report on cheque dishonour

7/30/2019 Report on Cheque Dishonour

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1.INTRODUCTION

1.1 DISHONOUR OF CHEQUE

In times of hard economies of the world are functioning beyond the

international boundaries and relaying to a very great extent on the mechanism of

the Negotiable Instruments such as cheques and bank drafts. Since business

activities have increased many fold the attempt to commit crimes and indulge in

activities for making easy money have also increased. An important criminal

activities and external trade is the growth of fraud and criminal activities and

we find that banking transactions and banking business is every day being

confronted with criminal frauds activities and this has led to an increase in the

number of criminal cases relating to, or concerning the banking transaction.

Whenever a cheque is dishonored the legal machinery relating to the dishonored

of a cheque comes into action. What is dishonored has first to be considered and

for this reference may be made to section 92 of the Negotiable Instruments Act,

1881section 92 reads as under :

Dishonored by non payment A promissory notes, bill of exchange or

cheques is said to be dishonored by non payment when the maker of the note,

acceptor of the bill or drawer of the cheques makes default in payment upon

being duly required to pay the same.

Thus, if on presentation the bank does not pay then dishonored takes place and


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the holder acquired at once the right of recourse against the drawer and the other

parties.

Section 93 of the Negotiable Instrument Act, 1881 is also important which read

as under :

By and whom notice should be given: When a promissory note, bill of

exchange or cheque is dishonored by non acceptance or non- payment, the

holder there of, or some party there to who remains liable there on, must give

notice that the instrument has been so dishonored to all parties , whom the

holder seeks to make severally liable there on and to some one of several parties

whom he seeks to make jointly liable there on.

Nothing in this section renders it necessary to give notice to the maker of the

dishonored promissory note, or the drawee of acceptor of the dishonored bill of

exchange or cheque.

Notice of dishonor proceeds from the holder who presents the instrument for

acceptance or payment, but it is not necessary that is should always emanate

from him.

Rightful Dishonor: The dishonored may be Rightful dishonor or wrongful

dishonor In case there are reasons for bank to dishonor a cheque it is called a

rightful dishonor.

Wrongful dishonor:- In case there is negligence on the part of the Bank and its

staff, it is wrongful dishonor.

When there is a rightful dishonor then the holder in due course, has remedy both


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mistake on the part of the banker, the bank can be but task. In case, a customer

files a case against the bank for damages on account of the fact that the cheque

exceeds arrangements and the bank may be having funds in the account, the

customer can sue the bank damages on account of having caused a loss to the

status and reputation of the customer. Thus the bank must be very careful in

assigning a reason while retuning the cheque.

In view of the criminal liability cast on the drawer, the bankers liability to

assign a reason is very important. To constitute on offence under section 138,

the cheque must be retuned on the ground of insufficiency of funds or on the

ground of exceeding the arrangement with bank through the Honble Supreme

Court and High Court have laid down many other grounds in various rulings

that can be covered under 5.138 of Negotiable Instrument Act.

1.2 SUMMARY SUITS ON CHEQUE DISHONOURED

When a chaque is dishonoured the holder of, or the payee of ,the cheque can

see the drawer or endorser for the recovery of the amount along with interest.

Besides a civil suits for recovery of the amount can be initiated under order 37

of the Code of Civil procedure, 1908 there is a special provision made in

chapter XXXVII of the Code for a summary procedure for trial of suits on bills

of exchange, promissory notes or chaques. This summary procedure is also

available even thought the bill or note is non-negotiable. The advantage o seeing

Order Chapter XXXVII of the Code is that the defendant is not allowed in such


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cases to defend the suit without leave

obtain from court and it is provided further that a decree passed under the said order,

may be executed forthwith. If no such leave is applied for or granted, the allegation in

the plaint shall be deemed to be admitted, and the plaintiff is entitled to a decree for a

principle seen and also interest as calculated under section 79 and 80 of The

Negotiable Instrument Act, 1881 upto the date of the institution of the suit and after

wards upto the decree at the same or at such other rate as the court thinks fit. Interest

subsequent to the decree is to be provided for as provided by section 34 of the Code of

Civil Procedure, 1908.

1.3 PROSECUTION UNDER INDIAN PENAL CODE

The existence of a civil remedy would not necessarily exclude a trial by a criminal

court or an offence (Lai bahadur vs. emperor)1. Similarly there cannot be any absolute

proposition of law that whenever any civil proceedings is pending between the parties

criminal proceeding can never be proceeded with there are many transactions which

results in civil as well as criminal liabilities. Cheating, misappropriation and theft are

undoubtly the transactions of this type. Therefore, simply because civil proceedings

between the parties are pending, it cannot be said that criminal proceedings cannot go

on.

1

AIR 1933 ALL 42


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Whereas order XXXVII of the Code of Civil Procedure 1908 provides for a civil

remedy, so far as the criminal remedy is concerned, it is provided in the Indian Penal

Code, (45 of 1860) regarding cheating and Forgery.

If a cheque is dishonoured, the drawer of the cheque may be prosecuted u/s 417 and

420 of the Indian Penal Code. However, every dishonour of a cheque is not cheating.

It must be proved that there was an intention to cheat.

In the case ofBhola Nath v. state2, the high court held that it would be sufficient to

afford on a ground for persuming that the accused had committed an offence under

section 420 of I.P.C.

1.4 CRIMINAL LIABILITY OF DRAWER ON DISHONOUR

The laws in India against a defaulting drawer of a cheque were less draconian1

until

the turn of the 20th century. Indian Law evolves in sudden spurts, as it were, when in

1988 the liability of a drawer of a dishonoured cheque was brought under prosecutory

measure by insertion of a new chapter XVII in the Negotiable Instrument Act, 1881.

The chapter containing sections 138 to 142 was inserted by the Banking, Public

Financial Institutions and Negotiable Instrument laws (Amendment) Act, 1988. The

operative portion of the chapter as contained in section 138 therein which came into

effect from April, 1, 1989.

Whereas, earlier to the amendment, no criminal charge would be brought against the

drawer of a cheque unless the doctrine of Mens Rea was established as required by

sections 415 and 420 of the Indian Penal Code, the amendment provides for criminal

21982 cri LJ 1482


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prosecution for dishonour per se, without limiting the aggrieved party the right to

prosecute for dishonour per se, without limiting the aggrieved party the right to

prosecute under the said sections of the IPC.

Section 138 of N.I. Act, is not violative of Articles, 14, 19, 20 and 21 of The

Constitution of India even though the section excluded promissory notes and bills of

exchange from the purview of criminal prosecution. A promissory note and a cheque

cannot be equated, a note simply creates a liability while issuing a cheque the drawer

desires to make a certain payment to the payee. Also section 138 of N.I. Act, 1881

does not seek to punish every dishonour of cheque but only dishonour answer

specified conditions.

A person can be held liable for being punished under section 138 of the Act as well as

under section 420 of the Indian Penal Code. Where on facts of a case prima facie the

accused dishonestly induced the complainant to part with the shares on false

representation that there were enough funds to his credit knowing fully well at the

time of representation there were no funds to his credit to honour the cheque so issued,

the offence complained against the drawer is not only for the offence under section

138 of N.I. Act, 1881 but as well for an offence, under section 420 of the I.P.C.

1.5 DISHONOUR OF CHEQUE U/S (138-142)

Offence u/s 138 of Negotiable Instrument Act, chapter XVII, inserting sections 138 to

142 was introduced by Banking Financial Institution and Negotiable Instrument Laws

(Amendment) Act 1988, w.e.f. 1st

April, 1989.

3Excessively harsh


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Section 138 : Penalties In Case Of Dishonour For Insufficiency Of Funds In The

Accounts

Where any cheque drawn by a person on the account maintained by him with a banker

for payment or 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 bank

unpaid, either because of the amount of money standing in 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 provisions of

this act be punished with imprisonment for a term which may extend to one year or

with fine or which may extend to twice the amount of the cheque or with both.

Section 139: presumption in favour of holder

Section 139 is what may be termed as special rules of evidence and to confirm the

presumption already provided by sections 118(a) and 118(g) of Chapter XIII of

Negotiable Instrument Act. It means that the cheque is for discharge of our existing

debt and not for creation of a new debt. The phrase "Shall presume" is explained

under section 4 of the Indian Evidence Act, 1872.

It says that whenever it is directed by this Act that the court shall presume a fact, it

shall regard such fact as proved unless and until it is disapproved.


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Section 140: Defences which may not be allowed in any prosecution under section

138

It shall not be defence in a prosecution for an offence u/s 138 that the drawer had no

reason to believe when he issued the cheque that the cheque may be dishonoured on

presentation for the reasons stated in that section.

Section 141: offences by companies

If a person committing on offence u/s 138 is a company, every person who, at the time

of an 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 an offence and shall be liable to be proceed against and punished.

Section 141 also govern the offence by the firm and other association of individuals.

Since a proprietorship concern is not a firm section 141 is not applicable.

Section 142 : Cognizance of offence section 142 of N.I. Act 1881

Section 142 of Negotiable Instrument Act relates to cognizance of offence. Section

142 for taking cognizance of an offence for the offence punishable u/s 138 of N.I. Act.

According to section 142 the complain for talking offence as cognizance the

complaints must be made within one month from the date of notice of dishonoured

served. Only a metropolitan magistrate or a judicial magistrate of the first class shall

try any offence punishable under section 138. The Magistrate is to comply with the

provisions of section 202 read with section 204 of the Code of Criminal Procedure for

issuing the process and taking cognizance under section 142.


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So all these section 138 to 142 has been inserted in Negotiable Instrument Act, 1881

and the object and reason for inserting this chapter are to provide that where any

cheque drawn by a person for the discharge of any liability is return by the bank

unpaid for the reasons of the insufficiency of the amount of money standing to the

account on which the cheque was drawn or for the reason that it exceeds the

arrangement made by drawer cheque with banker for that account, the drawer of such

cheque shall be deemed to have committed on offence.

So in this dissertation it is tried to learn about liabilities of cheque criminal and civil in

a very concise format.


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2.DEFINITION OF CHEQUE

It is a common knowledge that the London Goldsmith was the first bankers in

England and the system of payment of cash through cheque dated back to the 17th

century. Written orders were addressed to the bankers by the customers which were

known as "Drawn notes" It used to be only on ordinary slip of paper containing

written order addressed to the banker by his customers to pay on demand the sum

specified there in. Generally, it was made payable to the payee only and sometimes to

the payee or order or bearer under the Lex-Mercaloria, the drawn note was regarded as a

bill of exchange. However, at present, we find that the cheques have become popular

in International Trade and are playing on important role in the monetary system of all

the countries. A study of banking law involves a study of the development of cheque

as a bill of exchange and also the liability of the banks as collecting bankers and

paying bankers. The drawing, collecting and paying of cheques and various

implications and legal problems resulting there from have become the backbone of the

banking law. In India, section 6 of the negotiable Instrument Act, 1881 states that "a

cheque is a bill of exchange drawn on a specified banker and not expressed to be

payable otherwise that on demand. Thus, it becomes necessary to know the definition

of the bill of exchange before understanding the definition of cheque. A bill of

exchange is defined under section 5 of the negotiable Instrument Act 1881 as "An

Instrument, in writing containing an unconditional order, signed by the makes,

directing a certain person to pay a certain sum of money only to, or to the order

of a certain person or to the bearer of the instrument."


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The cheque is very firstly defined by the Bills of Exchange Act 1882, (England)

Section 73 as a bill of exchange drawn on a banker payable on demand'. 'Banker'

includes a body ofpersons whether incorporated or not who carry on the business of

Banking ofBills ofExchange act 1882 (U.K.).4

In addition to being drawn on a banker, a cheque must conform to the requisites laid

down by the Bills ofExchange Act as necessary to constitute a bill by section 3(1) a

bill is defined as :

"An unconditional order in writing addressed by one person to another, signed by the

person giving it, requiring the person to whom, it is addressed to pay on demand, or at

a fixed or determinable future time, a sum certain in money to or to the order of a

specified person or to bearer"

If we consider the definition of cheque as given in section 6 of the Negotiable

Instrument Act 1881 and the definition of the Bill of Exchange as given in section 5 of

the Act and consider also the object and reasons for amending the Act, it will be seen

that the circumstances that may contribute to the situation when a cheque is

dishonoured would be irrelevant, The technical and frivolous pleas are to be brushed

aside. In,

Pawan Kumar v. Ashish Enterprises5

It was held that "where a cheque is returned with the endorsement "as suit filed by the

bank against account holder", the court held that it was the case of insufficiency of


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funds. The criminal proceedings were justified, regardless the plea that a civil action

is justified. Moreover, a bill of exchange is an unconditional order and this fact is also

to be kept is view.

Difference between Bill of Exchange and Cheque :-

After examining the definition and combining the definition of a cheque and a bill of

exchange, it is possible to point out the essential requisites of a cheque.

For a difference between a cheque and a bill of exchange one can refer to the Bank of

Baroda v. Punjab National Bank6

in which it is held that a cheque is a peculiar sort

of instrument, in many ways resembling a bill of exchange, but in some cases it is

entirely different. In the ordinary course it is never accepted, it is not intended for

circulation, it is given for immediate payment, and it is not entitled to days of grace. In

addition it is to be noted, a cheque is presented for payment whereas a bill in the first

instance is presented for acceptance unless it is bill on demand. A bill is dishonoured

by non acceptance, this is not so in the case of a cheque, because the holder of a

cheque as between himself and the drawer, has no right 10 require acceptance."

Similarly in,

Anil Kumar Sawhney v. Gulshan Rai7

The Supreme Court of India held that - "Section 5 and 6 of the Act defines "Bill of

Exchange" and "cheque" . A bill is a Negotialble Instrument in writing containing an

6AIR 1944 PC 58 : AC 176 (PC)

71(1944) BC 1 (SC)


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instruction to a third party to pay a stated sum of money at a designated future date or

on demand a 'cheque' on the other hand is a bill of exchange drawn on a bank by the

holder of an account payable on demand. Thus a cheque under section 6 of the Act is

also a bill of exchange but it is drawn on a banker and is payable on demand. It is thus

obvious that a bill of exchange even though drawn on a banker, it is not payable on

demand it is not a cheque. In,

Ramachuru Mullic v. Luchmeechand Radhakissen8

All cheques are a kind of bill of exchange but all bills of exchange need not to be

cheque. The main difference between the two is that a cheque is always drawn on and

payable by bank, whereas the drawee of a bill of exchange may be a non banker. Also,

all cheques are necessarily and always payable on demand but a bill of exchange may

be made payable either on demand or on a stated future date.

A cheque does not require acceptance; in the ordinary courts it is never accepted. It is

not intended for circulation; it is given for immediate payment, it is not entitled to

days of grace and though it is an order upon a debtor by a creditor to pay to a third

person the whole or part of a debt, yet in the ordinary understanding of persons, it is

not so considered. It is more like an appropriation of what is stated as ready money in

the hands of the banker; and in giving the order to appropriate to a creditor the person

giving the cheque must be considered as the person primarily liable to pay who

orders his debt to be paid at particular place and not elsewhere, who has no right to

insist on immediate presentment at that place.

8(1854) 9 Moore PC 46


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3.DISHONOR OF CHEQUE

The present days economics of the world which are functioning beyond the

international boundaries are relying to a very great extent on the mechanism of

Negotiable Instrument such as cheque and bank drafts and also the oriental bill of

exchange prevalent in India, known as 'hundi' since business activities have increased,

the attempt to commit crimes and indulge in activities for making easy money have

also increased . An important development both in internal and external trade is the

growth of crimes relating to banking manfunction and wejfind that banking

transactions and banking business is every day being confronted with criminal actions

and this has led to an increase in the number of criminal cases relating to, or

concerning the banking transactions.

Whenever a cheque is dishonoured, the legal machinery relating to the dishonour of a

cheque comes into motion. What is dishonour has first to be considered and for this

reference may be made to section 91 and 92 of the Negotiable Instrument Act, 1881.

3.1 DISHONOUR BY NON ACCEPTANCE

Section 91 read as under :

Dishonour by nan acceptance : A bill of exchange is said to be dishonoured by non

acceptance when the drawee, or one of several drawers not being partners makes

default in acceptance upon being duly required to accept the bill, or where

presentment is excused and the bill is no accepted.


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When the drawee is incompetent to contract, or the acceptance is qualified, the bill

may be treated as dishonoured.

Section 92 reads as under:

Dishonour by non-payment - A promissory note, bill of exchange or cheque is said to

be dishonoured by non-payment when the maker of note, accepter of the bill or

drawee of the cheque makes default in payment upon being duly required to pay the

same.

Thus if on presentation the banker does not pay then dishonour takes place and the

holder acquire at once the right of recourse against the drawer and the other parties.

The provisions of this section were applicable to bills of exchange payable at sight or

on demand. But consequently the supreme court has held in,

Jagjivan Mauji v. Ranchhoddas Meghji

That where a bill payable at sight or on demand is presented, it is presented both for

acceptance and on payment. If the bill is not paid, it is treated as dishonoured by non

acceptance.

3.2 DISHONOUR OF CHEQUE FOR INSUFFICIENCY, ETC. OF FUNDS IN

THE ACCOUNT:

Section 138 of the Negotialble Instrument act, 1881 read as under:

Dishonour of cheque for insufficiency, etc. of funds in the account:


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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 the account is

insufficient to honour 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 extend to one year or with

fine which may extend to twice the amount of the cheque or with both.

Provided that nothing contained in this section shall apply unless :

(a) The cheque has been presented to the bank within a period of six months fromthe date on which it is drawn or within the period of its validity, whichever is

earlier;

(b) The payee or holder in due course of the cheque, as the case may be, makes ademand for payment and the said amount of money by giving notice, in

writing, to the drawer of the cheque, within 15 days of the receipt of

information by him from bank regarding the return of the cheque as unpaid,

and ;

(c) The drawer of such cheque fails to make payment of the said amount of moneyto the payee or as the case may be to the holder in due course, of the cheque,

within 15 days of the receipt of the said notice.

9

AIR 1954 SC 554 : (1955) I SCR 503


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Explanation : For the purposes of this section "debt or other liability" means a legal

enforceable debt or other liability.

Duty of Bank in case of cheque dishonoured

If the cheque is dishonoured the collecting bank should intimate the customer

regarding the dishonour of the cheque and it is to be returned immediately.

Return of cheque and liability of the bank

If a cheque is dishonoured , the paying banker does not have any legal obligation to

give in writing as to why the cheque is being returned. However, in compliance with

the clearing house rules the cheque is returned to the holder or bearer or presents with

a return memo.

In dictionary of banking by Percy and Ryder10

it has been stated that cheque or bills

which are return either due to lack of funds or some irregularity in the instrument

themselves are commonly known as "returns' here a cheque "return unpaid" suggest

dishonour of a cheque on presentation.

A cheque drawn on bank can be dishonoured on some reasons, while returning the

cheque, banker must assign the reason other wise he is liable for wrongful dishonour

of the cheque to the drawer and will have to pay compensation for any loss sustained

by him.

Since there is a criminal liability cast on the drawer it is the responsibility of a banker

to assign the reason before returning any cheque .

101lth Edition, Page 499


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In case there is a mistake on the part of the banker, the bank can be put to task. In

case, a customer files a case against the bank for damages on account of the fact that

the cheque exceeds arrangement and the bank may be having funds in the account of

having caused a loss to the statues and reputation of the customers.

Thus the bank must be very careful in assigning a reason while returning the cheque.

In view of criminal liability cast on the drawer the bankers liability to assign a reason

is very important. To constitute an offence under section 138, the cheque must be

returned on the ground of insufficient fund or exceeding the arrangement with bank.

When banker returns the cheque either presented on the counter or through clearing,

banker is required to give an answer to the holder to whom it is returned.

3.3 REASONS TO BE WRITTEN IN CASE OF CHEQUE DISHONOURED

The memorandum which contains reasons for dishonour is called "Return

memorandum" the reasons are :

1. Refer to drawer

2. Not arranged for


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3.Eceeds arrangement

4. Full cover not received

5. Effect not yet cleared ,present again

6. No Account

7. Account closed

8. Account transferred to our . Branch

9. No arrangement

10. ..payees endorsement incomplete/ required

11. . Payees endorsement irregular/ illegiblde

12. endorsement requires bank s guarantee/ confirmation

13. Drawer deceased/ bankdrupt

14. Contravene S.B / Current account rule no..

15. Payment stopped by drawer

16 (a) post dated(b) Out of date (c) not dated

17. Amount in words and figure differs

18. No advice

19. Not drawn on us

20. Crossed please present through bank

21. Crossed not over/ under Rs only

22.Crossed to two bank

23.Crossed Account Payee only

24. Mutilated

25. Drawer signature incomplete/ differ/required

26. Alteration in date/ figure/ words/ irregular/ ambiguous

27. Banks discharge required/ irregular/ ambiguous


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28. Payees separate discharge to the bank required

29. Payees receipt required

30. Should not contain extraneous matter.

31. Not drawn on us

32.Revenue stamp requied

33. Discharge on revenue stamp required

34. Collecting banks confirmation required clearing banks guatantee

35.Collecting banks confirmation required/ irregular

36. Title of Account required.

37. Drawn on non resident account form A 7 approved by Reserved Bank of India

38. Insufficiency of funds.

certain circumstances. The most usual circumstances is where the drawer has no

available funds for payment or has exceeded any arrangement for accommodation.

The use of the phrase is not confined to this case, however, it is proper answer to be

put on a cheque which is being return on account of the drawer being involved in

bankrupting proceedings".


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credit articles paid in for collection to a customers amount, before clearance thereof.

In some cases items are entered in the ledger and statement as 'cash', in other cases

they are indicated by symbols.

Full cover not received : It is generally meant to convey inadequate funds to honour

the cheque or adequate security has not been given to cover the overdraft which might

be created by paying the cheque.

Not provided for : Sometimes the season written by a banker on a cheque which is

being return unpaid is that the drawer has failed to provide funds to meet it.

Not sufficient : When the funds in a customer's account are insufficient to meet a

cheque which has been presented to the banker through the clearing or otherwise, the

cheque, on being return unpaid, is sometimes marked with the worlds "not sufficient",

or "not sufficient funds".

Present again : According to Thomson's Dictionary of Banking, these words are

sometimes written by a baker upon a cheque which is returned unpaid because of

insufficient funds in the customer's account to meet it.


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In,

Baker v. Australia and New Zealand Bank Ltd.13

The words "Present again" were held to be capable of defamatory meaning.

Payment stopped by drawer : One of the reasons on account of which the banker can

refuse to make payment of a cheque is that the payment has been stopped by the

drawer. The customer has the right to give notice to his bankers to stop payment of a

cheque which he has issued. The notice should be in writing and should give accurate

particular of the cheque and should be signed by the drawer. According to Thomson's

Dictionary of Banking, in case a bank passes a cheque after a 'stop order' has been

received, he shall be liable for so doing. It is necessary, therefore, to warn each branch

where the cheque may be presented, of the notice which has been received. A notice

should be placed in the customer account in the ledger, so that any one referring to the

account may at once observed particulars of the 'stop order' a red colour slip may be

inserted in the ledger, so that there is a mistake. In case notice is given to one branch,

it shall not be deemed a notice to the other branches as well.


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1958 NILR 907

4. THE RIGHTFUL DISHONOUR

4.1 BANK MAY REFUSE TO HONOUR

The cheques which are not presented through a bank for payment cannot always be honoured by the Bank. We

have seen that there may be a number of occasions or circumstances when the cheque cannot be honoured and

such circumstances may be either personal or legal or on account of certain situations which are beyond the

control of the customer or of the banker. There are circumstances when the bank is to stop the payment as a

result of the countermand instructions given by the customer and there are also circumstances when legal forces

come into play such as the garnishee orderfrom a court or the attachment orders from the Income Tax


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Department. These are the situation when the relationship between the banker and customer terminates. Here we

can say in these situation the dishonour of cheque is rightful.

When there is a relationship of banker and customers as the parties, the banker has obligation to pay cheque

when a mandate to pay is

received from the customer, or when a cheque is issued. Two question arises are :

a. Whether at the time when the cheque is presented, the banker is underthe liability to pay the amount for which it is drawn;

b. Whether the banker is liable to pay upon that particular cheque.In other words, is the cheque in order? If the relationship subsists the banker's

obligation to pay remains in order.

Sir John Paget's in his law of banking15

, has referred the statement of Atkin L.J. in,

Joachimson vs. Swiss Banking Corporation which include the sentence that the


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customer on his part undertakes to exercise reasonable care in executing his written

order so as not to mislead the bank or facilitate forgery. This is necessary requirement

in view of banker's obligation to pay. This is also illustrated by an earlier decision of

the house of lords in London Joint Stock Bank Ltd. vs. Macmillan & Arthur16

. Thus, it

is settled that banker's obligation to honour his customer's cheques is subject to certain

conditions.

Thus, there may be a number of circumstances when the bank has no other alternative

but to return the cheques and in all such cases the bank is fully justified in returning

the cheques, infact when we

159th Edition

16(1918) AC 777

consider section 31 of the Negotiable Instrument Act, which relates t the general

circumstances under which the banker is bound to honour the cheque but in case these

circumstances are missing, the bank is justified in refusing to honour the cheque.

These are the cases which may be termed as a countermand from the customer which

means an order to revoke the former instruction and annulling the former mandate

given by the customer to the bank to honour the cheques and it also means the

situations resulting from the closure of account by the customer, prohibitory

'Garnishee' order having been received from the court or orders for payment having

been received from the court or orders for payment having been received under


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section 226 (3) of the Income Tax Act, 1961 and similarly it also means the situation

when there is a restraint order from a court, notice of death of the customer, lunacy of

the customer and notice of loss of cheque. When the bank is restrained from making

the payment by a competent court by means of order given in 'Garnishee' proceedings,

the balance can be got attached by a third party. As stated by Lord Chorly in Law of

Banking the usual form of order nisi attaches the whole of the "debt due or accruing

due" from the third party to the judgement debtor, and the save therefore cannot safely

honour any of its customer's cheque after receipt of the notice, even if there is reason

to suppose that the amount

of the judgement -debtor is less than the balance of the account. Where evidence to

the latter effect to be produced to the bank manager, he might perhaps exercise his

discretion and allow the amount to be drawn.

In,

Rogers vs. Whitely17


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Rogers had an account at the banking department of Whitley's which had in credit

6800. Judgement was given against him for 6000 in an action and a judgement -

creditor obtained a garnishee ordernisi ordering that "all debts owing or accruing due",

from Rogers should be attached to answer the sum of 6000. This order was served

on Whitley's. Afterwards various small cheques for sums totaling less than 800 were

presented for payment, which was refused. Rogers accordingly send whitefly's for

damages for wrongful dishonour of his cheques.

Held that the order attached to the whole of the moneys in the account and that the

garnishee was entitled, therefore, to refuse payment of cheques. The only exceptions

to the rules are that the account may be overdrawn or the amount of the balance or

part of it may have been

17(1892) AC 118 : C & S 48

assigned by the customers to a third party and notice given to the bank. In such cases

of genuine assignment the amount is no longer the property of the customer and

cannot be attached. The bank may be further entitled to a setoff a debt due to itself


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3. The cheque should be presented at the branch where the account is kept.4. The cheque should be presented for payment in business hours.18

5. Funds should be for whole amount of the cheque.6. There should be no ambiguity in the material part of the instrumentincluding the defects resulting from the crossing of the cheque.

7. The words and figure should represent the same amount and the chequemust not altered between drawing and presentation.

8. The cheque should not be carelessly drawn.199. There are no irregular endorsement and the endorsements should not beforged and unauthorized.

10. When the cheque is not in proper form and has not been properly signedor presented or when it is not dated or because it is mutilated.

20

11. The cheque is not mutilated.


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Jao Chimson V Swiss Bank (1921) 3 KB 110 Joints Stock Bank v.

Macmillon (1918) AC 717 Bill of Exchange Act 1882, Section 64(1)

12. Closing of account may be either by the bank or by the customer. Thecustomer can withdraw the entire amount from the bank and give in writing that

his account may be closed.

13. Death of a customer : upon the death of a customer, the title to his bankbalance passes to his legal representatives. In case however, the bank has no

knowledge relating to the death of a customer, the bank can make the payment

of the cheques drawn by the said customer.

14. Customer's insanity - if the customer becomes mentally deranged on account ofwhich he loses contractual capacity, the banker should not honour his cheques ,

this means that the customer is not in a position to give any mandate , and any

existing mandate is revoked. However, if the banker has no knowledge and no

reason to suspect, then the bank can operate on the earlier mandate received

from the customer.

I


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15. Customer's insolvency - as soon as a banker learns of an insolvency petitionfiled in respect of his customer, he should stop paying cheques drawn by the

customer whether the cheque be drawn before or after the date of such petition.

21Drew v. Munn (1879) 4 QBD 661

22The Imperial Loan Co. Ltd. v. Stone (1892) 1QB 599

16. Forged signature : A banker has no obligation to pay if the signature of the

customer on the cheque are forged and has a right to dishonour the cheque on

this ground.

The specimen signature of the person authorised to draw money is always with the

bank and it is the duty of the bank to compare the signature on the cheques with the

specimen signature and in case the bank finds that the drawer's signature on a cheque

differs from the specimen signature supplied to the bank, then the bank should not

honour it even if the signature on a cheque is a clever forgery, the bank cannot debit

his customer's account with the amount of the cheque as he has no legal authority

from his customer to part with the funds. Even if the signature is forged, very cleverly

and there is negligence on the part of the customer, the bank cannot debit a customer's


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account if the signature has been forged. The law is that a cheque with the drawer's

signature forged is a mere nullity.

i

In this view of the matter, whenever a cheque with forged signature is dishonoured, it

is only a rightful dishonour.

Concluding Remark : The cheques which are presented through a bank for payment

cannot always be honoured by the bank, we have seen that there may be a number of

occasions or circumstances when

5. THE WRONGFUL DISHONOUR

5.1 LIABILITIES TO PAY DAMAGES

In cases all the conditions which are necessary for the payment of a cheque are present had have been fulfilled

then if the bank is dishonour a cheque, it will amount to a breach of contract for which the banker is liable to

pay damages.


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I n ,

Hadley v. Boxen Dale23

It was held that the party in breach must pay. The amount of damages which flows directly and naturally from

his failure. To keep his contract, provided that it was contemplated at the time of contract if a party loses the

benefit of exceptionally high profits would the bank be liable for the same in case of a wrongful dishonour of a

cheque. Apart from general danger of this kind there is a danger to the customer's reputation and business. It is

difficult to assess


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In,

Rolin v. Steward24

The plaintiff who banked with a company of which the defendant was public officer

had three cheques and a domiciled bill dishonoured by them owing to the

inadvertence of a clerk. They were represented and paid next day. The plaintiff

brought this action for damages, and gave no evidence to show that he had actually

suffered injury. A jury awarded him 500.

Held - that the jury were entitled to award substantial damages though 500 was in

the circumstances excessive 200 was eventually agreed.

Damage of reputation follows almost as a matter of course, when the customer is in

trade or business, unless, of course, it can be shown that owing to bankruptcy or some

other reason the customer's credit is of no business value. In the case of other persons,

however, the loss to reputation may be problematical.

5.2 NATURE OF DAMAGES


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The damages are just in the nature of damages in an action for

24(1854) 14 CB 595

defamation. If it is correct that only a trader can recover so called exemplary damages

for wrongful dishonour, it might be possible for a trader to recover by framing his

action in libel only, as was done in,


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Davidson vs. Braclays Bank Ltd.23

So long as bankers continue the practice in question they must expect occassional

actions against them framed in libel, especially in actions by non traders. In,

Urquhart Lindsay v. Eastern Bank

The important question of how much in damages a bank must pay if it wrongly

dishonours drafts drawn under a credit was discussed. It was argued for the bank that,

since by English law, failure to pay a debt does not sound in damages, they could not

be liable for more than the amount of the drafts in question, less an allowance for the

value of the document which should have been taken up. While for the sellers it was

contended that the bank's failure to take up the draft amounted to a repudiation of the

contract as a whole and the damages must be assessed on that basis. The later was the

view taken by the court. It is clear, however, that each case must be considered on its

merits, and if the evidence shows that the breach of contract by the bank is confined

25

(1940) All ER316

26(1922) 1 KB 318, 323


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to one particular draft or otherwise indicates that there was no intention to repudiate, damages will not be

recoverable.

5.3 SOME ENGLISH CASES ON WRONGFUL DISHONOUR

Gibbons v. Westminister Bank Ltd.

27

It is an important case upon the wrongful dishonour of his cheque, a customer

who is not a trader must prove special damage before he can be awarded

substantial damages. In this case the plaintiff was a woman customer of the

defendant bank, who, after paying a sum of money to her account, drew a

cheque which was dishonoured as a result of the bank's having put the credit to

another account instead of to hers. Upon the dishonour, she called on the

manager of the branch at which the account was kept, and he paid her 1, 1-s.

in full satisfaction, as the bank claimed, of any claim she might have against

them. The jury found, however, that she did not so accept the payment.

The defendant - bank contended that the plaintiff was entitled to nominal

damages only, as she had not pleaded any special or actual damages. The jury

awarded substantial damages, however, in the sum


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27(1939) 2KB 882

of 50, and after they had been discharge, the court heard further argument regarding

damages. It was held that as the plaintiff was a non-trader, who had not proved any


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special damage, she was entitled to nominal damages only, only 40 shilings were

awarded. In the course of his judgement, Lawrence, J said :

"The authorities which have been cited in argument all lay down that a trader is

entitled to recover substantial damages for the wrongful dishonour of his cheque

without pleading and proving actual damage, but it has never been held that exception

to the general rule as to the measure of damages for breach of contract extends to

anyone who is not a trader. So a person who is not a trader is not entitled to recover

substantial damages for wrongful dishonour of his cheque, unless the damage which

he had suffered is alleged and proved as special damage."

Thus we can say that the banker is liable for wrongful dishonour of a cheque. If a

banker, without justification, dishonour his customer's cheque, he makes himself

liable to compensate the customer for injury to credit.

Marzetti Vs. Williams28

(1830) IB & Ad 415


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held, the wrongful dishonour may be due to banker's mistakes, negligence, wrong

advice by third parties, malafide intention etc.

5.4 SOME INDIAN CASES

1. Gopesh Chandra Pal v. Nirmal Kumar Das Gupta29

It was held by Calcutta High Court that where a person, who had opened a current

account in a bank, sought to prosecute the managing director, the Chief Accountant

and the accountant of the bank for offence of criminal misappropriation and criminal

breach of trust by a banker for wrongfully dishonouring his cheque.

Held, (i) that they were not bankers and the essential ingredient of entrustment in the

offence of criminal breach of trust was not involved in a deposite of money on current

account.

(ii) that dishonouring a cheque did not can not misappropriation and that, therefore, no

case of a criminal nature was made out against them.


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The remedy for a cheque being wrongfully dishonoured lies in the civil court.

(1950) 20 Comp Cas 220

2. New Central Hall v. United Commercial Bank Ltd.

Held that where a banker having sufficient funds of a customer in his hands fails,

even by mistake to honour cheque issued by the customer, the customer has a right to

claim damages. Further it was held that in an action for damages against a bank by a

non- trader customer for dishonour of cheques nominal damages should be awarded.

In this case it was held that even though the plaintiff had failed to prove positively,

special loss or damages by wrongful dishonouring of the 11 cheques, they were

entitled to substantial damages under the presumption under the law.

Further held that the fact that the wrongful dishonouring of the cheque was due to a

mistake committed by a clerk concerned or the fact that the bank had offered to write

letters to the various payees of the dishonoured cheques exploring the mistake wound

not take away the liability of the bank to pay substantial damage.


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Canara Bank Ltd vs. I.V. Rajgopal31

In this case it was held that mere expression of regret is not the answer to the situation.

It is expected of a bank to honour its customer's cheque if it has sufficient funds in his

hands. If it fails to do so, it will

30AIR 1959 Mad. 153

31(1975)-(1)MLJ420

be liable to damages the reason is obvious. It injuriously affects the reputation, credit

and integrity of its customer.

Jogendra Nath Chakrovarti v. New Bengal Bank Ltd.32

Where the banker, being bound to honour his customer's cheque, has failed to do so,

he will be liable for damages. If special damage, naturally ensuring from the

dishonour, is proved, it will be properly taken into account in assessing the amount of

the damages. If the customer be a trader, the court may properly award substantial

damages.


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5.5 COMPENSATION

The principle of awarding compensation to the drawer of a cheque is reparation for the

injury sustained or likely to be sustained by reason of the dishonour. In almost every

case the drawer can recover substantial damages against the drawee on the basis of

injury to his credit, although he may not be able to prove that he had suffered actual

pecuniary loss through the dishonouring of the cheque33

. But there appears to be a

distinction between a trader and non-trader in this respect; while a trader is always

entitled to substantial damages for

32AIR 1959 Mad 153.

33Sridhar v. Tyrwitt (101) AWN 113

dishonouring of his cheque, a non-trader will be entitled only to nominal damages in

the absence of an allegation and proof of substantial damages.34

5.6 REMEDY


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So far as the civil remedy is concerned a customer on account of a wrongful

dishonour can claim damages against the bank. So far as the question of civil remedy

for the payee is concerned, it is a case for recovery of money under the summary

procedure which can be filed against the drawer. As for criminal remedy against the

drawer, the same are : prosecution for cheating, and prosecution under chapter XVII

of the negotiate instrument act, 1881.


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Gibbons v. Westminister Bank (1939) 3 All ER 577

6. SUMMARY SUITS ON CHEQUE DISHONOURED

6.1 SPECIAL PROCEDURE FOR SUMMARY SUIT

When a cheque is dishonoured, the holder of, or the payee of , the cheque can sue the

drawer or endorser for the recovery of the amount along with interest. Besides a civil

suit of recovery of the amount can be initiated under order 37 of the Code of Civil

Procedure, 1908. There is a special provision made in Chapter XXXVII of the Code

for a summary procedure for trial of suits on bills of exchange, promissory notes or

cheques. This summary procedure is also

35

available even though the bill or note is non-negotiable.


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The advantage of suing under Chapter XXXVII of the Code is that the

>

defendant is not allowed in such cases to defend to suit without leave obtained from

court and it is provided further that a decree passed under the said order, may be

executed forthwith. If no such leave is applied for or granted the allegations in the

plaint shall be deemed to be admitted, and the plaintiff is entitled to a decree for the

principal 35 Tailors Priya v. Gulab Chand, AIR 1963 Cal. 36

sum and also interest as calculated under section 79 and 80 of the Negotiable

Instrument Act 1881 upto the date of the institution of the suit and afterwards upto the

decree at the same or at such other rate as the court thinks fit. Interest subsequent to

the decree is to be provided by section 34 of the Code of Civil Procedure, 1908.

Rule 1 of order XXXVII is as under :

1. Courts and classes of suits which the order is to apply -


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(1) This order shall apply to (a) High Court, City civil courts and courts ofsmall causes and (b) other courts.

(2) Subject to the provisions of sub rule (1) the order applies to thefollowing classes of suits, namely :-

(a) Suit upon bills of exchange, hundies and promissory notes;(b)Suit in which plaintiff seeks only to recover a debt in money payable by thedefendant, with or without interest, arising.

>

(i)On a written contract(ii)On an enactment(iii) On a guarantee.

6.2 REASONS FOR SUMMARY SUITS :

Rule 1 of order XXXVII provides for a summary procedure in respect of certain suits.

The essence of the summary suit is that the defendant is not, as in ordinary suit,

entitled as of right to defend the suit. He must apply for leave to defend within ten


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days from the date of the service of the summons upon him and such leave will be

granted only if the affidavit filed by the defendant discloses such fact as will make if

incumbent upon the plaintiff to prove consideration or such other facts as the court

may deem sufficient for granting leave to the defendant to appear and defend the suit.

If no leave to defend is granted, the plaintiff is entitled to a decree. The object

underlying the summary procedure is to prevent unreasonable obstruction by a

defendant who has no defence.

Rule 2 of order XXVII

Institution of summary suits-

>

(1) A suit to which this order applies, may if the plaintiff desires to proceed

hereunder, be instituted by presenting a plaint which shall contain -

(a) a specific averment to the effect that the suit is filed under that order.


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(b) that no relief, which does not fall within the ambit of this rule, has been

claimed in the plaint.

2. The summons of the suit shall be in Form No. 4 in Appendix B or insuch other form as may, from time to time, be prescribed.

3. The defendant shall not defend the suit reffered to in sub rule (1) unlesshe enters an appearance and in default of his entering an appearance. The

allegation in the plaint shall be deemed to be admitted and the plaintiff should

be entitled to a decree for any sum, not exceeding the sum mentioned in the

summons, together with interest at the rate specified, if any, upto the date of the

decree and such sum for costs as may be determined by the High Court from

time to time by rules made in that behalf and such decree may be executed

forthwith.

6.3 PROCEDURE FOR APPEARANCE OF DEFENDANT


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Rule 3 of the order is as under : Procedure for

Appearance of Defendant-

1. In a suit to which this Order applies, the plaintiff shall, together with the summons

under rule 2, serve on the defendant a copy of the plaint and annexure thereto

and the defendant may, at any

time within ten days of such service, enter an appearance either in person or by

pleader and, in either case, he shall file in court an address for service of notices in

him.

Unless otherwise ordered all summons, notices and other judicial processes, required

to be served on the defendant, shall be deemed to have been duly served on him if

they are left at the address given by him for such service.

On the day of entering the appearance, notice of such appearance shall be given by the

defendant to the plaintiffs pleader, or, if the plaintiff sue in person, to the plaintiff

himself, either by notice delivered at or sent by a paid letter directed to the address of

the plaintiffs pleader or of the plaintiff, as the case may be.

If the defendant enters an appearance, the plaintiff shall

thereafter serve on the defendant a summon for judgement in


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i

Form No. 4A in Appendix B or such other Form as may be prescribed from time to

time, returnable in not less than 10 days from the date of service supported by an

affidavit verifying the cause-of-action and the amount claimed and stating that in his

belief there is no defence to the suit.

The defendant may, at any time within 10 days from the service of such summons for

judgement, by affidavit or otherwise disclosing such facts as may be deemed

sufficient to entitle him to defend, apply on such summons for leave to defend such

suit and leave to defend may be granted to him unconditionally or upon such terms as

may appear to the Court or Judge.

At the hearing of such summons for judgement -


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(a) If the defendant has not applied for leave to defend or if such applicationhas been made and is refused, the plaintiff shall be entitled to judgement

forthwith; or

(b) If the defendant is permitted to defend as to the whole or any part of theclaim the court or judge may direct him to give such security and within such

time as may be fixed by the court or judge and that, on failure to give such

security within the time specified by the court or judge or

>

to carry out such other directions as may have been given by the court or judge,

the plaintiff shall be entitled to judgement forthwith.


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7. The court or judge may for sufficient cause shown by the defendant, excuse

the delay of the defendant in entering an appearance or in applying the leave to

defend the suit.

6.4 LEAVE TO DEFEND - WHEN TO BE GRANTED

Order XXXVII deals with summary procedure for suits and its object is certainly

abridgement of the proceedings and rapidity of disposal. It is a suit of document itself

is not admissible or cannot be acted upon, the suit does not lie. This order is

applicable to all suits or promissory notes, bills of exchange even though they are

made non-negotiable by specific terms.

Mrs. Raj Duggal v. Ramesh Kumar Bansal

It has been held that a defendant has to obtain a leave to appear and defend the suit. It

has been held by the supreme court that leave to defend the suit under order XXXVII

of the Code of civil procedure, 1908 is declined where the court is of the opinion that

the grant of leave would merely enable the defendant to prolong the litigation by

raising untenable and frivolous defend.


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AIR 1990 SC 2218.

In,

Bank of Rajasthan Ltd. v. Food Corporation of India37

Which was a suit by the corporation against bank for recovery of certain amount on account of a bank

guarantee, unconditional leave had been granted on the ground that the defendant was a scheduled bank.

However, it was held by the High Court that proper discretion had not been exercised by the Lower Court and

the Lower Court was not justified in granting unconditional leave to defend the suit on the ground that the

defendant is a scheduled Bank and as such not an ordinary debtor. Taking into consideration the defences raised

by the defendant and the terms of guarantees furnished by it, leave to defend the suit should be granted on the

condition that the defendant deposites in the trial court a sum of Rs. 5 lakh. The liability of the defendant had

been reduced by making an order that the defendant was being required to deposite a sum of Rs. 5 lakh in the

trial court as condition for the grant of leave of the suit. This order as passed by the Trial Court and modified by

the High Court is unique in itself.

Effect of forgery in,

Jasbhai, Motibhai Patel v. Hasmukhbhai Ramjibhai Patel38


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37AIBLF Vol. II P.96.

38(1994) BC306

the defendant has taken plea in written statement that his signature of the defendant on

pronote was a forgery. The Trial Court compared the signature and rejected the plea.

At High Court, the High Court held that once a party raises a triable issue then

unconditional leave must be granted. It was further held that defences such as forgery

or fabrication of documents being allegations of gravest nature raise disputed question

of facts constituting the case by this triable issue and such issue cannot be decided by

near ipse dixit of the court because the personal belief of opinion of court which is not

based on any evidence on the record howsoever honest it may be, can turn out to be

erroneous to the prejudice of a party affected by it.


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In,

39

Parvinder Kaur v. Ramlal

it has been held that in a summary suit for recovery of money on

promissory note when defendant seeks leave to defend on the ground

i

that the promissory notes in a forgery was without consideration, leave should be

granted unless the court holds the defence to be frivolous or vexatious.

AIR 1991 J& K 5


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6.5 EFFECTS OF PENDENCY OF CRIMINAL MATTERS ON CIVILSUITS

State of Rajasthan. v. Kalyan Sundaram Industries Ltd.40

It has been held it is a settled law that pendency of the criminal matter would not be an

impediment to proceed with the civil suits. The criminal court would deal with offence

punishable under the Act. On the other hand, the courts rarely stay the criminal cases

and only when the compelling circumstances require the exercise of power.

6.6 LIMITATION TO LEAVE DEFENDUnder article 118 of the limitation act 1963, the period fixed for filing an application

for leave to appear and defend under order 37 of the Code of Criminal Procedure is

ten days from the date when the summon is served . The right to apply for the leave to

appear and defend the suit can be availed of even before the service of summons. The

court can condone the delay in filing the application for leave to defend under section

5 of the limitation act.

I

Civil liability is however not effective. We have to consider the criminal liability for

dishonour of a cheque arises in two ways when the prosecution can take place.

40(1996) ISJ Banking 320


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7. LAW PRIOR TO INTRODUCTION OF BANKING AMENDMENT ACT, 1988

G.K. Mohanty Vs. Partap Kishore Udas41

Ordinarily invariably it has been need that the dishonour of cheque is only a civil liabilities as contemplated

under sees 30 and 117 of Negotiable Instrument Act, 1881, unless the cheque was issued on deceitful and

fraudulent and on such persuasion the other party was led to deliver the goods, in such cases the offence u/s 420

has been held to be made out in the previous case it would be only breach of contract giving rise to civil liability

only.

It may be pertinent to mention that prior to the enactment of the Negotiable Instruments Act (Amendment),

1988 the offence of dishonour of cheques were dealt with by section 420 read with sec 417, IPC. The enactment

of the banking public financial institutions and Negotiable Instrument Laws (Amendment) Act, 1988, made the

dishonour of cheque simpliciter an offence punishable under section

411987(2)RCR615(Ori)


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138 of the act. For the credibility and trustworthiness of the business and trade in the

society, it is imperative to love a speedy disposal of the offence of this nature. This

was the sole purpose of incorporating these new provisions, otherwise, these offences

were being tried earlier (before the said amendment of 1988) under section 420 with

sec 417.

7.1 Civil Liability : It is settled law that mere dishonouring of cheque does not come

within mischief of sections 406 and 420 of IPC. The complaint does not show that

there was any misrepresentation. Elements of cheating must be at the initial stage

which is missing in the case even if allegations in complaint are taken as correct. Such

a despite is essentially of a civil nature and has no element of cheating the view has

been taken in Sita Ram Vs. State42

; Murari Lai vs. Shiv Prakash43

; Randir Singh vs.

State of Punjab44

, and none of these authorities and relevant to the facts in the present

case. Application u/s 482 of CrPC is competent to give effect to any order under the

Code or to prevent abuse of process of any court or to secure ends of justice.

Jawahar Lai Bansal vs. Mohinder Singh45

u1985 PLR 474

431971 CrLJ9b

441978 PLF 28

45

1980 PLR 116 (P&H)


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report on cheque dishonour

Documents