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The main object of this piece of legislation is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. Section 138, THE NEGOTIABLE INSTRUMENTS ACT 1881 is intended to prevent dishonesty on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account maintained by him in a bank and induces the payee or holder in due course to act upon it. The dishonour of cheque is now a criminal offence punishable by imprisonment up to one year or with fine up to the double the amount of dishonored cheque or with both.
Advent of cheques in the market have given a new dimension to the commercial and corporate world, its time when people have preferred to carry and execute a small piece of paper called Cheque than carrying the currency worth the value of cheque. Dealings in cheques are vital and important not only for banking purposes 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 of giving cheques without any intention of honoring them.
Before 1988 there being no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them in the vent of such cheque not being honoured by their bankers and returned unpaid. Of course on dishonour of cheques there is a civil liability accrued. However in reality the processes to seek civil justice becomes notoriously dilatory and recover by way of a civil suit takes an inordinately long time. 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 form of the Banking, Public Financial Institutions 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 provision  light of the amendments and the judicial interpretations.
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 under the penalty 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 ingredient of a crime. However the Legislature can always create an offence of absolute liability or strict liability where ‘mens rea’ is not at all necessary.
While elucidating on this aspect the Kerala High Court in K. S. Anto v. Union of India held that:
"Knowledge or reasonable belief, that pre requisite could be statutorily dispensed with in appropriate cases by creating strict liability offences in the interest of the Nation."
Further the 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 attitude of drawers of cheques in discharge of debts or otherwise. The words as appearing in clause (b) of S. 138 cannot be construed even to imply failure without reasonable cause in view of the explicit language in which the provision is couched, the principle of strict liability incorporated in the main enacting clause.
Circumstances of Dishonour:The circumstances under which dishonour of cheque takes place or that may contribute to the situation would be irrelevant and are required to be totally ignored.
In Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar the Bombay High Court held that:
"A clear reading of Section 138 leaves no doubt in our mind that the circumstances under which such a dishonour takes place are required to be totally ignored. In such case, the law only takes cognizance of the fact that the payment has not been forthcoming and it matters little that any of the manifold reasons may have caused that situation."
Five ingredients of the offence under s. 138The offence under Sec. 138 of the Act 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.
It is not necessary that all the above 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 localities. But concatenation of all the above five is sine qua non for the completion of the offence under Sec. 138 of the Act.
Drawing of a ChequeThe drawer in payment of a legal liability to discharge the existing debt should have drawn cheque. Therefore any cheque given say by way of gift would not come within the purview of the section. It should be a legally enforceable debt; therefore time barred debt and money-lending activities are beyond its scope.
The words any debt or any other liability appearing in section 138 make it very clear that it is not in respect of any particular debt or liability The presumption which the Court will have to make in all such cases is that there was some debt or liability once a cheque is issued. It will be for the accused to prove the contrary. i.e., there is no debt or any other liability. This of course unless the prosecution restricts itself to a particular liability. The Court shall statutorily make a presumption that the cheques were issued for the liability indicated by the prosecution unless contrary is to be proved.
Presentation of ChequeThe presentation of cheque should be within its validity period. Generally a cheque is valid for six months, but there are cheques whose validity period is restricted to three months etc. The question arises as to which bank the cheque should reach within the validity period, is it the payee to his bank presents that of drawer’s bank or it is enough if the cheque before six months. The courts are divided on the issue. But common sense demands that the cheque should reach the drawer bank within the period of validity as it is that bank that either pays or rejects payment as per the situation existing on that day.
Returning Of the Cheque UnpaidLot of controversy had arisen on the issue. What reasons are relevant to hold the drawer of the cheque criminally responsible for bouncing of a cheque. The case laws on the subject have now made the position clear. It is not what the bank says in its return memo that is relevant but the actual position as on the date when the cheque reaches the drawer bank whether there were enough funds in the drawer account to honour the cheque.
The following judgments bring out the correct legal position:
Rakesh Nemkumar Porwal vs. Narayan Dhondu Joglekar (1993 1 CR 268) = (1993 CRI L J 680) = (1993 MH L J 630) = (72 CC 822) DB BOM Any reason for dishonour is an offence.
J. Veeraraghavan v. Lalith Kumar (1995 3 CRI 205) = (1995 83 CC 853) = (1995 CRI L J 1882) MAD DB Any reason for dishonour is an offence. S. 138 of the NI Act Marginal Note stating "Dishonour of cheque for insufficiency etc. of funds in accounts" addition of word "etc." cannot be considered to be an accident.
Disagreeing with Hunasikathimath case (1991 (1) Crimes 226 of Karnataka H.C., who following Punjab and Haryana H.C. in the case of Abdul Samad (1990(@) RCR 335 (P&H) and by a learned single Judge of Bombay H.C. in the case of Om Prakash (1992 (3) Crimes 3006, terming them as rigid and wooden view states:
"there is no other go for us except to agree to disagree with the views expressed herein, in as much as such a view, apart from suffering from a serious infirmity of erroneous interpretation of the relevant provisions of the Act, is to frustrate the very object and purpose for which the relevant provisions had been introduced by the amending Act. It is to be noted that this sort of a view is not negligibly supported by the very title of the Chapter of penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts (Emphasis supplied.) Equally important it is to note that the marginal note to sec. 138 of the Act states ----------etc. Top of all, such sort of a view, if accepted and followed, the statutory provisions of Chapter 17, introduced by amending Act, would become a dead letter and a non-sense situation would be created, in the sense of posing insurmountable obstacle in the free negotiability and acceptability of the cheques in the fast moving commercial transactions at regional, national and global level, creating a calamitous situation in the commercial world.
With respect, we agree fully with the view expressed by the Dn. Bench of BOM. H. C in the case of Rakesh Porwal (1993 Cri LJ 68- (Bom) (DB) of the Kerala H. C in the case of Thomas Verghese (1992 Cri L J 3080) (DB) and a single Judge of the Rajasthan H.C in the case of Pearay Lal Rajendra Kumar P Ltd. (1993 (3) Crimes 395), in as much as such a view had been arrived at in interpretingthe various expressions and words used in the relevant provisions in a meticulous fashion keeping in view the object and reasons for which such a provision had been introduced with the avowed purpose of achieving the object for which it was enacted."
Supreme Court had left certain grey areas by their previous judgments but Three Bench of the Supreme Court has now put to end to this controversy as well.
Following is the said judgment:
Modi Cements v. Shri Kunchil Kumar Nandi (1998 2 JT SC 198) Rel. on 1998 (2) ALL MR 433 9[S.C.) = 1998 ALL MR (Cry) 1247)= 100 BOM LR 97=AIR 1998 SC 1057; 1998  SCC 249; 1998 CRI LJ 1397; 1998 92 COM CASES 88. / VOL.3.DCTC.232.
Three Bench Decision Of Sc. - Even if notice is issued stopping payment before the payee deposited the cheque in his bank, offence is complete. (Electronics AND Siddharthan cases overruled)
Notice is a very important stage. It is the non-payment of dishonoured cheque within fifteen days from the receipt of the notice that constitutes an offence. Issuing of a cheque and its dishonour is not an offence. The offence is when the drawer receives a notice from the payee and he fails to pay the dishonoured cheque amount within the grace period of 15 days that constitute an offence. Any demand made after the dishonour of cheque will constitute a notice. It is not necessary that the notice should be sent by Registered Post alone, it could be sent even by fax. It is not necessary that the notice should be in any particular form or style. What is essential is that there should be a demand to pay the dishonoured cheque amount.
It is held by the Supreme Court that while the cheque could be presented at any number of times however there shall be only one Notice.
The following case may be noted on the subject:
Sadanandan Bhadran v. Madhavan Sunil Kumar (1998 (4) SCALE SCComplaint U/s. 138- Maintainability - conditions precedent to applicability of sec. 138 - A cheque can be presented any number of times during the period of its validity- Whether dishonour of the cheque on each occasion of its presentation gives rise to a fresh cause of action within the meaning of Sec. 142(b) of the act - Held No. - A competent court can take cognizance of a written complaint of an offence u/s.138 if it is made within one month of the date on which the cause of action arises under clause c of Sec.142 gives it is a restrictive meaning - it is the failure to make payment within 15 days from date of receipt of notice which will give rise to cause of action - Cause of action within meaning of Sec. 142 (c) arises and can arise only once - impediments which negate concept of successive causes of action- Held.
On each presentation of the cheque and its dishonour a fresh right and not cause of action - accrues in his favour. He may, therefore, without taking pre-emptory action in exercise of his right under clause (b) of Section 138, go on presenting the cheque so as to enable him to exercise such right at any point of time during the validity of the cheque. But, once he gives a notice under clause (b) of Sec. 138 he forfeits such right for in case of failure of the drawer to pay the money within the stipulated time he would be liable for the offence and the cause of action for filing the complaint will arise. Needless to say, the period of one month for filing the complaint will be reckoned from the day immediately following the day on which the period of fifteen days from the date of the receipt of the notice by the drawer expires.
No action taken on the first notice - cheque presented again - second notice sent - on failure to receive money case filed on the basis of second notice - Acquittal on ground that there could not be more than one cause of action in respect of a single cheque - sustainable - Appellant had earlier taken recourse to clause (b) of Sec. 138 but did not avail of cause of action that arose in his favour u/s. 142(b) of the Act.
Approved: S.K.D. Lakshmanan Fireworks Industries v. K.V.Sivarama Kirshnan (1995 Cr.L.J. 1384)
Overruled: Kumaresan vs. Ammerappa (1991 (1) K.L.T. 893)
Therefore it is essential that the notice should be perfect and in conformity with law. A mistake in the notice will be fatal. It is common mistake committed by most of the payees that as soon as the cheque is returned unpaid to write a letter to the drawer threatening him that in case he does not pay against the dishonoured cheque legal action will be taken etc. Such letter will also be construed as a notice. Since a second notice cannot now be issued on the basis of subsequent dishonour of cheque, due care and caution should be taken while sending the notice on dishonour of cheque.
As stated already that non-payment of cheque amount within the grace period of fifteen days from the date of receipt of the notice constitutes an offence and therefore liable to prosecuted for the criminal offence so committed.
Amendments of section 138 in 2002In section 138 of the principal Act,—
(a) For the words “a term which may be extended to one year”, the words “a term which may be extended to two years” shall be substituted;
(b) In the proviso, in clause (b), for the words “within fifteen days”, the words “within thirty days” shall be substituted.
These being a special legislation certain time limits have been laid down and they should be strictly followed. Any lapse in adhering to the schedule, shall take away a cause of action under Sec. 138. The time limits placed cannot be condoned by the Courts. Therefore the question of making an application for condonation of delay as in the case of civil does not arise at all under the said section. What then are the limitations one has to keep in one mind and follow them strictly to prosecute the drawer of cheque who has failed to pay the said sum within fifteen days from the receipt of the notice?
• Cheque should be presented to the bank for encashment within its validity period.
• Within fifteen days from the receipt of return memo indicating reason of dishonour, a notice should be sent demanding the amount of dishonoured cheque.
• If the drawer does not pay the amount of dishonoured cheque within the grace period, a complaint thereafter should be filed within one month in the relevant court of Metropolitan Magistrate/Judicial Magistrate as the case may be, having jurisdiction.
On the subject, Supreme Court in its following judgment laid down the relevant law as follows:
Saketh India Ltd. v. India Securities Ltd. (1999 96 SC 329 SC)=1999 Cri LJ 1822 (SC)=Vol 3 DCTC 647 (SC)- decided on 10-3-1999. Limitation for filing complaint limit defined as from a particular day - first day to be excluded. Period of 15 days from the date of receipt of notice ending on 14-10-1995 - 30 days period begins on 15-10-1995 Complaint filed on15-11-1995-within time.
Held on the facts that the period of limitation of 15 days expired on 14-10-1995. So the cause of action for filing the complaint would arise from 15-10-1995. That day (15 Oct) was to be excluded for counting the period of one month - The Complaint filed on 15-11-1995 was in time) 1972 (1) SCC 639 (Haru Das Gupta v. St. of West Bengal) relied.
On the question of jurisdiction, the following judgment of Supreme Court is worth noting:
K. Bhaskaran v. Sankaran Vaidhyan Balan; for citation is below. = 1999 (6) SCALE 272 (Judgment dated Sept.29, 1999= 1999 ALL MR (Cri) 1845 (SC) = 1999 (4) ALL MR 452 (S.C.)) by K.T.Thomas and Mr. M.B.Shah JJ; decided on 29-9-1999. Section 138 - Criminal Procedure Code, 1973, Sections 177, 178, 179 -Territorial jurisdiction - Dishonour of cheque - Complaint can be filed at any of the place:
1. Where the cheque was drawn.
2. Where the cheque was presented for encashment.
3. Where the cheque was returned unpaid by drawee bank.
4. Where notice in writing was given to drawer of cheque demanding payment.
5. Where drawer of cheque failed to make payment within 15 days of receipt of notice.
Each of the fine acts constituting offence could be done at 5 different localities. Hence one of the Courts exercising jurisdiction in one of the five local areas can become the place of trail for the offence under sec. 138 of the Act. In other words, the complainant can choose any one of those courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done. As the amplitude stands so widened and so expansive it is an idle exercise to raise jurisdictional question regarding the offence under Sec. 138 of the Act. K. Bhaskaran v. Sankaran Vaidyan Balan.
On the subject of penalty, the following Supreme Court case is worth noting: 1999 SO.L. Case No. 590 K. Bhaskaran v. Sankaran Vaidhyan Balan. Penalty is restricted to Rs.5, 000/- besides imprisonment; but magistrate can make liberal use of Sec. 357(3) of the Code. A Magistrate can award any sum as compensation to alleviate the grievance of the complainant by making resort to Sec. 357(3) of the Code. It is well to remember that this Court has emphasized the need for making liberal use of that provision. No limit is mentioned in the sub-section and therefore, a magistrate can award any sum as compensation. Of course while fixing the quantum of such compensation the Magistrate has to consider what would be the reasonable amount of compensation payable to the complainant. Thus, even if the trial was before a court of magistrate of first class in respect of a cheque which covers an amount exceeding Rs, 5,000/- the court has power to award compensation to be aid to the complainant.
Trial held by Magistrate 1st Class who acquitted the accused; In appeal HC convicted the accused and sentenced him to 6 months imprisonment and fine of Rs. One lac. HC could not impose fine exceeding Rs.5000 which the Magistrate could impose under Sec. 29(2) Cr.P.C. High Court could not exercise its own power in imposing the fine.
Civil And Criminal Cases
Civil and criminal action is not mutually exclusive but clearly co-extensive. Therefore civil case is no bar for criminal proceedings. The Supreme Court has laid down the following law and put end to the controversy.
Medchl Chemicals and Pharma Pvt. Ltd. v. Biological E. Ltd. 2000 Cri.L.J. 1487 (Supreme Court)
Quashing of complaint; complaint cannot be quashed merely on the ground that civil remedy is available. Cri.P.No. 5386 of 1998 /5-2-1999 (A.P.) reversed. "8. In Rajesh Bajaj v. St of NCT of Delhi (1999) 3 SCC 259: (1999 AIR SCW 881) : AIR 1999 SC 1216: 1999 Cri LJ 1833) In this case this Court also pointed out that merely because an act has a civil remedy is not sufficient to denude it of its criminal outfit.
We quote the following observations:
It may be that the facts narrated in the present complaint would as well reveal a commercial transaction or money transaction. But that is hardly a reason for holding that the offence of cheating would elude from such a transaction. In fact, many a cheatings were committed in the course of commercial and also money transactions; ---the fact that there is a remedy provided for beach of contract, that does not by itself clothe the Court to come to a conclusion that civil remedy is the only remedy available to the appellant herein. Both criminal law and civil law remedy can be pursued in diverse situations. As a matter of fact they are not mutually exclusive but clearly co-extensive and essentially differ in their content and consequence. The object of criminal law is to punish an offender who commits an offence against a person, property or the State for which the accused, on proof of the offence, is deprived of his liberty and in some cases even his life. This does not, however, affect civil remedies at all for suing the wrongdoer in case like arson, accidents etc. It is anathema to suppose that when a civil remedy is available, a criminal prosecution is completely barred.
This article does not claim to be all exhaustive one on the subject. But this should provide a basis and an insight into the main characteristics of the amendment to the N.I.Act. making bouncing of cheque a criminal offence. If this article kindles ones desire to know more, the main purpose can be considered as fulfilled.
Though insertion of the penal provisions have helped to curtail the issue of cheque lightheartedly or in a playful manner or with a 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 dishonoured 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 dishonoured cheque, which the complainant is at liberty to avail of if so advised in accordance with law.
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