Cheque Bouncing: A Criminal Offence

Cheque Bouncing is such a peculiar situation in law where someone may be held for criminal offence for a civil wrong. Refer https://manowise.com/cheque-bouncing-fulfill-your-promise-to-avoid-criminal-offense/ for introductory part.

1) Broad reasons behind  cheque bouncing are either financial dispute or non-payment of dues. But such disputes or non-payment of dues give rise to civil liability.  Till 31^st March 1989 bouncing of cheque was a civil wrong and not a criminal offence. Chapter XVII of the Negotiable Instrument Act, 1881, which includes Sections 138 to 148 relates to “Penalties in Case of Dishonour of Certain Cheques for Insufficiency of Funds in the Accounts”, and only due to provisions contained in this Chapter, cheque bouncing is a criminal offence in India.

This Chapter was introduced by the Act No. 66 of 1988 and made effective from 1^st April, 1989.

2) Reasons and the intention of legislature behind inserting Chapter XVII in the Negotiable Instruments Act, 1881, as cited by the Hon’ble Supreme Court in the matter of Goa Plast (P) Ltd. v. Chicko Ursula D’Souza, 2004 SCC (Cri) 499, are as follows:

1. To enhance the acceptability and credibility of cheques
2. To introduce financial discipline in business dealings
3. To restore the credibility of cheques as a trustworthy substitute for cash payment
4. To protect the interests of an honest drawee from long and cumbersome process of recovery through Civil proceedings.

In 1988, when Chapter XVII was introduced in the Negotiable Instrument Act, 1881, the punishment for the offence committed under Section 138 was up to one year. The maximum punishment of one year was enhanced to two years vide the Amending Act No. 55 of 2002, which was made effective from 6^th February 2003.  

3) In order to make cheque bouncing a criminal offence, there are certain pre-conditions to be met. Section 138 of the N.I. Act is as below:

“Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank 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 that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for ²[a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless–

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice; in writing, to the drawer of the cheque, ³[within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation – For the purposes of this section, debt of other liability means a legally enforceable debt or other liability.”

4) In simple language, ingredients of Section 138 of N.I. Act, 1881 or pre-conditions to make it a criminal offence, are:

1. The cheque must have been drawn for discharge of existing debt or liability.
2. Cheque must be presented within 3 months or within validity period whichever is earlier.
3. Cheque must be returned unpaid due to insufficient funds or it exceeds the amount arranged.
4. Fact of dishonour be informed to the drawer by notice within 30 days.
5. Drawer of cheque must fail to make payment within 15 days of receipt of the notice.

5) Conditions to initiate criminal proceedings against the drawer of the cheque for committing offence under Section 138 of N.I. Act are mentioned in Section 142(1) of the N.I. Act, which is as below:

 (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),

(a) no court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque;

(b) 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:

Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period;

And the maximum punishment for committing such criminal offence is- “imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both”.

6) However, the basic intention behind section 138 of N.I. Act, is recovery of cheque amount and not to send someone behind bars. Section 147 of the N.I. Act makes every offence committed under the Act compoundable. The Hon’ble Supreme Court in the matter of Damodar S. Prabhu Vs. Syed Babalal H. (AIR 2010 SC 1907) laid down guidelines for compounding of such offences:

“In the circumstances, it is proposed as follows:

(a) That directions can be given that the writ of summons be suitably modified making it clear to the accused that he could make an application for compounding of the offences at the first or second hearing of the case and that if such an application is made, compounding may be allowed by the court without imposing any costs on the accused.

(b) If the accused does not make an application for compounding as aforesaid, then if an application for compounding is made before the Magistrate at a subsequent stage, compounding can be allowed subject to the condition that the accused will be required to pay 10% of the cheque amount to be deposited as a condition for compounding with the Legal Services Authority, or such authority as the court deems fit.

(c) Similarly, if the application for compounding is made before the Sessions Court or a High Court in revision or appeal, such compounding may be allowed on the condition that the accused pays 15% of the cheque amount by way of costs.

(d) Finally, if the application for compounding is made before the Supreme Court, the figure would increase to 20% of the cheque amount.”

So, even if the criminal case for cheque bouncing has been filed against someone before the competent court, he may avoid going behind bars by way of settlement with the drawee and makes payment thereof and files application under Section 147 for leave/permission of the Court, which may be granted subject to aforementioned guidelines.

By- Advocate Vijay K.