In a recent judgment, the Allahabad High Court has reiterated that cheques dishonored due to reasons such as “insufficient funds,” “account closed,” and “signature mismatch” fall under the purview of Section 138 of the Negotiable Instruments Act, 1881 (NI Act). This ruling aligns with the broader judicial interpretation aimed at preventing cheque-related fraud and ensuring accountability.
Key Points from the Ruling:
- Broad Interpretation of Section 138:
The court emphasized a liberal interpretation of Section 138 to encompass various scenarios where a cheque may be dishonored. This approach aligns with the legislative intent to uphold the integrity and reliability of cheques as instruments of financial transactions【68†source】【72†source】. - Insufficient Funds:
Traditionally, Section 138 explicitly covers cheques dishonored due to insufficient funds in the drawer’s account. This provision ensures that individuals cannot issue cheques without having adequate funds to honor them, thereby preventing fraudulent activities【72†source】. - Account Closed:
The court noted that cheques returned due to the account being closed are treated similarly to those dishonored for insufficient funds. The reasoning is that closing an account after issuing a cheque is tantamount to not having sufficient funds to cover the cheque, thus attracting penal consequences under Section 138【69†source】【72†source】. - Signature Mismatch:
Dishonoring a cheque due to a signature mismatch also falls under the scope of Section 138. The Supreme Court has previously ruled that a mismatch in signatures indicates an issue with the authenticity of the cheque, which undermines the trust in the transaction process. Therefore, such cases are treated as offences under Section 138 to deter individuals from evading their financial liabilities through technical discrepancies【68†source】【70†source】【71†source】. - Legal Obligations and Remedies:
The ruling underscores the necessity for individuals issuing cheques to ensure all details are correctly filled and that their account can cover the issued amount. If a cheque is dishonored, the payee must notify the drawer within 30 days, demanding payment. If the drawer fails to make the payment within 15 days of receiving the notice, legal proceedings under Section 138 can be initiated【69†source】.
This decision by the Allahabad High Court reinforces the robust legal framework designed to maintain the credibility of cheques in commercial and financial transactions, ensuring that defaulters face appropriate legal consequences.