presentation on: section 138 of the negotiable instruments act 1881and the amendments of the act

PRESENTATIONON:

SECTION 138 of the Negotiable

Instruments Act 1881and the

Amendments of the Act

An Overview :

[Act No. 26 of Year 1881, dated 9-12-1881]

Negotiable Instruments

Act 1881Came into force on 1st March, 1882

the said act was enacted to define and to provide the law relating topromissory notes,bills of exchange

and cheques !

Promissory Note:

Section 4 of the Act defines: A Promissory Note is an

instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument.

Cheque:

Section 6 of the Act defines: A cheque is a bill of exchange

drawn on a specified banker and not expressed to be payable otherwise than on demand.

Or we can say a cheque is a bill of exchange which is payable on demand and which is drawn on a specified banker.

But the cheques have assumed great importance these days due to rapid industrialisation followed by the economic liberalisation or

because of the increasing participation in the international commercial activities. Increasing

use of the cheque called for strengthening the reliability of payment when made through

cheque so that cheques could be used with more credibility and

better reliance.

Two things were of great concern viz., such provisions were

required to be made that prove to be of deterrent effect to the others

and in case of dishonouring of cheque, the amount is paid to the

payee as early as possible together with interest and

compensation.

In other words, the emphasis was on the speedy justice, exemplary

and compensatory justice

From 1st April 1989(1988 Amendment)

If a person issues a cheque and it got dishonoured the person is said to

have done an offence.

Whatever be the reason for the dishonour weather for insufficiency of funds or whatever, the same does not matter.

1988 Amendment

towards achieving the goal on the speedy justice, exemplary and

compensatory justice new provisions with enlightened

jurisprudential foundation were engrafted and put on the statute

book in the year 1988 in the form of institution of

Chapter XVIIto the Negotiable Instruments Act,

1881

Chapter XVIIThe said chapter was incorporated for

penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque or whatsoever

(like stop payment etc.).

Object

These provisions were incorporated with a view to encourage the culture of use of

cheques and enhancing the credibility of the instrument.

The larger objective is to protect the

interest of honest people dealing in

cheques.

1988 Amendment

DRAWER BEWAREBecause, by the said

amendment the DISHONOURED CHEQUE is being TREATED as an

CRIMINAL OFFENCE

New sections in the Chapter XVII

Section 138:

this section defines the dishonour of cheque is an offence. The same also

defines the main ingredients which have to be fulfilled to

made it, an offence.

Basic Presumption of Section 138:

Dishonour of Cheque

is an Offence

Five basic ingredients of section 138 which shall have

to be fulfilled for creating an offence for dishonour of a cheque cheque should have been drawn by the drawer in payment of a

legal liability to discharge the existing debt. Cheque given by way of gift would not come under this provision.

The cheque should be presented within the validity period i.e. within six months or three months as the case may be. Common sense demands that the cheque should reach the drawer bank within the validity period.

Return memo by the drawer bank to the drawee bank and subsequently by the drawee bank to the drawee reporting that the cheque got unpaid is must. Reasons for dishonour is not material at this stage.

Giving notice to the drawer of the cheque by the drawee or the holder of the cheque in due course is must for making the said payment within fifteen days. The notice must be sent to drawer within 15 days (amended to 30 days by the 2002 amendment) of the receipt of the information from the drawee bank that the cheque got dishonoured.

The drawer of the cheque fails to make the payment of the said amount of money to the payee or to the holder in due course within 15 days of the receipt of the said notice.

Supreme Court also held in K. Bhaskaran Vs. Sankaran Vaidyan Balan:

It’s not necessary that all the five acts should have been perpetrated at the same locality. It is possible that each of those five acts could be done at five different areas.

In this context a reference to section 178 (d) of the Cr. P. C. is useful:

Where the offence consists of several acts done in different

local areas, it may be inquired into of tried by a

court having jurisdiction over any of such local areas.

New sections in the Chapter XVII

Section 140:

This section says that defence in the prosecution under section

138 shall not be available to the drawer if the ingredients of 138

are completed.

New sections in the Chapter XVIISection 141:

This section defines that if an offence done by any company, the person/s

shall be held liable who were in charge and responsible to the

company, for the conduct of the business of the company, at the time

the offence under section138 was committed.

1988 amendment

The object of the amendment was, “to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheques”.

Supreme Court examined:

The provisions of sections 138 and 141 of the Act and noted that mere dishonour of a cheque would not raise a cause of action unless the payee makes a demand in writing to the drawer of the cheque for the payment and drawer fails to make the payment of the said amount of money to the payee.

More Over From 06.02.2003(by the 2002 amendment)

The said offence will be punishable

with imprisonment

for a term up to 2 years or with

fine twice the amount of the

cheque or bothunder section 138 of the Act

2002 AmendmentAnother amendment came into force from 06.02.2003 as

Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002

Through the said amendment:Sections 6, 64, 81 and 89 have been

amended due to entrance of the electronic technology in the Negotiable Instruments.

Section 138(a) amended regarding the term of imprisonment increased to Two years from One year and through 138(b) the period of giving notice of demand to the drawer increased from fifteen days to thirty days.

2002 AmendmentSection 142(b) amended by the insertion of a proviso: “Provided that the 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.”

Note: Prior to this amendment there was no provision in the Act for the condonation of delay in preferring the complaint under section 138.

2002 Amendment

Moreover new sections from 143 to 147 have been inserted for the speedy disposal of the cases under section 138.

Note: The aforesaid sections were inserted to boost up the speed of the proceedings in courts in the cases under section 138 of the Act

New sections inserted through the 2002 amendment:Section 143:

This section provides the power to courts to try cases, under section 138, summarily and the trial of the case, as far as practicable, should

be continued from day to day until its conclusion and endeavour is to be

made to conclude the trial within six months.


This section provides that the evidence of a complainant may be given by him in an affidavit and that will be

read in evidence, and the court, if it thinks fit, shall on application of the

prosecution or the accused, summon and examine any person who is

giving evidence on affidavit.


This section provides the court shall presume the fact of dishonour of a cheque on

production of Bank’s slip or memo having thereon the official mark denoting that the cheque

has been dishonoured.


Every offence punishable under this Act shall be compoundable.

Which means that a compromise in the matters under section 138

can be made between the complainant and the accused at

any stage of the case.

Meaning of Compoundable in 138 N. I. Act: The case may be closed and the accused

may be discharged, by the magistrate but only on his sole discretion, if some settlement executed between the complainant and the accused and the complainant gave his statement before the magistrate that he want to close the matter and they (complainant and the accused) have settled upon a certain conditions and now the complainant has no more grievance against the accused.

Compounding can be done at any stage of the case whether it is before the original magistrate or before any appellate authority.

Some frequently asked queries on the chapter of section 138 of the act:

What is Pay order and Holder in Due Course? Supreme court held in the matter of Punjab and Sindh

Bank Vs Vinkar Sahakari Bank Ltd. and ors. (AIR 2001 SC 3641, 2001 AIR SCW 3709)

Pay order is also a negotiable Instrument. 21. Section 142 of the Act envisages a complaint to be

made in writing "either by the payee or the holder in due course of the cheque, as the case may be". Section 8 of the Act defines "holder" as any person entitled in his own name to the possession of the cheque and to receive or recover the amount due thereon from the parties thereto. We have no doubt that complainant-bank was well within its right to possess the cheque and to receive or recover the amount covered by the instrument. "Holder in due course" means a person who for consideration became the possessor of a cheque if payable to bearer before the amount became payable. (vide S. 9).

22. In this context reference has to be made to S. 118(g) of the Act which contains a mandate that until the contrary is proved the holder of a negotiable instrument shall be presumed to be a holder in due course.


Where does the Nominee Director Stand?

Supreme Court observed in Punjab National Bank Vs. Surendra Prasad Sinha (AIR 1992 SC 1815)

The answer is that a nominee director enjoys full immunity under the newly enacted provisions of the Negotiable instruments Act.

Basically a Nominee Director is a person appointed in a company for observation by some other company (mainly financial or governmental) whose interest involve in the business of the said company

A nominee director whose position is purely non-executive in the board of a company fully protected against prosecution and harassment under section 141.

The vicarious liability of a person for being prosecuted for an offence committed by a company arises if at the material time he was in charge of and responsible to the company for the conduct of its business.


Weather a Non-Bailable Warrant Can be issued for the offence under section 138?

Madras High Court Observed: Personal liberty of a person is protected

under Article 21 of the Constitution Of India. Therefore a Non-Bailable warrant shall not be issued under section 138 cases unless it is absolutely necessary.

Considering that section 138 is a matter of dispute between two individuals relating to civil liabilities and the magistrate shall always use his discretion in favour of the accused and issue only a Bailable Warant.

The offence is Bailable.


Can second notice of demand from drawer gave a new cause to the drawee?

The answer is NO. the drawee, of a cheque that is

dishonoured, has only one life i.e. only one cause for action that he has to use within the prescribed time and file the case. Else, this will become a technical defence that the court will have to uphold.

It’s a technical defence for the accused.


Post-Dated Cheque (PDC) is a Valid Instrument?

The answer is Yes. Supreme Court in Ashok Yashwant

Badve Vs Surendra Madhavrao Nighojkar and anr. (AIR 2001 SC 1315) has resolved the issue.

A PDC is a cheque that bears a date that is after the date when the cheque is made out, signed and delivered and is given to the creditor well in advance so that he can present it on such due date.


Shall Section 138 apply in case of a Disnonoured Cheque drawn without any liability to pay?

Cheque should have been drawn by the drawer in payment of a legal liability to discharge the existing debt.

Supreme Court in C. Anthony Vs K. Raghavan Nair (2002 SOL Case No.550 supremecourtonline.com) has resolved the issue.

It is necessary for the drawee/ complainant to prove before the court that the cheque was received by him in the discharge of some liability.

If complainant could not prove that the cheque was in the discharge of some liability, the complaint will be dismissed and the accused will be acquitted.


Who can take cognizance of the offence under section 138?

As per the Section 142 (c) of the Act. No court inferior to a Metropolitan

Magistrate or a Judicial Magistrate can try the offence.

Supreme Court Case:K. Bhaskaran

VsSankaran Vaidyan Balan

A case between two brothers for the offence under section138:

In this case the court held that the

burden is on the accused to rebut the presumption of

section 139 that holder of a cheque received it for

discharge of any debt or liability.

Section 29(2) of Cr. P. C.:Fine can not be more than

Rs.5,000/-

In the previous case the Supreme Court also held that the appellate court shall not inflict greater punishment for the offence which in its opinion the accused has committed, then might have been inflicted for that offence by the court passing the order or sentence under appeal.

In this context a reference to section 29(2) of the Cr. P. C. is necessary as it contains a limitation for the magistrate of first class in the matter of imposing fine as a sentence or as a part of the sentence.

Goaplast V/s Shri Chico Ursula D’ Souza

Stop Payment Instructions will not take a

case out of the purview of Section 138, it has elaborated on the reasons why this should

be so. More importantly, it would follow from the judgments

affirming this position that the court will give great credence to the presumption that cheques

have been issued in discharge of a debt or liability and will not accept any argument to the

contrary.

presentation on: section 138 of the negotiable instruments act 1881and the amendments of the act

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