Allahabad High Court’s Decision on Dishonored Cheques

The Allahabad High Court has made certain observations regarding dishonored cheques and the implications under Section 138 of the Negotiable Instruments Act (NI Act). According to the court, if a cheque is dishonored and returned with endorsements such as “case referred to drawer,” “instruction for stoppage of payment,” “exceeds arrangement,” “insufficient fund,” “signature differed or mismatch,” or “account closed,” it will be sufficient for a prima facie case for issuing a process under Section 138 of the NI Act.

The court further stated that despite the bank’s endorsements for returning the cheque, summoning the cheque drawer under Section 138 of the NI Act is proper. It emphasized that while disputing the bank’s endorsement can be raised during the trial, it cannot be grounds for quashing the complaint proceeding at the initial stage.

The Allahabad High Court referred to several decisions of the Supreme Court to support its observations. In the case of NEPC Micon Ltd. vs. Magma Leasing Ltd (1999), it was observed that when a cheque is returned by a bank with the endorsement “account closed,” it amounts to returning the cheque unpaid, as the amount of money in the account is insufficient to honor the cheque as required by Section 138 of the Act.

Similarly, in the case of Laxmi Dyechem vs. State of Gujarat (2012), the Supreme Court held that even if a cheque is returned by the bank with the endorsement “signature differ,” it is sufficient to initiate proceedings under Section 138 of the NI Act. The court reasoned that after dishonoring the cheque, the drawer receives a statutory notice allowing them to arrange for payment within 15 days. If the drawer fails to make the payment within this period, proceedings under Section 138 can be initiated.

Case Summary

The observations mentioned above were made by the Allahabad High Court while dismissing a Section 482 CrPC application filed by Vijay Kumar. Kumar sought to quash the summoning order and the entire proceeding of a Complaint Case under Section 138 of the NI Act.

In the case, the complainant (Opposite party no.2) filed a complaint against Kumar under Section 138 of the NI Act, alleging that Kumar had requested Rs.3,00,000/- in October 2022. Kumar issued a cheque of the same amount to the complainant on July 4, 2023. However, when the cheque was presented to the bank, it was returned on July 12, 2023, with the endorsement “account closed”.

The complainant then sent a registered notice to Kumar on August 9, 2023, demanding payment within 15 days. However, Kumar did not make any payment. Consequently, the complainant filed a complaint, and the Magistrate summoned Kumar, which was challenged in the present case.

Kumar’s counsel argued that the cheque in question was missing and that Kumar had already filed a police report and a complaint to stop the payment. They contended that the complainant had misused the cheque and filed the complaint, asserting that the cheque was not issued to discharge any liability.

On the other hand, the Additional Government Advocate (AGA) for the State argued that the defense raised by Kumar’s counsel was a disputed question of fact that could be decided during the trial. The AGA stated that the proceeding should not be quashed on this ground.

After considering the arguments from both sides, the court opined that whether the cheque was a missing cheque was a disputed question of fact that could be decided during the trial. The court also noted that a police complaint regarding the missing cheque was not lodged as per the procedure but was submitted as a simple application to the police station. Regarding the second contention raised by Kumar’s counsel, the court observed that since the cheque had been bounced and returned by the bank with the endorsement “account closed,” summoning Kumar under Section 138 of the NI Act was not illegal.

In conclusion, the Allahabad High Court’s observations clarify that if a cheque is dishonored and returned with specific endorsements, it can be considered a prima facie case for issuing a process under Section 138 of the NI Act. These observations were made in the context of a case where the complainant filed a complaint against the drawer of a cheque that was returned with the endorsement “account closed.” The court dismissed the application to quash the summoning order and the proceeding under Section 138 of the NI Act. The court emphasized that the disputed questions of fact can be addressed during the trial.