LAW RELATING TO DISHONOUR OF CHEQUES IN INDIA: AN ANALYSIS OF SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT

SUHITA MUKHOPADHYAY, Company Secretary

The Negotiable Instruments Act, 1881 is an Act to define the law relating to promissory notes, bill of exchange and cheques. This Act has been amended several times commencing from 1885 till 2002. Cheque is a carrier without luggage. It carries money of any quantity on a single small piece of paper. It has made money transactions very easy, convenient and economical as well as safe and secured vis-a-vis the legal tender. The negotiable instruments particularly cheque has oiled the wheels of commerce and facilitated quick and prompt deals and transactions. With expanding commerce the growing demands for money could not be met by mere supply of legal tender and cheques took the function of money. It has facilitated trade and commerce tremendously.

But pursuant to the rise in dealing with also rises the practice of giving cheques without any intention of honoring them. The need to depart from a narrow and pedantic approach in interpreting the law is noteworthy. If commerce is to flourish , cheques ought not to be allowed to bounce with

impunity, and if they do, the drawer must be brought to quick criminal and civil justice. Recognising this imperative Parliament has enacted the new provisions to the Negotiable Instruments Act.

To ensure promptitude and remedy against defaulters and to ensure credibility of the holders of the negotiable instrument, a criminal remedy of penalty was inserted in Negotiable Instruments Act,1881 in the form of Banking, Public Financial Institutes and Negotiable Instruments Laws (Amendment) Act,1988 which were further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act ,2002.

This Article endeavors to elucidate the penal provisions in the light of amendments and judicial interpretations.

Scope: Of the ten sections comprising the chapter of the Act, section 138 creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker. Section 138 of the Act can be said to be falling either in the Acts which are not criminal in real sense, but are acts which in public interest are prohibited or those where although the proceeding may be in criminal form, they are really only a summary mode of enforcing a civil right. Normally in criminal law existence of guilty intent is an essential

ingredient of a crime. However the Legislature can always create an offence of absolute liability or strict liability where mens rea is not all necessary.

The Kerela High Court, in K.S. Anio vs. Union of India held that

Knowledge or reasonable belief, that pre requisite could be statutorily dispensed with in appropriate cases by creating strict liability offences in the interest of the Nation.

Creation of the strict liability is an effective measure by encouraging greater vigilance to prevent usual callous or otherwise attitude of drawers of cheques in discharge of debts or otherwise. The words as appearing in clause (b) of section 138 cannot be construed even to imply failure without reasonable cause in view of the explicit language in which the provisions is couched, the principle of strict liability incorporated in the main enacting clause. The Supreme Court in the case of Electronics Trade & Technology Development Corpn. (Supra(c) struck a somewhat discordant note whilst going out of it's way to observe that sec. 138 of the Negotiable Instruments Act is not attracted if the payee being put to notice not to deposit a cheque issued in his favour nonetheless presents such cheque for encashment and finds that it is dishonoured. It was really concerned with a situation where the drawer after issuing a cheque instructed the bank to

stop payment and when the cheque was dishonoured contended that Sec. 138 was not attracted because it was not a case of dishonour for insufficiency of funds. This contention was rejected by the Supreme Court rightly holding that the provisions of Sec. 138 could not be whittled down by issuing a stop payment order to the drawer's bank after a cheque had been issued by the drawer in discharge of his liability" but it needlessly added that instructions to the payee not to deposit a cheque issued to him before he actually presented it would have the effect of avoiding the rigors of Sec. 138. The Supreme Court also held that the said section raised a presumption of dishonesty if a person draws a cheque on a bank without supporting funds in the account at that time. Ingredients and requirements of the penal provisions Section 138 creates an offence for which the mental elements are not necessary. It is enough if a cheque is drawn by the accused on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for discharge in whole or in part ,of any debt or other liability due. Therefore, whenever the cheques are on account of insufficiency of funds or reasons referable to the drawers liability to provide for funds, the provisions of section 138 of the Act would be attracted, provided the following conditions are satisfied:

(1)

Existence of a Live account:

Existence of a live account at the time of issue of cheque is a condition precedent for attracting penal liability for the offence under this section. (2) Issue of a cheque in discharge of a debt or liability The cheque issued unpaid by the bank must have been issued in discharge of a debt or other liability wholly or in part. Where a cheque is issued not for the purposes of discharge of any debt or other liability ,the maker of the cheque is not liable for prosecution under section 138 of the Act. A cheque given as a gift or for any other reasons and not for the satisfaction of any debt or other liability, partly or wholly even if it is returned unpaid will not meet penal consequences.

If the above conditions are fulfilled ,irrespective of the mental conditions of the drawer he shall be deemed to have committed an offence, provided the other three requisites are fulfilled. a) Presentation of the cheque within six months or within the period of its validity The cheque must have been presented to the bank within a period of six months from the date on which it is drawn or its period of validity, whichever is earlier .Thus if a cheque is valid for three months and is presented to the bank within a period of six months

the provisions of this section shall not be attracted. However if the period of validity of the cheque is not specified or prescribed the cheque is presented within six months from the date the cause of action can arise. The six months are taken from the date the cheque was drawn. b) Return of the cheque unpaid for reason of insufficiency of funds The cheque must be returned either because the money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the arrangement made to be paid from that account by an agreement with the bank. Even if the cheque is returned with the endorsement account closed section 138 is attracted.

c) Issue of the notice of dishonour demanding payment within thirty days of receipt of information as to dishonour of the cheque The payee or the holder in due course of the cheque has to give a notice in writing making a demand for payment of the said amount of money to the drawer of the cheque. Such notice must be given within 30 days of information from the bank regarding the return of cheque as unpaid.

d) Failure of the drawer to make the payment within fifteen days of the receipt of the payment After the receipt of the above notice the drawer of the cheque has to make payment of the said mount of money to the payee or to the holder in due course of the cheque within 15 days of the receipt of the notice .If the payment is not made after the receipt of the notice within stipulated time a cause of action for initiating criminal proceedings under this section will arise.

It is distinctly possible that each of these ingredients may arise in a different locality and therefore the court in each of these localities may assume jurisdiction to try the offence. This is the plain reading of section 177 of the Criminal Procedure Code. (K.Bhaskaran vs Sankaran Vaidhyan Balan reported in 1999 Criminal Law Journal 4606)

Presumptions Under Section 139, a court must presume that the holder of a cheque received it for the discharge, in whole or in part, of a legally enforceable debt or other liability. This presumption is rebuttable.

Defences Under Section 140, a person being prosecuted for drawing a cheque which has bounced cannot defend himself by saying that he had no reason to believe when he issued the cheque that it may be dishonoured on presentment for the reasons stated in Section 138. Offences by Companies Under Section 141, if the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. However, no person is liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of the offence. If any offence under the Negotiable Instruments Act is committed by a company and it is proved that the offence is committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, he is also be deemed to be guilty of that offence and is liable to be proceeded against and punished accordingly. Under Section 141, a company means any body corporate and includes a firm or other association of individuals; and a director, in relation to a firm, means a partner in the firm.

Cognizance of Offences

Under Section 142, courts take cognizance of offences punishable under Section 138 only upon a complaint made by the payee or, as the case may be, the holder in due course of the cheque. The complaint must be in writing and be made within one month of the date on which the cause of action i.e. after the person drew the cheque fails to pay the amount within 15 days of the receipt of notice of its dishonour. No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class has the power to try any offence punishable under section 138. Summons Under Section 144, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where the accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session. The Court issuing the summons may declare that the summons has been duly served if it receives: an acknowledgment purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorised by the postal department or the courier services that the accused or the witness refused to take delivery of summons. Trial Under Section 143, a trial regarding the dishonour of a cheque is carried out in the manner of a summary trial and the Magistrate may pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees. The Magistrate may, however, after hearing the parties, choose not to try a case in the manner of a summary trial and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the Code of Criminal Procedure.

The trial should, if practicable, be continued from day to day till its conclusion, unless the Court finds that it should be adjourned for reasons recorded in writing. It should ideally be concluded within six months from the date of the filing of the complaint. Under Section 145, the complainant may give his evidence on affidavit. The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein. Under Section 146, the banks slip or memo having thereon the official mark denoting that the cheque has been dishonoured is prima facie evidence that the cheque has been dishonoured although the fact of dishonour may be disproved. Compoundable Offence By an amendment introduced in 2002, under Section 147, an offence related to the dishonour of a cheque - and every other offence punishable under the Negotiable Instruments Act, 1881 can be privately settled.

Case Laws on Dishonor of Cheques

1)

Account Closed: Account closed was held to be an offence u/s 138 of the Negotiable Instruments Act and the accused cannot escape liability of the offence.

2)

Issuance of Post-dated cheque & Closing of Account: Where the accused issued the post dated cheque and

had also closed his account in the bank ,in such a case he is liable to be prosecuted u/s 138 of the N.I. Act . 3) Incomplete Signature : Dishonour of cheque because of incomplete signature on cheque of drawer. Held: Did not attract section 138 ( 2002(7) SCC 531. 4) Cheque Issued by Partner: Complaint u/s 138 of the N.I. Act against firm and its partners . No allegation in the complaint that the partner was in charge of and was responsible to the affairs of the firm-Held not maintainable against the partner. 5) Offences committed by a Company: Where an offence is committed by a Company ,either Company can be prosecuted or the person in charge of the Company can be prosecuted or both of them can be prosecuted. (1198 (2) Crimes 409) 6) Discharge of Fathers Debt: Father of the accused but not the accused owes a debt to the complainant. Complainant obtained cheque from the accused by force. Cheque was not issued in discharge of fathers debt. Accused cannot be prosecuted.(2003(6) AID(NOC)64) 7) Notice once issued, cheque cannot be presented for collection: It is settled that the payee is free to present the cheque repeatedly within its period of validity any number of times, but once notice has been issued, the drawee to avail the

cause of action arising thereupon and file the complaint within the stipulated period.( 2002 (1) ALD( Crl)397 (AP)(1998 SCC(Crt) 1471 followed. 8) Omission of ch No. in Notice: The number on the cheque has no relevance in a proceeding u/s 138 of the N.I. Act. Sec 5 and sec.6 of the Act does not specify that the cheque or bill of exchange should bear a number. There is also nothing in section 138 of the Act to show that the number of the dishonored cheque also should be mentioned in the statutory notice or in complaint , (2004 Cr.LJ 712 AP) 9) Issue of Second Notice: Cheque issued by the respondent was dishonored presented again-again dishonoured. The notice issued by the complainant at the time of first dishonor was not served on respondent/accused , but the fact remains that the notice has been issued for second time. Therefore, cause of action stood terminated. (2003 (117) Company Cases (Madras) 10) Accused refused to receive Notice: Where accused has refused to receive notice, even then compliant to be filed after expiry of 15 days from the date of receipt of notice. In case of refusal to receive notice it amounts to acceptance of notice and date of refusal to receive such notice shall be treated as the date of receipt of such notice. In such case the period of 15 days to be computed from date of refusal (AIR 1996 SC 330 AIR 1989 SC 630)

11)

Evading Notice: Where accused has evaded service of notice relating to dishonour, it will amount to constructive notice. (2001 (2)ALD (Crt) (Mad) 137)

12)

Civil Suit and Criminal Complaint : Filing of civil suit and filing of criminal compliant are not alternative remedies and they are different type of rights.(19994 Criminal Laws Journal 887). The mere pendency of a civil dispute will not oust the jurisdiction of a criminal court from taking cognizance of an offence on a compliant u/s 138 of N.I.Act (1998 Crt. LJ559-1198(2) ALD (Crt) 300 Guj.)

13)

Section 138 of N.I.Act & Section 420 of I.P.C.: When the cheque was dishonored for insufficiency of funds such person issuing a cheque is liable for offence of section 138 of N.I.Act but not u/s 420 of IPC (1989 Cuttack law times 719)

14)

Time Barred debt : Where cheque itself was issued for a time-barred debt there cannot be conviction under provisions (1997 (2) Crimes 658). Where the loan was taken in 1985 and cheque was issued in 1990 and the loan is barred by limitation, drawer of cheque cannot be prosecuted.( 1997 (1) ALT(Cri)509.

15)

Refer to drawer: The bank endorsement refer to drawer also may fall within the ambit of provisions of section 138 of the N.I.Act-(1194 Crt.LJ 2874, Crt.LJ3828,1994 (1) Crimes 606).

16)

Dismissal of complaint for default and restoration: Where the complaint is dismissed for default in restoration application, the complainant must assign a valid reason as to what prevented him from coming to the court by the time when the case was called ( 1998 BC 63 (AP). For securing the ends of justice ,the Magistrate is empowered to restore the complaint filed u/s 138 of the Act (2001 Crt.LJ2821 Kant)

17)

Dismissal of complaint and appeal thereof Dismissing complaint due to non-appearance of complainant resulting in acquittal of accused. Revision is not maintainable and only appeal lies to High Court u/s 378 of Cr.Pc (11 2003 CCr 387 HP)

18)

Default of fine u/s 138 of N.I.Act: Sentence of imprisonment in default of payment of fine-imposition of imprisonment and challenge thereof. Section 138 does not

provide for such sentence. Hence sentence in default of fine set aside. (200 6 (9) SCC 784).

Question of maintainability of criminal charge with a civil liability There is nothing in law to prevent the criminal courts from taking cognizance of the offence merely because on the same facts, the person concerned might also be subjected to civil liability or because civil remedy is obtainable. Civil and criminal proceedings are coextensive and not exclusive. If the elements of the offence under section 138 of the N.I.Act are made out on the face of the complaint petition itself, enforcement of the liability through a civil court will not disentitle the aggrieved person from prosecuting the offender for the offence punishable under section 138 of the Act. The penal provisions have helped to curtail the issue of cheque with a dishonest intention. However there being no provision for recovery of the amount covered under the dishonoured cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine ,the only option left with the complainant is to file civil suit. The provisions of the Act do not permit any other alternative

method

of

realization of

the

amount

due

to

the

complainant on the cheque being dishonoured for the reasons of insufficient fund in the drawers account. The proper course to be adopted by the complainant in such a situation should be by filing a suit before the competent civil court, for realization/recovery of the amount due to him for the reason of dishonored cheque which the complainant is at liberty to avail of if so advised in accordance with law. However the practice in criminal courts belies the hopes of the law makers and by and large magistratrates have failed to give expression to the legislative intent of securing speedy disposal to an action under 138 of the N.I.Act. If dishonour of cheques were swiftly dealt with Commerce certainly would bloom.

If only the Court pounced each time a cheque bounced..commerce would smile.
But an equally great beneficiary would be the institution of the judiciary. Public confidence in courts is perhaps at an all time low today and to revive it by a complete overhaul through legislative and executive measures is but a distant dream. But this apparently insignificant change in the realm of commercial law has tremendous potential to bring about a new ethos with unbounded gains to society and the courts

must seize this chance to swiftly enforce the law and in the process resurrect and breathe new life into their own sagging and dismal image

Dishonour of cheques Procedure thereof As you are aware, in January 1992, banks were advised to implement the recommendation of the Goiporia Committee that dishonoured instruments are returned / despatched to the customer promptly without delay, in any case within 24 hours (Ref.No.3.36 our circular DBOD.No.BC.74/09.07.001/91-92 dated 28th January 1992). 2. Pursuant to the investigation by the Joint Parliamentary Committee (the JPC) into the Stock Market Scam, the JPC has recommended (in para 5.214 of its report ) that "specific guidelines need to be issued by the Reserve Bank to all banks regarding the procedure to be followed by them in respect of dishonoured cheques from Stock Exchanges." In the light of aforesaid recommendations of the JPC, the extant instructions relating to return of all dishonoured cheques have been reviewed. 3. We understand that banks are already following the appropriate procedure keeping in view the above instructions to deal with the dishonour of cheques. However, it is considered necessary to streamline the procedure to be followed by all banks in this behalf. It is therefore suggested that in addition to the existing instruction in respect of dishonoured instruments for want of funds, banks may follow the additional instructions laid down in para 4 of this circular which could cover all cheques dishonoured on account of insufficient funds and not only those relating to settlement transactions of Stock Exchanges. 4. I. Procedure for return/ despatch of dishonoured cheques: (i) The paying bank should return dishonoured cheques presented through clearing houses strictly as per the return discipline prescribed for respective clearing house in terms of Uniform Regulations And Rules for Bankers' Clearing Houses. The collecting bank on receipt of such dishonoured cheques should despatch it immediately to the payees / holders. (ii) In relation to cheques presented direct to the paying bank for settlement of transaction by way of transfer between two accounts with that bank, it should return such dishonoured cheques to payees/ holders immediately. (iii) Cheques dishonoured for want of funds in respect of all accounts should be returned along with a memo indicating therein the reason for dishonour as "insufficient funds." 4.II Information on dishonoured cheques: (i) Data in respect of each dishonoured cheque for amount of Rs.1 crore and above should be made part of bank's MIS on constituents and concerned branches should report such data to their respective controlling office / Head Office. (ii) Data in respect of cheques drawn in favour of stock exchanges and dishonoured should be consolidated separately by banks irrespective of the value of such cheques as a part of their MIS relating to broker entities, and be reported to their respective Head Offices / Central Offices.

4.III Dealing with incidence of frequent dishonour: (i) With a view to enforce financial discipline among the customers, banks should introduce a condition for operation of accounts with cheque facility that in the event of dishonour of a cheque valuing rupees one crore and above drawn on a particular account of the drawer on four occasions during the financial year for want of sufficient funds in the account, no fresh cheque book would be issued. Also, the bank may consider closing current account at its discretion. However, in respect of advances accounts such as cash credit account, overdraft account, the need for continuance or otherwise of these credit facilities and the cheque facility relating to these accounts should be reviewed by appropriate authority higher than the sanctioning authority. (ii) For the purposes of introduction of the condition mentioned at (i) above in relation to operation of the existing accounts, banks may, at the time of issuing new cheque book, issue a letter advising the constituents of the new condition. (iii) If a cheque is dishonoured for a third time on a particular account of the drawer during the financial year, banks should issue a cautionary advice to the concerned constituent drawing his attention to aforesaid condition and consequential stoppage of cheque facility in the event of cheque being dishonoured on fourth occasion on the same account during the financial year. Similar cautionary advice may be issued if a bank intends to close the account. 4.IV General: (i) For the purpose of adducing evidence to prove the fact of dishonour of cheque on behalf of a complainant (i.e. payee / holder of a dishonoured cheque) in any proceeding relating to dishonoured cheque before a court, consumer forum or any other competent authority, banks should extend full co-operation, and should furnish him/her documentary proof of fact of dishonour of cheques. (ii) Commencing from the first quarter of 2003-04 i.e. quarter ending June 2003, banks should place before their Audit/ Management Committee, every quarter, consolidated data in respect of the matters referred to at II above; 5. Banks are also advised to adopt, with the approval of their respective Boards, appropriate procedure for dealing with dishonoured cheques with inherent preventive measures and checks to prevent any scope for collusion of the staff of the bank or any other person, with the drawer of the cheque for causing delay in or withholding the communication of the fact of dishonour of the cheque to the payee/ holder or the return of such dishonoured cheque to him. Banks should also lay down requisite internal guidelines for their officers and staff and advise them to adhere to such guidelines and ensure strict compliance thereof to achieve aforesaid object of effective communication and delivery of dishonoured cheque to the payee. 6. Please acknowledge receipt. Yours faithfully,

Sd/(C.R.Muralidharan) Chief General Manager

No offence u/s 138 of N.I. Act is committed for dishonour of cheque given as security deposit
Judgment IN THE HIGH COURT OF JUDICATURE AT BOMBAY CRIMINAL APPELLATE JURISDICTION Joseph Vilangadan. v. Phenomenal Health Care Services Ltd. & Anr. CRIMINAL WRIT PETITION NO.2243 OF 2009 CORAM : J.H.Bhatia, J. DATE : 20th July, 2010 1 Rule. Rule made returnable forthwith. Heard the learned counsel for the parties. 2 There is no dispute that the respondent no.1/complainant and M/s. Encon Engineering and Contractors (Hereinafter referred to as Contractors) had entered into an agreement on 28th January, 2005 whereby Contractors had undertaken to carry out certain works for the respondent. As per the said contract, Contractors deposited the sum of Rs. 10 lacs by undated cheque no.027840 drawn against South Indian Bank Ltd., Palarivattom Branch, Cochin branch with the respondent no.1 as refundable security deposit for the due performance of the agreement. The said undated cheque was in custody of the respondent no.1 and it appears that the respondent no.1 filled in the date on undated cheque as 4.6.2008. The cheque was presented to the drawee bank through the banker of the respondent no.1. Cheque was returned unpaid on the ground that the drawer had stopped the payment. Therefore, notice was issued by the respondent to the contractor as well as its managing partner for the payment of the cheque amount . In spite of notice, payment was not made. Therefore, the respondent no.1 filed complaint under Section 138 of the Negotiable Instruments Act, in the Court of Metropolitan Magistrate 44th Court, Andheri. Process was issued against the accused, who is the petitioner before this Court. Petitioner/accused challenged the issuance of process by filing revision application no.789/2009 before the Sessions Court, Gr. Bombay. By the impugned order dated 8th June, 2009, the learned Additional Sessions Judge rejected the revision application. Hence this petition. 3. At the outset it may be stated that before the revisional Court, petitioner had taken several grounds challenging the issuance of process. However, during the arguments before this Court, the learned counsel for the petitioner restricted the challenge only to one point. According to him, cheque was not issued in discharge of any debt or liability and as the cheque was issued as security deposit, provisions of Section 138 are not applicable. The learned counsel placed reliance upon several authorities in support of his contention. The learned counsel for the respondent/complainant contended that the said cheque was deposited in lieu of the amount of Rs. 10 lacs which would be otherwise required to be deposited as security by the contractor with the respondent for due performance of the contact and, therefore, it must be held that the cheque was issued in discharge of other liability. 4. Section 138 of the Negotiable Instruments Act provides that where any cheque was drawn by a person on account maintained by him with the banker for the payment of any amount of money to another person for discharge in whole or in part of any debt or other

liability and it was returned by the drawee bank unpaid either because the amount of money in the account is insufficient or it exceeds the amount arranged to be paid, such person shall be deemed to have been committed offence and shall be liable to punishment with imprisonment or with fine or with both. Of course, before the offence is committed, several other conditions are required to be fulfilled. We are not concerned with the same for the decision of the present matter. mportant ingredient for the offence punishable under Section 138 is that cheque must have been issued for the discharge in whole or in part of any debt or other liability. If the cheque is not issued for the discharge of any debt or other liability, Section 138 can not be invoked. It is now well settled legal position that if the cheque is issued only as security for performance of certain contract or an agreement and not towards the discharge of any debt or other liability, offence punishable under section 138 is not made out. In Travel Force v. Mohan N. Bhave and Another 2007 Mh.L.J.3339 , the cheque in question was issued by the accused for investment in fixed deposit and it was accepted by the complainant as fixed deposit in the scheme. As the cheque was dishonoured, the complaint under Section 138 of the Negotiable Instruments Act was filed. Process was issued by the Magistrate. However, the Sessions Court set aside the order issuing the process holding that the cheque was not issued for discharge in whole or in part of any debt or other liability and, therefore, presumption under Section 139 could not arise in favour of the complainant. Revision application filed by the complainant was rejected by this High Court holding that when the cheque was issued only as a deposit and not in discharge of any debt or liability, offence under Section 138 is not made out. 5. In M.S.Narayana Menon @ Mani v. State of Kerala and Another (2006) 6 SCC 39, accused and the complainant were brokers working in the stock exchange and the complainant was to enter into certain transactions on behalf of the accused. The cheque was issued for an amount of Rs. 2,95,033/by the accused in favour of the complainant. On presentation, the cheque was dishonoured. After notice also the payment was not made. In the case under Section 138 plea of the accused was that the complainant was in dire need of financial assistance and the said cheque was issued so as to enable him to tide over his financial difficulties and not in discharge of any debt or liability payable to the complainant. During the trial, it was revealed that there was discrepancy of more than Rs. 14 lacs in the account maintained by the complainant. Accused was convicted by the trial Court but was acquitted by the appellate Court . High Court set aside the acquittal and convicted the accused. Accused went to the Supreme Court. After going to the facts and circumstances, the Supreme Court observed thus in paragraph 52: 52. We, in the facts and circumstances of this case, need not go into the question as to whether even if the prosecution fails to prove that a large portion of the amount claimed to be a part of the debt was not owing and due to the complainant by the accused and only because he has issued a cheque for a higher amount, he would be convicted if it is held that existence of debt in respect of large part of the said amount has not been proved. The appellants clearly said that nothing is due and the cheque was issued by way of security. The said defence has been accepted as probable. If the defence is acceptable as probable the cheque therefore cannot be held to have been issued in discharge of the debt as, for example, if a cheque is issued for security or for any other purpose the same would not come within the purview of Section 138 of the Act. From these observations, it appears that if the cheque was not issued for discharge of any debt or liability but as a security only, offence is not made out under Section 138. 6. Coming to the facts of the present case from the complaint as well as particulars of the agreement executed on 28.1.2005, it is clear that cheque was issued as a security deposit at the time of entering into contract for due performance of the terms of the contract. Agreement shows that the contractor had deposited the undated

cheque no.027840 with the respondent as refundable security deposit for due performance of the agreement. Even the allegations in the complaint are not different. Admittedly, when this agreement was entered into, no debt or liability was in existence and under that agreement, parties had entered into a contract whereby contractor was to perform certain works for the respondent. Naturally, as per the terms of the contract and the allegations made in the complaint if the contractor would fail to perform the agreement, respondent could encash the cheque and recover an amount of security deposit. 7. The learned counsel for the respondents vehemently contended that the contractor was to perform so many works and in respect of some works, his rates were higher and in respect of some other, rates were lower than the other bidders. He was also advanced certain amount for carrying out certain works from time to time. Contractor had completed works in which higher rates were given to him but he ignored to carry out those works where the rates were less and thereafter he ignored to complete those particular works resulting into the disputes between the parties. Admittedly, the disputes had occurred in the year 2006 and the contractor filed a suit against the respondent in the year 2006. Not only was this, admittedly, matter also referred to arbitrator in respect of said disputes. The learned counsel for the respondents pointed out that undated cheque was lying with the respondent since 28.1.2005. However, for the first time a date 4.6.2008 was put on him and then cheque was presented for encashment, which was returned unpaid with endorsement payment was stopped. It shows that date was put on the cheque by the respondents long after disputes had arisen between the parties. Proviso (a) to Section 138 requires that the cheque should be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. In the present case though the cheque was drawn and handed over on 28.1.2005, date was not put on it. If the date would have been put, cheque would have been valid for six months from 28.1.2005. However, the respondent put the date 4.6.2008, i.e., almost three years after the period of cheque was over. Thus, the cheque was not presented to the drawee bank within six months from the date when it was actually drawn. Anyhow, it is not necessary to enter into that controversy for the purpose of deciding the present petition. Fact remains that the cheque was issued towards the security deposit and not towards the discharge of any debt or liability. 8 . The learned counsel for the respondent contends that it is not necessary that the cheque should be issued for discharge of a debt.According to him, it may be issued towards the discharge of other liability also and in support of this, he placed reliance on ICDS Limited v. Beena Shabeer and Another (2002) 6 SCC 426. In that case, husband of the accused/respondent no.1 had obtained a car under hire purchase agreement from the complainant. The accused was a guarantor for payment of the amount by her husband and towards the part payment of the said transaction, she had issued a cheque in favour of the complainant. Cheque was dishonoured and the payment was not made in spite of the notice. High Court quashed the complaint on the ground that cheque from the guarantor could not be said to have been issued for the purpose of discharge of any debt or liability. However, the Supreme Court set aside the order of the High Court. The Supreme Court observed thus in paragraphs 10 and 11. 10. The language, however, has been rather specific as regards the intent of the legislature. The commencement of the section stands with the words Where any cheque. The above noted three words are of extreme significance, in particular, by reason of the user of the word anythe first three words suggest that in fact for whatever reason if a cheque is drawn on an account maintained by him with a banker in favour of another person for the discharge of any debt or other liability, the highlighted words if read with the first three words at the commencement of Section 138, leave no manner of doubt that for whatever reason it may be, the liability under this provision cannot be avoided in

the event the same stands returned by the banker unpaid. The legislature has been careful enough to record not only discharge in whole or in part of any debt but the same includes other liability as well. This aspect of the matter has not been appreciated by the High Court, neither been dealt with or even referred to in the impugned judgment. 11. The issue as regards the coextensive liability of the guarantor and the principal debtor, in our view, is totally out of the purview of Section 138 of the Act, neither the same calls for any discussion therein. The language of the statute depicts the intent of the lawmakers to the effect that wherever there is a default on the part of one in favour of another and in the event a cheque is issued in discharge of any debt or other liability there cannot be any restriction or embargo in the matter of application of the provisions of Section 138 of the Act. Any cheque and other liability are the two key expressions which stand as clarifying the legislative intent so as to bring the factual context within the ambit of the provisions of the statute. Any contra interpretation would defeat the intent of the legislature. The High Court, it seems, got carried away by the issue of guarantee and guarantors liability and thus has overlooked the true intent and purport of Section 138 of the Act. The judgments recorded in the order of the High Court do not have any relevance in the contextual facts and the same thus do not lend any assistance to the contentions raised by the respondents. Supreme Court in ICDS Ltd. v. Beena Shabeer and Another (2002) Supreme Court Cases 426 considered provisions of the law and held that when the cheque is issued by the guarantor in discharge of such other liability, provisions of section 138 are applicable. Infact, section 138 itself specifically provides that the cheque should have been issued by a person for the discharge of any debt or other liability. The guarantor may not be himself a debtor but he guarantees the repayment of the loan taken by the principal debtor. By giving such a guarantee, the guarantor incurs a liability towards the creditor and for the discharge of that liability, if he issues cheque, he will be covered by the provisions of Section 138. As the cheque was issued for the discharge of other liability case would be covered by Section 138. 9 In the present case, there was no liability or debt towards the complainant/respondent when the cheque was issued by the contractor. From the language of the agreement as well as allegations made in the complaint, it is clear that said cheque was issued as security deposit and not towards the discharge of any debt or lone. The learned counsel for the respondent contended that in M.S.Narayana Menon @ Mani (Supra), evidence was led by the parties and on the basis of evidence, the Supreme Court came to conclusion that the cheque was issued as a security and, therefore, Section 138 would not be applicable. According to the learned counsel, in this case only process has been issued and the parties are yet to go to the trial and, therefore, said authority in M.S. Narayana Menon @ Mani (Supra) would not be applicable. It would be difficult to accept this contention. Ratio in M.S.Narayana Menon @ Mani (Supra), is applicable to the facts of the present case. When on the face of the complaint itself, it is clear that the cheque was issued as a security deposit and not towards the discharge of any debt or other liability, case under Section 138 is not made out. When the complaint itself does not make out criminal case to issue the process, to force the accused to undergo trial would be clear misuse of the process of the Court and this should not be allowed. The Additional Sessions Judge while rejecting the revision application dealt with the liability of the contractor on the basis of terms of the contract and the cheque. The learned counsel for the respondent also contended that the matter was referred to arbitrator and arbitrator also held that the contractor is liable to pay on the basis of that cheque. As far as civil liability of the contractor/petitioner is concerned, it is not necessary to look into the same in present matter. Suit was filed in the year 2006 and the arbitrator was also appointed in 2008, therefore, civil liability of the parties against each other can be looked into the said litigation or arbitration

proceedings. In the present matter, we have only to see whether the offence under Section 138 of the Negotiable Instruments Act is made out or not. The learned Revisional Court did not address to this question properly before rejecting revision application. 10 In view of the facts and circumstances, I find that no case to issue process under Section 138 was made out and, therefore, process issued by the trial Court is liable to be quashed. 11 For the aforesaid reasons, petition is allowed. The order passed by the learned Metropolitan Magistrate to issue process under Section 138 is hereby quashed. Rule made absolute accordingly.

Bounced cheques: SC offers a new interpretation

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2 comments + COMMENT

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Vrinda Bagaria | 10/12/2012 12:49 PM |

The apex court has taken a strict view of cases where cheques are dishonoured In a recent judgement on cheque bounce issues, the Supreme Court, while taking into consideration genuine cases, has suggested to follow the principle of the Laxmi Dyechem Vs State of Gujarat & Others, on a case to case basis as it is also necessary to properly judge the intention of the accused to avoid wrongful conviction.

Hopefully in near future, our legislature would incorporate the principles laid down by the judiciary into the statute by way of a much needed amendment to Section 138 in The Negotiable Instruments Act, 1881, to avoid any ambiguity as well as consider the inclusion of electronic operation of the bank accounts within the ambit of Section 138 of the Act.

I.

Background

Chapter XVII of the Negotiable Instruments Act, 1881 (the Act), was enacted to give effect to the legislative intent of the statute which it sought to achieve and to inculcate faith in the efficacy of banking operations and maintaining the credibility of the banking transactions. It seeks to prevent the misuse of the provisions of the Act and therefore, necessitates that a wider interpretation be imparted to it. However, over the years the operation of Section 138 of the Act has not been adequate to meet the needs of the society. The language of the Section itself is unsatisfactory as it restricts the scope thereof as well as does not make the bouncing of cheques and non-payment on notice, a summary offence. The Section has not been utilized very effectively and its administration has been very languid.

The Supreme Court, has assumed the role of a parliamentarian to ensure the effective compliance of law through a recent case of M/s Laxmi Dyechem Vs State Of Gujarat & Ors (Laxmi Dyechem), together with another recent ruling in Msr Leathers Vs S Palaniappan and Anr (Msr Leathers), wherein it has endeavoured to accord to the Section a broad scope to cover all aspects for prevention of misuse of the provisions of the Act, which may occur due to the restricted language of Section 138 of the Act. However, in the present era when there is an increasing dependency on the electronic mode of payment in all spheres of life, many milestones are yet to be achieved to ensure the longevity of the statute. For instance, with the onset of internet banking, phone/mobile banking, electronic transfers,

etc, cheques are getting antiquated as a mode of payment. Hence, requisite provisions regulating the electronic mode of payment have to be incorporated. Despite the fact that an electronic mode of payment does not constitute a negotiable trade paper, this cannot be the reason for not giving it credibility equivalent to that which the cheques warrant. Secondly, it is inevitable that the courts should resort to effective and proficient methods for the expeditious and speedy disposal of cases. Presently, the number of backlog cases in the courts across the country is estimated to be over an unreasonable amount of 3.5 crore, which poses a serious question on the reliability of the courts and the same is a major concern which needs to adhered to as urgently as possible.

II. Scope of Sec 138 prior to the SC ruling in Laxmi Dyechem

According to the limited scope assigned to Section 138 of the Act, a dishonour of cheque would constitute an offence under Section 138\142 only in the event of following two contingencies:

i. Insufficiency of funds in the bank account of the drawer, i.e. the amount promised to be honoured through the cheque exceeds the amount standing to the credit of the drawers account; or

ii. The amount to be paid by the drawer through the cheque exceeds the amount arranged to be paid from that account by an agreement with the bank. It, therefore, essentially provides that the bank cannot make payment from an account in excess of what is agreed between the banker and the respective drawer.

Prior to the judgment of Laxmi Dyechem, the scope of the Section was broadened by the Supreme Court to include within its ambit, the following grounds, based on which an action can lie under Section 138\142: a. Instructions by drawer to bank to stop payment after the cheque have been issued 1; b. Closing the bank account with the mala fide intention of not honouring the liability/ debt2. c. Dishonour of cheque even after notice to the payee to not present the cheque3.

In the Modi Cements4 case , the apex court held with reference to an instruction for stopping payment resulting in dishonour of the cheque that if such acts are excluded from the scope of the Section, it would nullify the effect of the enactment and further amount to misuse of the section in the sense that the drawer of a cheque unwilling to discharge his liability/debt, by giving instructions to his bank to stop payment after issuing a cheque, can escape the penal consequences of the Section notwithstanding the fact that a deemed offence was committed

with a mala fide purpose. Additionally, in the case of Goalplast (P) Ltd Vs Chico Ursula D Souza and Anr5 , it was held that ordinarily the stop payment instruction is issued to the bank by the account holder when there is no sufficient amount in the account.

In both the cases as above-mentioned, another question which arose for determination was with respect to Section 139 of the Act which raises a presumption that a cheque issued under Section 138 of the Act shall be presumed to be so issued with the purpose of discharging the debtors liability/debt. However, it was observed in both the cases that such presumption may be rebutted by adducing evidence for the same and the burden of proof lies on the person wanting to rebut such presumption. The presumption when coupled with the object that the Act seeks to achieve, leads to the conclusion that by cancellation of the payment of a post-dated cheque, a dishonest drawer should not be allowed to escape from the consequences of the penal provision of Section 138 of the Act.

In all the afore-mentioned instances, the court has taken into consideration the situations and contingencies arising out of deliberate acts of omission or commission on the part of the drawer of the cheques which would inevitably result in dishonour of the cheque issued by them. For instance, this court has held that if after issue of the cheque the drawer closes the account it must be presumed that the amount in the account was nil and hence, insufficient to meet the demand of the cheque.

III.

Overview of present ruling: Laxmi Dyechem case

A.

Facts:

The present case is the consequence of an appeal directed against the orders of the Gujarat High Court (HC) which has quashed 40 different complaints filed by the appellants against the respondents under Section 138 of the Act. Reliance was placed on the ruling of Vinod Tanna & Anr Vs Zaheed Siddiqui & Ors6 , based on which the HC held that an action under Section 138 of the Act can lie only if they fulfil any of the two contingencies as stipulated therein (which have been set out above) and the same being a penal provision, a strict interpretation should be assigned to it so as not to include within its scope the dishonour of cheque on grounds of mismatch of signature; incomplete signature, image not found and other similar instances.

In the instant case, the appellant company is a proprietorship firm engaged in the sale of chemicals and had an amount of approximately Rs5 crore outstanding against the respondentcompany. Certain post-dated cheques signed by the authorised signatories of the company were issued to the appellants in discharge of the debts as were remaining to be satisfied. However, out of the 117 cheques issued to the appellants, some

were dishonoured with an endorsement stating mismatch of signature to be the reason of such dishonour. On receiving such endorsement, the appellant, in compliance with the statutory provisions as provided under the section, sent a notice to the respondent company to issue fresh cheques in their favour. The respondent company cited the change in the mandate to be the reason of such dishonour and undertook to issue fresh cheques on return of the dishonoured cheques and further on the precondition of settlement of the account. Nevertheless, the same remained unpaid by the respondent company thus compelling the appellants to take recourse to legal action as a last and final resort under Section 138\142 of the Act.

B.

Principles

This division bench of the Supreme Court placed reliance on a plethora of judgements and succeeded in preserving the efficacy of the provisions of the Act. Reiterating what had also been observed in the NEPC Micon case7, it was held by the apex court that the expression amount of money is insufficient appearing in Section 138 of the Act is the genus of which all other reasons of dishonour, for instance, account closed, payment stopped and like are only the species. Similarly, reasons such as signature mismatch, illegible signature, image not found are also species of the genus and hence liable to action under Section 138 of the Act.

The Supreme Court, in the instant case, opined on the principles that a change in the mandate of the authorised signatories, or a deliberate mismatch in the signature may be caused with a dishonest and fraudulent intention which would undoubtedly result in the dishonour of cheque signed by the previous signatories or as the case may be. The apex court held that irrespective of whatever may be the reason, if a certain act is done or omitted to be done with a purpose of preventing the honour of a cheque issued by the drawer, it will necessarily fall within the scope of Section 138 of the Act.

The apex court also took into consideration situations where the dishonour of cheque due to the above reasons may not be intended by the drawer and is caused bona fide, for example, on account of changes genuinely made in the mandate of the authorised signatories or changes occurring in the ordinary course of business of a company, partnership firm or an individual. A prosecution can be initiated only after the preconditions in the proviso to the Section are exhausted. The proviso makes it mandatory for the payee to issue a notice to the drawer 15 days after receiving information of dishonour of cheque from the bank giving sufficient opportunity to the drawer to discharge his liability by issuing a fresh cheque within 15 days of receipt of such notice. Only on the failure to do so, can an action be initiated under the said Section. Hence, the Supreme Court observed that sufficient protection is provided to a bona fide drawer to honour his commitment and discharge his liability before a prosecution can be initiated.

C.

Judgement

In view of the observations made above, the apex court disregarded the contentions of the respondent company that the section being a penal provision should be strictly construed and that dishonour on ground of mismatch of signature does not fall within the scope of Section 138 of the Act. It also did not accept the contention of the signatories who contended that they should not be held liable for the dishonour of cheques issued by the respondent company as they ceased to form a part of the same post their retirement.

Thus, in light of all the observations made in the course of proceedings, the impugned order of the HC was set aside and the appeal allowed. Further, the trial court was directed to proceed with the complaints made by the complainants.

IV.

Conclusion

In the wake of the increasing fraudulent and dishonest acts with respect to issue of negotiable instruments, it is only imperative and inevitable that a liberal construction be accorded to the provisions of a statute which seeks to protect the society against the wrongs suffered by it.

Giving effect to the intention of the Act and the provisions therein, the wrongdoers should not be allowed to escape the consequences by reason of adopting a strict interpretation to such provisions under the garb that it is a penal provision. Thus, this step of the apex court, combined with its previous decisions, go a long way to fulfil the objectives of the Act and is a constructive measure to prevent the misuse of the provisions of law which are enacted for the protection of the society rather than to encourage the illegal acts and misdeeds of the offenders of the society. It is also appreciable that the Supreme Court has taken into consideration the genuine cases and suggested to follow the principle of the Laxmi Dyechem on a case-to-case basis as it is also necessary to properly judge the intention of the accused to avoid wrongful conviction. Hopefully our legislature in near future shall incorporate the principles laid down by the judiciary into the statute by way of a much needed amendment to Section 138 of the Act to avoid any ambiguity as well as consider the inclusion of electronic operation of the bank accounts within the ambit of Section 138 of the Act.

12 Important Circumstances under which a Banker will be Justified or Bound to Dishonor a Cheque
By Rehaan Bansal

Important circumstances under which a banker will be justified or bound to dishonor a cheque are listed below:
Circumstances

1. If a cheque is not dated [Griffth vs Delton (1940)]. 2. If the banker gets notice about the insolvency or lunacy of customer. 3. If it contains material alteration, that is irregular signature or endorsement. 4. A banker is justified in refusing payment of a post dated cheque presented for payment before its extensible date [Morley is Culverwell 7 M & W 174, 178]. 5. If the instrument is incomplete and not free from reasonable doubt. 6. If notice in respect of closure of the account is served by either party on the other. 7. If it is state that is if it has not been presented within reasonable period. 8. If the customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank in which either he has account or his account is overdrawn [Wood Land vs. Fear (1857)]. 9. By notice of loss of cheque and a banker should not pay a cheque after receiving from the holder notice of its loss. 10. If the customer countermands the payment of cheque, the bankers duty ceases for payment. 11. If the authority of the banker to honour a cheque of his customer is determined by the notice of the laters death. Any payment made prior to the receipt of the notice of death is valid. 12. If the garnishee or other legal order from the court attaching or otherwise dealing with the money in the hand of the banker, is served on the banker.

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