When cheques get dishonoured

K. Krishnamurthy

CHAPTER 17, consisting of cluster of sections was inserted by Act 66, 1988, the object of amendment being to provide penalties in the event of cheque issued by drawer getting dishonoured for want of funds. This Section envisages various steps for prosecuting the drawer of the cheque in the event of dishonour by the bank.

According to Section 138, when any cheque drawn by a person on an account maintained by him in a bank, is returned on the ground of insufficiency of funds, he is said to have committed an offence. Before this amendment, people were resorting to Section 420 of the Indian Penal Code for the offence of cheating.

Procedure for prosecution: The proviso to Section 138 lays down the procedure before launching the prosecution for dishonour of cheques:

* The cheque should be presented to the bank within six months.

* The payee on receipt of information from the bank that the cheque has not been passed for want of funds, should make a demand for payment of the cheque amount by notice in writing with 15 days from receipt of information from the bank.

* If the drawer of the cheque fails to make payment of the money covered by the cheque to the payee within 15 days of the receipt of the notice from him (payee) and fails to pay, he commits the offence under Section 138.

* There is a further step to be followed for prosecuting the drawer for the offence under Section 138 - "such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to Section 138.

The case M/S Unipals India Ltd versus State (see box for details) decided by the Supreme court of India, throws more light on the technical points such as the cause of action, nature of notice, whether notice given for winding up under the provisions of the companies act can be construed as a notice under N. I. Act. The supreme court observed:

* If any notice is issued under Section 434 of the companies Act within 15 days of the information from the Bank regarding returns of the cheque drawn by a company as unpaid such a notice would as well be good enough under clause (b) of the proviso to sect ion 138 of the N. I. Act.

* Referring to the case, Sadanandan Bhadran versus Madhvan Sunil Kumar, decided by the Supreme Court, it was held that a complainant cannot create successive causes of action with the same cheque.

* The payee is not entitled to create another cause of action to file a complaint for the purpose of launching a complaint on it.

Importance of notice: The apex court has, in this judgment, clearly explained the ingredients of Section 138, N. I. Act in the following words: "One of the indispensable factors to form the cause of action envisaged in Section 138 of the N. I. Act is contained in clause (b) of the proviso to that Section. It involves making of a demand by giving a notice in writing to the drawer of the cheque "within 15 days of receipt of information by him from the bank regarding the return of the cheque as unpaid" If no such notice is given within the 15 days, no cause of action could have been created at all.

Timing of notice: Thus, if dishonour of a cheque has once snowballed into a cause of action, it is not permissible for a payee to create another cause of action with the same cheque. The question in this case is, did the payee issue notice within 15 days after the first dishonour of the cheque. Was the notice within 15 days of the date of intimation from the bank regarding dishonour, or was it sent after that period of 15 days? In fact, that is the crux of the issue involved in this case.

Court's ruling: The court finally held (for substance of ruling see accompanying box) that:

* Appellants have not stated that the interval between the date of the earlier dishonour of the cheque and notice did not exceed the statutory period of 15 days.

* To a query, the learned counsel for the appellants admitted that the notice was issued only after expiry of 15 days from the date of intimation from the bank regarding dishonour.

* If so, the said dishonour remained without any escalation and need not snowball into a cause of action.

* Its corollary is that the payee was not prevented from presenting the cheque once again.

* Within the permitted period, to make use of such presentation and subsequent dishonour for a cause of action to be founded for launching a complaint, as in the present case.

To use the provision of Section 138 of the Negotiable Instruments Act, if the cheque is dishonoured, notice demanding payment should be made within 15 days. Notice demanding money under Sections 433 and 434, can also be acted upon. If dishonour of a cheque has snowballed into a cause of action, it is not permissible to create another cause of action with the same cheque.

(The author is a Chennai-based advocate and notary public.)