Does 'Refer to Drawer' Endorse Cheque Dishonour Under NI Act?

In the fast-paced world of business transactions, cheques remain a common payment method in India. However, when a cheque bounces, it can lead to serious legal consequences under Section 138 of the Negotiable Instruments (NI) Act, 1881. A frequent question arises: Does the dishonour of a cheque by endorsement such as 'refer to drawer' or similar remarks refer to the branch, amounting to dishonour under Section 138?

This blog post delves into the judicial stance on cheque dishonour via endorsements like refer to drawer, payment stopped, or exceeds arrangements. Drawing from landmark cases and statutory interpretations, we'll clarify when such endorsements trigger criminal liability. Note: This is general information based on case law and not specific legal advice. Consult a qualified lawyer for your situation.

Understanding Cheque Dishonour Under Section 138 NI Act

Section 138 NI Act aims to promote the efficacy and credibility of banking operations by penalizing the dishonour of cheques due to insufficient funds or other specified reasons. The provision is triggered when a cheque is returned unpaid by the bank, typically with an endorsement explaining the cause.

Courts have consistently held that certain bank endorsements equate to dishonour. For instance, phrases like refer to drawer, payment stopped, or exceeds arrangements are not mere clerical notes but legally significant indicators. As established in key judgments, these endorsements invoke the offence under Section 138 1998 2 Supreme 471.

Key Endorsements Recognized as Dishonour

The Indian judiciary, particularly the Supreme Court, has outlined specific endorsements that constitute dishonour:

• Refer to Drawer: This politely signals that the cheque cannot be honoured, often due to insufficient funds. It explicitly refers the matter back to the drawer (issuer), triggering Section 138 1999 4 Supreme 378. In Modi Cements Ltd. v. Kuchil Kumar Nandi, the Supreme Court clarified: endorsements like 'referred to drawer,' 'instructions for stoppage of payment,' and 'exceeds arrangements' are regarded as dishonour within the scope of Section 138 1999 4 Supreme 378.

• Payment Stopped or Instructions for Stoppage of Payment: Even if funds exist, stopping payment post-issuance amounts to dishonour. The presumption of liability arises, and the drawer must rebut it 1998 2 Supreme 471.

• Exceeds Arrangements or Funds Insufficient: These directly point to inadequate balances, solidifying dishonour 1996 1 Supreme 744.

In Electronics Trade & Technology Development Corporation Ltd. v. Indian Technologists & Engineers (Electronics), it was reinforced: such endorsements amount to dishonour within the meaning of Section 138 of the Act 1996 1 Supreme 744.

Judicial Precedents on Refer to Drawer and Similar Endorsements

The phrase refer to drawer is elastic but commonly implies insufficiency of funds. In one case, the court noted: in business it is well known that the expression 'refer to drawer' is employed by a bank to convey courteously that the cheque issued by a customer cannot be honoured on the ground of insufficiency of funds. It is quite possible that the expression 'refer to drawer' may be elastic enough to take within its sweep, certain other contingencies also 2003 0 Supreme(Mad) 582. Non-mention of these exact words in a complaint isn't fatal if the endorsement implies dishonour 2003 0 Supreme(Mad) 582.

Stop payment instructions post-issuance don't absolve the drawer. As held: Once the cheque has been drawn and issued to the payee and the payee has presented the cheque and thereafter, if any instructions are issued to the bank for non-payment and the cheque is returned to the payee with such an endorsement, it amounts to dishonour of cheque and it comes within the meaning of Section 138 1998 0 Supreme(AP) 12

KUSUM INGOTS VS State OF A. P.

The onus shifts to the drawer to prove no dishonest intent, a question of fact determined at trial 1998 0 Supreme(AP) 12.

Broader Contexts: Other Reasons for Dishonour

Endorsements extend beyond insufficiency:

• Account Closed or Frozen: Even account closed or account frozen constitutes dishonour. A complaint is maintainable for frozen accounts, with the accused bearing the burden to prove circumstances 2024 0 Supreme(J&K) 328. The court emphasized: dishonour due to reasons beyond the drawer's control does not exempt liability under Section 138 2024 0 Supreme(J&K) 328.

• Multiple Presentations: A cheque can be presented multiple times within six months. Initial dishonour doesn't bar re-presentation, and cause of action arises per Section 138(c)

  Manjeet Singh Dhillan VS Baljinder Singh Rajpal

  . Dishonour of cheque – Within six months cheque may be presented several times

  Manjeet Singh Dhillan VS Baljinder Singh Rajpal

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These rulings ensure unscrupulous drawers can't evade liability by manipulative tactics like stop payments without funds

KUSUM INGOTS VS State OF A. P.

Exceptions and Limitations

While robust, there are nuances:- Endorsements must be bank-stamped and documented properly.- Drawers may rebut presumptions under Section 139 (e.g., proving no debt), but this requires evidence at trial.- Account closed still implies insufficiency if post-issuance

THIRUMALA AGENCIES VS SAMALA MAREPA

Mere claims that the endorsement wasn't valid fail; courts prioritize the statutory object of banking credibility 1996 1 Supreme 744.

Practical Recommendations for Businesses and Individuals

To navigate cheque-related disputes:- Examine Returned Cheques Thoroughly: Note endorsements like refer to drawer or payment stopped – they form the basis for Section 138 complaints 1998 2 Supreme 471.- Issue Legal Notice Promptly: Within 30 days of dishonour, demand payment within 15 days (per Section 138(b)).- Preserve Bank Memos: Retain originals as evidence.- Re-Present if Viable: Within validity period, especially if initial bounce was for stop payment

Manjeet Singh Dhillan VS Baljinder Singh Rajpal

Banks should clearly endorse reasons to aid legal proceedings.

Conclusion and Key Takeaways

Endorsements such as refer to drawer, payment stopped, or exceeds arrangements are firmly recognized as cheque dishonour under Section 138 NI Act, enabling criminal proceedings upon notice and non-payment 1999 4 Supreme 378 and 1996 1 Supreme 744. This upholds transactional trust, deterring casual cheque issuance.

Key Takeaways:- Such endorsements trigger presumption of liability – rebuttal is drawer's burden.- Applies to stop payments, frozen accounts, and more 2024 0 Supreme(J&K) 328.- Multiple presentations allowed within six months

Manjeet Singh Dhillan VS Baljinder Singh Rajpal

Disclaimer: Legal outcomes depend on facts; this overview isn't advice. For tailored guidance, contact a legal expert.

References:- 1998 2 Supreme 471, 1996 1 Supreme 744, 1999 4 Supreme 378,

Manjeet Singh Dhillan VS Baljinder Singh Rajpal

THIRUMALA AGENCIES VS SAMALA MAREPA

KUSUM INGOTS VS State OF A. P.

Stay informed, issue cheques responsibly, and protect your financial interests.