UNIVERSITY INSTITUTE OF LEGAL STUDIES,

PANJAB UNIVERSITY, CHANDIGARH

BUSINESS LAW - II

TOPIC – CHEQUES, TYPES AND PENALTIES FOR

DISHONOUR OF CHEQUES

SUBMITTED TO - SUBMITTED BY-

MS. ATAMBIR KAUR RIJUL GARG
BCOM LLB (HONS.)
ROLL NO.- 333/19
SEMESTER - 8th
SECTION – F

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 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my

teacher Ms. Atambir Kaur for her exemplary guidance, monitoring and constant
encouragement throughout the course of this project. The blessing, guidance and
help given by her shall carry me a long way in journey of my life of which I am
about to embark.

I also take this opportunity to express a deep sense of gratitude to our director
Rajinder Kaur for giving me golden opportunity to enhance my practical skills by
the completion of this project.

Lastly, I thank almighty, my parents and friends for their constant encouragement
without which this project would not be possible.

RIJUL GARG

333/19

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 INDEX
1. Meaning………………………………………………………………………4
2. Parties involved………………………………………………………………4-5
3. Essentials……………………………………………………………………..5
4. Advantages……………………………………………………………………5
5. Disadvantages………………………………………………………………..6
6. Types…………………………………………………………………………6-11
7. Dishonour of cheques………………………………………………………..11
8. Reasons for Dishonour……………………………………………………….12-13
9. Dishonour due to insufficient funds………………………………………....13-14
10. Notice of dishonour………………………………………………………….14
11. Punishment for dishonour……………………………………………………14-16
12. Case laws……………………………………………………………………..16-17
13. Conclusion……………………………………………………………………17
14. Bibliography…………………………………………………………….……18

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 MEANING
A cheque is a piece of document/paper which orders the bank to transfer money from the bank
account of an individual or an organisation to another bank account.

Section 6 of the Negotiable Instruments Act defines what a ‘cheque’ means. According to this
provision,

a cheque is basically a bill of exchange drawn on a specific banker. Furthermore, it is not

payable otherwise than on demand.

The Negotiable Instruments (Amendment) Act had amended this definition to make it broader in
2015. Accordingly, cheques now include the electronic image of a truncated cheque and also an
electronic cheque. Despite this amendment, the basic definition still remains the same.

The person who writes the cheque is called the “drawer” and the person in whose name the
cheque has been issued is called the “payee”. The amount of money that needs to be transferred,
payee’s name, date and signature of the drawer are all mentioned in a cheque.

There are certain points to remember regarding cheques which are mentioned below:

• A cheque can only be issued against a current or savings bank account

• A cheque without date shall be considered invalid
• Only the payee, in whose name the cheque has been issued, can encash it
• A cheque is only valid for 3 months from the date it has been issued
• A 9-digit MICR (Magnetic Ink Character Recognition) code is mentioned at the bottom
of the cheque. This makes the clearance of cheques easier for the banks.

PARTIES INVOLVED

There are three parties involved with a cheque.

Drawer or Maker – Drawer of the cheque is the customer or account holder who issues the
cheque.

Drawee – Drawee is basically the bank on which the cheque is drawn. Remember that a cheque
is always drawn on a particular banker.

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Payee – This is the person who is named in the cheque and gets the payment for the amount
mentioned in the cheque. In particular cases (when the drawer writes a self-cheque), the drawer
and the payee can be the same individual.

Apart from these three, there are two more parties involved with a cheque –

Endorser: When a party i.e., payee transfers his right to take the payment to another party,
he/she is called endorser.

Endorsee: The party in whose favour, the right is transferred, is called endorsee.

ESSENTIALS

There are certain extremely important pointers or features of a cheque which should be known
and understood before using this payment mode for money transfer. Some of the important
pointers related to a cheque are:

• A cheque is an unconditional order.

• A cheque’s payment is always in cash.
• A cheque is always drawn on a particular Bank.
• A cheque is always payable on demand.
• Signature on the exchequer is mandatory and should be only by the maker.
• The amount is always a certain sum of money from one’s account.
• This cash amount is to be paid to the person mentioned therein, or order, or the bearer.

ADVANTAGES

• More convenient than carrying the cash around

• Payments can be stopped if necessary
• A safer means to make payment if cheques are crossed
• It excludes the risk of making counting mistakes as in the case of cash notes
• Can be posted more cheaply
• Can be traced if lost and can be post-dated as well

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 DISADVANTAGES

• Cheques are not legal tender and other creditors may refuse to accept it
• Are valueless if the drawer has no funds in his/her account
• Are not suitable for small amounts
• People without bank accounts can face inconvenience if the cheque is crossed
• Bank charges are levied on cheque books and dishonoured cheques

TYPES OF CHEQUES

1. Bearer Cheque

A cheque which is payable to a person whosoever bears, is called bearer cheque. The bearer
cheque is a type of cheque in which the bearer is authorised to get the cheque encashed. This
means the person who carries the cheque to the bank has the authority to ask the bank for
encashment. This type of cheque can be used for cash withdrawal. This kind of cheque is
endorsable. No kind of identification is required for the bearer of the cheque.

For example: A cheque has been signed by X (drawer) and the payee for the cheque is Y. Y can
either go to the bank himself or can send a third person to get encashment for the cheque. No
identification shall be required for the bearer’s name.

If a person does not want their cheque to be endorsable, they can strike off the “OR BEARER”
option mentioned in the cheque.

2. Order Cheque

This type of cheque cannot be endorsed, i.e., only the payee, whose name has been mentioned in
the cheque is liable to get cash for that amount. The drawer needs to strike the “OR BEARER”
mark as mentioned on the cheque so that the cheque can only be encashed to the payee.

For Example: If a cheque has been signed with the name of Y, then only the payee can visit the
bank to get an encashment for the same for an order cheque.

The payee’s identity may be cross-checked by the bank before encashing the sum of money.
Identification must be insisted on by the bank when encashing the order cheque for the presenter.
The ID number and the named payee’s signature will be asked for on the back of the cheque.

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 3. Crossed Cheque

In this type of cheque, no cash withdrawal can be done. The amount can only be transferred
from the drawer’s account to the payee’s account. Any third party can visit the bank to submit
the cheque.

In case of a crossed cheque, the drawer must draw two lines at the left top corner of the cheque.

4. Account Payee Cheque

In these kind of cheques no third party involvement is required. The amount shall be transferred
directly to the payee’s account number.

To ensure that it is an account payee cheque, two lines are made on the left top corner of the
cheque, labelling it for “A/C PAYEE”.

5. Stale Cheque

In India, any cheque is valid only until 3 months from the date of issue. So, if a payee moves to
the bank to get withdrawal for a cheque which was signed 3 months ago, the cheque shall be
declared a stale cheque. A stale check is not an invalid check, but it may be deemed an ‘irregular’
bill of exchange. A bank may refuse to honor it unless its drawer reconfirms it payment either by
inserting a new payment date or by issuing a new cheque. Also called stale dated check.

For example: If a cheque is dated January 1, 2021, and the payee visits the bank for withdrawal
on May 1, 2021, his/her request shall be denied and the cheque is declared stale.

6. Post Dated Cheque

If a drawer wants the payee to apply for withdrawal or transfer of money after the present date,
then he/she can fill a post-dated cheque.

For example: If the date on which the drawer is filling the cheque is May 10, 2021, but he wants
the payment to be done later, he/she can fill the cheque dates as May 30, 2021. It shall be called
a post-dated cheque.

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 7. Ante Dated Cheque

If the drawer mentions a date prior to the current date on the cheque, it is called ante dated
cheque.

For example: If the current date is January 30, 2021, and the drawer dates the cheque as January
1, 2021. It shall be considered as an ante-dated cheque.

8. Self Cheque

If the drawer wishes cash for himself he can issue a cheque where in place of the Payee’s name
he can write “SELF” and get encashment from the branch where he owns an account. This
cheque can only be encashed in the account holder's or the drawer's bank.

This cheque must be used carefully because if it is lost, another person may easily get it encashed
by visiting the drawer's bank.

For example: If a person wants Rs.1,00,000/- in cash, he can issue a self cheque and visit his
bank branch where he owns an account and get encashment in place of a cheque.

9. Traveller’s Cheque

As the name suggests, the Traveler’s cheque can be used when a person is travelling abroad
where the Indian currency is not used. If a person is travelling abroad, he can carry the
traveller’s cheque and get encashment for the same in abroad countries.

Travelers Cheques are accepted almost everywhere and are available in many denominations.
Plus, the no-expiration feature allows you to cash in leftover cheques or retain them for the next
time you travel.

Benefits

• Convenience: Easy to use. Secured to protect your money when on the move.
• Choice: Available in United States Dollars (USD), Great Britain Pounds (GBP), EURO,
Japanese Yen (JPY), Australian Dollars (AUD) and Canadian dollars (CAD).
• Acceptance: Accepted worldwide in over 400,000 locations spread across 200 countries.
TCs can be encashed or used at Exchange bureaus, Banks, Hotels Shops, Restaurants and
other establishments.

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 • Security: Signature based security. If your cheques are lost or stolen, the 24 hour Call
Centre is just a phone call away. Replacement of lost TCs is attended to on priority across
the world.
• Buy-Back: When you return back to India, you can encash any unused TCs issued by us,
at any of the Axis Bank Branches.
• Expiry: Valid forever! You can save any unused Travellers Cheques for future trips.
10. Mutilated Cheque

If a cheque reaches the bank in a torn condition, it is called a mutilated cheque. If the cheque is
torn into two or more pieces and the relevant information is torn, the bank shall reject the cheque
and declare it invalid, until the drawer confirms its validation.

If the cheque is torn from the corners and all the important data on the cheque is intact, then the
bank may process the cheque further.

11. Blank Cheque

When a cheque only has a drawer’s signature and all the other fields are left empty, then such a
type of a cheque is called a blank cheque.

The above-mentioned types of cheques are the most commonly known and used in the Indian
banking industry. Let us now know the parties associated with a cheque.

12. Open cheque

A cheque that is not a crossed cheque. The person whose name appears on the cheque can write
the name of another person on it, and the money will be paid to them.

An open cheque is a cheque that is not crossed on the left corner and payable at the drawee bank
on presentation of the cheque.

The words ‘OPEN’ should not be struck off and the person issuing the cheque should sign on the
reverse of the cheque also before giving it to another person; otherwise the bank may refuse
payment. The latter can collect the money from any branch of the bank nowadays, depending on
the bank. S/he should also sign at the back of the cheque while receiving the amount.

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 13. Gift Cheques

Gift cheque, it is a cheque in decorative form issued for a small extra charge by the banks for use
by customers who wish to give presents of money on special occasions.

Gift cheques may be purchased in unlimited numbers from every branch of the ‘X’ Bank. Gift
cheques may be used to give presents of money as

• Birthday Gift
• Wedding Gift
• Honour Gift
• EASI SMART Gift

Gift cheques are used for offering presentations on occasions like birthday, weddings and such
other situations. It is available in various denominations.

Features and Benefits

• Convenient
• Pre-denominated
• Elegant: Improve promotional impact with packaging customization and personalization
options
• Flexible: Provide redemption flexibility by offering the reward with no expiration date
• Replaceable: Protect your investment and offer Reward Earners increased security and
peace of mind with lost and stolen Cheque protection
• Simple: Order and administer rewards easily for timely reinforcement
• Reliable: Feel at ease with the American Express brand name as it conveys reliability,
security and prestige
14. Marked cheques

Often the cheques are marked which is a kind of certification given by the drawee Bank that the
drawer has sufficient funds to provide payment for the cheque in question. The bank writes
"good" across one corner of the cheque and puts its official stamp along with the signature. In
such a way, the bank represents that at the time of marking, the drawer's account was in state of

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being capable of meeting the cheque. Thus, marking of cheque adds its negotiability and credit.
Cheque is marked in the following circumstances

a. At drawer's instance

b. At Holders instance

c. At collecting banker's instance

15. Not payable or bad cheque –

Such cheque is not payable in spite of completion in all respects. A postdated cheque is not
payable till the date mention on the cheque.

Circumstances-

• If there is no sufficient fund in the account of drawer of cheque. If the account of the
drawer of the cheque has been closed or the account of the drawer of the cheque has been
seized.
• If the drawer has issued the cheque in spite of his insolvency. If the cheque has been
cancelled illegally after issuance of its payment has been stopped illegally.

If anybody issues a Cheque with the knowledge that the cheque will be dishonored, then it is
punishable under Section 420 of the Indian Penal Code.

16. Electronic Cheque:

It is a cheque which contains the exact mirror image of the cheque and it is generated in a secured
system, ensuring safety standards with the use of digital signatures.

DISHONOUR OF CHEQUE

When the cheque signed by the drawer is presented for the payment to the drawee bank and such
payment is not made as the maker, acceptor, or drawee makes any default, it is called dishonour
of cheque. In the banking scenario, the honored cheque indicates the successful transaction of the
amount cited on the check to the beneficiary concerned i.e., payee. Conversely, if the Bank
refuses to dispense the cheque sum to the beneficiary, it will be treated as a dishonored cheque

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 REASONS OF DISHONOUR

1. Stop payment

When the cheque drawer of the cheque countermands the payment, that is it issues the instruction
to the bank not to make the payment. On receipt of a valid stop payment order, the cheque must
be returned unpaid with the remark “payment countermanded by drawer“

In Electronics Trade and technology development Corporation India Vs Indian Technologies

and Engineers (Electronics) Pvt. Ltd.1 The Supreme Court observed that if, before presentation
of a cheque, notice is issued by the drawer to the payee or holder in due course not to present the
cheque for payment, and it is still presented and, on the drawer's instructions, dishonoured,
Section 138 is not attracted.

But in Modi Cements Ltd. Vs Kuchil Kumar Nandi2 the Supreme Court disapproved its own
observations in earlier case and held that even if a cheque is dishonoured because of "Stop
Payment" it is an offence under section 138 Negotiable Instrument Act.

2. Bank Account Closed

If the bank account on which the cheque was drawn at the time of in operation but at the time
when cheque was presented it was closed, bank can dishonour the cheque. The court will
presume in such case that the intention was not of payment hence it will be a reason of offence
under section 138 of Negotiable Instrument Act.

3. Refer to the Drawer

Bank may refuse to pay the amount on presented cheque to it and may say refer to the drawer. It
means bank is showing inability to make the payment on such cheque, in such case as well it is
dishonour of cheque.

4. Customer’s Insanity

Where the account holder is certified as insane by a recognised medical practitioner then the
cheques signed by him should be returned unpaid.

1
1996 (1) SCR 843
2
AIR 1998 SC 1057

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 5. Customer’s Insolvency

Where a customer is adjudged insolvent, the banker must refuse to pay cheques drawn by the
customer.

6. Liquidation of company

When a bank receives notice from the liquidator in accordance with the provisions of Companies
Act, requiring to pay the balance to liquidator’s account, all the cheques by the companies should
be returned unpaid.

DISHONOUR OF CHEQUE IN CASE OF INSUFFICIENT FUNDS

Section 138 of Negotiable Instrument Act deals with dishonour of cheque in case of insufficient
funds in the account of the holder. It says that where any cheque is drawn by one person on
account maintained by him in some bank, in favor of another person regarding the payment of
any whole or partial debt or any other liability, if such cheque is returned by the bank stating that
the funds are not sufficient in the account of the holder to pay on such cheque or

Such cheque remains unpaid by the bank because the amount is higher than the amount agreed to
be paid by the bank as per the agreement between the account holder and the bank. In both the
cases the person (Drawer) has committed the offence under this Act, for which he will be
punished with two years, imprisonment or with fine which may be twice of the amount of the
cheque.

Certain conditions are also attached with this law-

• Presentment of the cheque within the period of its validity

The cheque should be presented before the bank within six months from the date it is drawn or
within its validity whichever is earlier.

• Notice and demand from the drawer for the payment

Notice is very important at this stage. Once the cheque is presented but remains unpaid by payee
bank, notice in writing to be issued within thirty days of receiving information from bank
regarding return of cheque by holder of to the drawer demanding the payment.

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 • Drawer's failure to pay

If after receiving above mentioned notice drawer of cheque fails to make the payment within
fifteen days the offence is said to be committed. For all above things it is important that a cheque
should be drawn against enforceable debt or liability.

NOTICE OF DISHONOUR

Notice of dishonour means information about the fact that the instrument has been dishonoured.
Notice of dishonour is given to the party sought to be made liable and, therefore it serves as a
warning to the person to whom the notice is given that he could now be made liable. Enormous
delay in giving notice of dishonour may put an end to the plaintiff’s right in respect of the
dishonoured instrument.

Notice of dishonour is to be given by a person who wants to make some prior party of his liable
on the instrument. Therefore, such a notice may be given:

• Either by the holder

• A party to the instrument who remain liable for it

PUNISHMENT FOR DISHONOUR OF CHEQUE

Two recourses are there for such offence-

In Civil: Payee may initiate recovery procedure in a jurisdictional court apart from criminal
proceedings.

In Criminal: Dishonour of cheque attracts section 138 of Negotiable Instrument Act which
provides imprisonment which may extend up to 2 years or fine which may extend up to twice of
the cheque amount or both. This offence is bailable, compoundable and non-cognizable.

Procedure-

• Issuance of cheque for Discharge of any debt or any other liability

• Presentation of Cheque
• Dishonour of cheque
• Notice to the drawer

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 • Failure to pay by drawer
• Filing of complaint

Jurisdiction –

Complaint can be filed at any of the place:

• if the cheque is delivered for collection through an account, the branch of the bank where
the payee or holder in due course, as the case may be, maintains the account, is situated;
or
• 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, is situated.

Section 139 of Negotiable Instrument Act says that it will always be presumed that the holder
must be bonafide person holding the check for any whole or partial payment of any debt or
liability.

Section 140 of Negotiable Instrument Act says that a drawer cannot take the defence that he has
no idea actually that the cheque drawn by him may get dishonoured for the reason given in
section 138.

Section 141 of Negotiable Instrument Act says that in case that the offence is committed by
some company, every person who was in-charge for the company's conduct at the time of
committing the offence will be liable to punished.

Provided if the person proves that he had no knowledge of such offence or he exercised all his
due diligence to prevent the offence, he shall not be liable for punishment.

Provided further that a person who was nominated as the director of a company because he was
associated with state or central government in the past he cannot be made liable under this
section.

It further provides that if it is proved that the offence was committed with the consent, neglect or
knowledge of high officials like manager, director, secretary or other officers, they also be
deemed to be guilty and shall be liable to be punished under this section.

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Company means anybody corporate and includes a firm or other association of individuals
Director means a partner in a firm.

Section 142 of Negotiable Instrument Act of 1881 deals with cognizance of offences.

Conditions Essential for cognizance

For initiating proceedings against the drawer of dishonoured cheque drawee has to fulfil
following conditions –

1. The payee or the holder in due course has to file a written complaint.

2. The complaint is to be made within one month of the date on which the cause of action arose
under clause (c) of the proviso to Section 138

3. Only the court of Metropolitan Magistrate or a Judicial Magistrate of First Class is empowered
to try the offence defined under the provision of Section 138.

Section 142 of Negotiable Instrument Act talks about the power of courts to try cases summarily

CASE LAWS

• Pankaj Mehta vs. State of Maharashtra3

In this case it was held by the Supreme Court of India that if the petition was presented for
winding up of the company before the notice for payment by the payee to company cheque
amount, company cannot take the defence and escape from the liability.

• Tomy Jacob Kattikaran vs. Thomas Manjaly4

In this case Supreme Court held that if the appellant did not serve the notice on drawer within the
prescribed period as per the section 138 of Negotiable Instrument Act, 1881 acquittal of drawer
in such case is justified.

3
AIR 2019
4
AIR 1998 SC 366

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 • Kumaresan vs. Ammerappa5

It was held that due care and caution should be taken while sending the notice on dishonour of
cheque. it is essential that the notice should be perfect and in conformity with law any mistake
regarding this can bring a great loss.

• Saketh India Ltd. vs. India Securities Ltd6

It was held by the Supreme Court that limitation period of the filing complaint should be
calculated as given in section but first day should be excluded.

CONCLUSION

The law related to Negotiable Instruments is a law of commercial world that was enacted to
facilitate trade and commerce by providing for the sanctification of a credit instrument that
would be deemed convertible into money and easily transferable from one person to another. In
absence such instruments, trade and commerce activities were expected to affected, as it was not
practical for the trading community to continue using the bulk of the currency in force.

The Act's key objective is to legalize the manner by which the instruments covered by it can be
passed from hand to hand through negotiation, just like any other good. Though the penal
provisions have served to reduce the issue of cheques in a light hearted or playful manner, or
with a dishonest intention, the trading community today feels more comfortable in receiving
payment by cheques

5
1991 (1) KLT 651
6
(1999) 3 SCC 1

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 BIBLIOGRAPHY
BOOKS:

• Deepa Paturkar (2022), Avtar Singh’s Negotiable Instruments, Eastern Book Company.
• Dr. R.K. Bangia (2023), The Negotiable Instruments Act, 1881, Allahabad Law Agency.

BARE ACT:

• Negotiable Instrument Act, 1881

WEBSITES:

• https://indiankanoon.org
• www.casemine.com
• www.legalserviceindia.com
• Blog.ipleaders.in
• www.lawnn.com

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