Dishonour of a Cheque as an Offence

In one line

If a cheque bounces for want of funds and the drawer does not pay within fifteen days of a demand, he has committed an offence punishable with two years' imprisonment or twice the amount of the cheque.

In the wording a student can write in an exam: section 138 of the Negotiable Instruments Act, 1881 provides that where a cheque drawn on an account maintained by a person for payment of any amount of money to another person for the discharge in whole or in part of any debt or other liability is returned by the bank unpaid for insufficiency of funds or because it exceeds the arrangement, the drawer shall be deemed to have committed an offence and shall be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both, subject to the three conditions in the proviso.

Why a civil wrong was made a crime

A bounced cheque was, until 1988, only a breach of contract. The payee sued the drawer for the amount, waited years for a decree, and then began execution proceedings which were themselves slow. The remedy cost more than most cheques were worth.

The consequence was that a cheque meant nothing. A drawer who knew that the worst outcome was a civil suit in five years' time had every reason to issue a cheque he could not meet, and the instrument's reliability, which chapter 380 identified as the whole point of negotiability, collapsed.

Chapter XVII, inserted by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, was the answer, and its stated object was to enhance the acceptability of cheques in settlement of liabilities. It did that by attaching a criminal sanction to dishonour, so that a drawer risks conviction rather than merely a decree.

The result is the most heavily used criminal provision in the Indian commercial law, and, as the last section of this chapter shows, that success is now itself the problem.

The offence: section 138

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 offence 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."