Dishonour Of Cheques
With the advent of payment through cheques, monetary transactions became much easier. In place of bundle of notes a piece of cheques is much easier to carry. It has facilitated trade and commerce tremendously. But with the arrival of cheque system the problem of bouncing or dishonoring of cheque also started. People started to issue cheques without intention of honoring them. This led to decline in the value system of trade and credibility of business. Some step was needed to curb this. For commerce to flourish it was needed that some law, which could ensure credibility to the holder of the negotiable instrument, should be enacted. Before 1988 there was no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them on cheque not being honored by their bankers and returned unpaid. The money could be recovered on filing a civil suit by the holder but it would take a lot of time.
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. The object and purpose of bringing in the act was to make the person dealing in commercial transactions work with a sense of responsibility and for that reason under the amended provisions of law lapse on their part to honour their commitment renders the persons liable for criminal prosecution.2
What is Negotiable Instrument
A Negotiable instrument is a specialized type of "contract" for the payment of money that is unconditional and capable of transfer by negotiation. As payment of money is promised later, the instrument itself can be used by the holder in due course frequently as money3. It is a transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand. Examples include checks, bills of exchange, and promissory notes.4 A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.5
Section 138 to 142 of chapter XVII, of the negotiable Instrument Act,1881, deals with dishonoring of cheques.. The Parliament in its wisdom had chosen to bring section 138 on the statute book in order to introduce financial discipline in business dealings. Prior to insertion of 138 of NI, a dishonored cheque left the person aggrieved with the only remedy of filing a claim. The remedy available in civil court is a long drawn matter and an unscrupulous drawer normally takes various pleas to defeat the genuine claim of the payee6.Section 138 has converted civil liability into criminal offence. This has been inserted by the parliament with the object and purpose of holding a person criminally responsible for his acts in commercial transactions trade and business dealings with people carried out carelessly or without sense of responsibility7.
Offence under 138 is an offence without any mens rea .It is not a criminal offence in real sense as it does not require mens rea, like few other criminal offences, but as public interest is hampered by such offence so it has been made a punishable offence. It includes strict liability. Creation of the strict liability is an effective measure by encouraging greater vigilance to prevent usual callous attitude of drawers of cheques in discharge of debts.
The circumstances under which such a dishonour takes place are not of much importance. Any reason for dishonour is an offence under section 138 of the NI Act. Marginal Note stating "Dishonour of cheque for insufficiency etc. of funds in accounts" addition of word "etc." cannot be considered to be an accident.8
The essential ingredients of sec138 are as follows:-
1. Drawing of a cheque by a person on an account of any debt or other liability.
2. Presentation of the cheque to the bank within a period of 6 months from date of its drawing or within the period of its validity.
3. Returning of the cheque unpaid by the drawee bank.
4. Notice in writing to the drawer of cheque within 30 days of receipt of information regarding return of cheque as unpaid in form of debit advance or return memo.
5. Failure of the drawer to make payment within 15 days of receipt of notice.
The provisions of section 138 will be attracted only when the cheque has been issued for the discharge of any debt or other legally enforceable liability. The maker of the cheque is not liable for prosecution if cheque which is dishnoured, is the one, which is given as gift, present or donation.9 The offence gets completed only after notice is served and payment as required by notice is not made.10
Letters written by complainant can be construed as notice under Section 138 NIA.-Complaint can be filed on 16th day 11.Notice need not be sent through registered post –notice/letter sent under certificate of posting is presumed to have received by accused.12 Notice served on company but not MD and director who are parties in complaint , is valid notice U/S 13813. Notice to reasonably correct address is sufficient14.A notice refused to be accepted by the addressee can be presumed to have been served on him.15
Drawer of cheque is alone liable. Even it is true that the cheque was issued by the first accused towards the discharge of the liability of the petitioner/second accused company. Still the 2nd accused company cannot be prosecuted as it is not the drawer.16
When a cheque of joint account is return as “signature required from another director”, 138 will lie. Cheque returned as ‘account operation jointly., another director signature required’ it amounts to dishonour17 Even if notice is issued stopping payment before the payee deposited the cheque in his bank, offence is complete18. In the case of dishonour of cheque period of one month for filing the complaint will be reckoned from the day immediately following the day on which the period of fifteen days from the date of receipt of the notice by the drawer expires19
Presence of all the above mentioned ingridents is necessary to attract the provision of section 138 of the N.I. Act. It is not necessary that all the above five acts should have been perpetrated at the same locality, they may have been performed in five different localities. Complaint can be filed at any of the places mentioned below. One of the Courts exercising jurisdiction in one of the five local areas can become the place of trail for the offence under sec. 138 of the Act
1.Where the cheque was drawn.
2. Where the cheque was presented for encashment.
3. Where the cheque was returned unpaid by drawee bank.
4. Where notice in writing was given to drawer of cheque demanding payment.
5. Where drawer of cheque failed to make payment within 15 days of receipt of notice.20
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.
By the 2002 amendment Courts have been provided discretion to waive the period of one month, which has been prescribed for taking cognizance of the case under the Act; Cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.21
The Magistrate while taking cognizance has to look into the question whether the ingredients of an offence have been made out or not22. So long as the period of notice does not expire there can be no cause of action with the payee to make the drawer liable criminally23
The time period laid down in the act has to be strictly followed. Any lapse in adhering to the schedule, shall take away a cause of action under Sec. 138. The time limits placed cannot be condoned by the Courts. The limitations which has to be kept in mind and taken into account are as follows:
• Cheque should be presented to the bank for encashment within its validity period.
• Within fifteen days from the receipt of return memo indicating reason of dishonour, a notice should be sent demanding the amount of dishonoured cheque.
• If the drawer does not pay the amount of dishonoured cheque within the grace period, a complaint thereafter should be filed within one month in the relevant court having jurisdiction.
Limitation for filing complaint limit defined as from a particular day . The first day is to be excluded. Period of 15 days from the date of receipt of notice ending on 14-10-1995 –so, 30 days period begins on 15-10-1995. Complaint filed on15-11-1995 is within time24
Death of complainant will not terminate proceedings U/S 138 NI Act. Complainant’s presence is not necessary .Legal heirs can be impleaded25
Punishment for accused if proved guilty under section 138 N.I. Act:
1. Imprisonment of up to 2 years
2. Penalty of up to twice the amount of the bounced cheque.
Beside the punishments, the court can grant compensation to the complainant under section 357 of the Code of Criminal Procedure, 1973 and no limit has been provided for the amount of compensation.
By the 2002 amendment the term of imprisonment has been increased to two years.
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.
Offence under 138 by Company
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. A person shall not be liable if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence26. Where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution27. Where any offence under this Act has been committed by a company and it is proved that the offence has been 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, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.28 Notice served on company but not MD and director who are parties in complaint , is valid notice U/S 13829
Civil or Criminal Wrong
Merely because an act has a civil remedy is not sufficient to denude it of its criminal outfit. Both criminal law and civil law remedy can be pursued in diverse situations. As a matter of fact they are not mutually exclusive but clearly co-extensive and essentially differ in their content and consequence. The object of criminal law is to punish an offender who commits an offence against a person, property or the State for which the accused, on proof of the offence, is deprived of his liberty and in some cases even his life. This does not, however, affect civil remedies at all for suing the wrongdoer in case like arson, accidents etc. It is anathema to suppose that when a civil remedy is available, a criminal prosecution is completely barred.30 Filing of civil suit and filing of criminal compliant are not alternative remedies and they are different type of rights31
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. Sec.420 is valid even after Sec.138 is introduced.32 Section 420 Indian Penal Code can be clubbed with complaints filed Under Section 138 of NI Act33. If Section 138 not made out then Section 420 IPC can be drawn such complaint was dismissed by magistrate under Section 138 and 141 of NI Act. High Court directed to take cognizance under Section 120-B and 420 IPC. Such decision of the High Court held to be valid by the Supreme Court.34 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 IPC35. In case of prosecution launched under Section 420 IPC in respect of dishonour of cheques, prosecution has to establish facts which prima facie point to the conclusion that the failure to meet the cheque was not accidental but was a consequence expected and was intended by the accused36
Section 138 creates statutory offence in the matter of dishonor of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker. It makes the matter of dishonoring of cheques on grounds of insufficient fund, a statutory offence. In the cases of dishonour of cheques mens rea is not required. Offence under 138 is an offence without any mens rea but it is based on a negotiable instrument ie cheque, If a cheque is issued in discharge of a legally enforceable debt and on presentation of the cheque for encashment the same is dishonoured and offence will come into existance under section 138 of the N.I act. 37 The circumstances under which the dishonour took place is irrelevant. The law only takes cognizance of the fact that the payment has not been forthcoming and it matters little that any of the manifold reasons may have caused that situation38. Defect in structure cheque will not attract Sec. 138.39 Dishonour of cheque because of incomplete signature on cheque of drawer did not attract section 138.40
Complaint under section 138 of the Act cannot be quashed or dismissed merely because the notice was not served on the accused or drawer, without enquiring into the circumstances leading to the non serving of the notice.41Burden is on the complainant to show that the accused has managed to get incorrect postal order endorsement made42.
It is erroneous to construe that section 138 would not apply from a closed bank account, section 138 does not call for such a narrow construction, and such an interpretation would defeat the provision of the act.43
The burden of proof as to cheque has not been issued for legal debt or liability, is always on the accused44. Complainat is not required to adduce number of witnesses and bulk of documentary evidence on the question.45
1 Chanakya National Law University,3rd Year, Patna
2 Lal Bhatia vs City Credit and Leasing Company iii (2002)BC210(P&H)
4 http://www.investorwords.com/3226/negotiable_instrument.html, last visited on 21st May,2010.
5 Section 13, N.I. Act, 1881.
6 Goa Plast (p)ltd v Chico Urrsula D’souza AIR 2004 SC 408
7 Ratanlal Gulabchand Gupta v Shara Sev Gruh Udyog Bhanda, 2001 CrLJ 373
8 J. Veeraraghavan v. Lalith Kumar, 1995 CRI L J 1882
9 SKD Lakshman Firework & Industries v K V Sivarama Krishna, 1995 CrLJ 1384(Ker)
10 Mahesh Mehta Huf v state of Goa,2006CrLJ 1142(Bom.)
11 2002 Crl.L.J. 3001. Bom.
12 2002 Crl.L.J.2731 A. AP
13 2001 (1) CTC 725.
14 Syed Hamid Bafaky Vs. Moideen1996 Crl.L.J. (Ker) 1013
15 V.Raja Kumar v P. Subbarama Naidu, 2005(1)PLJR(SC)235: Harcharan Singh v Shivrani 1981(2) SCC 647
16 2001 (4) CTC 278
17Shri Vinod Tanna & Anr. Vs.Shri Zaheer Siddiqui, Constituted Attorney of Ahsan Exports Pvt. Ltd. & Ors 2001 Crl.L.J.2297 (A) Bom
18 Modi Cements v. Shri Kunchil Kumar Nandi, AIR 1998 SC 1057
19 Prem Chand Vijay Kumar v Yashpal Singh, 2005(3) PLJR(SC)115
20 K. Bhaskaran v. Sankaran Vaidhyan Balan, 1999 (4) ALL MR 452 (S.C)
21 Ins. by Act 55 of 2002, sec. 9 (w.e.f. 6-2-2003).
22 M/s. Pearey Lal Rajendra Kumar Pvt. Ltd. v. State of Rajasthan, (1994) 3 Crimes 308 (Raj).
23 T.K. Khungar v. Sanjay Ghai, (1994) 3 Crimes 802 (P & H).
24 Saketh India Ltd. v. India Securities Ltd, 1999 Cri LJ 1822 (SC)
25 1998 (2) CTC 647
26 Section 141(1), N.I Act,1881
27 Ins. by Act 55 of 2002, sec. 8 (w.e.f. 6-2-2003).
28 Section 141(2), N.I. Act 1881.
29 2001 (1) CTC 725.
30 Medical Chemicals and Pharma Pvt. Ltd. v. Biological E. Ltd. 2000 Cri.L.J. 1487 (SC)
31 Satishkumar S/o Premchand Jain Vs.Krishnagopal S/o Mohanlal Sarda1994CrLJ 887
32 OPTS Marketing (P) Ltd. and others Vs.State of A.P. and another2001 Crl.L.J.1489
33Smt. Sosamma Vs. Rajendran and Anr. 1993 Crl.L.J. 2196.
34 M/s Indseam Services Ltd. vs. Bimal Kumar Kejriwal (HUF) AIR 2001 SC 3512.
35 1989 Cuttack law times 719
36 Keshavji v. Emperor, AIR 1930 Bom. 179
37 Abdul Gafoor v Abdulla(2005) 4 KLT 840
38 Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar
39 98 Crl.L.J. 4750 Bom.
40 2002(7) SCC 531
41 V Satyanarayan v A.P. Travel& Tourism Development Corporation Ltd, 1997(2) ALT (Crl.01 A.P.
42 V. Raja Kumari v P. Subbarama Naidu, 2005(1) PLJR(SC)239
43 Joginder Singh v Amar Kaur,2005(1)PLJR(SC)181
44 Joseph Jose v J. baby Puthval Pura Vidom Poothoppu I(2003) BC 180
45 Steel Tubes of India v Steel authority of India, 2006 CrLJ 1988
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