Law governing the Negotiable Instruments in India
The law governing the exchange and dishonor of promissory notes, bills of exchange, hundis and cheques (all collectively referred to as Negotiable Instruments) in India is the Negotiable Instruments Act, 1881
The most important section of the Act is Section 138 that talks about the procedure that is applicable in case a negotiable instrument such as cheque has bounced.
If a cheque is
dishonoured
When a cheque is dishonoured, the drawee bank
immediately issues a ‘Cheque Return Memo’ to the banker of the payee mentioning
the reason for non-payment. The payee’s banker then gives the dishonoured
cheque and the memo to the payee.
If payee
decides to proceed legally, then the drawer should be given a chance of
repaying the cheque amount immediately. Such a chance has to be given only in
the form of notice in writing.
The payee has to sent the notice to the drawer
with 30 days from the date of receiving “Cheque Return Memo” from the bank. The
notice should mention that the cheque amount has to be paid to the payee within
15 days from the date of receipt of the notice by the drawer. If the cheque issuer fails to make a fresh payment within 30 days
of receiving the notice, the payee has the right to file a criminal complaint
under Section 138 of the Negotiable Instruments Act.
However, the complaint should be registered in a magistrate’s court within a
month of the expiry of the notice period. It is essential in this
case to consult an advocate who is well versed and experienced in this area of
practice to proceed further in the matter.
Punishment
& penalty
On receiving the complaint, along with an affidavit
and relevant paper trail, the court will issue summons and hear the matter. If
found guilty, the defaulter can be punished with monetary penalty which may be
twice the amount of the cheque or
imprisonment for a term which may be extended to two years or both. The bank
also has the right to stop the cheque book facility and close the account for
repeat offences of bounced cheques.
If the drawer makes payment of the cheque amount
within 15 days from the date of receipt of the notice, then drawer does not
commit any offence. Otherwise, the payee may proceed to file a complaint in the
court of the jurisdictional magistrate within one month from the date of expiry
of 15 days prescribed in the notice.
The law was amended vide the Negotiable Instruments (Amendment) Act, 2018 which came into effect on 01/09/2018.
KEY CHANGES
- Drawer to pay interim compensation to the Complainant
The Amendment inserts a new section, Section 143A, in the Act. It empowers the courts, in a summons trial or a summons case, to direct the Drawer to pay interim compensation to the Complainant, in two scenarios:
- at the time the Drawer pleads not guilty to the accusations made in the complaint; or
- at the time of framing of the charge, in any other case.
2. The court can direct the Drawer to pay interim compensation of up to 20% of the amount of the dishonored cheque, within 60 days from the date of its order, or within a further period of 30 days, if the Drawer provides sufficient cause for such delay.
3. If the Drawer fails to pay interim compensation within this time frame, the court may recover the said amount as a fine under Section 421 of the Code of Criminal Procedure, 1973.
4. In cases of acquittal, the Court is now empowered to direct the complainant to repay to the appellant the amount so released, at interest rates as prescribed by RBI.
5. As per Section 148, if the drawer proceeds to file an appeal against conviction, the appellant court has the power to order the drawer of a cheque to deposit an amount. This deposited amount in such case has to be a minimum of 20% of the fine or compensation awarded by the Magistrate Court.