Prosecution & cheque dishonour - New View

Section 138 of the Negotiable Instruments Act, 1881, deals with the consequences of dishonour of cheque for insufficiency , etc., of funds in the account. The provision provides for punishment with imprisonment for a term which may extend to 2 years or with fine or with both. Generally, a cheque can be presented to the bank for collection within a period of 6 months from the date on which the cheque was drawn or within the period of its validity, whichever is earlier. If the cheque is dishonoured, a statutory notice has to be issued and subsequently a complaint is required to be filed.

The question is whether the notice/complaint has to be commenced immediately on the first occasion when the cheque was dishonoured.  The Apex Court had earlier held in Sadanandan Bhadran Vs. Madhavan Sunil Kumar (1998) 6 SCC 514 that while a second or successive presentation of a cheque was legally permissible so long as such presentation was within the period of 6 months or the validity of the cheque whichever was earlier, the second or subsequent dishonour of the cheque would not entitle the holder/payee to issue a statutory notice to the drawer nor would it entitle him to institute legal proceedings against the drawer in the event he failed to arrange for the payment. The Court gave 3 reasons, namely, (1) the expression “cause of action” in section 142(b) had been used in a restrictive sense and hence the cause of action can arise only once, (2) dishonour of cheque will lead to commission of only one offence and that the offence was complete no sooner the drawer failed to make the payment of the cheque amount within a period 15 days of the receipt of the notice served upon him, and, (3) successive causes of action will militate against the provisions of section 142(b) and make the said provision otiose.

The correctness of the decision was doubted by a bench comprising Markandey Katju and B. Sudershan Reddy, JJ and hence the issue was posted before a larger Bench of the Apex Court.  Now a larger Bench (comprising of 3 Honourable Judges) have overruled the view expressed in Sadanandan Bhadran Vs. Madhavan Sunil Kumar’ case. The decision of the larger bench, dated 26.9.12, is reported in (2012) 26 TAXMANN.COM 332 (MSR Leathers Vs. S. Palaniappan).

The views of the Larger Bench are summarized as under:

(1) Neither section 138 or section 142 or any other provision in the Act forbids the holder or payee of the cheque from presenting the cheque for encashment on any number of occasions within a period of 6 months of its issue or within the period of its validity, whichever is earlier;

(2) Presentation of the cheque and dishonour thereof within the period of its validity or a period of 6 months was just one of the 3 requirements that constituted “cause of action” within the meaning of sections 138 and 142(b);

(3) there is nothing in the provisions of the Act that forbids the holder/payee of the cheque to demand by service of a fresh notice under clause (b) of proviso to section 138 of the Act, the amount covered by the cheque, should there be a second or successive dishonour of the cheque on its presentation;

(4) So long as the cheque remains unpaid it is the continuing obligation  of the drawer to make good the same by either arranging the funds in the account on which the cheque is drawn or liquidating the liability otherwise. The omission or the failure of the holder to institute prosecution does not given any immunity to the drawer so long as the cheque is dishonoured within its validity period and the conditions precedent for prosecution in terms of the proviso to section 138 are satisfied;

(5) there is nothing in section 142 to suggest that the expiry of the limitation for issue of statutory notice/filing of complaint would absolve the drawer of his criminal liability should the cheque continue to get dishonoured by the bank on subsequent presentations. So long as the cheque is valid and so long as it is dishonoured upon presentation to the bank, the holder’s right to prosecute the drawer for the default committed by him remains valid and exercisable.  By reason of a fresh presentation, the drawer gets an extended period to make the payment and thereby benefits in terms of further opportunity to pay to avoid prosecution. Such fresh opportunity cannot held the defaulter on any  juristic principle, to get a complete absolution from prosecution;

(6) A prosecution based on a second or successive default in payment of the cheque amount should not be impermissible simply because no prosecution based on the first default was followed by a statutory notice and a failure to pay had not been launched;

(7) There is no reason why a person who has issued a cheque which is dishonoured and who fails to make payment despite statutory notice served upon him should be immune to prosecution simply because the holder of the cheque has not rushed to the court with a complaint based on such default or simply because the drawer has made the holder to defer prosecution promising to make arrangements for funds or for any other similar reason;

(8) An interpretation which curtails the right of the parties to negotiate a  possible settlement without prejudice to the right of holder to institute proceedings within the outer period of limitation stipulated by  law should be avoided and there is no reason why parties should, by a process of interpretation, be forced to launch complaints where they can or may like to defer such action for goods and valid reasons.