LAW RELATING TO DISHONOUR OF CHEQUES IN
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
“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 drawer’s 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 bank’s 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 Father’s 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 father’s 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 (
10)
Accused refused to receive Notice:
Where accused ha 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
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 drawer’s 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
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