheque should be returned
unpaid
2.
The cheque returned unpaid
because of insufficiency of funds or the amount exceeds the limit (allowed to
be transferred) specified by the bank
3.
The cheque was presented to the
bank within 6 months on which it was drawn or within the period of its
validity, whichever is earlier, (This period was recently brought down from 6
months to 3 months by the RBI)[4]
4.
The payee should have sent a
notice of return of cheque to the drawer, within 30 days of him receiving the
‘Cheque Return Memo’ from the bank
5.
The drawer should have failed
to make the payment within 15 days after receiving the notice from payee about the
return of cheque.
Once
these conditions are met the complaint is taken into cognizance and the trial
begins. According to Section 138, dishonour due to insufficiency of funds is a
criminal offence and can lead to imprisonment of up to two years along with a fine
up to twice the amount of the cheque.
Recent Amendments
In order
to streamline the proceeding under Section 138, the government introduced two
amendments in 2015 and 2018. The Negotiable Instruments (Amendment) Ordinance
2015 added Section 142(2) which specified the jurisdiction of courts in case of
offences under Section 138 of Negotiable Instruments Act. According to it, if
the cheque is delivered for collection through an account, the complaint is to
be filed at the place where the payee’s bank branch is located. In case the
cheque is presented for payment over the counter, the jurisdiction lies with
the court where the drawer maintains his bank account.
Further,
the amendment added Section 142A, according to which the changes under Section
142(2) were made applicable retrospectively. The section also specified that in
the case between a payee and drawer all subsequent cases by the same payee
against the same drawer have to file before the same court notwithstanding
whether the cheque was delivered or presented for payment over the counter.
The Negotiable
Instruments (Amendment) Act 2018 was to protect the immediate interests of the
payee. It has added Section 143A which provides for interim compensation to the
payee for the duration of the trial. The interim compensation can be made up to
20 per cent of the amount cheque was for. Further, the amount has to be paid
within sixty days of the order and further a thirty-day extension can be given
depending on the judgement of the court. Further, Section 148 was added which
provided for an additional 20 per cent interim compensation in case of an appeal
by the drawer if convicted at the lower court level.
[4] https://www.businesstoday.in/moneytoday/perspective/cheque-validity-payment-pay-orders-credit/story/20418.html
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Eashaan is a 2nd year law student at National Law University Delhi. A voracious reader, he loves to travel to new places and experience the culture of different places. His interests include Constitutional Law, Contracts and Law of Crimes.
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