CASE ANALYSIS

(DISHONOUR OF CHEQUE)
(This assignment has been submitted towards the partial fulfilment of
1ST semester LLM Course for the session 2020-21)

Submitted by:

APEKSHIT PARHI

REGN. NO- 2O61811072

COURSE: LLM (1 Semester)

ST

BATCH: 2020-21

SUB: BANKING LAW AND INSURANCE (SPIA-02)

Guided by:
PROF. DR ITISHREE MISHRA

Submitted to:

SOA NATIONAL INSTITUTE OF LAW

SIKSHA ‘O’ ANUSANDHAN

(DEEMED TO BE UNIVERSITY)

1
 TABLE OF CONTENTS
CASE ANALYSIS OF M/S Modi Cements vs Shri Kuchil Kumar Nandi
INTRODUCTION
INTRODUCTION TO THE CASE
FACTS OF THE CASE
ISSUES
ARGUMENTS BY APPELLANT
ARGUMENTS BY RESPONDENT
JUDGEMENT
ANALYSIS
CONCLUSION
 DISHONOURING A CHEQUE

The main object of this piece of legislation is to inculcate faith in the efficacy of banking
operations and credibility in transacting business on negotiable instruments. Section 138, THE
NEGOTIABLE INSTRUMENTS ACT 1881 is intended to prevent dishonesty on the part of the
drawer of negotiable instrument to draw a cheque without sufficient funds in his account
maintained by him in a bank and induces the payee or holder in due course to act upon it. The
dishonour of cheque is now a criminal offence punishable by imprisonment up to one year or with
fine up to the double the amount of dishonored cheque or with both. Advent of cheques in the
market have given a new dimension to the commercial and corporate world, its time when people
have preferred to carry and execute a small piece of paper called Cheque than carrying the
currency worth the value of cheque. Dealings in cheques are vital and important not only for
banking purposes but also for the commerce and industry and the economy of the country. Before
1988 there being no effective legal provision to restrain people from issuing cheques without
having sufficient funds in their account or any stringent provision to punish them in the vent of
such cheque not being honoured by their bankers and returned unpaid. of course on dishonour of
cheques there is a civil liability accrued. However in reality the processes to seek civil justice
becomes notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To
ensure promptitude and remedy against defaulters and to ensure credibility of the holders of the
negotiable instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act,
1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments Laws
(Amendment) Act, 1988, which were further, modified by the Negotiable Instruments
(Amendment and Miscellaneous Provisions) Act, 2002[3]. This article endeavors to elucidate the
penal provision [4] light of the amendments and the judicial interpretations.

Scope
of the ten sections comprising the chapter of the Act, section 138 creates statutory offence in the
matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained
by a person with the banker. Section 138 of the Act can be said to be falling either in the acts
which are not criminal in real sense, but are acts which in public interest are prohibited under the
penalty or those where although the proceeding may be in criminal form, they are really only a
summary mode of enforcing a civil right. Normally in criminal law existence of guilty intent is an
essential ingredient of a crime. However the Legislature can always create an offence of absolute
liability or strict liability where 'mens rea' is not at all necessary.

Five ingredients of the offence under s. 138

The offence under Sec. 138 of the Act can be completed only with the concatenation of a number
of acts. Following are the acts, which are components of the said offence;
1.Drawing of the cheque,
2.Presentation of the cheque to the bank,
3.Returning the cheque unpaid by the drawee bank,
4. Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount.
5. Failure of the drawer to make payment within 15 days of the receipt of the notice.

It is not necessary that all the above five acts should have been perpetrated at the same locality. It
is possible that each of those five acts could be done at five different localities. But concatenation
of all the above five is sine qua non for the completion of the offence under Sec. 138 of the Act.

Drawing of a Cheque
The drawer in payment of a legal liability to discharge the existing debt should have drawn
cheque. Therefore any cheque given say by way of gift would not come within the purview of the
section. It should be a legally enforceable debt; therefore time barred debt and money-lending
activities are beyond its scope. The words any debt or any other liability appearing in section 138
make it very clear that it is not in respect of any particular debt or liability The presumption which
the Court will have to make in all such cases is that there was some debt or liability once a cheque
is issued. It will be for the accused to prove the contrary. i.e., there is no debt or any other liability.
This of course unless the prosecution restricts itself to a particular liability. The Court shall
statutorily make a presumption that the cheques were issued for the liability indicated by the
prosecution unless contrary is to be proved.

Presentation of Cheque
The presentation of cheque should be within its validity period. Generally a cheque is valid for six
months, but there are cheques whose validity period is restricted to three months etc. The question
arises as to which bank the cheque should reach within the validity period, is it the payee to his
bank presents that of drawer's bank or it is enough if the cheque before six months. The courts are
divided on the issue.
Common sense demands that the cheque should reach the drawer bank within the period of
validity as it is that bank that either pays or rejects payment as per the situation existing on that
day.

Returning of the Cheque Unpaid

Lot of controversy had arisen on the issue. What reasons are relevant to hold the drawer of the
cheque criminally responsible for bouncing of a cheque. The case laws on the subject have now
made the position clear. It is not what the bank says in its return memo that is relevant but the
actual position as on the date when the cheque reaches the drawer bank whether there were enough
funds in the drawer account to honour the cheque.

Notice
Notice is a very important stage. It is the non-payment of dishonoured cheque within fifteen days
from the receipt of the notice that constitutes an offence. Issuing of a cheque and its dishonour is
not an offence. The offence is when the drawer receives a notice from the payee and he fails to pay
the dishonoured cheque amount within the grace period of 15 days that constitute an offence. Any
demand made after the dishonour of cheque will constitute a notice.

Failure of the drawer to make payment within 15 days of the receipt of the notice
A complaint is to be filed in the court within 30 days from the date on which the limitation period
for making such payment came to an end.
APPELLANT- M/S. Modi Cements Ltd

RESPONDENT- Shri Kuchil Kumar Nandi

CITATION-AIR 1998 SC 1057

DATE OF JUDGEMENT-22 March, 1998

BENCH-M Mukherjee, S Kurdukar, K Thomas

INTRODUCTION TO THE CASE

Appellant, Modi Cements Ltd, is a company known for selling cement throughout India. It was
alleged by appellant that respondent, Kuchil Nandi, purchased from them non-levy Modi Cement
on credit against the orders placed on behalf of his concerns. These orders were placed by the
respondent with the Calcutta office of the appellant and it was agreed that the price of the
consignments was to be paid by the respondent at the said office. After taking accounts it was
found that on 23.2.1994 the respondent incurred a liability/debt of Rs. 1,10,53,520.30 payable to
the appellant towards the purchase price of the cement supplied by them to the respondent. In
partial discharge of the said liability/debt the respondent drew three cheques in favour of the
appellant.

FACTS OF THE CASE

It is alleged by the appellant in the complaint that the respondent purchased from them non-levy
Modi Cement on credit against the orders placed. These orders were placed by the respondent with
the Calcutta office of the appellant and it was agreed that the price of the consignments was to be
paid by the respondent at the said office. After taking accounts it was found that on 23.2.1994 the
respondent incurred a liability/debt of Rs. 1,10,53,520.30 payable to the appellant towards the
purchase price of the cement supplied by them to the respondent. In partial discharge of the said
liability/debt the respondent drew three cheques in favour of the appellant on 23.2.94, 26.2.94 and
28.2.94 bearing cheque Nos. 1308340- 42 for a sum of Rs.2,00,000/- each. The appellant
presented these three cheques on 9.8.1994 for encashment through their banker- Bank of India,
J.L. Nehru Road Branch, Calcutta. On 6.9.94 the Indian Bank, the Banker of the respondent,
returned the said cheques as unpaid with an endorsement "payment stopped by the drawer". Later
on it transpired that vide his letter dated 8.8.94 the respondent had given such instruction. The
appellant on 13.9.94 sent a legal notice in terms of Section 138 of the Act to the respondent
demanding payment of the aforesaid amounts under the cheques. The said notice was duly served
on the respondent on 17.9.94. Since the respondent failed and neglected to make the payment of
the amount of the aforesaid three cheques within the stipulated period of 15 days which expired on
2.10.94, the appellant filed three criminal complaints against the respondent under Section 138 of
the Act. After entering appearance in obedience to the processes issued in connection with the
above three cases the respondent filed applications for staying the proceedings which were
rejected. The respondent then filed three petitions under Section 482 Cr.P.C. in the High Court of
Calcutta for quashing the complaints. The Learned Single Judge vide his common Judgment and
order dated 21.11.96 allowed the petitions of the respondent and quashed the complaints. It is
against this order passed by the High Court the appellant has filed these appeals.
ISSUES
Whether an order to “stop payment” amounts to dishonour of cheque under S.138 of Negotiable
Instruments Act? Whether the rules laid down in S.138 of Negotiable Instruments act were
complied by the appellant? Whether failure to make payment within 15 days after receipt of notice
for such payment from the holder in due course violates the provisions laid down under S.138 the
Negotiable Instruments Act?

ARGUMENTS BY APPELLANT
1. The Learned Counsel for the appellant vehemently urged that the this case may be decided with
reference to the cases of (i) Electronics Trade & Technology Development Corporation Ltd.,
Secunderabad vs. Indian Technologists & Engineers (Electronics) (P) Ltd., & & Anr. 1996 (2)
SCC 739 and (ii) K.K. Sidharthan vs. T.P. Praveena Chandran & Anr.. (1996) 6 SCC 369.
2. It was held by the Bench of this Court in Electronics Trade and Technology Development
Corpn. Ltd., vs. Indian Technologists and Engineers (Electronics) (P) Ltd.. that even if a cheque is
dishonoured because of `stop payment' instruction to the bank, Section 138 would get attracted".
3. The Learned Counsel for the appellant argued that the decisions of this Court clearly support the
case of the appellant and the trial court had rightly issued the process and the High Court was
totally wrong in taking a contrary view.
4. According to the learned counsel if the observations of this Court in Electronics Trade &
Technology Development Corporation Ltd. Secunderabad (supra) to the effect, "Suppose after the
cheque is issued to the payee or to the holder in due course and before it is presented for
encashment, notice is issued to him not to present the same for encashment and yet the payee or
holder in due course presents the cheque to the Bank for payment and when it is returned on
instruction. Section 138 does not get attracted" is accepted as good law, the very object of
introducing Section 138 in the Act would be defeated.
5. We see grate force in the above submission because once the cheque is issued by the drawer a
presumption under Section 139 must follow and merely because the drawer issues a notice to the
drawer or to the Bank for stoppage of the payment it will not preclude an action under Section 138
of the Act by the drawer or the holder of a cheque in due course. The object of Chapter XVII,
which is intituled as "OF PENALTIES IN CASE OF DISHONOR OF CERTAIN CHEQUES
FOR INSUFFICIENCY OF FUNDS IN THE ACCOUNTS" and contains Sections 138 to 142, is
to promote the efficacy of banking operations and to ensure credibility in transacting business
through cheques.
6. It is for this reason we are of the considered view that the observations of this Court in
Electronics Trade & Technology Development Corporation Ltd., Secunderabad (supra) in
paragraph 6 to the effect "Suppose after the cheque is issued to the payee or to the holder in due
course and before it is presented for encashment, notice is issued to him not to present the same
for encashment and yet the payee or holder in due course presents the cheque to the bank for
payment and when it is returned on instructions. Section 138 does not get attracted", does not fit in
with the object and purpose for which the above chapter has been brought on the Statute Book.
ARGUMENTS BY RESPONDENT
1. It been took up for consideration a similar contention advanced before them by the Learned
Counsel for the drawer of the cheques that stoppage of payment due to instructions does not
amount to an offence under Section 138 of the Act.
2. Reference was made to the plain reading of S.138 of the Negotiable Instruments Act, which
reads as under:
3. S.138- Dishonor of cheque for insufficiency, etc., of funds in the account:- 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 honor the cheque or that it exceeds the
amount arranged 6 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 a term which may extend to one year, 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, within fifteen days of the receipt of the 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
purpose of this Section, "debt or other liability" means a legally enforceable debt or other liability.
4. Mere endorsement of the Bank "payment stopped" was not sufficient to entertain the complaint
as that was not an ingredient of the offence under Section 138 of the Act.
5. It was, however contended on behalf of the respondent that the decision in Electronics Trade &
Technology Development Corporation Ltd., Secunderabad (supra) does not support the appellant
as far as the facts that emerged in the present cases inasmuch as the drawer had intimated to the
Bank on 8.8.1984 to stop the payment whereas the cheques were presented for encashment on
9.8.94 although the same were drawn on 23.2.1994, 26.21994 and 28.2.1994. 6. The Learned
counsel for the respondent strongly relied upon the following observations in Electronics Trade
and Technology Development Corporation Ltd., “Suppose after the cheque is issued to the payee
or to the holder in due course and before it is presented for encashment, notice is issued to him not
to present the same for encashment and yet the payee or holder in due course presents the cheque
to the bank for payment and when it is returned on instructions Section 138 does not get attracted”.

JUDGEMENT
The aforesaid propositions in both these reported judgments, in our considered view, with great
respect are contrary to the spirit and object of Sections 138 and 139 of the Act. If we are to accept
this proposition it will make Section 138 a dead letter, for, by giving instructions to the Bank to
stop payment immediately after issuing a cheque against a debt or liability the drawer can easily
get rid of the penal consequences notwithstanding the fact that a deemed offence was committed.
Further the observations in para 6 in Electronics Trade & Technology Development Corporation
Ltd., Secunderabad , Section 138 of the Act 7 intended to prevent dishonesty on the part of the
drawer of negotiable instrument to draw a cheque without sufficient funds in his account
maintained by him in a bank and induce the payee or holder in due course to act upon it. Section
138 dress presumption that one commits the offence if he issues the cheque dishonestly" in our
opinion, do not also lay down the law correctly. Section 138 of the Act is a penal provision
wherein if a person draws a cheque on an account maintained by him with the 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, on the ground 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. The distinction between the
deeming provision and the presumption is well discernible. To illustrate, if a person, draws a
cheque with no sufficient funds available to his credit on the date of issue, but makes the
arrangement or deposited the amount thereafter before the cheque is out in the bank by the drawer,
and the cheque is honoured, in such a situation drawing of presumption of dishonesty on the part
of the drawer under Section 138 would not be justified. Section 138 of the Act gets attracted only
when the cheque is dishonoured. On careful reading of Section 138 of the Act, we are unable to
subscribe to the view that Section 138 of the Act draws presumption of dishonesty against drawer
of the cheque if he without sufficient funds to his credit in his bank account to honour the cheque
issues the same and, therefore, amounts to an offence under Section 138 of the Act. For the
persons stated hereinabove, we are unable to share the views expressed by this Court in the above
two cases and we respectfully differ with the same regarding interpretation of Section 138 of the
Act of the limited extent as indicated above. It is needless to emphasize that the Court taking
cognizance of the complaint under Section 138 of the Act is required to be satisfied as to whether
a prima facie case is made out under the said provision. The drawer of the cheque undoubtedly
gets an opportunity under Section 139 of the Act to rebut the presumption at the trial. It is for this
reason we are of the considered opinion that the complaints of the appellant could not have been
dismissed by the High Court at the threshold. In the result the appeals succeed and the common
order dated 21.11.96 passed by the High Court in Criminal Revision Petition Nos. 2303-2304 of
1995 is quashed and set aside and the order passed by the Metropolitan Magistrate 11th Court,
Calcutta on 6.4.95 is restored.

ANALYSIS
In the case of Modi Cements Ltd v Kuchil Kumar Nandi (1998), the intention of Section 138 of the
Negotiable Instruments Act, 1881 has been declared to increase the efficiency of functioning of
banks and establish credibility in business transactions through the medium of cheques. Section
138 of the Act formulates a statutory wrong concerning the matter of disgrace oriented cheques
based on the grounds of insufficiency of available funds in the account of the person that has been
maintained with the concerning banks. Further, the amount greater than the one arranged to be
delivered which is in the form of an agreement with the bank also falls within the ambit of Section
138. Dishonour of cheques amounts to a criminal offence in the form of enforcing a civil right.
Therefore, both civil and criminal liabilities come into play when dishonour of cheques takes
place. 

1. The civil liability associated as laid down in Section 138 of the Negotiable Instruments
Act, 1881 is charging a fine twice of what the amount was in the dishonoured cheque. In
 case of civil liability the interference of court takes place if the concerned payee files a
suit under Order 37 of the Code of Civil Procedure, 1908, the court decides a judgment
favouring the payee and in such a case the drawer is eligible to pay the same amount as
mentioned by the court.
2. In case of criminal liability, Section 138 comes along with the punishment of two
consecutive years and the prosecution of the drawer takes place under the provisions
of Indian Penal Code, 1860, namely Section 417 and  Section 420. The offences
acquired are bailable, compoundable and non-cognizable by nature. 

CONCLUSION
It is needless to emphasize that the Court taking cognizance of the complaint under Section 138 of
the Act is required to be satisfied as to whether a prima facie case is made out under the said
provision. The drawer of the cheque undoubtedly gets an opportunity under Section 139 of the Act
to rebut the presumption at the trial. It is for this reason we are of the considered opinion that the
complaints of the appellant could not have been dismissed by the High Court at the threshold. In
the result the appeals succeed and the common order dated 21.11.96 passed by the High Court in
Criminal Revision Petition Nos. 2303-2304 of 1995 is quashed and set aside and the order passed
by the Metropolitan Magistrate 11th Court. Calcutta on 6.4.95 is restored. It is made clear that all
contentions are kept open. Section 138 of the Act enforces strict liability towards the default of
payment and is, therefore, a necessary weapon for the regulation of the Act. A lot of steps are
being taken towards developments in accordance with the Negotiable Instruments Act, 1881. The
Negotiable Instruments (Amendment) Act, 2018, which was brought about on 1st  September
2018, widens the ambit of negotiation in India. It provides the court that is hearing an offence on
matters of cheque bouncing to issue direction for the drawer to compensate about 20% of the
amount on which the cheque was made to the payee within a period of 60 days of such decision.
The amendment version of the Act also authorizes the Appellate Court which is hearing appeals
under the provision of Section 138 to direct the drawer to deposit 20% of the original
compensatory amount. Although the legislature bringing about amendments are all working
towards one goal of improvement, one must not forget the realities associated with the same.
Thousands of cases related to the dishonour of cheques are coming up to the court making the
court burden the same. Remedying injustice has become a serious issue when it comes to a
commercial dispute in our country. While this is one side of the coin the other side of the coin
brings in a lot of positivity as well for a lot of payers have received the compensatory amount on
the stipulated frame of the time period. Thus, although there are inconveniences, solutions for
resolving the same come along with it.