S 138 NI Act – Dishonour Of Cheque That Was Drawn After Closing Account

A person (X) closes his bank account but somehow manages to retain some cheque leaves. Thereafter, X issues this cheque to Y. On presenting this cheque, it gets dishonoured as ‘account closed’. Demand notice was ignored and this person refuses to pay the amount. This may be an offence of cheating. However, the question is whether this amounts to an offence under Section 138 of Negotiable Instruments Act?

One of the ingredients of the offence under Section 138 is that the cheque should drawn by the accused on an account maintained by him with a banker for payment of any amount of money to another person.

When a person issues a cheque before his account is closed, he may attract this stipulation. This was the fact situation in  in NEPC Micon Ltd. v. Magna Leasing Ltd., (1999) 4 SCC 253  and the Supreme Court held thus : 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. This was reiterated in Goaplast (P) Ltd. v. Chico Ursula D’Souza, [2003 (2) KLT (SC) 16 = (2003) 3 SCC 232] in which Apex Court observed that if stoppage of payment of a post-dated cheque is permitted to take the case out of the purview of Section 138 of the Act, it will amount to allowing the party to take advantage of his own wrong.

But what about a person who draws the cheque after he closed that account? In Vathsan vs Japahari  [2004 CriLJ 414, 2003 (3) KLT 972] the Kerala High Court (Division Bench) observed that the dictum laid down in NEPC and Goaplast is equally applicable to a case of closure of account even prior to the drawal of the cheque. “We are of the view that once a person had issued a cheque drawn on an account, which he was holding in the bank, necessarily, he cannot take up a defence that he did not have a subsisting account on the date of drawal of the cheque“, it was observed.

Does a cheque issued after the date of closure of the account fall within the sweep of Section 138 of the N.I. Act? This question was again considered by a single bench of Kerala HC in Salim vs Thomas [2004 (1) KLT 816]. This was answered in the affirmative relying on Vathsan. But in 2016, another single bench in Muralidharan Vs. Kumaran [2016 (3) KLT 315 :: 2016 (3) KHC 845], without noticing these decisions explained the distinction between a situation wherein a person after issuing a cheque to another, closes that account, and a situation wherein a person after closing the account with the bank, manages to issue a cheque to another from that account he had already closed. According to this judgment, the latter situation deals with two totally different situations noted below:

(1) The account is being closed by the bank on the demand of the account holder himself and thereafter the account holder manages to issue a cheque to another from that account he had already closed – In this scenario, , it would be the offence of cheating, since the cheque was intentionally issued to the payee to cheat him with the knowledge that there was no live account – However, it would not be an offence under Section 138 of the N.I. Act, since there was no live account at the time when the cheque is issued

(2) The bank on its own volition closes the account by itself, without the knowledge and consent of the account holder; say for example, by treating the account as a non-performing account, and without the knowledge that the account was closed by the bank, the account holder issues a cheque to another from that account. -In this case, it would not be an offence of cheating, since the cheque was issued bonafide by believing that the account remained alive; whereas, the dishonour of that cheque would invite an offence under Section 138 of the N.I. Act.

But, this judgment, is evidently per incuriam.

Gujarat HC

The Gujarat High Court in Hashmikant M. Sheth V. State of Gujarat  2004 (2) GLH 783 held that dishonour of cheque which was issued after closure of the account maintained by the drawer amounts to an offence under Section 138 of Negotiable Instruments Act. According to this judgment, the phrase “any cheque drawn by a person on an account by him with banker” will have to be construed to mean that “any cheque drawn by a person on an account maintained and closed by him”. 

Bombay HC

The Bombay High Court in Shivendra Sansguiri v M/s. Adineo 1998 ALL MR(Cri) 880 observed thus: If he closes the account before or after the issuance of the cheque because when cheque is drawn in discharge of a pecuniary liability it can be always presumed that there exists an account in the Bank in the name of a drawer. This presumption however, cannot be displaced by misusing cheque facility after closing the account. In such circumstances, the drawer of the cheque is not only liable under of the Negotiable Instruments Act, but also under . At any stretch of reasoning, it cannot be said that such misuser of cheque is not liable under of the Negotiable Instruments Act.

To conclude, it appears that, the Courts have applied the mischief rule of Interpretation to protect the Cheque holders. However, it seems that this issue has not reached the Apex Court yet.

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