Allahabad High Court: Cheque Returned By Bank Indicating “Account Closed” Constitutes Dishonour of Cheque under Section 138 of the NI Act

Allahabad High Court: Cheque Returned By Bank Indicating “Account Closed” Constitutes Dishonour of Cheque under Section 138 of the NI Act

The Allahabad High Court has ruled that if a bank returns a cheque unpaid with an endorsement stating Account Closed, it constitutes dishonour of the cheque and falls under the purview of an offense as per Section 138 of the Negotiable Instruments Act (NI Act).

Justice Anish Kumar Gupta emphasized that the act of the drawee bank returning the cheque alone constitutes the commission of an offense under Section 138 of the NI Act.

The court based its decision on the Supreme Court's rulings in the cases of NEPC Micon Ltd. v. Magma Leasing Ltd. , where it was noted that when a bank returns a cheque with the endorsement account closed, it signifies that the amount of money available in the account is insufficient to honour the cheque, thus constituting the act of dishonour of cheque under Section 138 of the NI Act.

In the case of NEPC Micon Ltd it was observed that the expression "the amount of money standing to the credit of that account is insufficient to honour the cheque" is a general statement, with "that account being closed" being a specific instance of this general statement. It implies that when a person issues a cheque drawn on an account, and subsequently closes that account, it amounts to an offense under Section 138 of the Negotiable Instruments Act. This is because, irrespective of any other offense it might constitute, closing the account results in there being insufficient or no funds available to honour the cheque drawn on that account.

The High Court was hearing a petition filed by Jatan Kumar Singh, who sought to have a summoning/cognizance order in a complaint case under Section 138 of the Negotiable Instruments Act, pending in the court of the Additional Chief Judicial Magistrate, Varanasi, quashed.

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

The opposite party no. 2 contended that they issued a demand notice dated June 23, 2020, to the applicant, which he received on June 26, 2020. Despite receiving the notice, the applicant failed to settle the cheque amount. Subsequently, the instant complaint was filed against the applicant under section 138 of the Negotiable Instruments Act.

In challenging the summoning/cognizance order, the applicant petitioned the High Court. During the proceedings, his counsel argued that the dishonouring of the cheque due to the reason 'Account closed' does not fall under the two conditions stipulated in Section 138 of the Negotiable Instruments Act. These conditions include, firstly, insufficient funds in the account to honour the cheque, and secondly, that it exceeds the amount arranged to be paid from the account by an agreement made with the bank.

Conversely, the opposite party no. 2 argued that it was the responsibility of the cheque drawer to upkeep the account after issuing the cheque and ensure arrangements were made to honour it. Additionally, it was asserted that if the drawer of the cheque neglects to maintain adequate funds with the bank for honouring the cheque, it would constitute an offense under Section 138 of the Negotiable Instruments Act.

The Court observed that the dishonour of a cheque by the bank with the remark "Account Closed" would fall within the parameters of the two conditions specified under Section 138 of the Negotiable Instruments Act. These conditions are: firstly, the amount of money available in the account is insufficient to honour the cheque, or secondly, the cheque exceeds the amount agreed upon to be paid from the account as per an arrangement made with the bank.

Based on the Supreme Court's judgment in NEPC Micon Ltd (supra), the Court determined that when a bank returns a cheque unpaid with the endorsement "Account Closed," it constitutes returning the cheque unpaid, as the funds in the account are inadequate to honour the cheque, as stipulated in Section 138 of the Negotiable Instruments Act.

The Court found no justification in the present application, and dismissed it.