TMI BlogDISHONOR OF CHEQUE ISSUED AS SECURITY FOR DISCHARGE OF A DEBT OR OTHER LIABILITYX X X X Extracts X X X X X X X X Extracts X X X X ..... DISHONOR OF CHEQUE ISSUED AS SECURITY FOR DISCHARGE OF A DEBT OR OTHER LIABILITY - By: - Mr. M. GOVINDARAJAN - Other Topics - Dated:- 16-8-2016 - - Dishonor Section 91 of the Negotiable Instruments Act, 1881 ( Act for short) provides that a bill of exchange is said to be dishonored by non acceptance when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonored. Section 92 of the Act provides that a promissory note, bill of exchange or cheque is said to be dishonored by nonp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment when the maker of the acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. Notice Section 93 provides that when a promissory note, bill of exchange or cheque is dishonored by non acceptance or nonpayment, the holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been so dishonored to all other parties, whom the holder seeks to make severally liable thereon, and to some one of several parties whom he seeks to make jointly liable thereon. Nothing in this section renders it necessary to give notice to the maker of the dishonored promissory note, or the drawee or acceptor of the dishonored bill of exchange. Penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Section 138 of the Act provides that 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 honor 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 provision of this Act, be punished with imprisonment for a term which may be extended to two years or with fine which exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to twice the amount of the cheque, or with both. The proviso to this section provides that nothing contained in this section shall apply unless- The cheque has been presented to the bank within a period three months from the date on which it is drawn or within the period of its validity, whichever is earlier; The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and The drawer of such cheque fails to make the payment of the said amount of money to the payee or as the case ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be, to the holder in due course of the cheque within 15 days of the receipt of the said notice. The explanation to this section defines debt or other liability means a legally enforceable debt or other liability. Issue The issue to be discussed in this article is whether the cheques issued as security for discharge of a debt or other liability and its dishonor attracts the provisions of Section 138 of the Act , with reference to decided as case law as discussed below: In Don Ayenga V. State of Assam and another 2016 (1) TMI 951 - SUPREME COURT the appellant complaint is a partner in M/s Ayyan Consortium. He entered into an agreement with one Nazimul Islam for construction of a multi-storeyed building over a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain parcel of land. The complainant paid to Nazimul a sum of ₹ 10 lakhs. The agreement did not materialize in the execution of the work in question with the result that the same was cancelled in terms of a promissory note dated 13.08.2006 executed by Nazimul in favor of the complainant, with a promise to pay the said amount within a period of one month from the date the promissory note was executed. The promissory note stipulated that ₹ 10 lakhs was being refunded by the executants in terms of five post dated cheques, the receipt whereof was acknowledged by the complainant. The promissory note further mentioned that the cheques were being issued as a security and shall be returned to Nazimul when the amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 lakhs is paid by him within a period of one month. Interest was also promised to be paid on the said amount. The appellant presented the cheques after the expiry of the period of one month stipulated for return of the amount. The appellant presented the said cheques since Nazimul did not pay ₹ 10 lakhs as promised by him. All the cheques were dishonored by the bank on the ground of insufficiency of funds. A second presentation also proved abortive for the same reason. At this state, the respondent No. 2, Haren Mudoi indemnified the appellant by acknowledging that the cheques in question were actually issued by him and handed over to Nazimul. This acknowledgement was reflected in the form of an endorsement on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e promissory note in which he agreed to the cheques being presented for payment after 25.09.2007. The appellant once again presented the cheques for payment on 05.11.2007 but the same were dishonored by the bank for the third time. A statutory notice was issued by the appellant to the respondent. The respondent sent a reply to the appellant undertaking to pay the whole amount by the second week of January 2008 by issuing fresh cheques. A complaint under Section 138 of the Act was filed by the appellant. In the meantime Nizamul passed away and therefore, the proceedings against him abated but the trial court found the respondent guilty and accordingly convicted him for the offences punishable under Section 138 of the Act . Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Trial Court awarded compensation to the appellant in a sum of ₹ 12 lakhs to be paid within a period of three months. The Additional Sessions Judge, in appeal by the respondent, while upholding the conviction of the respondent modified the sentence awarded to him to payment of a fine of ₹ 2,000/- and a default sentence of imprisonment for a period of one month, in addition to the amount of compensation awarded by the trial court. The sentence of imprisonment was set aside by this court. Both parties filed appeal before the High Court. The High Court set aside the conviction of the respondent against which the appellant present this appeal before the Supreme Court. The Supreme Court found that it is not in dispute that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the execution of the promissory note and the endorsement made by the respondent has been satisfactorily proved at the trial. Concurrent findings recorded by the trial court and the first appellate court to that effect conclude the factual part of the controversy. The only question that survives is whether the cheques issued by the respondent were meant to discharge, in whole or part, any debt or other liability within the meaning of Section 138 of the Act . The Supreme Court has no hesitation in answering the question in the affirmative. The difficulty arises only because the promissory note uses the words security qua the cheques. This would ordinarily and in the context in which the cheques were given imply that once the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of ₹ 10 lakhs was paid, the cheques shall have to be returned. Since the amount was not paid within the time stipulated, the cheques were liable to be presented for otherwise there was no logic or reason for their having been issued and handed over in the first instance. If nonpayment of the agreed debit/liability within the time specified also did not entitle the holder to present the cheques for payment, the issuance and delivery of any such cheques would be meaningless and futile, if not absurd. The Supreme Court did not accept the arguments of the respondent that he had no liability to liquidate the debt owed by Nazimul. The endorsement made by the respondent on the promissory note that the cheques can be presented f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or encashment after 25.9.2007 clearly shows that the cheques issued by him were not ornamental but were meant to be presented if the amount in question was not paid within the extended period. The High Court in the view of the Supreme Court, fell in error in upsetting the conviction recorded by the Courts below who had correctly analyzed the factual situation and applied the law applicable to the same. The Supreme Court allowed the appeal and set aside the order passed by the High Court. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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