A Dishonoured Cheque, an Under-Insured Godown and an Unexplained Debit
Harishankar runs a small readymade garment shop in Purnia. On 3 March he issued a cheque for ₹42,000 to his supplier Kishore, though his current account held only ₹38,500, because a customer had promised ₹25,000 that afternoon. The credit never came. Kishore presented the cheque on 6 March; it was returned unpaid with the bank memo 'insufficient funds'. Kishore posted a written demand notice on 10 March, which Harishankar received on 12 March, asking for payment within fifteen days. No payment was made. Separately, Harishankar had insured his stock for ₹5,00,000 in June, when the stock was worth ₹8,00,000. A fire in January destroyed stock that he values at ₹3,00,000. The insurer has offered ₹1,87,500, citing the average clause. Harishankar also finds an unexplained debit of ₹1,200 labelled 'charges' in his account statement, which the branch cannot explain.
1. Explain whether an offence has been committed under Section 138 of the Negotiable Instruments Act and set out the dates by which each step must be taken.
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Ingredients of Section 138: a cheque drawn on an account maintained for payment of a legally enforceable debt, presented within its validity, returned unpaid for insufficiency of funds or because it exceeds the arrangement, a written demand within the prescribed time, and failure to pay within fifteen days of receiving that demand. All are present here: the ₹42,000 was owed to Kishore for goods actually supplied, a debt Harishankar does not deny.
Date-wise checklist:
- 3 March - cheque issued; with three-month validity it is good until early June, so presentation on 6 March is within time.
- 6 March - dishonour; the bank memo is the proof.
- 10 March - demand notice sent, received 12 March. The law requires the notice to be given within 30 days of receiving information of dishonour, so this is in time.
- 12–27 March - the drawer's 15 days to pay.
- 28 March - cause of action arises, since no payment was made.
- By 27 April - the complaint must be filed before the Magistrate, within one month of the cause of action.
Harishankar's hope of a later credit is no defence; what matters is the position of the account on the date of presentation. Punishment extends to two years' imprisonment and/or a fine up to twice the cheque amount, and the court may order compounding on payment.
2. Verify the insurer's calculation under the average clause and advise Harishankar how to get a fairer settlement.
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Verification: the average clause applies when the sum insured is less than the value of the property, and the claim is reduced in the same proportion:
Claim = (Sum insured ÷ Value at the date of loss) × Actual loss = (₹5,00,000 ÷ ₹8,00,000) × ₹3,00,000 = 0.625 × ₹3,00,000 = ₹1,87,500.
The insurer's arithmetic is correct, and the logic is that Harishankar paid premium for only five-eighths of his risk, so he bears three-eighths of every loss himself.
How to improve the position:
- Challenge the denominator. The average clause uses the value of stock on the date of the fire, not the value last June. If his purchase and sales records show that stock immediately before the fire was, say, ₹6,00,000, the claim becomes (5,00,000 ÷ 6,00,000) × 3,00,000 = ₹2,50,000. Stock statements, purchase bills and the bank's current-asset returns are the evidence.
- Check the policy wording - whether it is a reinstatement or agreed-value policy, or whether the average clause applies at all.
- For the future, insure at full value and update the sum insured every year; the extra premium is small against the risk of bearing a third of a loss.
The principles at work are indemnity - the insured must not profit from the loss - and utmost good faith, which requires honest disclosure of the value of stock.
3. Advise Harishankar on the ₹1,200 'charges' debit: what should he do first, and to whom can he escalate if the branch does not resolve it?
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Step 1 - collect facts before alleging wrongdoing. Ask the branch in writing for the voucher or tariff rule under which ₹1,200 was debited, and compare it with the schedule of charges he agreed to at account opening. Banks do levy service charges, and a charge that is validly notified is not a wrongful debit, however annoying. If no rule supports it, it is an unauthorised debit and the bank must reverse it with the value date.
Step 2 - complain in writing to the branch, keeping a dated acknowledgement or the complaint reference number generated on the bank's app or website. Escalate to the branch manager and then the nodal officer if there is no reply within 30 days.
Step 3 - escalate free of cost to the RBI Integrated Ombudsman under the Reserve Bank's Integrated Ombudsman Scheme, 2021, which covers complaints against banks and is filed online at the RBI's complaint portal. The complaint must normally be made within one year of the bank's reply, or of the expiry of 30 days from the complaint if no reply comes. No lawyer or fee is required.
Extra point: if the debit was an unauthorised electronic transaction rather than a charge, his liability depends on how quickly he reports it; reporting within three working days generally means zero liability. Prompt written reporting protects him either way.