NEGOTIABLE INSTRUMENTS ACT, 1881

INTRODUCTION:

Negotiable Instruments has been used in commercial world for a long period of time as one of the convenient modes for transferring money. Development in banking sector and with the opening of new branches, cheque becomes one of the favorite Negotiable Instruments. When cheques were issued as a Negotiable Instruments, there was always possibility of the same being issued without sufficient amount in the account. With a view to protect drawee of the cheque need was felt that dishonor of cheque he made punishable offence. With that purpose Sec.138 to 142 are inserted by Banking Public Financial Institutions and Negotiable Instruments clause (Amendment) Act, 1988. This was done by making the drawer liable for penalties in case of bouncing of the cheque due to insufficiency of funds with adequate safeguards to prevent harassment of the honest drawer.

These provisions deal with procedure, trial, cognizance, defence and punishment relating to offences of dishonor of cheques. Dishonour of a cheque is by itself not an offence u/s 138 of Negotiable Instruments Act. To come within the ambit of offence in such a case following elements have to be fulfilled:

1. Drawing the cheque.
2. Presentation of the cheque to the Bank.
3. Returning the cheque unpaid by the drawee Bank.
4. Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount.
5. Failure of the drawer to make payment within 15 days of the receipt of notice.

             The offence of dishonor of cheque has been made cognizable only on a written complaint by the payee or holder in due course. Sections 138 to 147 of Negotiable Instruments Act as inserted by the Amendment Act 2002, further lay down a kind of complete Code of trial of offences under the Negotiable Instruments Act. Thus, if the provision of Negotiable Instruments Act specially sections 138 to 147 are followed strictly by the Courts, a large number of such cases will reach their final fate within a fair and reasonable time. These provisions have been incorporated with a view to encourage the culture of use of cheques and enhancing credibility of the Instruments.

Section 138 Negotiable Instruments Act as it is present after coming into force of The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.

DISHONOUR OF CHEQUE FOR INSUFFICIENCY, ETC., OF FUNDS IN THE ACCOUNT:

SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881

Where any cheque drawn by a person 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 the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other priovision of this act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless-

• The cheque has been, 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;
• The payee or the holder in due course of the cheque as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
• The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within 15 days of the receipt of the said notice.

EXPLANATION:-

For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

CLASSIFICATION OF OFFENCES:

An offence committed under Section 138 is a non-cognizable offence (a case in which a police officer cannot arrest the accused without an arrest warrant). Also, it is a bailable offence.

IMPORTANT INGREDIENTS OF SECTION -138  

The ingredients of the offence as contemplated under Section 138 of the Act are as under:

1. The cheque must have been drawn for discharge of existing debt or liability.
2. Cheque must be presented within 6 months or within validity period whichever is earlier.
3. Cheque must be returned unpaid due to insufficient funds or it exceeds the amount arranged.
4. Fact of dishonour is informed to the drawer by notice within 30 days.
5. Drawer of cheque must fail to make payment within 15 days of receipt of the notice.

           A mere presentation of delivery of cheque by the accused would not amount to acceptance of any debt or liability. Complainant has to show that cheque was issued for any existing debt or liability. Thus, if cheque is issued by way of gift and it gets dishonored offence u/s. 138 of the will not be attracted.

OBJECTS & PURPOSE:

The object of this amendment Act is:

1. To regulate the growing business, trade, commerce and Industrial activities.
2. To promote greater vigilance in financial matters.
3. To safeguard the faith of creditors in drawer of cheque.

SCOPE:

Section 138 of Negotiable Instruments Act, reflects the anxiety of the legislature to user in a new healthy commercial morality through the instrumentality of the penal law. Here is a classic example where, as part of an attempt to envolve a healthy norm of commercial behavior, the principal of social engineering through the instrumentality of penal law I put into operation. What was, prior to the amendments of the Negotiable Instruments Act in 1988 only a moral or civil wrong, has been transformed and exalted to the position of a crime by a debt amendment of the Statute.

          The essential requirements to attract section 138, Negotiable Instruments Act are:

1. The cheque for an amount is issued by the drawer to the payee / complainant on a bank account maintained by him.
2. The said cheque is issued for the discharge, in whole or in part of any debt or other liability.
3. The cheque is returned by the bank unpaid on account of insufficient amount to honour the cheque or it exceeds the amount arranged to be paid from that account by an agreement made with the bank.
4. The cheque is presented within 3 months from the date on which it is drawn or within the period of its validity.
5. 30 days demand notice is issued by the payee or the holder in due course on receipt of information by him from the bank regarding the dishonor of the cheque.
6. The drawer of said cheque fails to make payment of the said amount of the money to the payee or the holder on due course within the 15 days of the said notice.
7. The debt or liability against which the cheque was issued in legally enforceable.

GROUNDS FOR DISHONOUR OF CHEQUE:

• “FUNDS INSUFFICIENT” :

Section 138 describes the above ground of insufficient funds in the account of the drawer of the cheque in the following words:

The amount of money standing to the credit of the account of the drawer on which the cheque is drawn is insufficient to honour the cheque, or

• The cheque amount exceeds the amount that can be paid by the bank under an arrangement entered into between the bank and the drawer of the cheque.

However, besides the above, the Courts have also accepted some other heads which though expressly do not say ‘insufficient funds’ but are implied to mean the same and a cheque dishonoured on any of these grounds can be used for the purpose of prosecution under section 138 Negotiable Instruments Act. Some of these grounds are:

• ACCOUNT CLOSED: “ It is an offence under section 138 of the Act – Closure of account would be an eventuality after the entire amount in the account is withdrawn- It means that there was no amount in the credit of ‘that account’ on the relevant date when the cheque  was presented for the honouring the same”

This has been held by the Hon’ble Supreme Court of India in-

NEPS MICON LTD. AND OTHERS VS. MAGMA LEASING LTD

• “STOP PAYMENT” INSTRUCTIONS:  The Judiciary has time and again been confronted with the issue whether a cheque is dishonoured by reason of“stop-payment” instruction. This aspect had been deliberated by the Supreme Court in the case of Modi Cements Ltd. v. Kuchil Kumar Nandi, wherein the Supreme Court opined that if the drawer issues a notice to the drawee or to the Bank for stoppage of the payment, the same will not preclude an action under Section 138 of the Act by the drawee or the holder of a cheque in due course. However, a presumption in favour of holder as provided under Section 139 of the Act must follow. This implies that if the accused can show that the “stop- payment” instructions were not issued because of insufficiency or paucity of funds. and that the stop-payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under Section 138 of the Act would not be made out.
• “SIGNATURES DO NOT MATCH”:  In a recent case of M/s Laxmi Dychem v. State of Gujarat, Two-Judge Bench of the Supreme Court was confronted with the question whether signature mismatch by drawer of cheque would tantamount to cheque dishonor under Section 138 of the Act. The Court held in the affirmative and opined “signatures do not match” or that the “image is not found”, which too implies that the specimen signatures do not match the signatures on the cheque would constitute a dishonour within the meaning of Section 138 of the Act.

FILING A COMPLAINT UNDER SECTION 138 OF THE ACT:

For filing a complaint, the complainant needs to follow these steps;

1. DISHONOUR OF CHEQUE(S):

The complainant should have deposited the cheque drawn in his/its favour, which cheque(s) has been returned unpaid or has been dishonoured due to:

• Insufficiency of fund in the account of the drawer;
• Issuance of stop payment instructions by the drawer to the drawer bank;
• Amount of cheque exceeding the arrangement with the drawer bank.

2. NOTICE ASKING FOR PAYMENT OF DUES:

A legal notice for cheque dishonor is necessary before any action. This Act provides that, once the cheque has been dishonoured, a notice needs to be issued (by registered A.D.) to the drawer within 30 days of the receipt of memo from drawee bank that the cheque is dishonoured. The legal notice for cheque dishonour to be sent should mention the following points;

• The cheque issued was presented for payment in bank;
• The cheque was subsequently dishonoured for the reason provided by the drawee   bank.
• Asking for payment for sum written on cheque within a period of 15 days from the date of receipt of notice.

After sending the legal notice for cheque dishonor the next step should be taken.

3. FILING COMPLAINT:

Where on the receipt of notice, if the drawer after the dishonor of cheque remains silent or refuses to pay the money within 15 days from the date of receipt of notice, then a criminal complaint should be filed against the drawer (“Accused”) within next 30 days from the expiry of time period provided to the drawer.

4. PLACE OF FILING THE COMPLAINT:

The place for filing the complaint shall be determined based on any of the following;

• Place of the bank on which the cheque is drawn;
• Place where cheque is presented to the bank and the same is dishonoured;
• Place of residence/business of the complainant;
• Place of residence/business of Accused;
• Place from where the notice is sent to the drawer of the cheque demanding the cheque amount.

5. CONTENTS OF CRIMINAL COMPLAINT:

A complaint should contain complete details about the complainant, Accused, details of the transaction, details of the notice sent to Accused, jurisdiction clause, limitation clause, prayers asking for compensation and punishment for the Accused. The complaint should also be accompanied with all the important attachments i.e. the list of witnesses, list of all original documents and copies, board resolution giving authority to a person to file complaint on behalf of the company (if applicable) etc.

6. ISSUANCE OF SUMMONS:

Upon filing of complaint and completion of all procedural aspects, the Magistrate before whom the complaint is filed shall verify the documents and upon subsequent verification, shall issue summons against the Accused.

7. POST- ISSUANCE OF SUMMONS:

On issuance of summons, the Accused may appear or may not appear.

On appearance of the Accused; the plea of the Accused shall be recorded and the proceedings shall be conducted as per Section 262 and 265 of CrPC.

Where Accused fails to appear; A Bailable warrant shall be issued against the Accused. Even after this, where the Accused fails to appear, a Non-Bailable warrant will be issued. If the Accused appears, the procedure will be the same as in the case of issuance of summons.

However, if the Accused fails to secure his attendance, then by courts order, Accused shall be declared absconding and a notice shall be issued in local newspaper in respect of the same. Properties of the Accused will be attached and will be sold by public auction. Complainant can recover his dues out of the sale proceeds.

8. ORDERS:

Upon hearing the parties, the court may pass any of the following orders;

• The Accused may be acquitted of all the charges; or
• The Accused may be held guilty of the offence committed under Dishonor of cheque Section 138 of the Act and shall be penalized as follows;
• imprisonment up to two years; or
• monetary fine which may extend to twice the amount of cheque; or
• both imprisonment and fine; or
• Paying off the dishonored cheque amount to the complainant. 

CASES:

• N. HARIHARA KRISHNAN V. J. THOMAS

The Apex court in a recent judgment held that any failure to include the company as an Accused in the complaint, filed for dishonour of cheque section 138 of the Negotiable Instruments Act, 1881 of dishonour of a cheque issued by a company, would be fatal to the prosecution of such company even if the complaint filed against the signatory of the cheque has been duly complied with.

In the concerned case, the cheque was signed by the appellant, Mr. Harihara Krishnan (“Appellant”), who was authorized to sign on behalf of Dakshin Granites Pvt. Ltd. (“Company”) which is the drawer company. When the cheque was dishonoured, the complainant, Mr. J. Thomas (“Respondent”), lodged a complaint under section 138 of the NI Act against the Appellant. However, he failed to lodge a complaint against the Company. It is important to note that the Appellant drew the cheque on behalf of the Company, thereby making Company the drawer of the cheque.

Respondent subsequently sought to implead Company in the complaint, which the trial court granted. Against this, Appellant filed an appeal before the High Court stating the application to implead was filed after the expiry of the limitation period, which also ruled in favour of Respondent. Appellant then appealed to the Apex Court, which then overruled both the orders.

• ANEETA HADA V. GODFATHER TRAVELS & TOURS PRIVATE LIMITED

The Apex Court relied upon its earlier judgment in Aneeta Hada v. Godfather Travels & Tours Private Limited which had arrived “at the irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an Accused is imperative”. The offence under Section 138 is person specific and therefore there cannot be a prosecution without an Accused being a party to it.

The Apex Court further observed, the decision is embedded largely in the procedural aspects of initiating and maintaining prosecution for offences of cheque dishonour. When a cheque is drawn on behalf of a company, it necessarily has to be signed by an authorised signatory (director, officer or other suitable person), so at the time of initiation of proceedings against the company, it is not sufficient to bring a complaint against the actual signatory, but to bring an action (within the stipulated time) against the company as well. Here in the present case, the Respondent made the Company a party to the suit, but there was a delay of 1211 days. Finally, the Apex Court was concerned with the question of whether the delay on the part of the complainant in impleading the Company can be condoned, which it answered in the negative and subsequently the appeal filed by the Appellant was allowed.

• BRIDGESTONE INDIA PVT.LTD. Vs. INDERPAL SINGH

In the following case, Bridgestone India Pvt. Ltd. (“Petitioner”) had filed a case against Inderpal Singh (“Respondent”) for dishonour of Cheque drawn on a bank at Chandigarh. The cheque was presented at a bank of Indore where Petitioner resides and was subsequently dishonoured. A petition was filed against the Respondent.  The Respondent prayed to the court that Indore court had no jurisdiction to entertain this aforesaid proceeding, which was eventually accepted by court applying the “Dashrath Rupsingh Rathod” case which stated that jurisdiction lays only before the court in whose jurisdiction original drawee bank was located, which is Chandigarh in the present case. An appeal was filed in the Supreme Court by the Petitioner challenging the order. The court held that, the new Ordinance vests jurisdiction for initiating proceedings under Section 138, inter alia, in territorial jurisdiction of court where cheque is delivered for collection (through an account of branch of bank where payee or holder in due course maintains an account). Therefore, in the following case, Section 142(1) (a) gives jurisdiction to Indore court to entertain the aforesaid proceedings and the judgement rendered in the “Dashrath Rupsingh Rathod” case shall not stand in any way of Petitioner insofar as territorial jurisdiction for initiating a proceeding emerging from dishonour is Cheque is concerned.

CONCLUSION:

Section 138 of the Act protects the payee from any illegal act on the part of the drawer. As cheques are commonly used instruments in the business world, banking sector needs to be protected. It not only aims at speedy disposal of cases but also to bring sanctity to the system by seeking to clamp down on defaults in payments and has empowered the payee against drawer to bring higher virtuousness to cheque transactions