Legal proceeding under section 138 of the Negotiable Instruments Act, 1881

Legal proceeding under section 138 of the Negotiable Instruments Act, 1881

Md. Abdur Razzak

Introduction:

 In this age of globalization and commercialization, the transfer and settlement of payment has been made more flexible to facilitate and boost up the business dealings and transactions. To this context cheque is considered to be the most recognized and convenient instrument which can be issued more quickly to settle payments and obligations in a contract more. The cheque is currently the most visible and significant mode of payment all over the world. Cheques are the creation of ancient business people or western business world. Advent of cheques in the market have given a new dimension to the commercial and corporate world, its time when people preferred to carry and execute a small piece of paper called cheque than carrying the currency worth the value of cheque. Dealings in cheque are vital and important not only fro banking proposes but also for the commerce and industry and the economy of the country. But pursuant to the rise in dealings with cheques also rises the practice the practice of giving cheques without any intention.

Prior to 1988 there was no fruitful legal provision to restrain people from issuing cheque without having adequate amount in their account or any stringent  provision to punish them in the vent of such cheque not being honored by their bankers and returned unpaid. In case of dishonor of cheque, there is definitely a a civil liability accrued. However in practice the procedure of seeking civil justice becomes a long drawn process and recovery by way of civil suit takes an inordinately long time. To ensure prompt remedy against defaulters and to ensure credibility to the holders of the negotiable instruments a criminal remedy of penalty was inserted in Negotiable Instruments Act. Section 138 is incorporated In Negotiable Instruments Act, 1881 in order to encourage the culture of use of cheques and enhancing the credibility of the instrument. Many issues under this section such as what happens in case of default, who will be liable to the holder of the cheque, what are the procedures involved to make the case adept in the eyes of the court.  The NI Act contains sufficient safe guards to protect the drawer of cheques by giving him an opportunity to make good the payment of dishonored cheque when a demand is made by the payee.

History of the Act and objective of amendment:

 The Negotiable Instrument Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amednment)  Act, 1988 to insert a new chapter XVII with sections 138-142. These new sections came into force in 1989.The Act

was further amended in 2002 by inserting sections 143 to 147  w.e.f. 06.02.2003 to deal with certain deficiencies noticed in the Act. Salient features of amendment are acceptance of Bankers memo  of dishonor as prima facie evidence, evidence of witness or accused on affidavit, serving of summons by post/courier for speedy trial/ prosecution, increase of period for issuance of notice by payee and enhancement of punishment.

Nature of liability under section 138:

The object of bringing in this section as mentioned above is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instrument. The ingredients which are to be satisfied for making out a case under S.138 of the Act are:

1. The cheque is drawn on a bank for the discharge of any legally enforceable debt or other liability. This means that the cheque must have been drawn for payment of money to a person other than the drawer for the full or partial discharge [8] of any legally enforceable debt or liability. Thus what we see here is that if a cheque was given merely as a security, then a suit cannot be filed upon that and S.138 will not be attracted. Also to bring it under the ambit of this section, a cheque should have presumably been issued and not merely drawn for payment in discharge of a debt.

1. The cheque so dishonored must have been presented to the drawee/ 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.[9]

1. The cheque is returned by the bank unpaid.

1. The cheque is returned unpaid because the amount available in the drawer’s account is insufficient for paying the cheque.

1. The payee has given a notice to the drawer claiming the amount within 15 days of the receipt of the information from the bank.[10]

1. The drawer has failed to pay within 15 days from the date of the receipt of notice.

1. The offence under this section is not complete till a statutory opportunity is offered to the drawer of the cheque for making the default good within 15 days of the receipt of notice to that effect. It is only the failure of the drawer to avail of this opportunity and meet the demand for the amount of the cheque that becomes the cause of action under the S.138. This position was laid down inMahalakshmi Enterprises v. Sri Vishnu Trading Co,[11] and has been deemed to be one of the essential ingredients of this section.

1. The payee has a limitation period of 30 days, within which he can file a complaint.

 

 

 

Procedure and Practice: 

The offence under S.138 is a non-cognizable offence by virtue of S.142 of the Act on account of the non-obstante clause as comprised in section 142 of the Act, the magistrate must proceed immediately on complaint. For a complaint however, first a statutory notice must be sent to the drawer and if the drawer does not reply accordingly within 15 days, it opens itself for prosecution.

Notice:

A notice is one of the essential characteristic of S.138. The period for cause of action is to be counted from the date of receipt of notice by the accused. Notice has to be sent to the drawer within 30 days of the receipt of information from the bank about the dishonor.[44] As regards liability of dishonor of cheques it is essential to prima facie show that after 15 days of receipt of notice, the accused failed to pay the amount. In the case of Padmini Polymers Ltd v. Unit Trust of India,[45] it has been held that a notice is must and mandatory. Unless and until the intention is clear on the part of the part of the person giving notice that the payment by the drawer of the cheque should be made within 15 days of receipt thereof, any communication between the parties insisting for making the payment cannot be termed as notice under S.138 of the Act. Otherwise the purpose of presenting the cheque time and again during the period of validity would have no meaning. So far as the question of giving notice is concerned, it is stated that every person who becomes liable upon an action for dishonor of the instrument and only by such dishonor either the holder thereof or some party thereto who remains liable thereon may give notice to such parties as entitled to immediate notice. But the holder may give notice to such parties as he desires to charge; but he cannot by giving notice make a person liable who is not otherwise liable under law, e.g., drawee in the case of dishonor of cheques.[46]

Serving the notice:

An important question that arises here is that when is a notice deemed to be served and upon who is the burden of proving service?

The problem that arises is that the section does not only say delivery of notice, but ‘receipt of the notice’, such wordings in the section can be put to numerous interpretations. The question is if ‘receipt of notice, postulates actually delivery, then the drawer can easily preempt action against him by deliberately staying away from his premises and the likes. It would be inequitable that such a person be let off the hook,

while another drawer who stays on and accepts the notice would subject himself to prosecution.

In the case of V.Raja Kumari v. P.Subbarama Naidu and Anr[47] the question that came up was what is meant by a proper notice and if there is no proper would the complaint be quashed. “In Clause (c) of the proviso the drawer of the cheque is given fifteen days from the date of receipt of said notice for making payment. This affords clear indication that ‘giving notice’ in the context is not the same as receipt of notice. Giving is the process of which receipt is the accomplishment. The payee has to perform the former process by sending the notice to the drawer in his correct address, if receipt or even tender of notice is indispensable for giving the notice in the context envisaged in Clause (b) an evader would successfully keep the postal article at bay at least till the period of fifteen days expires. Law shall not help the wrong doer to take advantage of his tactics. Hence the realistic interpretation for the expression ‘giving notice’ in the present context is that, if the payee has dispatched notice in the correct address of drawer reasonably ahead of the expiry of fifteen days, it can be regarded that he made the demand by giving notice within the statutory period. Any other interpretation is likely to frustrate the purpose for providing such a notice.” Thus from here we see that there can be deemed notice even where actual notice has not been given. However this is a rebuttable presumption and its for the complainant to prove that the notice was served and that the person either refused to accept the notice or was unavailable.

Though this is the popular position yet, many courts differ in opinion and it has been held that where the delivery is done by post, then reading S.138 with S.27 of the General Clauses Act

Ingredients:

Though no form of notice is prescribed, the requirement is that the notice shall be given in writing within fifteen days (now thirty with the amendment).

Secondly when a notice is served, it must demand the “said amount” i.e. the cheque amount in it. If no such demand is made the notice falls short of legal requirement.[48] However if apart from the “said amount” other amounts by way of interest, costs, etc is mentioned, such a notice would be a valid notice under the Section. The legislative intent of the Section is quite clear, the drawer of the cheque will be liable for conviction if the demand is not met within 15days of the receipt. Thus if the cheque amount is paid within the statutory period or before a complaint is filed the legal liability under S.138 will cease and for recovery of additional costs, a civil suit will lie.

Also the stating of the cheque number, though seems essential so that the drawer should know of which cheque the notice relates to, yet it has been held that S.138 does not lay down any such condition and if the cheque number is absent or wrong, depending on the facts and circumstances, the notice will deemed good or bad in law.[49]

PENALTIES AND LIABILITIES FOR DISHONOUR:

 

Dishonoring of a cheque:

In order to begin a discussion on the issue of dishonor under the Act, it is important to first consider the meaning of the term dishonor and what does it constitute. This finds mention in S.91 and S.92 of the Act.

Dishonor of negotiable instruments may be of two kinds:

1. Dishonor by non-acceptance.2. Dishonor by non-payment is said to be dishonoured.[13]3.

S.91 [14] of the Act speaks of dishonor by non-acceptance. What we see from this definition is a condition of presentment of the negotiable instrument, however presentment for acceptance is required only in the case of a bill of exchange. Usually acceptance and payment go together and this usually happens in case an instrument is payable after sight, thus often it is difficult to distinguish the two because dishonour by non-payment is usually dishonor by non-acceptance,[15] and thus it is only this bill of exchange which can be dishonored by non-acceptance and not a cheque as in the case of a cheque no acceptance is required to be taken to the banker and cheques are mainly instruments payable at sight .[16]

The second kind of dishonor is that of dishonour by non-payment. A negotiable instrument is said to be dishonored by non-payment when the drawee of a cheque makes default in payment upon being duly required to pay the same.[17] A drawee can dishonor a cheque

Thus it is well established that cheques are always dishonored only for the reason of non-payment and not non-acceptance.

Apart from the broad heads mentioned above, cheques can be dishonored by the banker for several reasons. (i) payment countermanded, (ii) insufficiency of funds, (iii) non-applicability of funds, (iv) improper presentation, (v) notice of death of account holder, (vi) court’s order prohibiting payment, (vii) post-dated cheques, (viii) stale cheques, (ix) lunacy, (x) insolvency, etc. the researcher will proceed to deal with only few of these instances.

Payment countermanded:

When the drawer of the cheques issues instructions to the bank not to make any payment of a particular cheque issued by him, the bank then stands revoked from making payment on that cheque, this is known as countermand of cheques by the drawer.[18] It must be noted here that any payment by the bank after such notice will not be considered as good payment. When a drawer wishes to stop payment he must give notice to the Bank, though

it is usually the drawer who gives such notice, however a payee can give a notice to the banker that the cheque is stolen or lost. In such a case the banker must inform the drawer, so that the latter can give necessary instructions.[19]

Insufficiency of funds:

When there are no funds to meet the cheque or the account of the drawer does not hold sufficient funds to meet the whole credit amount of the cheque, the banker is then justified in refusing the payment of such a cheque. However where the account has sufficient funds, the banker is under an obligation to its customer of honoring the cheque presented to it.

A cheque when dishonored for the purpose of insufficiency of funds, the drawer of such cheque is liable to penal consequences as under S. 138 of the Act. However there maybe an agreement to the contrary whereby the banker has undertaken to meet the customer’s cheques even though there may not be sufficient funds in his account, then in such a case the banker is bound to honor the cheque failing which the banker would be liable by way of breach of contract for an overdraft facility[20] and the necessary legal consequences will ensue.

One issue that arises here and has been under constant debate, is that whether a cheque returned by the banker endorsed with the words “refer to drawer” would amount to a dishonor under S.138. after a number of decisions on the point, there has been a sort consensus on the point and courts have often said that refer to drawer meant nothing but that the drawer lacked sufficient funds in his account and therefore S.138 would be attracted in certain circumstances.

Non-applicability of funds:

Under S.31 of the Act it is the banker’s duty to honour the cheque when funds which are lying in the account of the drawer are applicable for the purpose. Thus when the funds in the account are lying for other purposes, the will necessarily dishonour the cheque presented before it for payment. An example of such a situation is when the banker may have a lien over the funds lying in the account of the drawer under S.171 of the Indian Contract Act. Another situation might be where the funds in the account of the drawer is meant for a trust and a cheque is drawn in breach of a trust.[21]

Effects of dishonor of cheque:

Firstly, taking of a legal action. The payee/holder can take action against the drawer of such a bill may take action on the exact time of dishonoring of the bill. Thus the holder need not wait for the bill to mature and then to take action for dishonoring the same.[22] Secondly, when a cheque is said to be dishonored it loses its basic characteristic of negotiability with immediate effect. Thirdly, on the dishonoring of a cheque, nothing prevents the holder thereof to present it again particularly on being asked by the drawer of the cheque. Lastly, under S.138, mere dishonoring of cheques does not give

rise to a cause of action in favour of the complainant but it accrues only after the issue of demand notice and failure of the drawer to make the payment.[23]

The payee or holder of a cheque has the right to present the cheque for payment for any number of times and he may have it repeatedly dishonored, but he can prosecute the drawer only once.[24]

Burden of proof:

Under this law all presumptions are made against the drawer of such cheques and thus the onus of proof is left on the accused rather than the prosecutor.

Conclusion 

Though insertion of the penal provisions have helped to curtail the issue of cheque arising out of its dishonor either honestly or with dishonest intention and the trading community now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonored cheque, in a case where accused is convicted under 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 method of realization of the amount due to the complainant on the cheque being dishonored for the reasons of “insufficient fund” in the drawer’s 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. Thus what we see is that the section is not full proof, however there is no denying that this provision has done away with the rigorous and time consuming methods of criminal law. In support of this we can see that the section also provides for summary proceedings, making the issue penalty a lot simpler, because if a cheque gets dishonored today and proceedings go on as usual, then the person may only get relief after say three or four years, this defeats the purpose of a cheque which is meant for immediate acceptance and distribution of cheque amount.

 

References:

 

Negotiable Instruments Act, 1881.

Commercial Law including Company Law and Industrial Law by Sen & Mitra

Mercantile Law by M.C Kucchal.

Initiation of legal proceeding for dishonor of cheque. Available:

http://www.lawyersnjurists.com/resource/legal-documentations-litigations/legal-opinion/initiation-of-legal-proceedings-for-dishonour-of-cheque-ac-mr-x/

Dishonor of Cheque. Available: http://www.amlaw.pk/pakistan-law-site/criminal-law-dishonoring-of-cheque/faq-faqs-dishonor-dishonour-cheque-check-criminal-la/

Legal Proceeding of dishonor of cheque. Available: http://www.articlesbase.com/criminal-articles/dishonour-of-cheque-2060793.html

Critical study of the Dishonor of Cheque Under Negotiable Instruments Act, 1881

http://www.caclubindia.com/articles/critical-study-of-dishonour-of-cheques-under-negotiable-instruments-act-1881-10283.asp