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A PRESENTATION ON “DISHONOUR OF CHEQUES” Section B Legal Aspects of Business PGP1 By: Manmit Rout (2010PGP184) Meenakshi Lakra (2010PGP) Akshay Kumar (2010PGP) Puneet Pareek (2010PGP) Prakash Anovadia (2010PGP) Abhijeet Srivastava (2010PGP)

Introduction Efficient banking system determines the buoyancy of the nation’s economy in terms of growth and development. Volume of cheques cleared per year in India- 200 crores (average) Contribution of cheques in overall banking transactions - 80% The Negotiable Instruments Act, 1881 deals with the law relating to the cheques in India. “ Negotiable instrument” – A promissory note, bill of exchange or cheque payable either to order or to bearer.

Meaning of Cheque 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 electronic image of a truncated cheque and a cheque in electronic form. [section 6] A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. [section 5] [As per The Negotiable Instruments Act,1881]

Parties to a Cheque Drawer Payee Drawee/Paying bank

Electronic Cheque Electronic cheques given statutory recognition- The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 As per Explanation I(a) to section 6, ‘An electronic cheque is a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed by a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system’.

Advantages of Electronic Cheques Easy to understand and implement as it is similar to traditional cheques, thus eliminating the need for customer education. Electronic receipts are available, allowing users to resolve disputes without involving the issuer. The payer does not need to be on line to create a payment. Electronic cheques are much faster. The risk is taken care of by the accounting server, which will guarantee that the cheque would be honoured.

Payment Transaction Process in Electronic Cheque System

MICR(Magnetic Ink Code Recognition) Cheques It is a special technology used in the banking sector on cheques. Specially impregnated inks are read magnetically. Pioneered by The Bank of America in 1950s to automate processing of cheques. Used across the bottom of cheques and other documents like deposit slips and share certificates. Contains city code, bank branch code, customer’s account number, sort code and instructions on how the payment is to be automatically routed and processed. When magnetized by MICR reader it emits a unique signal. It is rejected if MICR line is printed incorrectly or the amount of ferrous oxide is inappropriate in the ink. It is screened through a sorting machine where the amount filled in the cheque gets recorded in bank’s computerized records, which rules out possibilities of fraud.

Cheque Showing MICR 6 Digit Cheque number 9 Digit MICR Code

Popularity of Cheques Play predominant role as a payment media Daily average volume 27.48 lakhs from 40 MICR centers 17.49 lakhs from 4 metros alone Daily average value 145780 crores from 42 MICR centers 22435 crores from 4 metros alone In 2004 Card became dominant payment medium 33.4% in volume terms

Cheques and Business hazards Economic growth popularize use of cheques Businessmen reluctant to accept cheque as medium of payment Cheque Guarantee Card invented by banks To counter reluctance of risk-averse businessmen Card provide guarantee to retailer Cheques paid to retailer will not be dishonoured through lack of funds Cheque Guarantee Card popularize use of cheque

Dishonour of Cheques – Remedies under the General Law Cheque should be as infallible as genuine currency Insufficiency of funds in bank account results in dishonour of cheques “ Dishonour of cheques comes as a shocking betrayal for the holder and may have deleterious and cascading effect on the lives and financial health of many others” Dishonour of cheques could be dealt with Civil Law Criminal Law

Dishonour of Cheques – Remedies under the General Law Civil Law Remedy Aggrieved party can file suit in civil court for recovery of the amount due on the cheque Civil cases can often be Procedure-bound Time-consuming frustrating

Dishonour of Cheques – Remedies under the General Law Criminal Law Remedy Dishonour of cheques covered by Section 420 of the Indian Penal Code Section 420 deals with “cheating and dishonestly inducing deliver of property” Imprisonment term may extend to seven years Drawbacks Necessary to prove that drawer of cheque had fraudulent or dishonest intention at the time of issuing the cheque Aggrieved party has very little say as investigation and prosecution is in hands of the police and the public prosecutor After proving drawer guilty, the accused person may be punished with imprisonment but no provision for the aggrieved party to get the money due on the cheque

Remedy under the N.I. Act 1881 Seriousness of the damage to the cheque transfer system Inadequate earlier remedies required AMENDMENTS TO N.I. ACT 1881 Amended in 1988 with the insertion of a new chapter XVII and 5 new Sections (Section 138 –Section 142) The major focus of this chapter XVII were: Definition of new offence of dishonour of Cheque Prescribes a Punishment for the same Provides remedy to the party aggrieved due to dishonour of cheque Lays down the procedure to be followed by the court

INGREDIENTS OF THE OFFENCE OF DISHONOUR OF CHEQUES Under Section 138 of the N.I. Act, a person is deemed to have committed an offence only if the following 5 ingredients are present:

SALIENT FEATURES OF THE OFFENCE UNDER SECTION 138 There is a digression from the normal criminal law provisions where the intention of the accused plays a major role For a person to be deemed guilty of this offence, the intention or the motive of the accused is irrelevant. Legislature has created an offence of absolute liability or strict liability Mens rea (pronounced as “ menz ree-uh” )

Drawing of a Cheque Provisions of Section 138 will be applicable only when : Cheque has been drawn by a person for payment of any amount of money to another person on account of any debt/liability Maker will not be liable for prosecution if the cheque was given as a gift, donation or present Court will statutorily presume that the dishonoured cheque was issued for the payment of a liability to plaintiff Accused has to prove that there is no debt or liability

Presentation of Cheque Cheque must have been presented to the bank within a period of six months or its period of validity from the date on which it is drawn Few cheques can have validity period of less than six months If the period of validity is not specified then cheque should be presented within six months Cheque can be presented any number of times within this period subject to conditions

Returning of the Cheque Unpaid The bank must have returned the cheque unpaid due to following reasons :- Money standing to the credit of that account is insufficient It exceeds the amount arranged to be paid from that account by an agreement made with the bank The actual account position as on the date when the cheque reaches the drawee bank will be relevant In Rakesh Nemkumar Porwal v. Narayan Dhondhu Joglekar , Bombay High Court held that : “ A clear reading of Section 138 leaves no doubt that the circumstances under which such a dishonour takes place are required to be totally ignored. In such case, the law only takes cognizance of the fact that the payment has not been forthcoming and it matters little that any of the manifold reasons may have caused the situation”

Notice Payee/Holder should have made : Demand for the payment of the money by giving a notice to the drawer within 30 days of the receipt of the information from the bank regarding the return of the cheque unpaid Drawer of such a cheque should have : Failed to make payment of the said amount to payee within 15 days of receipt of the notice Notice can be sent by a telegram , fax or preferably by a registered post . It should explicitly demand for the payment of dishonoured cheque amount

Non-Payment by the Drawer Non-payment by the drawer within 15 days of the receipt of the notice constitutes an offence under section 138 of N.I. Act Issuing of a cheque and its dishonour is not an offence, only the failure to respond and make payment post receipt of notice and failure to make payment within grace period of 15 days

Punishment for the Offence Under Section 138 of the Negotiable Instruments Act Person shall be punished with imprisonment for a term which may extend to two years or fine which may extend to twice the amount of cheque or both Compensation under section 357 of the Code of Criminal Procedure, 1973 No limit provided for the amount of compensation

Complaint To be filed in writing before a Magistrate within 1 month of the date on which the cause of action arises Cause of Action arises when the drawer fails to make payment within 15 days from the date of receipt of Notice is applicable from the 16 th day for 1 month after above mentioned period As per Section 142(c) Cause of Action arises only once

Complaint Contd… E.g. Case filed on the basis of Second Notice dismissed on the grounds that there cannot be more than one cause of action in respect of a single cheque the cause of action had arisen when payment was not made by the drawer on receipt of the 1 st Notice complaint should have been filed within 1 month from the expiry of Notice period

Jurisdiction Court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class only can try an offence u/s 138 Courts will have jurisdiction situated at the place where the cheque was drawn or delivered the bank on whom the cheque was drawn is located the cheque was returned unpaid by the drawee-bank notice in writing was given to the drawer of cheque demanding payment the drawer of the cheque fails to make the payment of money

Offences By Companies In case of dishonour of cheques issued by the company, the rationale for fixing liability on the natural person, who might have directly or indirectly contributed to the commission of the offence or who could have prevented it, is explained as: “ The offence of dishonour of cheque comes into being by a deeming clause in Section 138 of the N.I. Act and, in case of offence by companies, the natural persons are again held guilty by a deeming fiction as provided in the provision of Section 141 of the N.I. Act.”

Section 141 of the N.I. Act If the person committing the offence is a company, every person in charge or responsible to the company for the conduct of the business of the company at the time the offence was committed shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished A company official shall not be held liable for the punishment if he proves, that the offence was committed without his knowledge or that he exercised due diligence to prevent the commission of such offence

Section 141 of the N.I. Act Contd…. A person nominated as director of a company by virtue of his holding any office or employment in the central or state government or a financial corporation owned or controlled by the central or state government shall not be liable for prosecution under this chapter. When the offence is committed by the company and it is proved that the offence has been committed with the consent , or due to any neglect on the part of any director, manger, secretary or other officer of the company than such person shall also be deemed guilty of that offence and shall be liable to be proceeded against and punished accordingly

Exceptions to Section 141 of the N.I. Act A liability under Section 141 of the Act is sought to be fastened vicariously on a person connected with a company, It is a departure from the rule in the Criminal Law against vicarious liability In this regard Supreme Court has enunciated following principles To make the accused vicariously liable the primary responsibility is on the complainant to make specific averments. For fastening the criminal liability there is no pre assumption that every Director knows about the transaction. Section 141 does not make all Directors liable for the offence. The criminal liability can be fastened only to those who were in charge of the business at the time of the commission of the offence.

Exceptions to Section 141 of the N.I. Act Vicarious liability on the part of person must be pleaded and proved and not inferred. If the accused is MD or joint MD then it is not necessary to make specific averments in the complaint and by virtue of their position they are liable to be proceeded against and punished. If the accused is Director or an Officer of a company who signed the cheque on behalf of the company then also it is not necessary to make specific averment in the complaint. The person sought to be made liable should be responsible for the conduct of the business at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases.

Exceptions to Section 141 of the N.I. Act Vicarious liability can be inferred against the company registered under the Companies Act, 1956 only if the requisite statements, which are required to be declared in the complaint, are made so as to make accused vicariously liable for offence committed by company If the averments in the petition contains that accused were in charge of or responsible for the business of the company.

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