Stop Payment Cheque Bounce: Section 138 NI Act Ruling

Issuing a cheque is a common business practice, but what happens when it's dishonoured due to 'payment stopped by drawer'? Many drawers believe stop instructions shield them from liability. However, courts have consistently ruled otherwise. In this post, we explore judgments on grounds for dishonour due to payment stopped by the drawer, under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). This analysis draws from key precedents, helping payees and drawers understand their rights and obligations.

Disclaimer: This is general information based on judicial precedents and not specific legal advice. Consult a lawyer for your case.

Understanding Cheque Dishonour Due to Stop Payment

The question often arises: judgmnt on ground for dishonour paymnt stopped by drawer. Courts have clarified that dishonour due to stop payment instructions constitutes an offence under Section 138 NI Act. This triggers the presumption under Section 139 that the cheque was issued for discharge of a debt or liability. Proceedings cannot be quashed merely on this ground; the drawer must rebut the presumption at trial. 1998 2 Supreme 471 2001 8 Supreme 227

Section 138 applies when a cheque is returned unpaid for reasons like insufficiency of funds, exceeding arrangements, or stop payment. The Supreme Court held: Once the cheque is issued by the drawer a presumption under Section 139 must follow and merely because the drawer issues a notice to the drawee (Payee) or to the Bank for stoppage of the payment it will not preclude an action under Section 138 of the Act by the drawee, (Payee) or the holder of a cheque in due course. 1998 2 Supreme 471

Similarly: Dishonour of cheque—Essential ingredients—Once a cheque is drawn by a person of an account maintained by him for payment of any amount or discharge of liability or debt or is returned by a bank with endorsement like refer to drawer, exceeds arrangements and instruction for stop payment and like other usual endorsement, it amounts to dishonour within meaning of Section 138. 2014 2 Supreme 549

Presumption Under Section 139 and No Quashing at Threshold

Under Section 139, courts presume the cheque was for a legally enforceable debt. Stop payment does not exempt the drawer. Even if proceedings are challenged under Section 482 CrPC, courts refuse quashing: even though the cheque is dishonoured by reason of ‘stop payment’ instruction an offence under Section 138 could still be made out. It is held that the presumption under Section 139 is attracted in such a case also... the accused can thus show that the 'stop payment' instructions were not issued because of insufficiency or paucity of funds. 2001 8 Supreme 227 2001 8 Supreme 227

The drawer bears the burden to prove sufficient funds and a valid, non-dishonest reason at trial. Mere stop instructions or liability denial won't suffice early on. This upholds the NI Act's goal of promoting banking efficacy and punishing evasion. 2001 8 Supreme 227

Extension to Post-Dated Cheques

The rule applies to post-dated cheques stopped before maturity: Section 138 of the Negotiable Instruments Act will be attracted to a case in which a person issuing a post dated cheque stops its payment by issuing instructions to the drawee bank before the due date of payment and cheque is returned with the endorsement ‘present again.’ 2003 2 Supreme 536 2003 2 Supreme 536

Stop payment erodes payee confidence in negotiable instruments, justifying prosecution.

Insights from Related Judgments

Similar principles extend to other dishonour grounds, reinforcing Section 138's broad scope. For instance, dishonour due to 'account closed' attracts Section 138 and Section 139 presumption, unless rebutted at trial. Courts dismiss quashing pleas, as disputed facts like cheque misuse require evidence. 2024 0 Supreme(All) 848

In cases of multiple dishonours including stop payment by drawer or court order, the presumption holds despite account issues like seizure. The accused must disprove liability. 2023 0 Supreme(P&H) 398

Non-matching signatures or 'payment stopped' also fall under Section 138, as these are species of the 'insufficient funds' genus. Fraud claims or post-resignation defenses are trial matters, not for quashing. 2012 8 Supreme 274 2012 0 Supreme(UK) 517

Even for security cheques from guarantors, stop payment triggers liability if principal debt exists. Moment Principal Debtors fail to make payment, liability of petitioner as a guarantor will come into operation. 2018 0 Supreme(Mad) 3839

However, if the accused rebuts with proof of sufficient funds and valid stop reason (e.g., no debt), no offence lies—but only at trial. 2009 0 Supreme(Mad) 2505

Exceptions and Limitations

Drawers may defend by showing:- Sufficient funds in the account.- Valid stop reason unrelated to insufficiency or no liability (e.g., no existing debt). 1998 2 Supreme 471 2001 8 Supreme 227

Mere stop notice or prior non-presentation doesn't grant immunity. Courts have overturned quashing orders based solely on stop payment. Full evidence is needed; threshold challenges fail. 1998 2 Supreme 471

In one case, acquittal was upheld where stop payment coincided with sufficient funds and a legitimate dispute over goods, rebutting the presumption. 2009 0 Supreme(Mad) 2505

Practical Recommendations

For Payees/Holders:

• Issue demand notice within 30 days of bank dishonour info.
• File complaint within 1 month if no payment in 15 days post-notice.
• Proceed despite 'stop payment'—don't delay re-presentation. 2024 0 Supreme(Del) 372

For Drawers:

• Avoid early quashing petitions; focus on trial rebuttal with bank statements and proof of no debt.
• Ensure stop instructions have genuine basis to withstand scrutiny.

For Courts:

• Deny Section 482 CrPC quashing; allow trial with all defenses open. 2001 8 Supreme 227

Key Takeaways

• Stop payment dishonour triggers Section 138 NI Act offence and Section 139 presumption. 2014 2 Supreme 549
• No automatic quashing; rebuttal at trial only. 2001 8 Supreme 227
• Applies to post-dated cheques too. 2003 2 Supreme 536
• Related grounds like account closed or signature mismatch follow suit. 2024 0 Supreme(All) 848 2012 8 Supreme 274

Cheque dishonour via stop payment underscores the need for financial responsibility. Payees should act swiftly on notices, while drawers prepare robust defenses. Stay informed on NI Act updates to navigate these cases effectively.

References:1. 1998 2 Supreme 471: Stop payment no bar to Section 138.2. 2001 8 Supreme 227: No quashing; trial rebuttal.3. 2014 2 Supreme 549: Stop payment as valid dishonour.4. 2001 8 Supreme 227: Reiterates non-quashing.5. 2003 2 Supreme 536: Post-dated applicability.6. 2003 2 Supreme 536: Post-dated confirmation.