banking law - law relating to dishonour of cheques in india: an analysis of section 138 of the...

7/27/2019 BANKING LAW - LAW RELATING TO DISHONOUR OF CHEQUES IN INDIA: AN ANALYSIS OF SECTION 138 OF THE NEG

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LAW RELATING TO DISHONOUR OF CHEQUES IN INDIA: ANANALYSIS OF SECTION 138 OF THE NEGOTIABLE INSTRUMENTS

ACT

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 beenamended 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


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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


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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 India held that

Knowledge or reasonable belief, that pre requisite could bestatutorily dispensed with in appropriate cases by creating strictliability 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


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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 drawers

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:


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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


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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 saidamount 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.


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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)

PresumptionsUnder Section 139, a court must presume that the holder of acheque received it for the discharge, in whole or in part, of alegally enforceable debt or other liability. This presumption isrebuttable.


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DefencesUnder Section 140, a person being prosecuted for drawing acheque which has bounced cannot defend himself by saying that

he had no reason to believe when he issued the cheque that itmay be dishonoured on presentment for the reasons stated inSection 138.Offences by CompaniesUnder Section 141, if the person committing an offence underSection 138 is a company, every person who, at the time theoffence 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 offenceand shall be liable to be proceeded against and punishedaccordingly.However, no person is liable to punishment if he proves that theoffence was committed without his knowledge, or that he hadexercised all due diligence to prevent the commission of theoffence.If any offence under the Negotiable Instruments Act is committedby a company and it is proved that the offence is committed with

the consent or connivance of, or is attributable to, any neglect onthe part of, any director, manager, secretary or other officer of thecompany, he is also be deemed to be guilty of that offence and isliable to be proceeded against and punished accordingly.Under Section 141, a company means any body corporate andincludes a firm or other association of individuals; and a director,in relation to a firm, means a partner in the firm.

Cognizance of Offences


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Under Section 142, courts take cognizance of offences punishableunder Section 138 only upon a complaint made by the payee or,as the case may be, the holder in due course of the cheque. Thecomplaint must be in writing and be made within one month of

the date on which the cause of action i.e. after the person drewthe cheque fails to pay the amount within 15 days of the receipt ofnotice of its dishonour. No court inferior to that of a MetropolitanMagistrate or a Judicial Magistrate of the first class has the powerto try any offence punishable under section 138.SummonsUnder Section 144, a Magistrate issuing a summons to an accusedor a witness may direct a copy of summons to be served at theplace where the accused or witness ordinarily resides or carries onbusiness or personally works for gain, by speed post or by suchcourier services as are approved by a Court of Session.The Court issuing the summons may declare that the summonshas been duly served if it receives: an acknowledgment purporting to be signed by the accused orthe witness or an endorsement purported to be made by any person authorised

by the postal department or the courier services that the accusedor the witness refused to take delivery of summons.TrialUnder Section 143, a trial regarding the dishonour of a cheque iscarried out in the manner of a summary trial and the Magistratemay pass a sentence of imprisonment for a term not exceedingone year and an amount of fine exceeding five thousand rupees.

The Magistrate may, however, after hearing the parties, choosenot to try a case in the manner of a summary trial and thereafterrecall any witness who may have been examined and proceed tohear or rehear the case in the manner provided by the Code ofCriminal Procedure.


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The trial should, if practicable, be continued from day to day till itsconclusion, unless the Court finds that it should be adjourned forreasons recorded in writing. It should ideally be concluded withinsix months from the date of the filing of the complaint.Under Section 145, the complainant may give his evidence onaffidavit. The Court may, if it thinks fit, and shall, on theapplication of the prosecution or the accused, summon andexamine any person giving evidence on affidavit as to the factscontained therein.Under Section 146, the banks slip or memo having thereon theofficial mark denoting that the cheque has been dishonoured isprima facie evidence that the cheque has been dishonouredalthough the fact of dishonour may be disproved.Compoundable Offence

By an amendment introduced in 2002, under Section 147, anoffence related to the dishonour of a cheque - and every otheroffence 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


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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 ofincomplete 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 Fathers 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 fathers 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


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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 (Madras)

10) Accused refused to receive Notice: Where accused has

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 anddate 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)


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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 Cuttack law times 719)

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.


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15) Refer to drawer:The bank endorsement refer to drawer

also may fall within the ambit of provisions of section 138 of theN.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 whatprevented 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


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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 convictedunder 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


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method of realization of the amount due to the

complainant on the cheque being dishonoured for the

reasons of insufficient fund in the drawers 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


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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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Dishonour of chequesProcedure thereof

As you are aware, in January 1992, banks were advised to implement the recommendation of theGoiporia Committee that dishonoured instruments are returned / despatched to the customer

promptly without delay, in any case within 24 hours (Ref.No.3.36our circular

DBOD.No.BC.74/09.07.001/91-92 dated 28

th

January 1992).

2. Pursuant to the investigation by the Joint Parliamentary Committee (the JPC) into the Stock

Market Scam, the JPC has recommended (in para 5.214 of its report ) that "specific guidelinesneed to be issued by the Reserve Bank to all banks regarding the procedure to be followed by

them in respect of dishonoured cheques from Stock Exchanges." In the light of aforesaid

recommendations of the JPC, the extant instructions relating to return ofall dishonoured chequeshave been reviewed.

3. We understand that banks are already following the appropriate procedure keeping in view theabove instructions to deal with the dishonour of cheques. However, it is considered necessary to

streamline the procedure to be followed by all banks in this behalf. It is therefore suggested thatin addition to the existing instruction in respect of dishonoured instruments for want of funds,

banks may follow the additional instructions laid down in para 4 of this circular which couldcoverall cheques dishonoured on account of insufficient funds and not only those relating to

settlement transactions of Stock Exchanges.

4. I. Procedure for return/ despatch of dishonoured cheques:

(i) The paying bank should return dishonoured cheques presented through clearing houses

strictly as per the return discipline prescribed for respective clearing house in terms of Uniform

Regulations And Rules for Bankers' Clearing Houses. The collecting bank on receipt of such

dishonoured cheques should despatch it immediately to the payees / holders.

(ii) In relation to cheques presented direct to the paying bank for settlement of transaction byway of transfer between two accounts with that bank, it should return such dishonoured cheques

to payees/ holders immediately.

(iii) Cheques dishonoured for want of funds in respect of all accounts should be returned along

with a memo indicating therein the reason for dishonour as "insufficient funds."

4.II Information on dishonoured cheques:

(i) Data in respect of each dishonoured cheque for amount of Rs.1 crore and above should bemade part of bank's MIS on constituents and concerned branches should report such data to their

respective controlling office / Head Office.

(ii) Data in respect of cheques drawn in favour of stock exchanges and dishonoured should be

consolidated separately by banks irrespective of the value of such cheques as a part of their MIS

relating to broker entities, and be reported to their respective Head Offices / Central Offices.


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4.III Dealing with incidence of frequent dishonour:

(i) With a view to enforce financial discipline among the customers, banks should introduce acondition for operation of accounts with cheque facility that in the event of dishonour of a

cheque valuing rupees one crore and above drawn on a particular account of the drawer on four

occasions during the financial year for want of sufficient funds in the account, no fresh chequebook would be issued. Also, the bank may consider closing current account at its discretion.

However, in respect of advances accounts such as cash credit account, overdraft account, the

need for continuance or otherwise of these credit facilities and the cheque facility relating tothese accounts should be reviewed by appropriate authority higher than the sanctioning authority.

(ii) For the purposes of introduction of the condition mentioned at (i) above in relation tooperation of the existing accounts, banks may, at the time of issuing new cheque book, issue a

letter advising the constituents of the new condition.

(iii) If a cheque is dishonoured for a third time on a particular account of the drawer during the

financial year, banks should issue a cautionary advice to the concerned constituent drawing hisattention to aforesaid condition and consequential stoppage of cheque facility in the event of

cheque being dishonoured on fourth occasion on the same account during the financial year.Similar cautionary advice may be issued if a bank intends to close the account.

4.IV General:

(i) For the purpose of adducing evidence to prove the fact of dishonour of cheque on behalf of acomplainant (i.e. payee / holder of a dishonoured cheque) in any proceeding relating to

dishonoured cheque before a court, consumer forum or any other competent authority, banks

should extend full co-operation, and should furnish him/her documentary proof of fact of

dishonour of cheques.

(ii) Commencing from the first quarter of 2003-04 i.e. quarter ending June 2003, banks shouldplace before their Audit/ Management Committee, every quarter, consolidated data in respect of

the matters referred to at II above;

5. Banks are also advised to adopt, with the approval of their respective Boards, appropriate

procedure for dealing with dishonoured cheques with inherent preventive measures and checks to

prevent any scope for collusion of the staff of the bank or any other person, with the drawer of

the cheque for causing delay in or withholding the communication of the fact of dishonour of thecheque to the payee/ holder or the return of such dishonoured cheque to him. Banks should also

lay down requisite internal guidelines for their officers and staff and advise them to adhere to

such guidelines and ensure strict compliance thereof to achieve aforesaid object of effective

communication and delivery of dishonoured cheque to the payee.

6. Please acknowledge receipt.

Yours faithfully,


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Sd/-

(C.R.Muralidharan)

Chief General Manager


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No offence u/s 138 of N.I. Act iscommitted for dishonour of chequegiven as security depositJudgment IN THE HIGH COURT OF JUDICATURE AT BOMBAY CRIMINALAPPELLATE JURISDICTION Joseph Vilangadan. v. Phenomenal Health Care Services Ltd. &

Anr. CRIMINAL WRIT PETITION NO.2243 OF 2009 CORAM : J.H.Bhatia, J. DATE : 20th

July, 2010 1 Rule. Rule made returnable forthwith. Heard the learned counsel for the parties. 2There is no dispute that the respondent no.1/complainant and M/s. Encon Engineering and

Contractors (Hereinafter referred to as Contractors) had entered into an agreement on 28th

January, 2005 whereby Contractors had undertaken to carry out certain works for the respondent.As per the said contract, Contractors deposited the sum of Rs. 10 lacs by undated cheque

no.027840 drawn against South Indian Bank Ltd., Palarivattom Branch, Cochin branch with the

respondent no.1 as refundable security deposit for the due performance of the agreement. Thesaid undated cheque was in custody of the respondent no.1 and it appears that the respondent

no.1 filled in the date on undated cheque as 4.6.2008. The cheque was presented to the drawee

bank through the banker of the respondent no.1. Cheque was returned unpaid on the ground that

the drawer had stopped the payment. Therefore, notice was issued by the respondent to thecontractor as well as its managing partner for the payment of the cheque amount . In spite of

notice, payment was not made. Therefore, the respondent no.1 filed complaint under Section 138

of the Negotiable Instruments Act, in the Court of Metropolitan Magistrate 44th Court, Andheri.

Process was issued against the accused, who is the petitioner before this Court.Petitioner/accused challenged the issuance of process by filing revision application no.789/2009

before the Sessions Court, Gr. Bombay. By the impugned order dated 8th June, 2009, the learned

Additional Sessions Judge rejected the revision application. Hence this petition. 3. At the outsetit may be stated that before the revisional Court, petitioner had taken several grounds challenging

the issuance of process. However, during the arguments before this Court, the learned counsel

for the petitioner restricted the challenge only to one point. According to him, cheque was not

issued in discharge of any debt or liability and as the cheque was issued as security deposit,provisions of Section 138 are not applicable. The learned counsel placed reliance upon several

authorities in support of his contention. The learned counsel for the respondent/complainant

contended that the said cheque was deposited in lieu of the amount of Rs. 10 lacs which wouldbe otherwise required to be deposited as security by the contractor with the respondent for due

performance of the contact and, therefore, it must be held that the cheque was issued in discharge

of other liability. 4. Section 138 of the Negotiable Instruments Act provides that where anycheque was drawn by a person on account maintained by him with the banker for the payment of

any amount of money to another person for discharge in whole or in part of any debt or other


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liability and it was returned by the drawee bank unpaid either because the amount of money in

the account is insufficient or it exceeds the amount arranged to be paid, such person shall be

deemed to have been committed offence and shall be liable to punishment with imprisonment orwith fine or with both. Of course, before the offence is committed, several other conditions are

required to be fulfilled. We are not concerned with the same for the decision of the present

matter. mportant ingredient for the offence punishable under Section 138 is that cheque musthave been issued for the discharge in whole or in part of any debt or other liability. If the chequeis not issued for the discharge of any debt or other liability, Section 138 can not be invoked. It is

now well settled legal position that if the cheque is issued only as security for performance of

certain contract or an agreement and not towards the discharge of any debt or other liability,offence punishable under section 138 is not made out. In Travel Force v. Mohan N. Bhave and

Another 2007 Mh.L.J.3339 , the cheque in question was issued by the accused for investment in

fixed deposit and it was accepted by the complainant as fixed deposit in the scheme. As the

cheque was dishonoured, the complaint under Section 138 of the Negotiable Instruments Act wasfiled. Process was issued by the Magistrate. However, the Sessions Court set aside the order

issuing the process holding that the cheque was not issued for discharge in whole or in part of

any debt or other liability and, therefore, presumption under Section 139 could not arise infavour of the complainant. Revision application filed by the complainant was rejected by this

High Court holding that when the cheque was issued only as a deposit and not in discharge of

any debt or liability, offence under Section 138 is not made out. 5. In M.S.Narayana Menon @

Mani v. State of Kerala and Another (2006) 6 SCC 39, accused and the complainant werebrokers working in the stock exchange and the complainant was to enter into certain transactions

on behalf of the accused. The cheque was issued for an amount of Rs. 2,95,033/by the accused in

favour of the complainant. On presentation, the cheque was dishonoured. After notice also thepayment was not made. In the case under Section 138 plea of the accused was that the

complainant was in dire need of financial assistance and the said cheque was issued so as to

enable him to tide over his financial difficulties and not in discharge of any debt or liability

payable to the complainant. During the trial, it was revealed that there was discrepancy of morethan Rs. 14 lacs in the account maintained by the complainant. Accused was convicted by the

trial Court but was acquitted by the appellate Court . High Court set aside the acquittal and

convicted the accused. Accused went to the Supreme Court. After going to the facts andcircumstances, the Supreme Court observed thus in paragraph 52: 52. We, in the facts and

circumstances of this case, need not go into the question as to whether even if the prosecution

fails to prove that a large portion of the amount claimed to be a part of the debt was not owingand due to the complainant by the accused and only because he has issued a cheque for a higher

amount, he would be convicted if it is held that existence of debt in respect of large part of the

said amount has not been proved. The appellants clearly said that nothing is due and the cheque

was issued by way of security. The said defence has been accepted as probable. If the defence isacceptable as probable the cheque therefore cannot be held to have been issued in discharge of

the debt as, for example, if a cheque is issued for security or for any other purpose the same

would not come within the purview of Section 138 of the Act. From these observations, it

appears that if the cheque was not issued for discharge of any debt or liability but as a securityonly, offence is not made out under Section 138. 6. Coming to the facts of the present case from

the complaint as well as particulars of the agreement executed on 28.1.2005, it is clear that

cheque was issued as a security deposit at the time of entering into contract for due performanceof the terms of the contract. Agreement shows that the contractor had deposited the undated


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cheque no.027840 with the respondent as refundable security deposit for due performance of the

agreement. Even the allegations in the complaint are not different. Admittedly, when this

agreement was entered into, no debt or liability was in existence and under that agreement,parties had entered into a contract whereby contractor was to perform certain works for the

respondent. Naturally, as per the terms of the contract and the allegations made in the complaint

if the contractor would fail to perform the agreement, respondent could encash the cheque andrecover an amount of security deposit. 7. The learned counsel for the respondents vehementlycontended that the contractor was to perform so many works and in respect of some works, his

rates were higher and in respect of some other, rates were lower than the other bidders. He was

also advanced certain amount for carrying out certain works from time to time. Contractor hadcompleted works in which higher rates were given to him but he ignored to carry out those works

where the rates were less and thereafter he ignored to complete those particular works resulting

into the disputes between the parties. Admittedly, the disputes had occurred in the year 2006 and

the contractor filed a suit against the respondent in the year 2006. Not only was this, admittedly,matter also referred to arbitrator in respect of said disputes. The learned counsel for the

respondents pointed out that undated cheque was lying with the respondent since 28.1.2005.

However, for the first time a date 4.6.2008 was put on him and then cheque was presented forencashment, which was returned unpaid with endorsement payment was stopped. It shows that

date was put on the cheque by the respondents long after disputes had arisen between the parties.

Proviso (a) to Section 138 requires that the cheque should be 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. In the present case though the cheque was drawn and handed over on

28.1.2005, date was not put on it. If the date would have been put, cheque would have been valid

for six months from 28.1.2005. However, the respondent put the date 4.6.2008, i.e., almost threeyears after the period of cheque was over. Thus, the cheque was not presented to the drawee

bank within six months from the date when it was actually drawn. Anyhow, it is not necessary to

enter into that controversy for the purpose of deciding the present petition. Fact remains that the

cheque was issued towards the security deposit and not towards the discharge of any debt orliability. 8 . The learned counsel for the respondent contends that it is not necessary that the

cheque should be issued for discharge of a debt.According to him, it may be issued towards the

discharge of other liability also and in support of this, he placed reliance on ICDS Limited v.Beena Shabeer and Another (2002) 6 SCC 426. In that case, husband of the accused/respondent

no.1 had obtained a car under hire purchase agreement from the complainant. The accused was a

guarantor for payment of the amount by her husband and towards the part payment of the saidtransaction, she had issued a cheque in favour of the complainant. Cheque was dishonoured and

the payment was not made in spite of the notice. High Court quashed the complaint on the

ground that cheque from the guarantor could not be said to have been issued for the purpose of

discharge of any debt or liability. However, the Supreme Court set aside the order of the HighCourt. The Supreme Court observed thus in paragraphs 10 and 11. 10. The language, however,

has been rather specific as regards the intent of the legislature. The commencement of the section

stands with the words Where any cheque. The above noted three words are of extreme

significance, in particular, by reason of the user of the word anythe first three words suggestthat in fact for whatever reason if a cheque is drawn on an account maintained by him with a

banker in favour of another person for the discharge of any debt or other liability, the highlighted

words if read with the first three words at the commencement of Section 138, leave no manner ofdoubt that for whatever reason it may be, the liability under this provision cannot be avoided in


24/37

the event the same stands returned by the banker unpaid. The legislature has been careful enough

to record not only discharge in whole or in part of any debt but the same includes other liability

as well. This aspect of the matter has not been appreciated by the High Court, neither been dealtwith or even referred to in the impugned judgment. 11. The issue as regards the coextensive

liability of the guarantor and the principal debtor, in our view, is totally out of the purview of

Section 138 of the Act, neither the same calls for any discussion therein. The language of thestatute depicts the intent of the lawmakers to the effect that wherever there is a default on the partof one in favour of another and in the event a cheque is issued in discharge of any debt or other

liability there cannot be any restriction or embargo in the matter of application of the provisions

of Section 138 of the Act. Any cheque and other liability are the two key expressions whichstand as clarifying the legislative intent so as to bring the factual context within the ambit of the

provisions of the statute. Any contra interpretation would defeat the intent of the legislature. The

High Court, it seems, got carried away by the issue of guarantee and guarantors liability and

thus has overlooked the true intent and purport of Section 138 of the Act. The judgmentsrecorded in the order of the High Court do not have any relevance in the contextual facts and the

same thus do not lend any assistance to the contentions raised by the respondents. Supreme

Court in ICDS Ltd. v. Beena Shabeer and Another (2002) Supreme Court Cases 426 consideredprovisions of the law and held that when the cheque is issued by the guarantor in discharge of

such other liability, provisions of section 138 are applicable. Infact, section 138 itself specifically

provides that the cheque should have been issued by a person for the discharge of any debt or

other liability. The guarantor may not be himself a debtor but he guarantees the repayment of theloan taken by the principal debtor. By giving such a guarantee, the guarantor incurs a liability

towards the creditor and for the discharge of that liability, if he issues cheque, he will be covered

by the provisions of Section 138. As the cheque was issued for the discharge of other liabilitycase would be covered by Section 138. 9 In the present case, there was no liability or debt

towards the complainant/respondent when the cheque was issued by the contractor. From the

language of the agreement as well as allegations made in the complaint, it is clear that said

cheque was issued as security deposit and not towards the discharge of any debt or lone. Thelearned counsel for the respondent contended that in M.S.Narayana Menon @ Mani (Supra),

evidence was led by the parties and on the basis of evidence, the Supreme Court came to

conclusion that the cheque was issued as a security and, therefore, Section 138 would not beapplicable. According to the learned counsel, in this case only process has been issued and the

parties are yet to go to the trial and, therefore, said authority in M.S. Narayana Menon @ Mani

(Supra) would not be applicable. It would be difficult to accept this contention. Ratio inM.S.Narayana Menon @ Mani (Supra), is applicable to the facts of the present case. When on

the face of the complaint itself, it is clear that the cheque was issued as a security deposit and not

towards the discharge of any debt or other liability, case under Section 138 is not made out.

When the complaint itself does not make out criminal case to issue the process, to force theaccused to undergo trial would be clear misuse of the process of the Court and this should not be

allowed. The Additional Sessions Judge while rejecting the revision application dealt with the

liability of the contractor on the basis of terms of the contract and the cheque. The learned

counsel for the respondent also contended that the matter was referred to arbitrator and arbitratoralso held that the contractor is liable to pay on the basis of that cheque. As far as civil liability of

the contractor/petitioner is concerned, it is not necessary to look into the same in present matter.

Suit was filed in the year 2006 and the arbitrator was also appointed in 2008, therefore, civilliability of the parties against each other can be looked into the said litigation or arbitration


25/37

proceedings. In the present matter, we have only to see whether the offence under Section 138 of

the Negotiable Instruments Act is made out or not. The learned Revisional Court did not address

to this question properly before rejecting revision application. 10 In view of the facts andcircumstances, I find that no case to issue process under Section 138 was made out and,

therefore, process issued by the trial Court is liable to be quashed. 11 For the aforesaid reasons,

petition is allowed. The order passed by the learned Metropolitan Magistrate to issue processunder Section 138 is hereby quashed. Rule made absolute accordingly.


26/37

Bounced cheques: SCoffers a new interpretation

ooo 2 comments

+ COMMENTVrinda Bagaria| 10/12/2012 12:49 PM |

The apex court has taken a strict view of cases where

cheques are dishonoured

In a recent judgement on cheque bounce issues, the Supreme

Court, while taking into consideration genuine cases, hassuggested to follow the principle of the Laxmi Dyechem Vs

State of Gujarat & Others, on a case to case basis as it is also

necessary to properly judge the intention of the accused to avoid

wrongful conviction.

Hopefully in near future, our legislature would incorporate theprinciples laid down by the judiciary into the statute by way of a

much needed amendment to Section 138 in The Negotiable

Instruments Act, 1881, to avoid any ambiguity as well as

consider the inclusion of electronic operation of the bank

accounts within the ambit of Section 138 of the Act.
http://www.moneylife.in/article/bounced-cheques-sc-offers-a-new-interpretation/30098.html#postcommenthttp://www.moneylife.in/article/bounced-cheques-sc-offers-a-new-interpretation/30098.html#postcommenthttp://www.moneylife.in/author/vrinda-bagaria.htmlhttp://www.moneylife.in/author/vrinda-bagaria.htmlhttp://www.moneylife.in/article/bounced-cheques-sc-offers-a-new-interpretation/30098.htmlhttp://www.moneylife.in/article/bounced-cheques-sc-offers-a-new-interpretation/30098.htmlhttp://www.moneylife.in/author/vrinda-bagaria.htmlhttp://www.moneylife.in/article/bounced-cheques-sc-offers-a-new-interpretation/30098.html#postcommenthttp://www.moneylife.in/article/bounced-cheques-sc-offers-a-new-interpretation/30098.htmlhttp://www.moneylife.in/article/bounced-cheques-sc-offers-a-new-interpretation/30098.html


27/37

I. Background

Chapter XVII of the Negotiable Instruments Act, 1881 (the Act),

was enacted to give effect to the legislative intent of the statutewhich it sought to achieve and to inculcate faith in the efficacy

of banking operations and maintaining the credibility of the

banking transactions. It seeks to prevent the misuse of the

provisions of the Act and therefore, necessitates that a wider

interpretation be imparted to it. However, over the years the

operation of Section 138 of the Act has not been adequate to

meet the needs of the society. The language of the Section itselfis unsatisfactory as it restricts the scope thereof as well as does

not make the bouncing of cheques and non-payment on notice, a

summary offence. The Section has not been utilized very

effectively and its administration has been very languid.

The Supreme Court, has assumed the role of a parliamentarianto ensure the effective compliance of law through a recent case

of M/s Laxmi Dyechem Vs State Of Gujarat & Ors (Laxmi

Dyechem), together with another recent ruling inMsr Leathers

Vs S Palaniappan and Anr(Msr Leathers), wherein it has

endeavoured to accord to the Section a broad scope to cover all

aspects for prevention of misuse of the provisions of the Act,

which may occur due to the restricted language of Section 138

of the Act. However, in the present era when there is an

increasing dependency on the electronic mode of payment in all

spheres of life, many milestones are yet to be achieved to ensure

the longevity of the statute. For instance, with the onset of

internet banking, phone/mobile banking, electronic transfers,
http://indiankanoon.org/doc/17256619/http://indiankanoon.org/doc/17256619/http://indiankanoon.org/doc/142060872/http://indiankanoon.org/doc/142060872/http://indiankanoon.org/doc/142060872/http://indiankanoon.org/doc/142060872/http://indiankanoon.org/doc/142060872/http://indiankanoon.org/doc/142060872/http://indiankanoon.org/doc/17256619/http://indiankanoon.org/doc/17256619/


28/37

etc, cheques are getting antiquated as a mode of payment.

Hence, requisite provisions regulating the electronic mode of

payment have to be incorporated. Despite the fact that an

electronic mode of payment does not constitute a negotiabletrade paper, this cannot be the reason for not giving it credibility

equivalent to that which the cheques warrant. Secondly, it is

inevitable that the courts should resort to effective and proficient

methods for the expeditious and speedy disposal of cases.

Presently, the number ofbacklog cases in the courtsacross the

country is estimated to be over an unreasonable amount of 3.5

crore, which poses a serious question on the reliability of the

courts and the same is a major concern which needs to adheredto as urgently as possible.

II. Scope of Sec 138 prior to the SC ruling in Laxmi

Dyechem

According to the limited scope assigned to Section 138 of the

Act, a dishonour of cheque would constitute an offence under

Section 138\142 only in the event of following two

contingencies:

i. Insufficiency of funds in the bank account of the drawer,

i.e. the amount promised to be honoured through the cheque

exceeds the amount standing to the credit of the drawers

account; or
http://articles.timesofindia.indiatimes.com/2012-07-05/kanpur/32550840_1_backlog-of-civil-cases-magisterial-courts-crore-caseshttp://articles.timesofindia.indiatimes.com/2012-07-05/kanpur/32550840_1_backlog-of-civil-cases-magisterial-courts-crore-caseshttp://articles.timesofindia.indiatimes.com/2012-07-05/kanpur/32550840_1_backlog-of-civil-cases-magisterial-courts-crore-caseshttp://articles.timesofindia.indiatimes.com/2012-07-05/kanpur/32550840_1_backlog-of-civil-cases-magisterial-courts-crore-cases


29/37

ii. The amount to be paid by the drawer through the cheque

exceeds the amount arranged to be paid from that account by an

agreement with the bank. It, therefore, essentially provides that

the bank cannot make payment from an account in excess ofwhat is agreed between the banker and the respective drawer.

Prior to the judgment of Laxmi Dyechem, the scope of the

Section was broadened by the Supreme Court to include within

its ambit, the following grounds, based on which an action can

lie under Section 138\142:a. Instructions by drawer to bank to stop payment after the

cheque have been issued 1;

b. Closing the bank account with the mala fide intention of

not honouring the liability/ debt2.

c. Dishonour of cheque even after notice to the payee to not

present the cheque3.

In the Modi Cements4 case , the apex court held with reference

to an instruction for stopping payment resulting in dishonour of

the cheque that if such acts are excluded from the scope of the

Section, it would nullify the effect of the enactment and further

amount to misuse of the section in the sense that the drawer of acheque unwilling to discharge his liability/debt, by giving

instructions to his bank to stop payment after issuing a cheque,

can escape the penal consequences of the Section

notwithstanding the fact that a deemed offence was committed


30/37

with a mala fide purpose. Additionally, in the case of Goalplast

(P) Ltd Vs Chico Ursula D Souza and Anr5 , it was held that

ordinarily the stop payment instruction is issued to the bank by

the account holder when there is no sufficient amount in theaccount.

In both the cases as above-mentioned, another question which

arose for determination was with respect to Section 139 of the

Act which raises a presumption that a cheque issued under

Section 138 of the Act shall be presumed to be so issued withthe purpose of discharging the debtors liability/debt. However,

it was observed in both the cases that such presumption may be

rebutted by adducing evidence for the same and the burden of

proof lies on the person wanting to rebut such presumption. The

presumption when coupled with the object that the Act seeks to

achieve, leads to the conclusion that by cancellation of the

payment of a post-dated cheque, a dishonest drawer should not

be allowed to escape from the consequences of the penalprovision of Section 138 of the Act.

In all the afore-mentioned instances, the court has taken into

consideration the situations and contingencies arising out of

deliberate acts of omission or commission on the part of the

drawer of the cheques which would inevitably result indishonour of the cheque issued by them. For instance, this court

has held that if after issue of the cheque the drawer closes the

account it must be presumed that the amount in the account was

nil and hence, insufficient to meet the demand of the cheque.


31/37

III. Overview of present ruling: Laxmi Dyechem case

A. Facts:

The present case is the consequence of an appeal directed

against the orders of the Gujarat High Court (HC) which has

quashed 40 different complaints filed by the appellants againstthe respondents under Section 138 of the Act. Reliance was

placed on the ruling of Vinod Tanna & Anr Vs Zaheed Siddiqui

& Ors6 , based on which the HC held that an action under

Section 138 of the Act can lie only if they fulfil any of the two

contingencies as stipulated therein (which have been set out

above) and the same being a penal provision, a strict

interpretation should be assigned to it so as not to include within

its scope the dishonour of cheque on grounds of mismatch ofsignature; incomplete signature, image not found and other

similar instances.

In the instant case, the appellant company is a proprietorship

firm engaged in the sale of chemicals and had an amount of

approximately Rs5 crore outstanding against the respondent-company. Certain post-dated cheques signed by the authorised

signatories of the company were issued to the appellants in

discharge of the debts as were remaining to be satisfied.

However, out of the 117 cheques issued to the appellants, some


32/37

were dishonoured with an endorsement stating mismatch of

signature to be the reason of such dishonour. On receiving such

endorsement, the appellant, in compliance with the statutory

provisions as provided under the section, sent a notice to therespondent company to issue fresh cheques in their favour. The

respondent company cited the change in the mandate to be the

reason of such dishonour and undertook to issue fresh cheques

on return of the dishonoured cheques and further on the

precondition of settlement of the account. Nevertheless, the

same remained unpaid by the respondent company thus

compelling the appellants to take recourse to legal action as a

last and final resort under Section 138\142 of the Act.

B. Principles

This division bench of the Supreme Court placed reliance on aplethora of judgements and succeeded in preserving the efficacy

of the provisions of the Act. Reiterating what had also been

observed in the NEPC Micon case7, it was held by the apex

court that the expression amount of money is insufficient

appearing in Section 138 of the Act is the genus of which all

other reasons of dishonour, for instance, account closed,

payment stopped and like are only the species. Similarly,

reasons such as signature mismatch, illegible signature,image not found are also species of the genus and hence liable

to action under Section 138 of the Act.


33/37

The Supreme Court, in the instant case, opined on the principles

that a change in the mandate of the authorised signatories, or a

deliberate mismatch in the signature may be caused with a

dishonest and fraudulent intention which would undoubtedlyresult in the dishonour of cheque signed by the previous

signatories or as the case may be. The apex court held that

irrespective of whatever may be the reason, if a certain act is

done or omitted to be done with a purpose of preventing the

honour of a cheque issued by the drawer, it will necessarily fall

within the scope of Section 138 of the Act.

The apex court also took into consideration situations where the

dishonour of cheque due to the above reasons may not be

intended by the drawer and is caused bona fide, for example, on

account of changes genuinely made in the mandate of the

authorised signatories or changes occurring in the ordinary

course of business of a company, partnership firm or an

individual. A prosecution can be initiated only after the pre-conditions in the proviso to the Section are exhausted. The

proviso makes it mandatory for the payee to issue a notice to the

drawer 15 days after receiving information of dishonour of

cheque from the bank giving sufficient opportunity to the drawer

to discharge his liability by issuing a fresh cheque within 15

days of receipt of such notice. Only on the failure to do so, can

an action be initiated under the said Section. Hence, theSupreme Court observed that sufficient protection is provided to

a bona fide drawer to honour his commitment and discharge his

liability before a prosecution can be initiated.


34/37

C. Judgement

In view of the observations made above, the apex courtdisregarded the contentions of the respondent company that the

section being a penal provision should be strictly construed and

that dishonour on ground of mismatch of signature does not fall

within the scope of Section 138 of the Act. It also did not accept

the contention of the signatories who contended that they should

not be held liable for the dishonour of cheques issued by the

respondent company as they ceased to form a part of the samepost their retirement.

Thus, in light of all the observations made in the course of

proceedings, the impugned order of the HC was set aside and the

appeal allowed. Further, the trial court was directed to proceed

with the complaints made by the complainants.

IV. Conclusion

In the wake of the increasing fraudulent and dishonest acts with

respect to issue of negotiable instruments, it is only imperativeand inevitable that a liberal construction be accorded to the

provisions of a statute which seeks to protect the society against

the wrongs suffered by it.


35/37

Giving effect to the intention of the Act and the provisions

therein, the wrongdoers should not be allowed to escape the

consequences by reason of adopting a strict interpretation to

such provisions under the garb that it is a penal provision. Thus,this step of the apex court, combined with its previous decisions,

go a long way to fulfil the objectives of the Act and is a

constructive measure to prevent the misuse of the provisions of

law which are enacted for the protection of the society rather

than to encourage the illegal acts and misdeeds of the offenders

of the society. It is also appreciable that the Supreme Court has

taken into consideration the genuine cases and suggested to

follow the principle of the Laxmi Dyechem on a case-to-casebasis as it is also necessary to properly judge the intention of the

accused to avoid wrongful conviction. Hopefully our legislature

in near future shall incorporate the principles laid down by the

judiciary into the statute by way of a much needed amendment

to Section 138 of the Act to avoid any ambiguity as well as

consider the inclusion of electronic operation of the bank

accounts within the ambit of Section 138 of the Act.


36/37

12 Important Circumstances under which a

Banker will be Justified or Bound toDishonor a Cheque

By Rehaan Bansal

Important circumstances under which a banker will be justified or bound to dishonor a chequeare listed below:

Circumstances

1. If a cheque is not dated [Griffth vs Delton (1940)].

2. If the banker gets notice about the insolvency or lunacy of customer.

3. If it contains material alteration, that is irregular signature or endorsement.

4. A banker is justified in refusing payment of a post dated cheque presented for payment before

its extensible date [Morley is Culverwell 7 M & W 174, 178].

5. If the instrument is incomplete and not free from reasonable doubt.

6. If notice in respect of closure of the account is served by either party on the other.

7. If it is state that is if it has not been presented within reasonable period.

8. If the customer has credit with one branch of a bank and he draws a cheque upon another

branch of the same bank in which either he has account or his account is overdrawn [Wood Landvs. Fear (1857)].

9. By notice of loss of cheque and a banker should not pay a cheque after receiving from theholder notice of its loss.

10. If the customer countermands the payment of cheque, the bankers duty ceases for payment.

11. If the authority of the banker to honour a cheque of his customer is determined by the noticeof the laters death. Any payment made prior to the receipt of the notice of death is valid.

12. If the garnishee or other legal order from the court attaching or otherwise dealing with themoney in the hand of the banker, is served on the banker.


37/37

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