Dishonour of cheque


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Dishonour of cheque

  2. 2. OUTLINE 2 Sr. No. TOPIC PAGE NO. 1. Definition 3 2. Kinds of dishonour of cheque 4 - 6 3. Insufficiency of funds 7 4. Non – acceptability of funds 7 5. Effects of dishonour of cheque 8 6. When dishonour of a cheque is an offence 9 7. Liability of dishonour of cheque 10 - 14
  3. 3. DEFINITION  The Negotiable Instruments Act, 1881 makes the dishonour of cheques a criminal offence.  Section 138 of NIA provides that the dishonour of the cheques for the reasons: a. “insufficiency of funds” and b. Signature on the cheque does not match that in the bank records. 3
  4. 4. KINDS OF DISHONOUR OF CHEQUE 1. Dishonour by non-acceptance. 2. Dishonour by non-payment is said to be dishonoured. 4
  5. 5.  S.91[14] of the Act speaks of dishonour by non- acceptance. Presentment for acceptance is required only in the case of a bill of exchange. Usually acceptance and payment go together and this usually happens in case an instrument is payable after sight, thus often it is difficult to distinguish the two because dishonour by non-payment is usually dishonour by non-acceptance, and thus it is only this bill of exchange which can be dishonoured by non-acceptance and not a cheque as in the case of a cheque no acceptance is required to be taken to the banker and cheques are mainly instruments payable at sight. 5
  6. 6.  The second kind of dishonour, is that of dishonour by non-payment. A negotiable instrument is said to be dishonoured by non-payment when the drawee of a cheque makes default in payment upon being duly required to pay the same.  Payment countermanded: When the drawer of the cheques issues instructions to the bank not to make any payment of a particular cheque issued by him, the bank then stands revoked from making payment on that cheque, this is known as countermand of cheques by the drawer. 6
  7. 7.  Insufficiency of funds: When there are no funds to meet the cheque or the account of the drawer does not hold sufficient funds to meet the whole credit amount of the cheque, the banker is then justified in refusing the payment of such a cheque. However where the account has sufficient funds, the banker is under an obligation to its customer of honouring the cheque presented to it.  Non-applicability of funds: Under S.31 of the Act it is the banker’s duty to honour the cheque when funds which are lying in the account of the drawer are applicable for the purpose. Thus when the funds in the account are lying for other purposes, the will necessarily dishonour the cheque presented before it for payment. 7
  8. 8. EFFECTS OF DISHONOUR OF CHEQUE 1. Taking of legal action. The payee/holder can take action against the drawer of such a bill may take action on the exact time of dishonouring of the bill. Thus the holder need not wait for the bill to mature and then to take action for dishonouring the same. 2. When a cheque is said to be dishonoured it loses its basic characteristic of negotiability with immediate effect. 3. On dishonouring of a cheque, nothing prevents the holder thereof to present it again particularly on being asked by the drawer of the cheque. 4. Mere dishonouring of cheques does not give rise to a cause of action in favour of the complainant but it accrues only after the issue of demand notice and failure of the drawer to make the payment. 8
  9. 9. WHEN DISHONOUR OF A CHEQUE IS AN OFFENCE   Returning the cheque unpaid by the drawee bank,  Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount,  Failure of the drawer to make payment within 15 days of the receipt of the notice. 9
  10. 10. LIABILITY ON DISHONOUR OF CHEQUE  Necessary Ingredients for Liability  Civil Liability  Criminal Liability 10
  11. 11. Necessary Ingredients for Liability: 1. The cheque must have been issued in favour of the payee. 2. The cheque so issued must have been issued in discharge, either in whole or in part, of a legally enforceable debt or liability. 3. The cheque should have been presented for encashment within six months of the date it bears or within its specific validity period which is earlier; 4. The cheque should have been returned by the bank unpaid, because the amount of money standing to the credit of the account is insufficient or it exceeds the amount arranged. 11
  12. 12. Contd… The payee should have given a notice of dishonour to the drawer within 15 days of the receipt of information by him from the bank regarding dishonour of the cheque demanding payment of the cheque amount. The drawer should have failed to make payment within 15 days of the receipt of notice. 12
  13. 13. Civil liability:  Civil Liability is also arises when the cheque is presented for the payment to the bank gets dishonoured.  Section 138 also provides for civil liability which provides for fine twice the amount of dishonoured cheque. 13
  14. 14. Criminal Liability:  A criminal liability is provided under section 138 of the Act, which provides imprisonment for two years or with fine which may extend to twice the amount of the cheque, or with both.  In case of dishonour of cheque the drawer of it may be prosecuted under sections 417 and 420 of the Indian Penal Code, 1960 (IPC). However, it all depends on the circumstances of each case. Every dishonour of a cheque is not cheating. 14
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