Cheque Returned Unpaid By Bank With 'Account Closed' Endorsement Amounts To 'Cheque Dishonour' U/S 138 NI Act: Allahabad HC

The Allahabad High Court has held that when a cheque is returned unpaid by a Bank with an endorsement 'Account Closed', it would amount to 'dishonour of cheque' and constitute the commission of an offence under section 138 of the Negotiable Instruments Act.

A bench of Justice Anish Kumar Gupta further added that the return of the cheque by the drawee Bank alone constitutes the commission of offence under section 138 of the NI Act.

To conclude thus, the single judge relied upon Apex Court's judgments in the cases of NEPC Micon Ltd. vs. Magma Leasing Ltd (1999), wherein it was observed that when the cheque is returned by a bank with an endorsement account closed, it would amount to returning the cheque unpaid, because the amount of money standing to the credit of that account, is insufficient to honour the cheque as envisaged under Section 138 of the Act.

In NEPC Micon Ltd (1999) it was observed thus : “The expression the amount of money standing to the credit of that account is insufficient to honour the cheque is a genus of which the expression that account being closed is specie. 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.”

The High Court was essentially dealing with a petition filed by one Jatan Kumar Singh seeking quashing of a summoning/cognizance order in a Complaint Case under Section 138 NI Act pending in the court of Additional Chief Judicial Magistrate, Varanasi.

The applicant issued a cheque totalling around 29 Lakhs to the opposite party no. 2 on May 21, 2020, drawn from ICICI Bank Branch Pahadiya District Varanasi. However, when it was presented to the bank on June 19, 2020, the cheque was returned on the following day with the remark 'Account Closed'.

It was the further case of the opposite party no. 2 that the demand notice dated June 23, 2020 was issued to the applicant which was received by him on June 26, 2020 but he failed to pay the cheque amount and therefore, the instant complaint was filed by him against the applicant under section 138 N.I. Act.

Challenging the summoning/cognizance order, the applicant moved the HC wherein his counsel argued that the dishonour of the cheque for the reason 'Account closed' would not be covered within the two conditions laid down in Section 138 of the N.I. Act i.e., firstly, the amount of money standing to the credit of the account is insufficient to honour the cheque and secondly, it exceeds the amount arranged to be paid from the account by an agreement made with the Bank. 

On the other hand, the counsel for the opposite party No. 2 submitted that after issuing the cheque, it was the duty of the cheque drawer to maintain the said account and make the arrangements so that the cheque is honoured. It was also contended that if the drawer of the cheque fails to maintain sufficient funds with the Bank to honour the cheque, the offence under Section 138 of the NI Act would be made out.

At the outset, the Court perused Section 138 of the NI Act to note the following formal conditions required to be fulfilled to constitute the offence under Section 138 of the NI Act:

(i) that the drawer of the cheque has issued a cheque on an account maintained by him with a banker.

ii) the said cheque is issued for the discharge in whole or in part, of any debt or other liability.

iii) the said cheque is returned by the Bank unpaid,

for the reasons:

(a) the amount of money standing to the credit of that account is insufficient to honour the cheque; or

(b) it exceeds the amount arranged to be paid from that account by an agreement made with the bank.

The Court noted that the dishonour of a cheque by the Bank with the remark "Account Closed" would be covered within the parameters of twin conditions provided under Section 138 of the N.I. Act i.e., the amount of money standing to the credit of the account is insufficient to honour the cheque; or secondly, it exceeds the amount arranged to be paid from the account by an agreement made with the Bank.

Further, relying upon the SC's Judgment in NEPC Micon Ltd (supra), the Court concluded that when a cheque is returned unpaid by a Bank with an endorsement "Account Closed", it would amount to returning the cheque unpaid because the amount standing to the credit of such account is insufficient to honour the cheque as envisaged in Section 138 of the N.I. Act. 

Consequently, finding no merit in the instant application, the Court dismissed it.

Appearances

Petitioner's Counsels- Senior Counsel Manish Tiwari assisted by Sanjay Kr. Srivastava , Anurag Vajpeyi and Praveen Kumar Singh

Respondent's Counsel - G.A. , Kripa Shankar Singh , Rajesh Pratap Singh and Vibhu Rai

Case title - Jatan Kumar Singh Vs. State Of U.P. And Another 2024 LiveLaw (AB) 121 [APPLICATION U/S 482 No. - 2965 of 2021]

Case Citation: 2024 LiveLaw (AB) 121

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