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Cheque Payment Stopped by Issuer: What Are the Legal Consequences?
Issuing a cheque is a common business practice, but what happens when the cheque payment is stopped by the issuer? This scenario often leads to disputes under the Negotiable Instruments Act, 1881 (NI Act), particularly Section 138, which criminalizes cheque dishonour. If a cheque bounces with the remark 'payment stopped by drawer', it can trigger legal action, presumptions of liability, and potential penalties. This post explores the key legal principles, court interpretations, and practical advice based on landmark judgments.
Note: This is general information for educational purposes and not specific legal advice. Consult a qualified lawyer for your situation, as outcomes depend on facts.
Understanding Cheque Dishonour Due to 'Payment Stopped by Drawer'
When a payee presents a cheque for payment and the bank returns it unpaid with the endorsement 'payment stopped by drawer', it signals the issuer instructed the bank to withhold payment. Common reasons include insufficient funds resolution, disputes over debt, or claims the cheque was for security.
Under Section 138 NI Act, dishonour constitutes an offence if:
- The cheque is presented within validity (usually 3 months).
- A demand notice is sent within 30 days of dishonour info.
- Payment isn't made within 15 days of notice.
The phrase 'payment stopped by drawer' falls squarely within covered reasons, alongside 'funds insufficient' or 'account closed' M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547. Courts treat it as triggering liability unless rebutted.
Presumption of Liability Under Sections 118 and 139 NI Act
Section 118(a) presumes every negotiable instrument is for consideration, while Section 139 presumes the cheque was issued for a legally enforceable debt. This shifts the burden to the issuer to raise a probable defence on preponderance of probabilities M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547.
As held: For rebutting the presumption u/s 139 r/w 118... what is needed is to raise a probable defence... even the evidence adduced on behalf of complainant could M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547. The standard isn't 'beyond reasonable doubt' at trial stage but showing non-existence of debt is probable.
Inference can draw from records and circumstances, not just direct proof M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547.
Common Defences When Payment is Stopped
Issuers often claim:
- Cheque issued as security: Not for discharge of debt, so Section 138 inapplicable. The Appellant clearly said that nothing is due and the cheque was issued by way of security. The said defence has been accepted as probable M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547.
- No legally enforceable debt: Disputes over accounts, like stock transactions with discrepancies M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547.
- Theft or misuse: Cheques stolen, payment stopped after reporting Narendra Singh VS Jas Karan Lal Verma - 2023 Supreme(All) 2142.
In one case, acquittal upheld as prosecution failed to prove issuance or notice receipt; defence of stolen cheques succeeded Narendra Singh VS Jas Karan Lal Verma - 2023 Supreme(All) 2142. Courts won't interfere with acquittal if two views possible M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547.
Rebuttal Requirements
To rebut:
1. Raise probable defence early (e.g., in reply to notice or trial).
2. Provide evidence like account statements showing no dues.
3. Explain stop payment reason credibly.
Failure leads to conviction: Imprisonment up to 2 years, or fine up to twice cheque amount, or both Salim A. , S/o. Assan Bava VS State Of Kerala - 2024 Supreme(Ker) 952.
Bank's Role and Liability for Wrongful Handling
Banks must honour cheques unless valid stop instructions. However:
- Wrongful dishonour: If bank neglects to check stop details, liable for compensation DEVAKANTA KAKATI VS STATE BANK OF INDIA. E.g., The bank's official had neglected to check the details of the orders of 'stop payment', leading to Rs. 2,500 compensation DEVAKANTA KAKATI VS STATE BANK OF INDIA.
- No deficiency if legitimate: Banks can refuse if fraud suspected or account frozen BHUPINDER KUMAR SHARMA VS NATIONAL RESEARCH DEVELOPMENT CORPORATION.
For lost cheques or transit issues, issuer must implead as party; absence weakens collusion claims Punjab National Bank through its Branch Manager Tauni Devi VS Roop Singh.
Key Court Rulings on Stop Payment Cases
Rangappa vs. Sri Mohan (Influence from Results)
Courts emphasize: Even 'stop payment' triggers presumption; accused must disprove debt Harpal Singh VS State of Haryana - 2023 Supreme(P&H) 398. Freezing doesn't exempt liability Harpal Singh VS State of Haryana - 2023 Supreme(P&H) 398.
Stock Exchange Transaction Case
Acquittal restored: Discrepancies in books (Rs. 14L+), unacknowledged statements; defence of security cheque probable M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547. High Court erred reversing acquittal where two views possible.
Where two views were possible, appellate Court should not interfere with finding of acquittal M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547.
Consumer Forum Insights
- Banks bound to honour drafts unless non-beneficiary presents Bank of Maharashtra VS G. C. Jain.
- No liability if payee name blank or issuer denies B. L. Malviya VS A. Zohari.
In insurance contexts, cover notes valid despite later dishonour if accident predates cancellation United India Insurance Co. Ltd. VS Rano Devi - 1995 Supreme(J&K) 138.
Procedural Steps for Payees and Issuers
For Payees (Complainants):
- Send demand notice via registered post.
- File complaint within 1 month of payment failure (condonable delay if explained) Lakshmi Industries VS Subir Dass - 2022 Supreme(P&H) 2003.
- Prove presumption; rely on issuer's failure to rebut.
For Issuers (Accused):
- Reply to notice with defence.
- Lead evidence of no debt (ledgers, communications).
- Consider settlement to avoid conviction.
Potential Civil Remedies
Beyond criminal, civil suits for recovery possible. Parallel Section 138 complaints don't bar if no fraud pleaded G. Sagar Suri VS State Of U. P - 2000 1 Supreme 322. Abuse if purely pressure tactic G. Sagar Suri VS State Of U. P - 2000 1 Supreme 322.
Key Takeaways
- 'Payment stopped by drawer' invites Section 138 liability; presumption favours payee.
- Probable defence like security or no debt can rebut, but needs evidence.
- Courts lean towards acquittal if defence plausible and two views exist.
- Banks: Act diligently on instructions to avoid suits.
- Always document transactions; avoid blank payee cheques.
In summary, stopping cheque payment doesn't erase liability—it's a defence to prove. Cases show outcomes turn on evidence quality M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547 Salim A. , S/o. Assan Bava VS State Of Kerala - 2024 Supreme(Ker) 952 Harpal Singh VS State of Haryana - 2023 Supreme(P&H) 398. Stay informed, act promptly, and seek professional guidance.
Disclaimer: Legal outcomes vary by jurisdiction and facts. This post references judgments like M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547, G. Sagar Suri VS State Of U. P - 2000 1 Supreme 322, DEVAKANTA KAKATI VS STATE BANK OF INDIA, Salim A. , S/o. Assan Bava VS State Of Kerala - 2024 Supreme(Ker) 952, Harpal Singh VS State of Haryana - 2023 Supreme(P&H) 398, Narendra Singh VS Jas Karan Lal Verma - 2023 Supreme(All) 2142 for illustration.
Search Results for "Cheque Payment Stopped by Issuer: Legal Effects"
2006 5 Supreme 547 • India - Supreme Court
S.B.SINHA, P.P.NAOLEKAR
(a)of consideration - that every negotiable instrument was made or drawn for consideration, and that every such instrument ... The question which arose for consideration therein was as to whether closure of accounts or stoppage of payment is sufficient defence ... The Appellant clearly said that nothing is due and the cheque was issued by way of security.
1986 0 Supreme(SC) 115 • India - Supreme Court
D.P.MADAN, A.P.SEN
Rule 34 provides for payment of subsistence allowance during the period of suspension. ... Along with the said letter a cheque for three months basic pay and dearness allowance in lieu of notice was enclosed. ... Along with the said letter a cheque for three months basic pay and dearness allowance was enclosed. ... 12.
1958 0 Supreme(SC) 149 • India - Supreme Court
P.B.GAJENDRAGADKAR, T.L.VENKATARAMA AYYAR, A.K.SARKAR
That test emphasises that in determining the question as to whether an instrument produced before the Court is the last Will of the ... positioned in society too, does not suffer from the loopholes and infirmities which may understandably beset an humbler testamentary instrument ... It was sent by cheque on Mysore Bank. ... recover Rs. 2,100 which had been collected by respondent 1 by way of income from the suit lands and a further prayer was made for the payment ... It was tried on six issues....
1994 0 Supreme(SC) 1 • India - Supreme Court
S.C.AGRAWAL, R.M.SAHAI, M.M.PUNCHHI, K.RAMASWAMY, S.R.PANDIAN
should stand automatically transferred - Court opinion in such cases accused should be provided a counsel of his choice and the payment ... I am further of the opinion that in such cases the accused should be provided a counsel of his choice and the payment of fee should ... Bank of Commerce Ltd.{AIR 1947 PC 60 Ram Krishna Ramnath Agarwal v. ... Therefore, the only check up on a court's exercise of power is ones own sense of self-restraint and due respect to comity.
1981 0 Supreme(SC) 511 • India - Supreme Court
A.C.GUPTA, V.D.TULZAPURKAR, S.MURTAZA FAZAL ALI, R.S.PATHAK, P.N.BHAGWATI, D.A.DESAI, E.S.VENKATARAMIAH
of locus standi from bringing the matter to the attention of the court to vindicate the rule of law and get the unlawful conduct stopped ... acting or Additional Judge would come back to the Bar on the expiration of his term and start practice and this was intended to be stopped ... Payment of such compesatory allowance does not imply that a transfer involves an element of punishment.
• India - Consumer
RAJYALAKSHMI RAO, ANUPAM DASGUPTA
was paid quarterly interest—Bank found that cheque given by complainant towards fixed deposit was returned unpaid with remarks payment ... stopped by drawer and asked complainant to return the FDR and refund the amount paid towards interest—Consumer complaint and plea ... deposit scheme were mandated to be received only by cheque/bank draft/pay order and not in cash, could not be controverted by complainant—No ... for the above mentioned FDR) with th....
• India - Consumer
A.S.VIJAYAKAR, Y.KRISHAN, V.BALAKRISHNA ERADI, B.S.YADAV
The cheque was returned unpaid with the remark "payment stopped by drawer". ... had neglected to check the details of the orders of "stop payment" recorded from the issuer of the cheque. ... The court found that the bank's official had neglected to check the details of the orders of "stop payment" recorded from the issuer ... “payment stopped by drawer....
2002 0 Supreme(Pat) 703 • India - Patna
R.S.GARG
Draft and a Bankers Cheque. ... The court highlighted the distinction between a Bank Draft and a Bankers Cheque and emphasized the importance of adhering to the ... The court also noted the distinction between a Bank Draft and a Bankers Cheque and upheld the rejection of the petitioner's application ... Similar would be the position in case of a Bankers cheque or a cheque issued by the d....
2014 0 Supreme(Pat) 255 • India - Patna
ADITYA KUMAR TRIVEDI
and the culpability of the appellants in obtaining the bank draft through fraudulent means. ... The appellants manipulated a ledger entry to obtain a bank draft for an amount that was never deposited in the account. ... Issues: The issues revolved around the manipulation of ledger entries, the application of conspiracy and corruption laws, ... But the facts remains that appellant Krishna Prasad happens to be the person who had passed the cheque as well as i....
• India - Consumer
B.S.YADAV, Y.KRISHAN, A.S.VIJAYAKAR, V.BALAKRISHNA ERADI
, but the bank refused to issue the draft due to stopped account operations. ... He issued a cheque for Rs. 25,000/- towards the payment of a lump sum premium of process fee in favor of the National Research Development ... Whether the bank's refusal to honor the cheque and issue the bank draft amounted to a deficiency in service. ... However, the bank did not honour the #HL_STAR....
• India - Consumer
INDER SINGH MEHTA
The complainant himself is negligent for not making the issuer of the cheque as party to avoid noncollusiveness between the complainant and the issuer of the cheque in question. 17. ... In the absence of necessary party i.e. issuer of the cheque, the allegation of the complainant that cheque in question has been destroyed by the opposite party/Bank in collusion with the issuer of the cheque to save him from legal consequences is n....
• India - Consumer
A.S.VIJAYAKAR, Y.KRISHAN, V.BALAKRISHNA ERADI, B.S.YADAV
Unfortunately this cheque too was returned to the Complainants with the remarks “payment stopped by the drawer” and not arranged for”. ... The cheque on being presented to their bankers, the United Bank of India, Guwahati Branch was returned on 9.3.1992 with the remark “payment stopped by drawer”. On their enquiries it was revealed that due to excess payment such a step was adopted. ... It was not an act of willful negligence but the official did neglect to check the ....
• India - Consumer
Y.KRISHAN, A.S.VIJAYAKAR, B.S.YADAV, V.BALAKRISHNA ERADI
The cheque on being presented to their bankers, the United Bank of India, Guwahati Branch was returned on 9.3.1992 with the remark “payment stopped by drawer”. On their enquiries it was revealed that due to excess payment such a step was adopted. ... It was not an act of willful negligence but the official did neglect to check the details of the orders of ‘stop payment’ recorded from the issuer of the cheque. ... 14. ... But, the bankers fault was only with regard to ....
2024 0 Supreme(Ker) 952 • India - Kerala
M. B. SNEHALATHA
Ext.P2 would show that Ext.P1 cheque was dishonoured for the reason “payment stopped by the drawer”. ... The case of the complainant in brief is that Ext.P1 cheque issued by the accused in discharge of the liability of the accused to pay an amount of Rs.3 lakhs was bounced stating the reason “payment stopped by the drawer”. ... Hence the question is, in a case where cheque is returned by the bank unpaid on the ground that ‘payment stopped#H....
• India - Consumer
PREM NARAIN
In the present case, particularly issuer has denied issue of cheque in favour of the complainant and has also made a ‘stop payment request’. In these circumstances, there was no question of either returning the cheque to the complainant or making any kind of payment to the complainant. ... Learned counsel for the respondent further argued that the issuer of the cheque Amit Rathore has sent a communication to the bank for stopping the payment of the #....
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