Section 56 of Negotiable
Instruments Act: effect on cheque bouncing complaints
The requisites of complaints
under Section 138 of Negotiable Instruments Act 1881 (as amended and up to
date) have undergone substantive changes over the years, thus, need of being
aware of all such changes are very important. Though, the pre-requisites of
filing Section 138 of Negotiable Instruments Act are too well known to need
reiteration. In the present write up, however, the discussion shall remain
confined to section 56 and Section 15 of Negotiable Instruments Act and endorsement
and its effect on the complaints u/s Section 138 of Negotiable Instruments Act.
For instance:
(i)
what will be the effect of making part
payment in respect of cheque after the same is already drawn in favour of
drawer and till the date of presentation of cheque for encashment?
(ii)
Whether in such an event of part
payment, the amount shown in the cheque shall
not be payable and only part amount shall be payable on the date of
presentation ?
(iii)
If so, how the said situation could be
catered?
(iv)
What will be effect of presenting such
cheque and whether on the basis of dishonor of cheque, whether the complaint
u/s 138 of Negotiable Instruments Act shall be made out or not?
(v)
If such a complaint is not made out in
view of part payment as illustrated above, what are the way out?
(vi)
If endorsement/indorsement of part
payment is mandatory, how one may address the terms stipulated in Section 15
and Section 56 of Negotiable Instruments Act?
(vii)
Whether for non compliance of section
56 of the act, the complaint can be dismissed?
It may appear that the part
payment received after issuance of cheque but before presenting the cheque for
encashment has to be duly endorsed and even in statutory legal notice issued
thereafter, such facts shall have to be narrated and also in the complaint, the
said facts are to be narrated. Before proceeding further, Section 56 of the
Negotiable Instruments Act may be reproduced herein for ready reference:
56.
Indorsement for part of sum due.-
“No writing on a negotiable instrument is valid
for the purpose of negotiation if such writing purports to transfer only a part
of the amount appearing to be due on the instrument; but where such amount has
been partly paid a note to that effect may be indorsed on the instrument, which
may then be negotiated for the balance.”
Section 15 of the Negotiable instruments Act
relating to “indorsement” may also be referred to for correct import. It defines
the phrase ‘indorsement’ as follows:
“15. Indorsement.-
When
a maker or holder of a negotiable instrument signs the same, otherwise than as
such maker, for the purpose of negotiation, on the back or face thereof or on a
slip of paper annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as a negotiable instrument, he is said to indorse the
same, and is called the “indorse”.”
The Supreme Court,
recently, in a matter bearing Criminal Appeal No. 1497 of 2022 captioned as Dashrathbhai Trikambhai Patel Vs Hitesh
Mahendrabhai Patel has comprehensively dealt with the issue of
indorsement/endorsement and its effect on complaint u/s 138 of Negotiable
Instruments Act.
The
issue that emerged for deliberation before the Supreme Court are as under:
(i) The term ‘debt or other liability’ used in
Section 138 of the Act has been defined in the Explanation clause to mean a
‘legally enforceable debt or other liability’. Thus, whether the demand made in
the statutory notice must be for a sum that is legally enforceable;
(ii) If the debtor has paid a part of the debt, a
statutory notice seeking the payment of the entire sum in the cheque without
any endorsement under Section 56 of the part-payment made, would it not be legally sustainable; and
(iii) If the accused has paid off a part of the
debt, whether, a complainant is precluded from initiating action u/s 138 of Negotiable Instruments Act?
It may appear from
the aforesaid discussion that the instrument is not negotiable, if part payment
is made after issuance of cheque, but before presentation of cheque in bank for
encashment and not reflected or endorsed in cheque.
The Supreme Court in Dashrathbhai Trikambhai Patel (Supra) has held in para
12 of the judgment:
“12.
It must be noted that when a part-payment is made after the issuance of a post-dated
cheque, the legally enforceable debt at the time of encashment is less than the
sum represented in the cheque. A part-payment or a full payment may have been
made between the date when the debt has accrued to the date when the cheque is
sought to be encashed. Thus, it is crucial that we refer to the law laid down
by this Court on the issuance of post-dated cheques and cheques issued for the
purpose of security. In Indus Airways Private Limited v. Magnum
Aviation Private Limited (2014) 12 SCC 539, the issue before a two-Judge
Bench of this Court was whether dishonour of post-dated cheques which were
issued by the purchasers towards ‘advance payment’ would be covered by Section
138 of the Act if the purchase order was cancelled subsequently. It was held
that Section 138 would only be applicable, where there is a legally enforceable
debt subsisting on the date when the cheque is drawn. In Sampelly
Satyanarayana Rao v. Indian Renewable Energy Development Agency
Limited (2016) 10 SCC 458, the respondent advanced a loan
for setting up a power project and post-dated cheques were given for security.
The cheques were dishonoured and a complaint was instituted under Section 138.
Distinguishing Indus Airways (supra),
it was held that the test for the application of Section 138 is whether there
was a legally enforceable debt on the date mentioned in the cheque. It was held
that if the answer is in the affirmative, then the provisions of Section 138
would be attracted. In Sripati Singh v. State
of Jharkand 2021 SCC OnLine SC 1002, this Court observed that
if a cheque is issued as security and if the debt is not repaid in any other
form, before the due date or if there is no understanding or agreement between
the parties to defer the repayment, the cheque would mature for presentation”
Similarly, the Supreme Court in Sunil Todi v. State of Gujarat Criminal
Appeal No. 1446 of 2021 have expounded the meaning of the phrase ‘debt or other liability’. It was observed that the phrase takes within
its meaning a ‘sum of money promised to be paid on a future day by reason of a
present obligation’. The court observed that a post-dated cheque issued after
the debt was incurred would be covered within the meaning of ‘debt’. The court
held that Section 138 of Negotiable Instruments Act would also include cases,
where the debt is incurred after
the cheque is drawn but before it is presented
for encashment. In this context, it was observed:
“26. The object of
the NI Act is to enhance the acceptability of cheques and inculcate faith in
the efficiency of negotiable instruments for transaction of business. The purpose
of the provision would become otiose if the provision is interpreted to exclude
cases where debt is incurred after the drawing of the cheque but before its encashment.
In Indus Airways, advance payments were made but since the purchase agreement
was cancelled, there was no occasion of incurring any debt. The true purpose of
Section 138 would not be fulfilled, if ‘debt or other liability’ is interpreted
to include only a debt that exists as on the date of drawing of the cheque.
Moreover, Parliament has used the expression ‘debt or other liability’ The
expression “or other liability’ must have a meaning of its own, the legislature
having used two distinct phrases. The expression ‘or other liability’ has a content
which is broader than ‘a debt’ and cannot be equated with the latter. In the
present case, the cheque was issued in close proximity with the commencement of
power supply. The issuance of the cheque in the context of a commercial transaction
must be understood in the context of the business dealings. The issuance of the
cheque was followed close on its heels by the supply of power. To hold that the
cheque was not issued in the context of a liability which was being assumed by
the company to pay for the dues towards power supplied would be to produce an
outcome at odds with the business dealings. If the company were to fail to
provide a satisfactory LC and yet consume power, the cheques were capable of
being presented for the purpose of meeting the outstanding dues.”
HOW TO MAKE ENDORSEMENT
In para no. 29
of Dashrathbhai Trikambhai Patel (Supra)
the Supreme Court has narrated in detail as to how to make endorsement on the
cheque:
“29.
Under Section 56 read with Section 15 of the Act, an endorsement may be made by
recording the part-payment of the debt in the cheque or in a note appended to
the cheque. When such an endorsement is made, the instrument could still be
used to negotiate the balance amount. If the endorsed cheque when presented for
encashment of the balance amount is dishonoured, then the drawee can take
recourse to the provisions of Section 138. Thus, when a part- payment of the
debt is made after
the cheque was drawn but before the cheque is
encashed, such payment must be endorsed on the cheque under Section 56
of the Act. The cheque cannot be presented for encashment without recording the
part payment. If the unendorsed cheque is dishonoured on presentation, the
offence under Section 138 would not be attracted since the cheque does not
represent a legally enforceable debt at the time of encashment”.
HIGH COURTS
(i)
The
Division bench of Kerala High Court
has held in Joseph
Sartho vs Gopinathan (2008) 3 KLJ 784 that since the representation in the cheque was
for a sum higher than the amount that was due on the date that it was presented
for encashment, the drawer of the cheque cannot be convicted for the offence
under Section 138 of the Act.
(ii)
The Delhi
High Court in Alliance
Infrastructure Project Ltd. v. Vinay
Mittal ILR (2010) III Delhi
459. has observed that when part payment is made after the cheque is drawn, the payee has the option of either taking a new
cheque for the reduced amount or by making an endorsement on the cheque
acknowledging that a part payment was made according to the provisions of
Section 56 of the Act. It was also held that the notice of demand which
requires the drawer of the cheque to make payment of the whole amount
represented in the cheque despite receiving part repayment against the sum,
before the issue of notice, cannot be valid under Section 138(b) of the Act.
(iii)
A similar
view was taken by the High Court of Gujarat in Shree Corporation v. Anilbhai Puranbhai Bansal [2018 (2) GLH
The para no. 25 of Dashrathbhai Trikambhai Patel (Supra)
the Supreme Court has succinctly observed as under:
“25. Section 138
creates a deeming offence. The provisos prescribe stipulations to safeguard the
drawer of the cheque by providing them the opportunity of responding to the
notice and an opportunity to repay the cheque amount. The conditions stipulated
in the provisos need to be fulfilled in addition to the ingredients in the main
provision of Section 138. It has already been concluded above that the offence
under Section 138 arises only when a cheque that represents a part or whole of
the legally enforceable debt at the time of encashment is returned by the bank
unpaid. Since the cheque did not represent the legally enforceable debt at the
time of encashment, the offence under Section 138 is not made out”.
The Supreme Court has thus summarised the situation as under:
(i) For the commission of an offence under Section 138, the cheque
that is dishonoured must represent a legally enforceable debt on the date of
maturity or presentation;
(ii) If the drawer of the cheque pays a part or whole of the sum
between the period when the cheque is drawn and when it is encashed upon
maturity, then the legally enforceable debt on the date of maturity would not
be the sum represented on the cheque;
(iii) When a part or whole of the sum represented on the cheque is
paid by the drawer of the cheque, it must be endorsed on the cheque as
prescribed in Section 56 of the Act. The cheque endorsed with the payment made
may be used to negotiate the balance, if any. If the cheque that is endorsed is
dishonoured when it is sought to be encashed upon maturity, then the offence
under Section 138 will stand attracted;
(iv) If part-payments is made after the debt was incurred and before
the cheque was encashed upon maturity. The sum of rupees twenty lakhs
represented on the cheque was not the ‘legally enforceable debt’ on the date of
maturity. Thus, the accused cannot be deemed to have committed an offence under
Section 138 of the Act when the cheque was dishonoured for insufficient funds;
and
(v) The notice demanding the payment of the ‘said amount of money’ has
been interpreted by judgments of the Supreme Court to mean the cheque amount.
The conditions stipulated in the provisos to Section 138 need to be fulfilled
in addition to the ingredients in the substantive part of Section 138.
In Dashrathbhai Trikambhai Patel (Supra) it is thus found that the accused has
not committed an offence under Section 138 of the Negotiable Instruments Act,
since part payment made after the issuance of cheque and before presentation of
its encashment was not endorsed and factored and terms of section 56 of the Negotiable
Instruments Act was not complied with.
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Anil K Khaware
Founder & Senior Associate
Societylawandjustice.com
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