A person goes through a lot of difficulties if a cheque issued in his favor is dishonored or comes out to be void. The reason generally is the insufficiency of funds in the drawer’s account. It is to avoid such mishaps that the Negotiable Instruments Act was introduced by the Banking, Public Financial Institutions and Negotiable Instrument Laws (Amendment) Act, 1988.
A Cheque is a negotiable instrument in the form of a promissory note. It is a document that contains an unconditional order to the bank to pay a certain sum mentioned in the instrument, from the drawer’s account, to the person to whom it is issued (payee), or to the order of the specified person or the bearer. There are 3 parties to a check:
Drawer: The person who draws the cheque, i.e. signs and orders the bank to pay the sum.
Drawee: The bank on which the cheque is drawn or who is directed to pay the specified sum written on the cheque.
Payee: The beneficiary i.e., to whom the amount is to be paid.
Chapter XVII of this act is entitled “OF PENALTIES IN CASE OF DISHONOR OF CERTAIN CHEQUES FOR INSUFFICIENCY OF FUNDS IN THE ACCOUNTS”. It is divided into 5 sections i.e., Sections 138 to 142 which assure the proper functioning of the banking operations and credibility in transactions through cheques. The provisions are penal in nature but at the same time make sure that the real purpose of the enactment is not forgotten which is to make sure that the cheques are honored and related parties do their part in an honest financial exchange.
Sec. 138 of the NI Act was enacted to punish dishonest drawers of cheques who pretend to “discharge their liability” or make a credit to the payee’s account by issuing a cheque but have no real intention of doing so. Apart from civil liability, criminal liability must be imposed on such unscrupulous drawers of cheques. However, to avoid unnecessary prosecution of an honest drawer and also to present an opportunity to him to make amends, the prosecution under Sec. 138 has been made subject to certain conditions (provisos).
The Object of Sec. 138: The objective of the said section is to enhance the acceptability of cheques by making the drawer liable for a penalty in case the cheque is dishonored. It says where any cheque drawn by a person for payment of any amount of money in discharge of any debt or liability is returned by the bank unpaid, either because of the amount money in the drawer’s account is insufficient to honor the cheque or the amount agreed exceeds the amount arranged to be paid from the account by an agreement made with the bank, such person is said to have committed an offence and shall be punished without prejudice. The punishments he can receive can vary from imprisonment for a term which may extend to two years or with a fine extendable to twice the amount of the cheque in question, or with both. It is to be noted that a cheque is given as a gift or donation, or as security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the section.
Statutory Presumptions: Whenever cases related to the dishonor of cheques are handled the courts handling the respective cases have to make some presumptions. This is done to place the evidential burden on the accused party of proving that the cheque/cheques in question were not received by the complainant towards the discharge of any liability.
For example: when a cheque is dishonored, it shall be presumed that the holder had received the mentioned instrument without any debt or liability on the drawer’s side. The drawer may challenge the presumption by proving the contrary. Two scenarios come out as a result:
The accused can present a logical and authentic defence through material evidence which supports his innocence. He can rely on the materials submitted by the complainant to raise such a defence. Here, the prosecution fails.
If however, the accused/drawer neither raises a probable defence nor able to contest the existence of a legally enforceable debt or liability, the statutory presumptions under Sec. 139 comes into play. Here, the defence fails.
It is presumed that the cheque must have been presented to the bank within 3 months from the date on which it was drawn, or before the period of validity ends, whichever is earlier.
Also, the cheque issued has been returned unpaid by the payee’s bank either because of insufficient funds in the payer’s account or because the cheque exceeds the amount arranged to be paid from that account by an agreement with the bank. The bank must abide by the law that the bank can’t make payments that exceed the agreement between the banker and the respective drawer.
If the cheque in question is not accepted by the bank or the payment is not transferred, the payee, within 15 days, must make a written demand on the drawer for payment of the agreed amount written on the cheque.
A written complaint should have been to a metropolitan or a first-class judicial magistrate by the payee or the holder in due course of the cheque within a month from the date on which the drawer had to successfully pay the amount (which was within 15 days from the date of getting the notice by the payee.) No complaint from the payee’s part will mean that no court shall take cognizance of the drawer’s offence under Sec. 138.
Sec. 141 expressly extends to corporate bodies which include partnerships, companies or other associations of individuals. If the complainant specifically states that the person accused was in charge of and responsible for the conduct of the business of the company, this section does not stand as Sec. 141 is only apt when the company is the principal offender and not one of the individuals involved with it.
Application of Sec. 138: One of the main issues faced by the learned courts has been whether Sec. 138 is attracted in certain cases:
When a cheque is presented by the payee to the bank to credit the amount to his account but the same cheque is returned by the bank with the endorsement like (1) refer to the drawer; (2) instructions for stoppage of payment and stamped; (3) exceeds arrangement, it amounts to dishonor within the meaning of Sec. 138.
Another condition was presented by the respondent council in Electronics Trade & Technology Development Corp. Ltd v Indian Technologists & Engineers (Electronics) (P) Ltd. . According to them in case the cheque is issued to the payee/holder in due course and before it is presented for encasement, a notice is sent to him not to go for the encashment yet the payee goes and does it anyway, this will render Sec. 138 inapplicable. The learned court’s rebuttal was that aim of the Sec. 138 is to promote the efficacy of the banking system and to ensure credibility in cheque transactions. Hence when the cheque is drawn it is automatically presumed that the drawer is capable of and supposed to honor the agreement, the cancellation of which to escape the penal consequences of the same will attract the provisions of Sections. 138.
KUSUM IGNOTS & ALLOYS LTD. v PENNAR PETERSON SECURITIES LTD. [AIR 2000 SC 954] The Issue at Hand: Whether a company and its directors could be proceeded against for having committed an offence under Sec. 138 of the N.I. Act after the said company has been declared sick under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) before the expiry of the period of payment of the cheque.
ISSUE I: According to the appellants, their company had been declared sick by the Board of Industry and Financial Reconstruction (BIFR) therefore Sec. 138 was not effective in their case and the complainant’s case must be quashed.
The learned court made a point that the object of bringing provisions of Sec. 138 was to solidify the trust in the efficacy of the banking operations and cheque transactions. They considered the 5 prerequisites for doing so which were; a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person form out of that account for the discharge of any debt or other liability; check has been presented to the bank within six months or the period of validity, whichever is earlier; that check is returned unpaid by the bank due to insufficient funds or over-promised check amount without the affirmation of the bank; the payee notifies the drawer to pay the amount within the next 15 days after the latter receives the said receipt and; the drawer fails to make payment within 15 days from the day he got the complaint.
Since all the above-mentioned ingredients for attraction of Sec. 138 were present, the person who has drawn the case was deemed to have committed an offence. The Magistrate rightly took cognizance of the said offence and issued summons to the appellants.
ISSUE II: This time the provisions of SICA were considered as it was questioned whether the said provisions namely Sec. 22, allowed any legal impediment for payment of the amount for which the cheques were drawn and therefore the appellants can’t be declared to have committed an offence. Also, whether the same effect a criminal case for an offence under Sec. 138 NI Act.
For the 1st issue, the court answered, NO. Sec. 22 of SICA only creates an embargo against the disposal of assets of the company for recovery of its debts. It doesn’t halt transactions by the company or its directors to other persons for the satisfaction of their legally enforceable dues.
Regarding the 2nd issue, the court noted, “In the said section provision is made enabling the Board to render an order in writing to direct the sick industrial company not to dispose of any of its assets (a) during the preparation of the scheme under Sec. 18; and (b) while this proceeding of recording of Board’s opinion is going on till the commencement of the proceedings relating to the winding-up before the High Court concerned.” Accordingly, the criminal case can’t be instituted under Sec. 138 while the restraint order passed by BIFR remains operative. Also, the cheque was drawn after the restraint order by BIFR was imposed therefore the said offence of dishonoring the cheque can’t be stated. The court decided that leaving the above-mentioned circumstances, there were no good reasons to accept the conventions of the appellants and quash the criminal proceedings. The accused were also allowed to place relevant materials in regards to the case and it was made clear that the court will give its final decision on whether the case attracts Sec. 138 at the appropriate stage of the case in light of the right evidence.
DALMIA CEMENT (BHARAT) LTD. v GALAXY TRADERS & AGENCIES LTD. [AIR 2001 SC 676] The Issue at Hand: Whether the complainant is obliged to prove the ingredients of an offence under Sec. 138 which include the receipt of notice by the accused under clause (b). Also in contention is the argument that it is not the “giving” but the “receipt” of the notice by the drawer which gives the reason to the complainant to file the complaint within the statutory period.
ISSUE I: In its complaint, the appellant-Company had stated the accused respondent Firm purchased cement from it and issued a cheque worth Rs 9,13,353.84 on 26-5-1998. The cheque when presented was dishonored on account of insufficient funds in the drawer’s account. This was communicated on 2-6-1998 to the payee and the complaint then was sent to the drawer on 13-6-1998 which was received o 15-6-1998. Then on 30-6-2018, the appellants were informed that the former had received empty envelopes and requested the contents.
The same cheque was presented to the bank again on 1-7-1998 which was again dishonored on 2-7-1998. This time after the same detailed process, the payment was not made. The appellant finally filed the complaint on 9-9-1998 which was within the time of the second notice. But the respondent refused to appear at the hearing with a request to the high court to quash the complaint on grounds of the provision Sec. 138.
The Add. Chief Magistrate, Ernakulam finally decided that the complaint didn’t hold ground as “it is not the giving but the receipt of the notice which matters while filing a complaint. “Black Law Dictionary” was referred to where “giving” notice is to inform the other whether or not the other comes to know about it and “receiving” notice means the information is duly delivered to the latter. On the contrary, the “giver” of the notice is presumed to be the loser in the transaction but the provision itself is made for his interest so the above logic fails the motive of Sec. 138 as his responsibility ends with him sending the notice and rest depends on what the “sendee” does.
ISSUE II: The question of the validity of the second notice and the role of the sendee under Section 27 of the General Clauses Act.
Section 27 deals with the presumption of service of a letter sent by post. The dispatcher has 2 options before him; one is to accept that the sendee didn’t get the notice in the first place and; second being contesting the sendee’s stand and proving that he did get the notice. Such a course was taken by the dispatcher and it is proven that the complaint was filed within limitation from the date of notice of service.
Secondly, Sec. 138, clause (b) reiterates that once a notice is received by the drawer, the payee loses his right to again present the same cheque as the cause of action has accused when there was a failure to pay the amount within the prescribed period.
Thus the court concluded that “…respondents intimidated, “received one empty envelope”…appellant…issued a fresh notice after again presenting the cheque…the respondents have not denied the issuance…Despite admitting to its contents, they opted to approach the High Court…quashing the proceedings…upon assumption and conjectures.” The respondents had contradictory pleas as on one hand they confessed they didn’t receive the “notice of dishonor” and on the other prayed for the dismissal of the complaint rendering the court to believe that this was done to resist the claim to avoid the penalty by law. Therefore, the appeal was allowed and the order of the High Court quashing the complaint filed was set aside.
In conclusion, Chapter XVII of the Negotiable Instruments Act, 1881 was introduced to make sure that the people have faith in the Indian Banking System and preserving the credibility of the banking transactions. With its vast provisional sections, it makes sure that not only it interprets a wide variety of cases but also protects the provisions from being misused.
But, over the years, the operation of Section 138 has not been utilized very effectively and its administration has been very languid as the provision itself has not aged well with time due to its unsatisfactory language and inability to deal with modern issues like bouncing of cheques and non-payment on notice which are still not summary offences.
Although the Supreme Court has ensured the effective implementation of the law through a series of cases to cover diverse types of fraudulent methods to dishonor cheques and financial agreements, it can’t be denied that there is a need to realize the commercial realities in India and further expedite the process of recovery to discourage delays caused by the accused, unnecessary adjournments and frivolous appeals. Courts must resort to effective and proficient methods for the expeditious and speedy disposal of cases.
Steps undertaken by the judiciary will go a long way in helping India get rid of its backlog of cases and restoring people’s faith in the integrity and honesty of the system. Hopefully, our legislature would strive to not only incorporate but also to successfully execute the amendments suggested by the Indian judiciary.
Legislation- The Negotiable Instruments Act, 1991
Websites- Indian Kanoon and SCC