Saturday, May 24, 2014

Dishonour of Cheques : Section 138 of the Negotiable Instrument Act, 1881


What is Cheque?

As per Section 6 of the Negotiable Instrument Act, 1881, a ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Definition of Drawer and Payee

As per Section 7 of the Negotiable Instrument Act, maker of a bill of exchange, a promissory note or cheque is called the ‘drawer’ and the person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the ‘payee’.

Purpose and Object behind the incorporation of Section 138 of the Negotiable Instrument Act.

The offence under Section 138 of the Negotiable Instrument Act is a statutory offence. This Section excludes mens rea by creating strict liability. It does not say that there should be a direct nexus between the person who commits the act and the offence. The purpose behind the incorporation of Section 138 of the Negotiable Instrument Act is to lend credibility for cheque transactions. The object is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments.

Section 138 of the Negotiable Instrument Act reads as follows: - 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 provision of this Act, be punished with imprisonment for a term which may be extended 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 - 

(a) 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;

(b) 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

(c) 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 fifteen days of the receipt of the said notice.

Explanation- ‘debt or other liability’ means a legally enforceable debt or other liability.

Ingredients of Section 138

(i) drawing of the cheque;
(ii) presentation of the cheque to the bank;
(iii) returning the cheque unpaid by the drawee bank;
(iv) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount; and
(v) failure of the drawer to make payment within 15 days of the receipt of the notice.

It is incumbent upon the complainant to establish a case under Section 138 of the Negotiable Instrument Act, that the cheque was dishonoured only for want of funds in the account and not for the other reason. If a cheque is returned on account of any structural defect, that is, any defect in its form, want of signature, date has not been properly written, figure of the amount has been over written or erasures in the drawer's name, etc., the same will not amount to an offence punishable under Section 138 of the Act.

But on November 27, 2012, in M/s Laxmi Dyechem vs. State of Gujarat & Ors, the Apex Court held that where the drawer of the cheque changed his signature with a fraudulent intention that such change in signature would result in dishonour of cheque, in such situation mismatch of signature of drawer on cheque with the specimen signatures would constitute dishonour within the meaning of Section 138 of the Act subject to the condition that the drawer fails to make payment within the stipulated time despite receiving statutory notice under Section 138 of the Act.   

Liability of a Company under Section 138

Section 141 of the Negotiable Instrument Act lays down the liability of a company and its officers for an offence under Section 138 of the Act.

Section 141 of the Negotiable Instrument Act reads as follows: - (1) If the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was incharge 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 he offence and shall be liable to be proceeded against and punished accordingly.

The proviso of Section 141(1) lays down that no such person can be so held 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 offence.

 The second proviso of Section 141(1) further lays down that 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 the State Government, as the case may be, he shall not be held liable.

Sub-Section 2 of Section 141 of the Act provides that where any offence under the 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.

Explanation- (a) ‘company’ means any body corporate and includes a firm or other association of individuals; and (b) ‘director’, in relation to a firm, means a partner in the firm.

Who can file complaint; how and when?

The complaint for offence under Section 138 read with Section 142 after the dishonouring of the cheque can be filed either by the payee or the holder thereof. Whether the person is holder thereof is a question of fact and has to be pleaded. The complaint can only be filed in writing by the payee or the holder thereof in due course.

The payee is free to present the cheque repeatedly within its validity period but once notice has been issued and payment not received within 15 days of the receipt of the notice, payee has to avail the very cause of action arising thereupon and file the complaint. Complaint has to be filed within one month from the day immediately following the day on which the period of 15 days from the date of receipt of the first notice by the drawer expires.

No form of notice is prescribed in clause (b) of the proviso to section 138, the requirement is that the notice shall be given in writing within 30 days of receipt of information from the bank regarding return of the cheque as unpaid and in the notice a demand for payment of the amount of the cheque has to be made. If no such demand is made, the notice would fall short of its legal requirement.

Further it is not the giving of the notice but its receipt by the drawer which culminates in the cause of action. It is no doubt true that the receipt of the notice has to be proved, but if the notice is refused by the addressee, it may be presumed to have been served. In a case where notice is not claimed even though sent by registered post, with the aid of Section 27 of the General Clauses Act, the drawer of the cheque may be called upon to rebut the presumption which arises in favour of service of notice.
   
Place where complaint is to be filed

For purposes of Section 178(d) of the Code of Criminal Procedure, where an offence consists of several acts done in different local areas, it may be inquired into or tried by a Court having jurisdiction over any of such local areas.

In Nishant Aggarwal vs. Kailash Kumar Sharma, (2013) 10 SCC 72, the Apex Court observed that if the five different acts namely (i) drawing of the cheque; (ii) presentation of the cheque to the bank; (iii) returning the cheque unpaid by the drawee bank; (iv) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount; and (v) failure of the drawer to make payment within 15 days of the receipt of the notice, which are the components of offence under Section 138 of the Negotiable Instrument Act were done in five different localities, any one of the Courts exercising jurisdiction in one of the five local areas can became the place of trail for the offence under Section 138 of the Act and the complainant would be at liberty to file a complaint at any of those places. In other words, the complainant can choose any one of those Courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done.

On 01-08-2014, the Apex Court in Dashrath Rupsingh Rathod vs. State of Maharashtra, (2014) 9 SCC 129 held that the territorial jurisdiction is restricted to Court within whose local jurisdiction offence was committed which is where cheque is dishonoured by bank on which it is drawn and complaint will be maintainable only at place where cheque stands dishonoured. 

But after the Negotiable Instrument (Amendment) Ordinance, 2015 which was published in the Gazette of India on 15th June, 2015 the offence under Section 138 shall be inquired into and tried only by a court within whose local jurisdiction-

(a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or

(b) if the cheque is presented for payment by he payee or holder in due course otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

Explanation- For the purposes of clause (a), where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account. 

Offence of dishonour of cheque committed along with other offences in a single transaction- Territorial jurisdiction :-

The relief introduced by Section 138 of the NI Act is in addition to the contemplations in the IPC. It is still open to such a payee recipent of a dishonoured cheque to lodge a First Information Report with the police or file a complaint directly before the concerened Magistrate. All remedies under IPC and CrPC are available to such a payee if he chooses to pursue this course of action, rather than a complaint under Section 138 NI Act. He can also always file a civil suit for recovery wherever the cause of action arises in civil law.

Trail

All offences under the Negotiable Instrument Act are to be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate summarily and the provisions of Sections 262 to 265, both inclusive of the Code of Criminal Procedure shall apply to such trails. The trail Court has to look into the following main features, viz., the date of issuing of the cheque, the date of dishonouring of the cheque by the bank, the date of issuing notice, and the date of filing of the complaint in Court; if these facts are borne out from allegations in the complaint, the Court is entitled to take cognizance of the same.

High Court’s power under Section 482 of the Code of Criminal Procedure

The power of quashing criminal proceedings by the High Court should be exercised very stringently and with circumspection. In the cases where the petitioner is able to show to the Court that there was no existing debt or liability at the time of presentation of the cheque for encashment on the basis of the conduct of the complainant or admissions made by the complainant though that may be in other legal proceedings, then in such cases, the proceeding can be terminated and the accused should not be asked to face the trail till it is concluded. 

Further, a complaint filed in a Court under the territorial jurisdiction of High Court of a State, cannot be quashed by the High Court of another State.




Disclaimer: Above content are for general use and information. Consult your Lawyer before acting upon these information.