Dishonor of Cheque for Insufficiency of Funds

Section 138, Negotiable Instruments Act, 1881, deals specifically with the offense of dishonor of a cheque for insufficiency of funds in the account or drawer or if it exceeds the amount arranged to be paid by the drawer’s account.

As per Section 138, “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 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 offense and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both.”

Thus as per Section 138:

1. Account must be in the name of the drawer of the cheque.
2. Account must be maintained with a Banker
3. Payment shall be for discharges of any debt or other liabilities, in full or in part.
4. The cheque must be returned unpaid by the Bank either because of insufficient balance in the account or it exceeds the arranged funds in the account
5. Punishment will be either imprisonment for a term up to two years or fine up to twice the amount of the cheque or both

Provisions of Section 138 apply if the following conditions are fulfilled:

• 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.

• The payee or the holder in due course of the cheque, 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 thirty days* of the receipt of information, regarding the return of the cheque as unpaid. *(within fifteen days w.e.f. 06-02-2003)

• The drawer of such cheque fails to make the payment of the said amount of money to the payee or to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. 
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There are some other related Sections of the NI Act as under:

Section 139 of the Negotiable Instruments Act, 1881 states that if a cheque is returned unpaid, it is presumed that the cheque was issued for the discharge of any debt or other liability. This presumption is in favour of the holder of the cheque and the burden of proof is on the accused. But if the accused proves, by presenting evidentiary proof, that they are innocent, then the burden of proof shifts to the respondent. 

 Section 140 of the Negotiable Instruments Act, 1881 states that it is not a valid defense that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. In other words, the drawer of the cheque cannot claim that they had no knowledge of the insufficiency of funds in their account at the time of issuing the cheque as a defense in a prosecution under section 138.

Section 141 of the Negotiable Instruments Act, 1881, is a crucial provision that deals with the liability of a Company or a Corporate entity in cases of offenses committed under Section 138 of the Act. Under Section 141, every person who, at the time the offense was committed, was in charge of, and was responsible to the company for the conduct of business, as well as the company itself, shall be deemed to be guilty of the offense. This includes directors, managers, secretaries, or any other officer of the company who was responsible for its business operations.

Section 142 provides that

1. Courts can take cognizance of any offense under section 138, only upon a complaint, in writing, to be made by the payee or the holder in due course of the cheque
2. Such complaint is to be made within one month of the date on which the cause of action arises 
3. Cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period
4. Courts presided by a Metropolitan Magistrate or a Judicial Magistrate of the first class or higher only can try any offense punishable under section 138.
5. The offense under section 138 shall be inquired into and tried only by a court within whose local jurisdiction it falls. 
   1. If the cheque is delivered for collection through an account, the place branch of the bank where the payee or holder in due course maintains the account, will be the place of jurisdiction. 
   2. If the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, will be the place of jurisdiction.
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There are good number of Law Cases related to Section 138. A few of them are briefed here below:

1. K. Bhaskaran v. Sankaran Vaidhyan Balan:

This case is significant as it laid down guidelines for determining the liability of a drawer in cases of dishonor of cheques. It emphasized that the drawer’s liability arises only when the cheque is presented during its validity period or within six months from the date it was drawn. 

2. Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd.: 

In this case, the Supreme Court held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque.

3. Hiten P. Dalal v. Bratindranath Banerjee:

In this case, the Supreme Court held that the drawer’s knowledge of insufficiency of funds is a crucial element for establishing the offense under Section 138. Mere issuance of a cheque without such knowledge is not sufficient to attract the penal provisions.

4. M.S. Narayana Menon v. State of Kerala:

This case dealt with the issue of whether a complaint under Section 138 could be filed against a company and its directors. The court held that if the drawer is a company, every person who was in charge of the conduct of the business of the company at the time of the offense would be deemed liable. 

5. P. Vijayan v. Rajendran:

In this case, the Supreme Court highlighted that the offense under Section 138 is a strict liability offense, and the intention of the drawer is not relevant. The drawer can be held liable even if the cheque was issued as a security and not for the discharge of a debt.

6. N. Harihara Krishnan v. J. Thomas:

The Supreme Court, in this case, clarified that the drawer’s liability under Section 138 arises only when the cheque is presented to the bank within the period of its validity or within six months from the date it was drawn, whichever is earlier. 

7. Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd.: 

In this case, the Supreme Court held that the dishonour of a cheque due to “stop payment” instructions from the drawer of the cheque would not absolve the drawer of his liability under Section 138 of the NI Act. The court, in this case, clarified that the holder of the cheque must prove that the cheque was issued for the discharge of a debt or liability. If the holder fails to establish this, the drawer may escape liability.

8. Deena Dayalu v. Ram Kishan Rohtagi:

This case highlighted the importance of strict compliance with the statutory requirements for sending a legal notice under Section 138, emphasizing that even minor deviations can render the notice invalid. 

9. Lalitha Ramesh v. M. Sriram:

In this case, the Supreme Court clarified that the notice of demand under Section 138 must be sent to the drawer within 30 days from the date on which the drawer receives the information regarding the dishonor of the cheque.

10. A.C. Narayanan Nair v. State of Maharashtra:

This case emphasized that the offense under Section 138 is a criminal offense, and the drawer’s liability is not extinguished merely by making payment after the filing of a complaint. The drawer must also pay compensation to the payee.

11. Dashrath Rupsingh Rathod v. State of Maharashtra : 

This case emphasized that the territorial jurisdiction for filing a complaint under Section 138 is determined by the place where the cheque is dishonored. In this case, the Supreme Court also held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque.

12. M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta: 

In this case, the Supreme Court held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque. 

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What is a Material Alteration of a Negotiable Instrument

A material alteration of a negotiable instrument is any change that affects the legal character or validity of the instrument, such as the date, amount, payee, drawer, or signature. A material alteration renders the instrument void as against anyone who is a party to it at the time of making such alteration and does not consent to it unless it was made to carry out the common intention of the original parties. 

Some examples of material alterations are:

• · Changing the amount payable
• · Changing the date of payment
• · Changing the place of payment
• · Adding or deleting a party to the instrument
• · Converting a blank endorsement into a special endorsement
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Effects of material alteration:

The material alteration of a cheque renders such instrument void and the same cannot be enforced against any person who was a party to such instrument at the time of material alteration and did not give his/her approval to it.

RBI has prescribed the cheque format under CTS-2010. One of the mandatory features of the CTS-2010 cheque format, prescribed by RBI, is that No changes/corrections should be carried out on the cheques (other than for date validation purposes, if required). For any change in the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words), etc., fresh cheque forms should be used by customers. This would help banks to identify and control fraudulent alterations.

Section 87 to 90 of NI Act deals with provisions regarding the Material Alteration of Negotiable Instruments.

Section 87: Any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties. Material alteration means any change that affects the legal character or validity of the instrument, such as the date, amount, place, payee, drawer, or signature. If an endorsee makes such an alteration, he discharges his endorser from all liability to him in respect of the consideration thereof.

1. Definition of Material Alteration:

• · Material alteration refers to any change made in a negotiable instrument that affects its validity or changes the rights and obligations of the parties involved.
• · Alterations may include changes in the date, amount, payee, or any other essential terms of the instrument.
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2. Consequences of Material Alteration:

• · If a negotiable instrument is materially altered without the consent of all parties involved, the alteration is deemed ineffective.
• · The instrument is considered void as against anyone who has not given their consent to the alteration.
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3. Effect on Parties and Liability:

• · Parties who have not consented to the alteration are discharged from their liability under the instrument.
• · Any subsequent party who has given consent to the alteration is bound by it.
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4. Protection for Holders in Due Course:

• · Holders in due course are protected from the consequences of material alteration.
• · If an instrument is materially altered before it comes into the possession of a holder in due course, they may enforce payment according to the original terms of the instrument.
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Some of the related provisions under NI Act 1881 are:

Section 88: Every party whose signature appears on a negotiable instrument is, in the absence of evidence to the contrary, deemed to have become a party thereto for value.

It means that a person who accepts or endorses a changed cheque, bill, or note is liable for it, unless he proves he did not know or agree to the change. This section safeguards the holder who got the instrument honestly and for value from being cheated by the change.

For example, if A draws a cheque for Rs. 10,000 in favour of B, and B alters it to Rs. 15,000 and indorses it to C, who takes it in good faith and for value, then A is liable to pay C Rs. 15,000 unless he can prove that he did not know about the alteration or that it was done with B’s consent. Similarly, if B accepts or indorses the altered cheque, he is also liable to C for Rs. 15,000, unless he can prove his ignorance or consent.

Section 89: Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not appear to be crossed at the time of presentation or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay, and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such a person or banker from all liability thereon, and such payment shall not be questioned because of the instrument having been altered, or the cheque crossed.

For example, if A draws a cheque for Rs. 10,000 in favour of B, and B alters it to Rs. 15,000 and presents it to C, who is A’s banker, and C pays it without noticing the alteration, then C is discharged from all liability to A and B cannot claim Rs. 15,000 from A or C. Similarly, if A draws a cheque payable to order and crosses it generally, and B forges A’s signature and makes it payable to bearer and erases the crossing, and C pays it to B without noticing the forgery or the obliteration, then C is also discharged from all liability to A and B cannot claim the amount from A or C.

Section 90: If a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished.

Where the bill of exchange comes back, through negotiation, to the acceptor and the acceptor is thereby made the holder of the bill, then this concept is known as negotiable back. When such an instance happens at or after maturity, then the liability is discharged.

For example, if A agrees to pay a bill of exchange drawn by B in favour of C, and C transfers it to D, and D transfers it back to A, then A cannot claim any money from B or C or D on the bill. This section prevents the person who has to pay the bill from taking advantage of his own delay or default in payment,

The following are not considered as material alteration under NI Act:

1. Filling up of incomplete instrument (sec 20)

2. Conversion of blank endorsement into a special endorsement (section 49).

3. Qualifying or limiting an acceptance (section 86)

4. Crossing of a cheque by holder (section 125)

There are many law cases related to material alteration in India. Here are some of them:

Veera Exports vs. T. Kalavathy: The Supreme Court held that an invalid cheque can be re-validated voluntarily by altering the dates, so as to give fresh life to cheques for another six months.

Ramchandran vs. K. Dineshan and Others: The Kerala High Court held that any change in a written instrument that changes the legal identity or business character of the instrument, either in its terms or in the legal relationship of the parties to it, is a material alteration and such a change invalidates the instrument against the person not consenting to the change.

Bhaskaran Chandrasekharan vs V. Radhakrishnan: The Supreme Court ruled that a material alteration of a cheque would render the cheque void and the holder of the cheque would lose the right to prosecute the drawer under Section 138 of the Negotiable Instruments Act 1881.

Lakshmanan Chettiar vs. C. Kandasamy Chettiar: In this case, the Madras High Court considered the issue of material alteration in a promissory note. The court held that a material alteration to the date of a promissory note without the consent of the parties involved would render the instrument void.

Indian Overseas Bank vs. Mannai Narayanan: This case involved a promissory note where alterations were made to the rate of interest without the consent of the parties. The court emphasized that material alterations that change the character of the instrument require the consent of all parties, and if made without such consent, the instrument becomes void.

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