Page 107 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 4.9.2 Dishonour of a Cheque on Ground of Insufficiency of Funds

Sections 138 to 142 incorporated by the Amendment Act in 1988 provide for criminal penalties
in the event of dishonour of cheques for insufficiency of funds. The drawer, under s.138, may be
punished with imprisonment up to 2 years or with a fine up to twice the amount of the cheque
or with both. However, in order to attract the aforesaid penalties following conditions must be
satisfied:
1. The cheque has been dishonoured due to insufficiency of funds only – either the amount of
money standing to the credit of the account is insufficient or that the amount of cheque
exceeds the amount arranged to be paid from that account by an agreement with the bank.
2. The payment for which the cheque was issued should have been in discharge of a legally
enforceable debt or liability in whole or part of it. It implies that a cheque given as gift
will not attract such punishment.

3. The cheque should have been presented to the paying banker within 6 months from the
date on which it is drawn or within the period of validity, whichever is earlier.
4. The payee or the holder in due course of the cheque should have given notice in writing to
the drawer demanding payment, within 30 days of the receipt of information of dishonour
of the cheque from the bank. The court shall take cognisance of the offence under s.138
only if the complaint is made by the payee or by the holder in due course of the cheque.
5. The drawer is liable only if he fails to make the payment within 15 days of such notice
period. In other words, the drawer can make payment within 15 days of the receipt of the
notice.
6. The payee or holder in due course of the cheque dishonoured should have made a complaint
within one month of cause of action arising out of s.138 (i.e., expiry of 30 days’ time given
to the drawer to make payment s.142).
It may be noted that the holder of a cheque shall be presumed to have received the cheque for
discharge, in whole or in part, of any debt or other liability (s.139). The drawer of the dishonoured
cheque cannot defend himself on the ground that he had no reason to believe when he issued the
cheque, that the cheque may be dishonoured on presentation on account of insufficiency of
funds (s.140).

Further, the cheque will be deemed to have been dishonoured for insufficiency of funds in the
following situations:
1. where there is a notice of stop-payment to the bank, unless the notice can be justified.

2. where the account has been closed by the drawer.
3. where the payee is directed by the drawer not to present the cheque to the bank for
payment.

However, no court shall take cognisance of any offence punishable under s.138 except upon a
complaint, in writing, made, by the payee, or, as the case may be, the holder in due course of the
cheque. Further, no court inferior to that of a Metropolitan Magistrate or Judicial Magistrate of
the First Class shall try any offence punishable under s.138 (s.142).

Offence by Companies

If the person committing an offence is a company, every person, who at the time the offence was
committed, was in charge of and was responsible to, the company for the conduct of the business
of the company, as well as the company, shall be deemed to be guilty of offence and shall be

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