Cheque Dishonour And Criminal Liability
1. Section 138 of the Negotiable Instruments Act, 1881
Section 138 of the Negotiable Instruments Act, 1881, criminalizes the dishonour of a cheque for insufficiency of funds or if it exceeds the amount arranged. The drawer of the dishonoured cheque can be penalized with imprisonment for up to two years, a fine up to twice the cheque amount, or both.
Key Requirements:
The cheque must be drawn for the discharge of a legally enforceable debt or liability.
The cheque must be presented within its validity period.
The cheque must be dishonoured due to insufficient funds or account closure.
The payee must issue a legal notice within 30 days of receiving information about the dishonour.
The drawer must fail to make payment within 15 days of receiving the notice.
Case Law Illustrations
1. K.S. Mehta v. M/s Morgan Securities and Credits Pvt. Ltd. (2025)
Facts: In this case, two non-executive directors were accused under Section 138 read with Section 141 of the Negotiable Instruments Act. The cheques issued by the company were dishonoured due to insufficient funds.
Judgment: The Supreme Court quashed the criminal proceedings against the non-executive directors, stating that mere designation as a director does not automatically result in liability. Specific allegations must demonstrate their direct involvement in the affairs of the company at the relevant time.
2. Arunachal MLA and Others v. GTC-M-TRADEZ LLP (2025)
Facts: Arunachal Pradesh BJP MLA Raitu Techi and three other senior executives of TK Engineering Construction Pvt Ltd were convicted under Section 138 for issuing post-dated cheques that were dishonoured due to insufficient funds.
Judgment: The Mohali court sentenced them to two years of imprisonment and imposed a collective fine of ₹5.55 crore. The court emphasized the need for a strong deterrent, citing the convicts’ disregard for the law.
3. P.C. Hari v. Shine Varghese (2025)
Facts: P.C. Hari issued a cheque in repayment of a ₹9 lakh cash loan to Shine Varghese. The cheque was dishonoured due to insufficient funds.
Judgment: The Kerala High Court acquitted Hari, ruling that cash loans exceeding ₹20,000 violate Section 269SS of the Income Tax Act, which mandates non-cash modes for loans above ₹20,000. Since the debt originated from an illegal transaction, it cannot be enforced legally.
4. Radha Raman Sahu v. Trilochan Nanda (Orissa High Court)
Facts: Radha Raman Sahu issued a cheque to Trilochan Nanda, which was dishonoured due to insufficient funds. Nanda alleged that Sahu had fraudulent intent when issuing the cheque.
Judgment: The Orissa High Court held that mere dishonour of a cheque does not automatically lead to criminal liability under Section 420 of the Indian Penal Code. The prosecution must establish that the accused had the intent to deceive the complainant, which is a critical element of the offense of cheating under Section 415 IPC.
5. Kumar v. Bapsons Foot Wear (1995)
Facts: Kumar issued a cheque in the course of business transactions with Bapsons Foot Wear. The cheque was dishonoured due to insufficient funds.
Judgment: The court ruled that the essential requirement for an offence under Section 138 of the Negotiable Instruments Act is that the cheque be drawn for the discharge in whole or in part of any debt or other liability. Since the cheque was issued in the course of business and not for the discharge of a legally enforceable debt, the complaint was dismissed.
Conclusion
Cheque dishonour under Section 138 of the Negotiable Instruments Act is a criminal offence in India. However, the prosecution must prove that the cheque was issued for the discharge of a legally enforceable debt, and the drawer failed to make payment after receiving a legal notice. Case laws illustrate that mere dishonour of a cheque does not automatically lead to criminal liability; specific circumstances and evidence are crucial in determining liability.
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