It is common knowledge that sometimes cheques are dishonoured by the Bank with the remark "Account Closed". The drawer/accused plead in the Court that the dishonour of cheque for the reason of 'Account closed' is not covered within the two conditions laid down in Section 138 of the N.I. Act i.e., firstly, the amount of money standing to the credit of
the account is insufficient to honour the cheque and secondly, it exceeds the amount arranged to be paid from the account by an agreement made with the Bank. Thus, it is argued that since the cheque has not been dishonoured for the aforesaid two reasons, therefore, the complaint under Section 138 of the N.I. Act, is not maintainable.

Before deliberating on the subject, it would be trite to reproduce Section 138 & 139 of the Negotiable Instruments Act, which read as under:

Section 138 Dishonour of cheque for insufficiency, etc., of funds in the account- Where any cheque drawn by a person on an 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 that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision 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 the cheque, or with both:

Provided that nothing contained in this section shall apply unless:

1. the 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;
2. the payee or the holder in due course of the cheque, 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, 3[within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
3. 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.
    

Section 139- Presumption in favour of hold-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."

It will be relevant to understand the object/ purpose behind enactment of Section 138 of the NI Act. A 3 member Bench of the Apex Court in MSR Leathers vs. S. Palaniappan and Anr. (2013) 1 SCC 177 elaborated the object of Section 138 of NI Act and observed thus:

27. It is trite that the object underlying Section 138 of the Act is to promote and inculcate faith in the efficacy of banking system and its operations, giving credibility to Negotiable Instruments in business transactions and to create an atmosphere of faith and reliance by discouraging people from dishonouring their commitments which are implicit when they pay their dues through cheques.

The provision was intended to punish those unscrupulous persons who issued cheques for discharging their liabilities without really intending to honour the promise that goes with the drawing up of such a negotiable instrument. It was intended to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case the cheque was dishonoured and to safeguard and prevent harassment of honest drawers. (See Mosaraf Hossain Khan v. Bhagheeratha Engg. Ltd. (2006) 3 SCC 658, C.C. Alavi Haji v. Palapetty Muhammed & Anr. (2007) 6 SCC 555 and Damodar S. Prabhu v. Sayed Babulal H. (2010) 5 SCC 663)."

Thus, it is the legal duty of every drawer of the cheque to maintain the said account and make the arrangements for honour of the cheque. If the drawer of the cheque fails to maintain that account and fails to maintain the sufficient funds with the Bank to honour the cheque, the offence under Section 138 of the N.I. Act, is made out. Thus, till the time all the cheques issued by the drawer are honoured by the bank, it is the bounden duty of the drawer to keep running his bank account.

If the proposition that dishonour of cheque by reason of closure of account is said to be outside the scope of Section 138 of the NI Act, then, every drawer of the cheque would make it a legal device/ruse & after issuing the cheque will close the account and escape the rigour & liability u/s 138 of the N.I. Act. Such an interpretation of the ambit of Section 138 of the NI Act would frustrate the object & the very purpose of the NI Act.

It would be trite to refer to NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) 4 SCC 253 wherein the Apex Court rejected the contention that Section 138 of the NI Act has to be interpreted strictly or in disregard of the object sought to be achieved by the Statute. Relying upon its earlier judgment in the case of Kanwar Singh vs Delhi Administration, AIR 1965 SC 871 and Swantraj and Others vs. State of Maharashtra 1975(3) SCC322, the Court held that a narrow interpretation of Section 138 would defeat the legislative object underlying the said provision.

The Supreme Court relied upon its own decision in State of Tamil Nadu Vs. M. K. Kandaswami and others 1974(4) S.C.C. 745, and it was observed that while interpreting a penal provision which is also remedial in nature a construction that would defeat its purpose or have the effect of scrapping it from the statute book, should be avoided and that if more than one constructions are possible, the Court should choose to adopt construction that would preserve the workability and efficacy of the Statute and avoid an interpretation that would render the provision sterile.

The Court, accordingly, held that when a cheque is returned by the banker of a drawer with the comments "account closed" the same would constitute an offence under Section 138 of NI Act. The Court categorically held thus:

"Hence, the question is, in a case where cheque is returned by the bank unpaid on the ground that the account is closed, would it mean that cheque is returned as unpaid on the ground that the amount of money standing to the credit of that account is insufficient to honour the cheque. In our view, the answer would obviously be in the affirmative because cheque is dishonoured as the amount of money standing to the credit of that account was nil at the relevant time apart from it being closed. Closure of the account would be an eventuality after the entire amount in the account is withdrawn.

It means that there was no amount in the credit of that account on the relevant date when the cheque was presented for honouring the same. The expression the amount of money standing to the credit of that account is insufficient to honour the cheque is a genus of which the expression that account being closed is specie."

It would be apposite to refer to the Apex Court in Laxmi Dyechem vs. State of Gujarat and others, (2012) 13 SCC 375 wherein the Court dealt with the issue and held thus:

15. The above line of decisions leaves no room for holding that the two contingencies envisaged under Section 138 of the Act must be interpreted strictly or literally. We find ourselves in respectful agreement with the decision in NEPC Micon Ltd. (supra) that the expression "amount of money ����. is insufficient" appearing in Section 138 of the Act is a genus and dishonour for reasons such "as account closed", "payment stopped", "referred to the drawer" are only species of that genus. Just as dishonour of a cheque on the ground that the account has been closed is a dishonour falling in the first contingency referred to in Section 138, so also dishonour on the ground that the "signatures do not match" or that the "image is not found", which too implies that the specimen signatures do not match the signatures on the cheque would constitute a dishonour within the meaning of Section 138 of the Act.

This Court has in the decisions referred to above taken note of situations and contingencies arising out of deliberate acts of omission or commission on the part of the drawers of the cheques which would inevitably result in the dishonour of the cheque issued by them. For instance this Court has held that if after issue of the cheque the drawer closes the account it must be presumed that the amount in the account was nil hence insufficient to meet the demand of the cheque.

A similar result can be brought about by the drawer changing his specimen signature given to the bank or in the case of a company by the company changing the mandate of those authorised to sign the cheques on its behalf. Such changes or alteration in the mandate may be dishonest or fraudulent and that would inevitably result in dishonour of all cheques signed by the previously authorised signatories.

There is in our view no qualitative difference between a situation where the dishonour takes place on account of the substitution by a new set of authorised signatories resulting in the dishonour of the cheques already issued and another situation in which the drawer of the cheque changes his own signatures or closes the account or issues instructions to the bank not to make the payment. So long as the change is brought about with a view to preventing the cheque being honoured the dishonour would become an offence under Section 138 subject to other conditions prescribed being satisfied.

There may indeed be situations where a mismatch between the signatories on the cheque drawn by the drawer and the specimen available with the bank may result in dishonour of the cheque even when the drawer never intended to invite such a dishonour. We are also conscious of the fact that an authorised signatory may in the ordinary course of business be replaced by a new signatory ending the earlier mandate to the bank.

Dishonour on account of such changes that may occur in the course of ordinary business of a company, partnership or an individual may not constitute an offence by itself because such a dishonour in order to qualify for prosecution under Section 138 shall have to be preceded by a statutory notice where the drawer is called upon and has the opportunity to arrange the payment of the amount covered by the cheque. It is only when the drawer despite receipt of such a notice and despite the opportunity to make the payment within the time stipulated under the statute does not pay the amount that the dishonour would be considered a dishonour constituting an offence, hence punishable.

Even in such cases, the question whether or not there was a lawfully recoverable debt or liability for discharge whereof the cheque was issued would be a matter that the trial Court will examine having regard to the evidence adduced before it and keeping in view the statutory presumption that unless rebutted the cheque is presumed to have been issued for a valid consideration."

In Goaplast (P) Ltd. V. Chico Ursula D'Souza 2003(3) SCC 232, the Apex Court elaborated the object behind enactment of Section 138-142 of the NI Act and observed that the interpretation of the scope of the said sections be made in consonance with the objects sought to be achieved by these sections. The Court observed thus:

"For appreciating the issue involved in the present case, it is necessary to refer to the object behind introduction of Chapter XVII containing Sections 138 to 142. This Chapter was introduced in the Act by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (Acts 66 of 1998) with the object of inculcating faith in the efficacy of banking operations and giving credibility to negotiable instruments in business transactions and in order to promote efficacy of banking operations.

With the policy of liberalisation adopted by the country which brought about increase in international trade and commerce, it became necessary to inculcate faith in banking. World trade is carried through banking operations rather than cash transactions. The amendment was intended to create an atmosphere of faith and reliance on banking system.

Therefore, while considering the question of applicability of Section 138 of the Act to a situation presented by the facts of the present case, it is necessary to keep the objects of the legislation in mind. If a party is allowed to use a cheque as a mode of deferred payment and the payee of the cheque on the faith that he will get his payment on the due date accepts such deferred payment by way of cheque, he should not normally suffer on account of non payment.

The faith, which the legislature has desired that such instruments should inspire in commercial transactions would be completely lost if parties are as a matter of routine allowed to interdict payment by issuing instruction to banks to stop payment of cheques.

In today's world where use of cash in day to day life is almost getting extinct and people are using negotiable instruments in commercial transactions and plastic money for their daily needs as consumers, it is all the more necessary that people's faith in such instruments should be strengthened rather than weakened. Provisions contained in Sections 138 to 142 of the Act are intended to discourage people from not honouring their commitments by way of payment through cheques.

It is desirable that the court should ban in favour of an interpretation which serves the object of the statute. The penal provisions contained in Sections 138 to 142 of the Act are intended to ensure that obligations undertaken by issuing cheques as a mode of payment are honoured. A post-dated cheque will lose its credibility and accepatibility if its payment can be stopped routinely. A cheque is a well recognized mode of payment and post-dated cheques are often used in various transactions in daily life.

The purpose of a post-dated cheque is to provide some accommodation to the drawer of the cheque. Therefore, it is all the more necessary that the drawer of the cheque should not be allowed to abuse the accommodation given to him by a creditor by way of acceptance of post-dated cheque. If stoppage of payment of a post-dated cheque is permitted to take the case out of the purview of Seciton 138 of the Act, it will amount to allowing the party to take advantage of his own wrong."

It would be apropos to refer to Thirumala Agencies and Another vs Samala Mareppa And Sons on 2001 AIR - KANT. H. C. R. 1444 wherein the Karnataka High Court, on the subject, categorically observed thus:

7. It is clear from the reading of this section that, where a cheque is drawn by a person on an account maintained by him with the banker is dishonoured on the ground that there is no sufficient amount in the account or etc., as the case may be, that amounts to dishonour of cheque for insufficiency of funds in that account. In the case on hand, it is an admitted fact, the petitioners issued a cheque dated 4-4-2000 for a sum of Rs. 4,00,000/- drawn on Vyshya Bank Limited, Bellary Koad, Bangalore and the same was dishonoured with an endorsement "account closed.

It is manifest that as on the date of issuing cheque, the petitioners were aware of the fact that they were closing the account. But, they did not bring to the notice of the respondent regarding the closing of the account or any other subsequent acts.

If the cheque came to be presented, and it was returned with an endorsement "account closed" it amounts to dishonesty and it comes within the definition of Section 138 of the NI Act and thereby resulted in the dishonour of cheque. To add further, it can be said that the cheque was issued with an intention of defrauding the creditors. Therefore, the contention of the learned Counsel that the 'account closed' does not come within the ingredients of Section 138 of the NI Act cannot be accepted.

It is clear from the meaning of Section 138 of the NI Act that if a cheque is issued and bounced, that gives rise to initiation of proceedings under Section 138 of the NI Act. Therefore, I do not find any infirmity in presenting a complaint for initiation of the action under Section 138 of the NI Act wherein the Court has taken cognizance in accordance with law."

It would be befitting to refer to Shivendra Sansguiri v. M/s. Adineo & another, 1998 All.M.R.(Cri.) 880 wherein the Panaji Bench of the Bombay High Court examined the consequence of dishonour of cheque on account of closure of account. The Court examined the liability of the bank as well as that of the drawer in the light of the Banking Regulation Act and the Negotiable Instruments Act. The relevant observations of the Panaji Bench are as under:

"When a customer of the Bank draws a cheque in discharge of his debt, the Banker steps into the shoes of the customer or drawer to pay the money shown in the cheque to the payee of the cheque. Law, therefore, does not take cognizance of a situation to issuance of a cheque without an account in the Bank. If any customer closes an account with the Bank, it is the legal responsibility of the Banker to see that all unused cheque leaves are surrendered to the Bank and see that the cheque issued by the customer before closure of account is honoured

 If any banker doesn't observe this obligation it is liable not only under the Banking Regulation Act but also liable for damages to the person in whose favour the cheque was issued. However, this obligation of the Banker doesn't absolve the drawer from the liability in the event of the cheque being dishonoured under section 138 of the Negotiable Instruments Act. If he closes the account before or after the issuance of the cheque because when cheque is drawn in discharge of a pecuniary liability, it can be always presumed that there exists an account in the Bank in the name of a drawer.

This presumption however, cannot be displaced by misusing cheque facility after closing the account. In such circumstances the drawer of the cheque is not only liable under section 138 of the Negotiable Instruments Act, but also under Banking Regulation Act. At any stretch of reasoning, it cannot be said that such misuser of cheque is not liable under section 138 of the Negotiable Instruments Act. To hold otherwise will render the whole object of the legislation infructuous."

It is noteworthy to refer to Dilip v Nishant Sahakari Gramin Pat Puravatha Sanstha Maryadit Akola 2012 CriLJ 1702, wherein the Bombay High Court observed thus:

"After issuance of the cheque drawn on 'an account maintained' a person, if he closes his account, then apart from the fact that it may amount to offence of cheating also it would certainly be an offence punishable under Section 138 of the Negotiable Instruments Act because there was no sufficient fund to honour the cheque in that account or there was no fund to honour the cheque in that account.

The drawer drew a cheque of an account maintained by him. It is submitted that if one would draw a cheque knowing that it would not be honoured he could have necessarily equally guilty animus. It is further submitted that under Section 138 of the Negotiable Instruments Act intention of the Legislature is to suppress mischief and to advance remedy as the whole object is to promote efficacy of banking transactions. It is submitted that in the present case payment was stopped by the drawer. Therefore, the accused cannot be allowed to take shelter of the fact after having closed the account maintained with his bank."

Reference to the case of Hashmikant M. Sheth vs State of Gujarat 2005(1)ALD(CRI)3 is pertinent wherein the Gujrat High Court held as follows:
15. The object of the legislature is to enhance credibility of the instrument as well as to inculcate faith in the efficacy in banking operation. The negotiable instrument should inspire faith in commercial transaction. This faith would stand destroyed if parties to the negotiable instrument are permitted to play fraud. It is common knowledge that people are using the instrument in commercial transaction postdated cheques and therefore provisions of section 138 of the Act should be interpreted in a manner which discourages people from not honouring the commitment by way of payment through cheque.

16. The word "account" which has been mentioned in the opening words of Section 138 of the Act only relates to the fund and not to the cheque and the Section only recognises a facility of discharging a debt by issuing a cheque. An account holder alone will be able to utilise that facility, if the drawer issues a cheque from a cheque book which was issued to him by the bank on the strength of the account which he had opened then it can definitely be said that the drawer perpetrated an evil design by closing the account and issuing the cheque. The Section takes care of all dishonest acts likely to be committed by the drawer of the cheque as the main purpose of the Section being to bring in the acceptability to the cheque."

The Court further elaborated the reasoning & observed thus:
18. Viewed in the light of the object with which Section 138 of the Act was introduced by legislature, there is no manner of doubt that the phrase "any cheque drawn by a person on an account by him with banker" will have to be construed to mean that "any cheque drawn by a person on an account maintained and closed by him". The words "on an account maintained" do not suggest that cheque must be drawn on an account which is in operation. The words "account maintained" would include "an account maintained and closed in past.

19. In this connection, it would be appropriate to refer to the observations made by Lord Denning, L.J., on the interpretation of statutes, which has been reproduced by the Supreme Court in the case of N.K. Jain v. C.K. Shah, reported in AIR 1991 SC 1289, to fully understand the implication of Section 138 of the Act, as interpreted by the superior Courts of jurisdiction, which reads as follows:
"The English language is not an instrument of mathematical precision. Our literature would be much poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticised. A Judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if the Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears, a judge cannot simply fold his hands and blame the draftsman.

He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give 'force and life' to the intention of legislature.

A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out? He must then do so as they would have done. A judge must not alter the material of which the Act is woven, but he can and should iron out the creases."

It would be fruitful to refer to N.A. Issac v. Jeemon P. Abraham And Anr. (1) CIVIL COURT CASES 690 (S.C.):2005(1) CRIMINAL COURT CASES 119 (S.C.), wherein the Apex Court held that proceedings u/s 138 of NI Act are maintainable when a cheque is dishonoured because of Account Closure. The Court held thus:

"The interpretation of the High Court of section 138 of Negotiable Instruments Act, 1881 to the effect that the said provision will not be applicable when the cheque is issued from an already closed account cannot be upheld on the wordings of section 138. The word 'maintained' in section 138 of the said Act has been narrowly construed by the High Court for coming to the aforesaid conclusion.

Such an interpretation would defeat the object of insertion of the provision in Act. Section 138 does not call for such a narrow construction. The approach to be kept in view for construing section 138, has been discussed in detail by this Court in (Goaplast (P) Ltd. V. Chico Ursula D'Souza)1, 2003 Bom.C.R.(Cri.) (S.C.) 931. The High Court did not examine the merits while deciding Criminal Appeal No. 317 of 2002 in view of its opinion that section 138 would not apply where cheque is issued from a closed bank account."

Thus, in view of the authoritative pronouncements of the Apex Court & the various High Courts, if a cheque is returned unpaid by a Bank with an endorsement "Account Closed", it would amount to returning the cheque unpaid because the amount standing to the credit of such account is insufficient to honour the cheque as envisaged in Section 138 of the N.I. Act and proceedings under the said section 138 are maintainable with full force in such circumstances.

Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]