10 most important case-based questions from the Negotiable Instruments Act, 1881

Q1) Mr. Y issued a cheque for ₹10,000 to Mr. Z which was dishonoured by the Bank because Y did not have enough funds in his account and has no authority to overdraw. Examine as per the provisions of the Negotiable Instruments Act, 1881 whether-

(i) Mr. Y is liable for dishonour of cheque, if yes, what are the consequences for such an offence?

(ii) What would be your answer if Y issued a cheque as a donation to Mr. Z?

Provisions:

As per Section 138 of the Negotiable instruments Act, 1881,

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 that account

for the discharge, in whole or in part, of any debt or other liability, [A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the purview of this section]

• 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, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

Facts of the case:

Mr. Y issued a cheque to Mr. Z which was dishonoured by the Bank due to insufficiency of funds.

Analysis and conclusion:

In the instant case,

(i) Since Y’s cheque was dishonoured by the Bank due to insufficiency of funds in his account, he shall be deemed to have committed an offence and shall, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to ₹ 20,000, or with both.

(ii) A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the purview of this section. Hence, if Y issued a cheque as a donation to Mr. Z, he shall not be liable under section 138 of the Act.