LAWS RELATED TO BOUNCING OF CHEQUES: AS IT EVOLVED

 

LAWs RELATED TO BOUNCING OF CHEQUES: As it evolved

Requisites of filing complaint u/s 138 of Negotiable Instruments Act

Anil K Khaware

Advocate

The increased pace of commercial transactions over the years has placed transaction by cheques in pivotal place, as regards mode of payment, being bill of exchange as per section 5 of Negotiable Instruments Act 1881 as amended and up to date. The mode of payment in recent years, though,  have undergone changes in big way like RTGS/NEFT transactions and other mode of instant payment through Amazon, Google, Paytm etc. However, instant payment has multiple options. The cheques are not encashed instantly, in as much as the same shall have to be formally presented in the banker of the drawer and the payment advice is to be sent for by the banker of payee and the same has to be encashed by the banker of the drawer/payer. No doubt, even this aspect has also underwent a sea change, in as much as, the cheques as an instruments are payable at par in the same bank across the nation, thereby saving time. However, the cheques are integral part of commercial transaction, as ready money may not be available and cheques are handed over to payee with a view to comfort them to have bill of exchange, with the payee and it is generally assured by the payer that the same shall be encashed on presentation. Still further, the debtor hands over the cheque to the creditor and put a later date on it or request the payment of the cheque on some later date. These are nuances of commercial transactions and practice of payment by cheques are therefore, in vogue.

However, it has several pitfalls. The courts are flooded with cases of dishonoured cheques, since, the cheques are often handed over, when no sufficient amounts are found in the account of payer. Some time accounts are closed and even signature on the cheques may be found different and does not tally with the specimen signature of payers and the cheques are dishonoured due to these reasons. Quite often, the change of signature and closing the account is also with a view to block the payment. Yet another aspect is “stop payment advice” tendered to bank for flimsy reason and buy time.  The section 138 of Negotiable Instruments Act 1881 is brought in statute book in 1988 with a view to infuse confidence in commercial transaction, and should the cheques stands dishonoured , the punitive measures could be unveiled in terms of the provisions u/s 138 of Negotiable Instruments Act( In short “NI Act”) . The sections 139-142 of the Act shall also be relevant as the discussion is unveiled further.

PRESCRIPTION OF SECTION 138

Before adverting to details, it may be apt to reproduce the contents of Section 138 of Negotiable Instruments Act 1881, which was made part of the Act vide Amendment Act of 1988 insertion as Chapter XVII w.e.f  01.04.1989, thereby bouncing of cheques was made a penal provision entailing punishment.

138: Dishonour of cheques for insufficiency etc of funds in the accounts:  Where any cheque drawn by a person on a 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 the bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions 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 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 **(6) months from the date on which it is drawn or within the period of its validity whichever is earlier.

(b) The payee or holder in due course of the case, 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.

*The terms of imprisonment was enhanced from 1 to 2 years vide Amendment act of 2002.

** The period of six month reduced to Three month vide RBI Notification No. RBI/2011-12/251,DBDO AML BC No. 47/14.01.001/2011-12, w.e.f  01.04.2012

***Substituted for “within fifteen days” by Amendment act 2002 w.e.f 06.02.2003.

The bare perusal of the aforesaid provisions shall highlight the stipulations of the Section and prescription of penal provision. The bouncing of a cheque is reckoned as “Dishonour of a cheque” which is the cheque returned by the bank without encashment in view of “insufficiency of funds” “exceeds arrangement” or such other reasons. The “Bank Memo” issued by the bank narrates the reason of dishonor. The section 138 of the Negotiable Instruments Act, 1881 stipulates that if a drawer of the cheque is held guilty of the offence under the section, he/she if liable to 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. Of course, the cheating complaint u/s 420 of Indian Penal Code by way of police complaint converting it to F.I.R or before a Magistrate a case of cheating u/s 420 of IPC as a summoning case could also be filed.

To set the discussion in perspective, the present write up is confined only as regards the pre-requisites of maintaining the complaint under section 138 of NI Act i.e till the time a proper complaint is prepared for filing. The ingredients of a complaint under section 138 of Negotiable Instruments Act is clearly inbuilt in the provision as narrated above, still, the same shall be delineated further to amplify the horizon, besides, the steps or stipulations including the modalities that the complaint need to conform to, at the time of filing it before the court of Chief Metropolitan Magistrate (In Metropolitan Cities) or before Chief Judicial Magistrate (In other Cities/Towns) as the case may be.      

The complaint should be the creditor, service provider, seller or claimant of such other description and in lieu of services or sale of products or services provided, as the case may be and should have in his possession the originals of dishonoured cheque with original bank memo testifying the reasons of return of the cheque. The cheque/s handed over to such creditor, on presentation to the banker of the payee/credit, if stands dishonoured for any reason whatsoever, the cause is available to the payee for suing the payer. However, it may be noted that dishonor of the cheque is one constituent of a composite cause of action and not a complete cause of action in itself. The ingredients of Section 138 of the Negotiable Instruments  (NI) Act has been analysed by the Hon’ble Supreme Court  in Kusum Ingots & Alloys Ltd Vs Pennar Peterson Securities Ltd , (2000) 2 SCC 745 : 2000 SCC (Cri) 546 : AIR 2000 SC 954]. The following ingredients are required to be satisfied for making out a case under Section 138 of the NI Act:

"(i) a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account for the discharge of any debt or other liability;

(ii) that 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;

(iii) that cheque is returned by the bank unpaid, either because the amount of money standing to the credit of the 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 the bank;

(iv) the payee or the holder in due course of the cheque 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 15 days ( Now 30 days after amendment in the NI Act) of the receipt of information by him from the bank regarding the return of the cheque as unpaid;

(v) the drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice."

What is further more important is that the cheque/s issued should be in lieu of consideration. That the presumption of liability is otherwise in built u/s 139 of Negotiable Instruments Act.

*The validity period of cheque is now Three (3) months.

STOP PAYMENT ADVICE IS NO DEFENCE

The return of cheque due to “insufficient funds” or “exceeds arrangement” attracts the punitive measures under section 138 of Negotiable Instruments Act. However, even if the “stop payment” advice is the reason for dishonor of cheque or “signature differ” or such other reasons, then too, by operation of law and judicial precedents the complaint u/s 138 of Negotiable Instruments act shall be maintainable.

In Moodi Cements Vs Kuchil Kumar Nandi, AIR 1998 SC 1057 the hon’ble Supreme Court in a landmark judgment on the law relating to “Stoppage of payment under the Negotiable Instruments Act. 1881 has laid down that once a cheque is issued by drawer, a presumption under Section 139 of Negotiable Instruments Act, in favour of holder must follow and merely because the drawer issues notice to drawee or to Bank for stoppage of payment, it will not preclude action for dishonour of cheque under Section 138, Negotiable Instruments Act, by drawee or holder of cheque in due course.

It may be noted that whereas criminal action u/s 138 of Negotiable Instruments act could be set in motion upon dishonour of cheques and at the same time the civil rights to sue also arises in favour of the payee and as such both civil and criminal; case can go together.

 

Blank signed cheque in its effect

The cheques duly signed if handed over presumes liability. The defence that the cheques was handed over, but not for liability and the amount is allegedly filled in by the payee, shall not come to aid the prospective accused. If the signed cheque is handed over to the payee, the presumption shall be inbuilt. Similarly, the signature was different, though account had sufficient funds shall be no defence. Even closure of account shall not rescue the payer.   

SECTION 140-142 of Negotiable Instruments Act

Section 140 entails that when cheque is handed over to the payee, the payer cannot raise a plea that the drawer had no reason to believe that the cheque/s may be dishonoured on presentation.

Section 141 provides that in case the drawer of the cheque is a company, then by operation of law every person in charge of the company at the time of committing offence shall be responsible 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. It is a settled proposition of law that the company is a separate juristic entity and can sue or be sued through a natural person.  Only, if any person or in-charge is able to prove that the offence was committed without his knowledge and that he had exercised all due diligence to prevent the commission of offence, that he may have defence and that too while adducing evidence and not before.

The nominee Director of Government who is nominated as Director by virtue of his employment in Government, central or state or that of a Financial Corporation  shall not be liable.

The fall out of the section clearly relates to the fact that under section 141 (2) of the NI Act, all such persons, if it is proved that the offence is committed by the company with the consent or connivance or attributable to or any neglect on the part of any Director, Manager, Secretary or other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. 

Section 142 of NI Act stipulates that the courts shall take cognizance of offence , only, if a complaint is made in writing made by payee, or as the case may be, holder in due course and such complaint is lodged within Thirty (30) days from the date of cause of action which arises u/s 138( c) of the proviso to NI Act and that only Metropolitan Magistrate or judicial Magistrate of First Class shall be competent to take cognizance on the complaint. 

**** As per Section 141(2) the complaint u/s 138 of NI Act shall be inquired 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 the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

**** Inserted by Negotiable Instruments ( Amendment ) Act 2015 w.e.f 15.06.2015. The amendment was necessary in view of Dasrath Singh Roop Singh Rathod judgment (Supra) of Supreme Court as nnarrated below.

The import of the above discussion is that if the proposed accused/payer is a company, then apart from arraying company as an accused, the Managing Director and full time Directors, Manager and Secretary or such other responsible persons, who may be in charge of every day affairs of the company and the offence is committed within their knowledge and in connivance may be arrayed as party. The statutory legal notice u/s 138 of NI act therefore should be sent to all in the above cont4ext and in the complaint filed, before the court of Metropolitan Magistrate or Judicial Magistrate, First Class, as the case may be all such persons should be arrayed as accused.  

SECTION 118 & 139 OF NEGOTIABLE INSTRUMENTS ACT

               PRESUMPTION OF LIABILITY

Section 5 of Negotiable Instruments act defines “Bill of Exchange” “as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument”

That section 118 & 139 of the N.I. Act has clearly spelt out a presumption as to the existence of a debt or liability in favour of the holder of a cheque. Presumption in favour of holder It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability. Similarly, Section 118 (a), N.I. Act provides as follows:

 

Presumptions as to Negotiable Instruments. — Until the contrary is proved, the following presumption shall be made:— (a) of consideration —that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration;

Yet again, section 139 contains the following:

“139: Presumption in fvaour of holder: It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part of any debt or liability”.

In the case of M.M.T.C. Ltd. & Anr. v Medchl Chemicals and Pharma (P) Ltd. & Anr. reported in (2002) 1 SCC 234, the Supreme Court has already held that there is no requirement under the law that the complainant must specifically allege in the complaint that there was a subsisting liability. The burden of proving that there was no existing debt or liability is on the accused and that may only be during trial. The presumption that the cheque or cheques were handed over for the legally recoverable debt is presumed in the initial stage.

STATUTARY LEGAL NOTICE OR DEMAND NOTICE

The statutary demand notice should be sent to the payer after dishonor of cheque and within 30 days of receipt of Bank Memo. The demand notice should contain the amount of bounced cheques only and clear demand of the “dishonoured cheque” or cheques amount should be made while specifying that should the payee fails to pay the amount within fifteen (15) days the payee shall be liable to be prosecuted under section 138 of Negotiable Instruments Act. The cause of action shall arise upon expiry of fifteen (15) days from the date of receipt of demand/statutary legal notice.  The cause of action arise at the stage of expiry of Fifteen(15)  days and even then if the payee fails to pay the amount as per the legal notice, the criminal complaint can be instituted against him within Thirty (30) days from the date of cause of action in the appropriate courts of jurisdiction i.e Courts of Metropolitan Magjstrate or Judicial Magistrate as the case may be i.e whether the case is filed in Metropolitan cities or other Cities or Towns. 

The legal notice should be sent in writing in the correct address of payee vide registered or speed post preferably, apart from any other mode. The notice if sent on correct address, there shall be sufficient presumption of deemed service of notice.

In a matter captioned as AMIT KUMAR MISHRA v/s THE STATE (GOVT OF NCT OF DELHI & ANR) bearing no. Crl M.C 1189/2018 decided on 30.01.2020, The hon’ble Delhi High Court had quashed criminal complaint against the accused under Section 138 of Negotiable Instruments Act, 1881 on founding that Legal Notice of demand was served beyond 30 days by the complainant. 

The aforesaid judgment was passed after taking note of pronouncement of hon’ble Supreme Court in matters captioned as Kamlesh Kumar Vs State of Bihar & Anr (2014) 2 SCC 424, and Dheeraj jain Vs State & Anr 2012 SCC OnLine Del 1687

                                     SERVICE OF NOTICE

The service of notice i.e statutary demand notice shall be presumed on the payer, if sent through post or such other means on correct address with due postage paid. In this context some of the precedents may also be noted, which is narrated as under: 

(i)     That it has been reaffirmed by the Hon’ble Supreme Court in the case of C.C. Alavi Haji Vs. Palapetty Muhammed & Anr. (2007) 6 SCC 555, wherein the Court opined that Section 27 of General Clauses Act, 1897 gives rise to a presumption that service of notice has been effected when it is sent to the correct address by registered post …….unless and until the contrary is proved by the addressee, serviced of notice is deemed to have been effected at the time at which the letter would have been delivered in the ordinary court of business.

 

(ii)   That In the case of Gujarat Electricity Board & Anr. v. Atmaram Sungomal Poshani AIR 1989 SC 1433,  the Supreme Court examined the issue regarding the presumption of service of letter sent by registered post under Section 27  of General Clauses Act, and held that there is a presumption of service of a letter sent under registered cover…. No doubt the presumption is rebuttable and it is open to the party concerned to place evidence before the court to rebut the presumption by showing that the address mentioned on the cover was incorrect or that the postal authorities never tendered the registered letter to him…..The burden to rebut the presumption lies on the party challenging the factum of service. 

(iii)   Similarly, in the case of Parimal v. Veena @Bharti, CIVIL APPEAL NO.1467 OF 2011 (Arising out of S.L.P.(C) NO. 19632 of 2007) the Supreme Court held that in view of Section 114 (f) read with Section 27 of General Clauses Act, here is a presumption that the addressee has received the letter sent by registered post. 

 

The provision of Section 101 of Evidence Act provide that the burden of proof of the facts rests on the party who substantially asserts it and not on the party who denies it. The law under Section 103 of the Act, further amplifies the general rule of Section 101 that the burden of proof lies on the person who asserts the affirmative of the facts in issue.

 

Liability of Directors/ managing Director

If accused is a company, then the Managing Director and whole time Director/s apart from the company is to be arrayed as a party as per the trap of section 141 of NI Act and averments has to be made in the complaint, as regards their roles in dishonor of cheque and details as to why are they liable.  Merely, because someone is a Director of accused company, on that premise alone complaint case against such Director is not likely to sustain. To make a Director liable his clear role in dishonor of cheque and pervasive involvement in day to day affairs in the accused company is to be clearly averred in the complaint. Unless, averments of his actually being involved in everyday affair is averred in the complaint such Directors cannot be prosecuted u/s 138 of NI Act.( Ref: SMS Pharmaceuticals Ltd Vs Neeta Bhalla & Anr 123 (2005)DLT 275 SC-Para 7 )

Jayalakshmi Nataraj v. Jeena & Co. (1996) 86 Comp Case 265

The Managing Director of a Company accused under Section 138 of NI Act was held guilty notwithstanding her plea that she did not participate in the day-to-day administration of the company and was not aware of it’s affairs.

Geekay Exim (India) Ltd. v. State of Gujarat (1998) 94 Comp Cas 516

Mens rea not open to presumption- event though mens rea is not an essential condition specified in Section 138, such element may be presumed to have existed only on the basis of facts and circumstances of each case.

On Territorial Jurisdiction & CAUSE OF ACTION

(i)          The hon’ble Supreme Court in K. Bhaskaran Vs Sankaran Vaidhyan Balan (1999) 7 SCC 510 had interpreted Section 138 of the NI Act to indicate that:

“the offence under Section 138 can be completed only with the concatenation of a number of acts. Following are the acts which are components of the said offence: (1) Drawing of the cheque, (2) Presentation of the cheque to the bank, (3) Returning the cheque unpaid by the drawee bank, (4) Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount, (5) Failure of the drawer to make payment within 15 days of the receipt of the notice.”

The provisions of Section 177 to 179 of the Code of Criminal Procedure, 1973 (for short, ‘CrPC’) have also been dealt with in detail. Furthermore, Bhaskaran in terms draws a distinction between ‘giving of notice’ and ‘receiving of notice’. This is for the reason that clause (b) of proviso to Section 138 of the NI Act postulates a demand being made by the payee or the holder in due course of the dishonoured cheque by giving a notice in writing to the drawer thereof. While doing so, the question of the receipt of the notice has also been cogitated upon

(ii)        Harman Electronics Pvt Ltd vs National Panasonic India Ltd 156(2009)DLT 160 SC-If only legal notice is issued from Delhi then Delhi court shall have no jurisdiction. To attract jurisdiction it has to be more than the act of sending legal notice from a particular place.

(iii)       That the complaint u/s 138 Negotiable Instruments Act are based on distinct cause of action and the complaint relates to offence. The cause of complaint should be bundle of cause of action and conjoint- the dishonor of cheque being the first part of it, receipt of bank memo with the intimation of reasons of dishonor of cheque is another, yet another is sending and serving legal notice to payer within 30 days of receiving cause of action and still thereafter if after expiry of Fifteen (15) days of receipt of demand notice the payment is not made, then cause of action arises and thereafter within 30 days of such cause of action the complaint could be instituted in a court of Metropolitan magistrate or Judicial Magistrate’s court, as the case may be.

 

(iv)    In the case of Dashrath Roopsingh Rathod Vs State of Maharashtra & Anr, reported   in   MANU   /SC/   0655/  2014 the Supreme Court had changed the basic criteria and had laid down that the complaint could only be instituted by a complainant in a place where bank of the accused is situated and where the accused in ordinary course had maintained his account. This was contrary to earlier provisions. However, the said judgment of Supreme Court did no remain in force for long and the Negotiable Instruments act was amended subsequently to restore the earlier position.

 

REMARK

The law relating to Negotiable Instruments Act, 1881, more particularly 138 of NI Act 1881 has evolved over the years, after its inclusion in the Act vide the amendment in 1988. The NI Act has periodically been amended in the face of several bumpy rides and the section has charted its course in the journey. The Dasrath Singh Roop Singh Rathod (Supra) judgment, at one stage, had changed the criteria completely and tremendous hardship was felt by the complainants all over the country. This was so, as it was held by hon’ble Supreme Court in the said judgment that the complaint could only be lodged against the accused (payer) , in a place, where the accused (payee) in ordinary course maintained his bank account. The judgment had caused chaos in as much as Crores of cases, even ongoing cases were transferred to the location of accused, rendering prosecution of complainants extremely difficult. In a country as vast as India, thus, many complaints could not be prosecuted, due to a virtual roadblock caused due to distance. This, in a sense, turned out to according premium, to the delinquent. The very concept of cause of action was relegated and new vista was charted as per that judgment. What was also unfathomable, as to, in a fast moving world, where the sums under the cheques are paid at par all over the country and even otherwise, electronic mode of payment and transactions are culminated by click of mouse or touch of finger, then, why the hon’ble Supreme Court had accorded so much sanctity to the location of banker of the accused (payee) and had stipulated that compliant could be filed in the location of accused only. Earlier, the cause of action was to arise at the location of complainant upon the stage of dishonor of cheque itself. The communication of dishonor that the complainant was of paramount importance and that only culminated of cause of action. However, it was undone, as stated. In the face of the imbroglio and perennial hardship caused to the complainants, the section 142 of Negotiable Instruments Act was amended by virtue of Negotiable Instruments (Amendment) Act 2015 The situation as existed, i.e before the recitation of Dasrath Singh Roop Singh (Supra) judgment is thus restored, to the solace of many.

The provision of section 138 also have undergone periodical changes and as per the recent amendment in the Act in the year 2018, section 143 A was inserted enjoining the accused upon causing appearance in court to pay in the court 20% of the amount of cheque as interim payment, subject to outcome of the complaint. However, the provision in practice could hardly be invoked, in view of judgments to the contrary by courts of law. However, upon conviction of accused, if any, appeal is preferred, then 20% of the awarded amount is liable to be paid in court as interim payment, over and above of payment, if any made u/s 143 A of the Act, subject to the outcome of appeal. The said provision is included as section 148 of NI Act, vide Amendment act 2018. The law as regards bouncing of cheques, has evolved in last several decades and roadblocks if and when felt, are sought to be negated, periodically. The changes are the dynamic process and therefore, no changes could be perceived as final. It could be said that Section 138 of the Act has all the trap of civil proceeding, still, elements of criminal proceedings are conspicuous as well. The provision was incorporated with a view to infuse confidence in transaction by way of cheque and hence the element of criminality was crafted into it, to achieve the object and to dissuade the truant drawer from causing manipulation or mischief.

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