Payment By Cheques: What The Law Says

Updated: Jul 25 2004, 06:17am hrs
Every single reader of this article must be having at least one bank account with cheque book facility. We are so used to making and accepting payments by cheque that we do not even bother to give it a second thought, let alone consider the legal implications.

How many of us are really aware as to what is considered the date of payment when a cheque is issued Is it the date when the cheque is physically handed over Or is it the date when the cheque is debited to drawers account and credited to payees account In this article, I will deal with the law on the subject and its interpretation by the Supreme Court.

Under the Negotiable Instruments Act, 1881 a cheque is an instrument which is negotiated by delivery. The drawer is discharged when payment is made in due course. In simple terms, this means that when cheque is tendered there is a presumption that payment would be realised in due course, and hence the date of payment is considered to be the date on which the cheque is delivered, regardless of when the cheque is actually presented for payment.

This principle would not apply in the event of the cheque getting dishonoured. Thus the date of tendering the cheque is to be considered as the date of payment, just like a cash payment.

Now let us consider the interpretation of the law by the Supreme Court.

Case1

In the case of Commissioner of Income-Tax, Bombay South, Bombay v/s Ogale Glass Works Ltd, the Supreme Court took into consideration various English case-laws and commentaries.

It observed that payment by negotiable instrument is a conditional payment, which means that if the negotiable instrument is dishonoured on presentation the creditor may consider it as waste paper and resort to his original demand (Stedman vs Gooch).

In Benjamin on Sale, 8th Edition, it was stated that payment takes effect from the delivery of the bill, but might get defeated by the happening of the condition of non-payment at maturity. In Byles on Bills, 20th Edition, the position was summarised pithily as A cheque, unless dishonoured, is payment.

In Hart on Banking, 4th Edition, Volume I, expressed the same view as Byles on Bills. In the case of Felix Hadley & Co v/s Hadley, Justice Byrne, expressed the same idea, ie, that payment by a cheque or a bill is a conditional payment of the debt, the condition being that the cheque or bill should be duly met or honoured at the proper date.

Lord Maugham in Rhokana Corporation v/s Inland Revenue Commissioners, held that the common law rule is to the effect that the sending of a cheque in payment of a debt is subject to the condition subsequent that the cheque must be met on presentation, but the date of payment, if the cheque is duly met, is the date when the cheque was posted.

The Supreme Court concluded that even if cheques are taken conditionally, when the cheques are not dishonoured but cashed, the payment relates back to the dates of the receipt of the cheques and in law the dates of payments were the dates of the delivery of the cheques.

Case 2

In the case of K Saraswathy alias K Kalpana (Dead) By Legal Heirs v/s PSS Somasundaram Chettiar, the Supreme Court observed that payment by cheque is an ordinary incident of present day life, whether commercial or private, and unless it is specifically mentioned that payment must be in cash there is no reason why payment by cheque should not be taken to be due payment if the cheque is subsequently encashed in the ordinary course.

Relying on the judgement in the above case of Ogale Glass Works, the Supreme Court held that payment by cheque realised subsequently on the cheque being honoured and encashed, relates back to the date of the receipt of the cheque, and in law the date of payment is the date of delivery of the cheque.

Despite these judgements and the authoritative pronouncements of the Supreme Court, it is quite common to find even the Government authorities refusing to follow the well-established legal interpretation as laid down by the Supreme Court.

In the next article, I will explain the relevance of these judgements which came in handy for deciding a matter in the consumer courts where complainants had been filed for negligence and deficiency in service.

The author is an award-winning consumer activist and will answer readers queries in FE Investor. Send in your queries to consumercourt@hotmail.com