Section 138 of the Negotiable Instruments Act reads as follows: 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 provisions 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:
Thus the Section 138 NI Act explicitly refers to cheque bounce either on the ground of “insufficient funds” or that the “amount exceeds the arrangement with the Bank”. There are other grounds on which a cheque can be bounced. However, the Supreme Court in the judgment mentioned below has expanded the scope of this provision to include some other grounds as well.
(1) Stop payment
On the issue whether a complaint under Section 138 NI Act is maintainable if cheque dishonour was on the ground of ‘stop payment’, initially there were conflicting views by two judges benches of the Supreme Court. In Electronics Trade and Technology Development Corpn, LTD, vs. Indian Technologists and Engineers (Electronics) (P) Ltd., 1996 (2) SCC 739, it was held that even if a Cheque is dishonoured because of `stop Payment’ instruction to the bank, section 138 would get attracted. In K.K. Sidharthan vs. T.P. Praveena Chandran & Anr.. (1996) 6 SCC 369, it was held otherwise.
The controversy was laid to rest by a three judges bench in Modi Cements Ltd. Vs. Kuchil Kumar Nandi (1998) 3 S.C.C. 249. It was held that if the cheque is dishonoured, because of stop payment instruction to the bank, Section 138 would get attracted. It also amounts to dishonour of the cheque within the meaning of Section 138 when it is returned by the bank with the endorsement like (I) referred to the drawer (ii) instructions for stoppage of payment and stamped (iii) exceeds agreement. Any other view, according to the Court, will make Section 138 a dead letter, for, by giving instructions to the Bank to stop payment immediately after issuing a cheque against a debt or liability the drawer can easily get rid of the penal consequences notwithstanding the fact that a deemed offence was committed.
(2) Account closed
When the cheque is returned by a bank with an endorsement account closed, it would amount to returning the cheque unpaid because the amount of money standing to the credit of that account is insufficient to honour the cheque as envisaged in Section 138 of the Act. In NEPC Micon Ltd vs Magma Leasing Ltd (1999) 4 SCC 253, it was observed thus : “The expression the amount of money standing to the credit of that account is insufficient to honour the cheque is a genus of which the expression that account being closed is specie. After issuing the cheque drawn on an account maintained, a person, if he closes that account apart from the fact that it may amount to another offence, it would certainly be an offence under Section 138 as there was insufficient or no fund to honour the cheque in that account.”
(3) Signature mismatch
. In M/s Laxmi Dychem vs State of Gujarat (2012) 13 SCC 375, it was observed that ‘Just as dishonour of a cheque on the ground that the account has been closed is a dishonour falling in the first contingency referred to in Section 138, so also dishonour on the ground that the “signatures do not match” or that the “image is not found”, which too implies that the specimen signatures do not match the signatures on the cheque would constitute a dishonour within the meaning of Section 138 of the Act.’
(4) Account Blocked or Freezed
In Rajesh Meena v. State of Haryana , the Punjab and Haryana High Court quashed a complaint in which the cheque was dishonoured due to the reason ‘account blocked;. The court observed that the expression “account maintained by him” must necessarily include that the said account is not only alive and operative, but the account holder is capable of executing command to govern the financial transactions which include the clearance of cheques etc. “The authority and control of the account holder upon the account must exist on the effective date i.e. when the cheque becomes valid for presentation in the bank. It is settled law that mere issuance of a cheque is not an offence, but it becomes punishable when the said cheque is dishonoured. Mere fact that the record of the drawer bank shows a particular name as account holder would not be sufficient to establish that account is being maintained by the account holder, unless the said account holder holds the authority and control over the said account. In other words, if an account holder is deprived off his authority, control and dominion over the bank account, it cannot be said that the account is being maintained by the said account holder.” [ Also refer: Ceasefire Indusries Ltd. v. State and Standard Chartered Bank & Anr. v. State [Delhi HC]]
Quite recently, a District Court in Delhi observed that these judgments cannot be read to mean that in each and every case that the cheque is returned unpaid for the reason “account blocked”, no prosecution under Section 138 of the NI Act would be maintainable. The court said: “If the cheque is handed over in discharge of the admitted liability drawn on an account which as per orders/ directions of any Court/ Forum or Authority was not under the operation of the account holder, under such circumstances, the liability under Section 138 NI Act may very well be attracted, on the same corollary as propounded in the judicial pronouncements referred supra as ‘account closed. It is also for the accused to demonstrate that if due to supervening circumstances he was prevented from operation of the account due to “account blocked”, that he had duly notified the holder in due course of such subsequent development.”