2. OUTLINE
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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. 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.
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4. KINDS OF DISHONOUR OF CHEQUE
1. Dishonour by non-acceptance.
2. Dishonour by non-payment is said to
be dishonoured.
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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.
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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.
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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.
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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.
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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.
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10. LIABILITY ON DISHONOUR OF CHEQUE
Necessary Ingredients for Liability
Civil Liability
Criminal Liability
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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. 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.
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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.
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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.
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