With technological advancement and development of e- commerce, a number of alternatives to pay money have emerged like credit/debit card, net banking, digital wallets, etc. However, cheques still remain the most preferred mode of accepting and tendering payment. This is because of its long-standing use in personal and commercial transactions. Further, the use of cheques received impetus with the use of MICR cheques, development of Cheque Truncation System (CTS) and emergence of Core Banking. Now the concept of local and outstation cheques has lost its relevance.
Generally, banks are duty bound to honour cheques presented to it for payment. However, dishonour of cheques can happen due to various reasons and a banker is fully justified in refusing payment in those circumstances. Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 added a new Chapter XVII dealing with “penalties in case of dishonour of cheques for insufficiency of funds” to the Negotiable Instruments Act, 1881, to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheques due to insufficiency of funds in the accounts or for the reasons that it exceeds the arrangements made by the drawer, with adequate safeguards to prevent harassment of honest drawers. Later by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, the provisions of this chapter was made more stringent. By this amendment the duration of punishment was increased from one year to two years and summary trial procedure was prescribed with a view to speed up disposal of cases.
Criminal liability of drawer for issuing cheques without fund [Ss. 138-142]
Pre-requisites of liability [S. 138]
The object of bringing Section 138 on the statute book is to inculcate faith in the efficacy of banking operations and credibility in transacting business on the basis of negotiable instruments. According to an observation of the Supreme Court, these statutory provisions should be interpreted in a manner which promotes and advances the objects sought to be achieved, namely, an interpretation which strengthens faith in the financial system and discourages practice of rushing to courts of law.
Insufficiency of funds
The liability arises when a cheque is not paid on account of insufficiency of funds standing to the credit of the drawer’s account or the amount of the cheque exceeds the amount of credit facility allowed to the customer. It is for the drawee bank to make a statement in dishonouring the cheque that it is due to insufficiency of funds. The payee cannot make a declaration of this kind on his own. He is not supposed to know the state of any person’s bank account. The banks are under a duty of confidentiality as to a customer’s state of account. He is punishable with imprisonment extending up to one year or with fine extending up to twice the amount of the cheque or with both. It is necessary that the cheque should have been presented for payment within its validity period which is generally six months or in special cases it may be reduced to a shorter period by a notice on the face of the cheque. The cheque must reach the drawee bank’s branch within that period directly or indirectly or through collection process.
- Negotiable Instruments Act, 1881
- Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988
- Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002