However in reality the process to seek civil justice becomes notoriously dilatory and recovery 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 the 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 in light of the amendments and the judicial interpretations.
Negotiable Instruments
Negotiable Instruments have been used in the commercial world for a long period of time as one of the convenient modes for transferring money. Negotiable Instrument is a combination of two words Negotiable and Instrument with subject to their different meaning as “Negotiable is transferrable” and “Instrument is written document”. Two modes are being used for the Negotiable Instrument for its transferability either it can be delivered or by endorsement, passes to the transferee a bona fide title to payment according to its tenor and irrespective of the title, the transferor is bearing, provided that he is a bona fide holder for Instrument without any of notice of defect attaching to the instrument or in the title of the transferor, the principle of Nemo dat quod non-habit does not apply. Negotiable Instrument should be of as such nature that it should be in the form of writing, signed by the maker or drawer, an unconditional promise or order to pay, a fixed amount of money to be stated, freely transferrable from one person to another person, be payable to order or to bearer, lastly be payable on demand or at a definite time.
According to Section 13 of the Negotiable Instrument Act, 1881, a Negotiable Instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer. A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees.
Section 138
In the case of Modi Cements Ltd v Kuchil Kumar Nandi (1998), the intention of Section 138 of the Negotiable Instruments Act, 1881 has been declared to increase the efficiency of functioning of banks and establish credibility in business transactions through the medium of cheques. Section 138 of the Act formulates a statutory wrong concerning the matter of disgrace-oriented cheques based on the grounds of insufficiency of available funds in the account of the person that has been maintained with the concerning banks. Further, the amount greater than the one arranged to be delivered which is in the form of an agreement with the bank also falls within the ambit of Section 138. Dishonor of cheques amounts to a criminal offense in the form of enforcing a civil right. Therefore, both civil and criminal liabilities come into play when the dishonor of cheques takes place.
The civil liability associated as laid down in Section 138 of the Negotiable Instruments Act, 1881 is charging a fine twice of what the amount was in the dishonored cheque. In case of civil liability the interference of court takes place if the concerned payee files a suit under Order 37 of the Code of Civil Procedure, 1908, the court decides a judgment favoring the payee and in such a case the drawer is eligible to pay the same amount as mentioned by the court.
In case of criminal liability, Section 138 comes along with the punishment of two consecutive years and the prosecution of the drawer takes place under the provisions of the Indian Penal Code, 1860, namely Section 417 and Section 420. The offenses acquired are bailable, compoundable, and non-cognizable by nature.
Scope:
Of the ten sections comprising the chapter of the Act, section 138 creates statutory offense in the matter of dishonor 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 the real sense but are acts which in the 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 offense of absolute liability or strict liability where; men's 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 prerequisite could be statutorily dispensed with in appropriate cases by creating strict liability offenses 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 the discharge of debts or otherwise attitude of drawers of cheques in the 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 dishonor:
The circumstances under which dishonor 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 dishonor takes place are required to be totally ignored. In such a 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.
Ingredients
The essential ingredients of the offense as contemplated under Sec.138 of the Act were pointed out by Supreme Court in the matter of Kusum Ingots and Alloys Ltd vs Pennar Peterson Securities Ltd, (2000) 2 SCC 745 which reads as follows:
"(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;
As per RBI guidelines, with effect from April 1, 2012, the validity period of Cheques, Demand Drafts, Pay Orders, and Banker's Cheques have been reduced from six months to three months, from the date mentioned in the instrument.
(iii) that cheque is returned by the bank unpaid. either because of the amount of money standing to the credit of the account is insufficient to honor 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 30 days 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.
Exceptions:
The cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier.
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 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.
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.
Punishment:
Imprisonment for two years,
Fine which may extend to twice the amount of the cheque,
Imprisonment and fine both.
Procedure
The procedure that is followed in matters with regard to Section 138 of the Act is as follows:
A legal notice is to be issued to the drawer within 15 days of dishonor of cheque by registered post with all relevant facts. The drawer is given a time of 15 days to make the payment, if the payment is made then the matter is served and the issue is settled. On the other hand, if the payment is not made then the complainant is to file a criminal case process under Section 138 of the Act, against the drawer within 30 days from the date of expiry of 15 days specified the notice, with the concerned magistrate court within the jurisdiction.
The complainant or his authorized agent should appear in the witness box and provide relevant details for filing the case. If the court is satisfied and finds substance in the complainant, then a summons will be issued to the accused to appear before the Court.
If after being served with the summons the accused abstains himself from appearing then the court may issue a bailable warrant. Even after this if the drawer does not appear a non-bailable warrant may be issued.
On the appearance of the drawer/accused, he may furnish a bail bond to ensure his appearance during the trial. After which the plea of the accused is recorded. In case he pleads guilty, the court will post the matter for punishment. If the accused, denies the charges then he will be served with a copy of the complaint.
The Complainant may present his evidence by way of affidavit and produce all documents including the original in support of his complaint. The complainant will be cross-examined by the accused or his counsel.
The accused will be given an opportunity to lead his evidence. The accused will also be afforded an opportunity to submit his documents in support of his case, as well as witnesses in his support. The accused and his witnesses will be cross-examined by the complainant.
The last stage of the proceeding is that of the arguments after which the court will pass a judgment. If the accused is acquitted then the matter ends, but the complainant can go on further appeal in the High Court, similarly, if the accused is convicted he can file an appeal in the Sessions Court.
It must be noted that the offense under Section 138 of the Act, has been made compoundable.
Jurisdiction
Considering the ingredients of sec.138 referred above, the Hon'ble Supreme Court in the case of K. Bhaskaran vs. Shankaran had held that any of the following places have the jurisdiction to initiate the prosecution -
1. Where a cheque is drawn.
2. Where payment had to be made.
3. Where a cheque is presented for payment
4. Where a cheque is dishonored.
5. Where notice is served up to drawer.
However, in the case of Dashrath Rupsingh Rathod vs. the State of Maharashtra, the 3 judge bench of the Supreme Court took a strict approach and held that the territorial jurisdiction under section 138 should be exclusively be determined and considered by the place of the offense. The return of the cheque by the drawer bank only constitutes the commission of an offense under section 138.
The legal position regarding territorial jurisdiction of the courts in cases of dishonor of the cheque has completely changed with the new amendments i.e. the Negotiable Instrument (Amendment) Act, 2015 which has retrospectively come into force from 15th July 2015. New Clause i.e. section 142 (2) has been added in section 142 which stipulates provisions for the local jurisdiction of the court where the offense under Section 138 shall be inquired into and tried and new subsection 142A is inserted in the Act which stipulates provisions for validation for transfer of pending cases.
Documents required for filling Complaint u/s 138 of NIA.
Some of the basic documents that are necessarily required to file a complaint under the Section 138 of NIA are as follows.
Memo of Parties
Complaint u/s 138 of NIA, 1881.
Pre-summoning Evidence/ Affidavit
List of Witnesses
List of Documents
Vakalatnama.
Copy of the resolution authorizing Complainant's Attorney (in case of Company, firm etc).
Original dishonored cheques
Returning memo dated _____
Copy of legal notice dated _______
Postal Receipt No. ______ dated ______
UPC Dated _____
Limitation Document
LANDMARK JUDGEMENT
Dalmia Cements v. Galaxy Trading Agencies
The case of M/s. Dalmia Cement (Bharat) Ltd. v. M/s.Galaxy Traders & Agencies Ltd. & Ors. is one of the cases whose judgment became a landmark for the Supreme Court, in this case, the reasoning behind the enactment of Section 138 of the Negotiable and Instruments Act, 1881 was given. The facts of the case revolve around dishonoring of the cheque because of which notice was issued to inform the accused. When the same was received by the complainant by that time the period of filing the complaint was given to expire. The same thing happened for the second time as well with the accused failing to provide the amount.
The court basing its judgment on the existing facts said that Section 138 of the Act has been made keeping in concern any kind of infringement of legal right of the person whose payment has not been issued and therefore if any such situation arises which will make it impossible for the person to get the payment then in such case, the section should function the way it has been laid down to keep the objective of the Act. Thus, in this case, the court ordered actions to be carried out against the respondent as laid down in the Act.
Canara Bank v. Canara Sales Corporation
The case of Canara Bank v. Canara Sales Corporation (1987) serves as a basis of understanding the relationship shared between the banker and its customers that are tied with threads of duties and equity, during the times of negligence by either party or in case either party is involved with fraudulent activities.
In this case, the respondent had a current account in the plaintiff’s bank which was eventually found to be linked with fraudulent activity for the cheques which were encashed and didn’t bear the initials of the managing director, the respondents. Thus, forgery also took place in the given case. A suit was filed by the respondents to compensate for the amount that has been lost.
The Court highlighted that there was negligence on the part of both the creditor as well as the debtor but the beam balance of negligence weighed more for the banker than the company. Thus, mere negligence on the part of the bank cannot be a ground for not using the same. The court finally ruled that the company is eligible for compensation thereby dismissing the case.
M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta
The case of M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta (2017) was where the Supreme Court took into concern the object associated with Section 138 along with other statutory provisions laid down in Chapter XVII of the Negotiable Instrument Act, 1881, and passed its verdict.
The facts of the case go as such that the complainant, Kanchan Mehta under Section 138 of the Act had filed a complaint against the plaintiff on grounds that the latter who was supposed to pay an amount to the former on monthly basis according to an existing agreement between the two of them had failed to do so. The company had provided a cheque to the complainant thereby discharging their legal liabilities. The same cheque returned back for the presence of insufficient funds. Legal notices were provided to the company for the completion of their payment but the same was not fulfilled and the company was responsible for the offense under Section 138 of the concerned Act. Further, when the director of the company was willing to pay the complainant, there was a refusal of the demand draft from the laters end. Thus, the company filed a suit against the complainant under Section 147 of the Act which was the provision for compoundable offenses. The same was rejected by the concerned High Court on grounds that there was the absence of the consent of the complainant for holding the offense to be compounding by nature.
The Supreme Court passed a verdict saying that whatever offenses have been laid down in Section 138 are civil by nature. Further, the provision of compoundable offense is present in Negotiable Instruments (Amendments and Miscellaneous Provision Act), 2002 which does require the consent of both the parties in concern. In the present case, as the company was willing to compensate the complainant, the court in the sake of proper delivery of justice thought of discharging the accused for the complainant was compensated with the amount that was necessary to be provided with.
Harman Electronics Pvt. Ltd.v National Panasonic India Pvt. Ltd. ( 2004)
The apex court in this case was of the decision that no action will be taking place by legal notice but only by the acceptance of such notice. It went on to say that Section 138 is just a condition laid down for taking cognizance and therefore a particular court cannot be provided with territorial jurisdiction just for a notice.
Smt. Asha Baldwa v. Ram Gopal
The court in the case of Smt. Asha Baldwa v. Ram Gopal where the petitioner had filed a suit under Section 482 of the Code of Criminal procedure for being handed with a dishonored cheque held that only handing of such a cheque does not amount to an offense laid down under Section 138 of the Negotiable Instruments Act,1881 for it is not a reasonable ground. With each day passing by, development is taking place in a negotiable industry.
Mayawati v. Yogesh Kumar Gosain
In 2017, the verdict of the Delhi High Court in the case of Mayawati v. Yogesh Kumar Gosain approached a new pathway called the alternate dispute resolution mechanism to decide offenses labeled under Section 138 of the Act which is criminally compoundable by nature. This verdict brought not only a change in dealing with the Act but also a change for the Indian judicial system. It further highlighted that as the offenses labeled under the Negotiable Instruments Act, 1881 are different from other criminal offenses, they can be given a preference to be resolved differently and in a speedy way
Kishan Rao v. Shankargouda (2018) 8 SCC 165
In this case, the Apex Court discussed its view on two legal propositions. Firstly, about the revisional jurisdiction of the High Court where the Apex Court held that High Court in the exercise of revisional jurisdiction shall not interfere with the order of the Magistrate unless it is perverse or wholly unreasonable or there is non-consideration of any relevant material, the order cannot be set aside merely on the ground that another view is possible. Secondly, a presumption in favor of the holder of cheque under Section 139 of NI Act where the court held that the accused may adduce evidence to rebut the presumption, but mere denial regarding existence of debt shall not serve any purpose.
Uttam Ram v. Devinder Singh Hudan (2019) 10 SCC 287
The respondent had procured packing material on credit from the appellant, Uttam Ram, to carry an apple crop bought from various growers. It was found that the respondent owed money for which a cheque was issued. The cheque, however, bounced and the appellant filed a complaint. Supreme Court held that the burden of proving the due amount should not be on the complainant as if he has to prove a debt before a civil court. Rather, the burden to rebut the presumption of debt in the cheque bounce case under Section 138 of the Negotiable Instruments Act is on the accused.
RECENT DEVELOPMENT
Section 138 of the Act enforces strict liability towards the default of payment and is, therefore, a necessary weapon for the regulation of the Act. A lot of steps are being taken towards developments in accordance with the Negotiable Instruments Act, 1881. The Negotiable Instruments (Amendment) Act, 2018, which was brought about on 1st September 2018, widens the ambit of negotiation in India. It provides the court that is hearing an offense on matters of cheque bouncing to issue direction for the drawer to compensate about 20% of the amount on which the cheque was made to the payee within a period of 60 days of such decision. The amendment version of the Act also authorizes the Appellate Court which is hearing appeals under the provision of Section 138 to direct the drawer to deposit 20% of the original compensatory amount.
SC’s new Direction
The bench In Re Expeditious Trial Of Cases Under Section 138 of N.I Act issued the following directions to expedite the trial of cheque dishonor cases under Section 138 NI Act:
The High Courts are requested to issue practice directions to the Magistrates to record reasons before converting trial of complaints under Section 138 of the Act from summary trial to summons trial.
The inquiry shall be conducted on receipt of complaints under Section 138 of the Act to arrive at sufficient grounds to proceed against the accused when such accused resides beyond the territorial jurisdiction of the court.
For the conduct of inquiry under Section 202 of the Code, evidence of witnesses on behalf of the complainant shall be permitted to be taken on affidavit. In suitable cases, the Magistrate can restrict the inquiry to the examination of documents without insisting on the examination of witnesses.
We recommend that suitable amendments be made to the Act for the provision of one trial against a person for multiple offenses under Section 138 of the Act committed within a period of 12 months, notwithstanding the restriction in Section 219 of the Code.
The High Courts are requested to issue practice directions to the Trial Courts to treat service of summons in one complaint under Section 138 forming part of a transaction, as deemed service in respect of all the complaints filed before the same court relating to dishonor of cheques issued as part of the said transaction.
Judgments of the Court in Adalat Prasad v Rooplal Jindal and others (2004) 7 SCC 338 and Subramanium Sethuraman v State of Maharashtra (2004) 13 SCC 324 have interpreted the law correctly and we reiterate that there is no inherent power of Trial Courts to review or recall the issue of summons. This does not affect the power of the Trial Court under Section 322 of the Code to revisit the order of issue of process in case it is brought to the court's notice that it lacks jurisdiction to try the complaint.
Section 258 of the Code is not applicable to complaints under Section 138 of the Act and findings to the contrary in Meters and Instruments Private Ltd and Another v Kanchan Mehta and others (2018) 1 SCC 560 do not lay down the correct law. To conclusively deal with this aspect, an amendment to the Act empowering the Trial Courts to reconsider/recall summons in respect of complaints under Section 138 shall be considered by the Committee constituted the Court on 10.03.2021.
CONCLUSION
Although the legislature bringing about amendments are all working towards one goal of improvement, one must not forget the realities associated with the same. Thousands of cases related to the dishonor of cheques are coming up to the court making the court burden the same. Remedying injustice has become a serious issue when it comes to a commercial dispute in our country. While this is one side of the coin the other side of the coin brings in a lot of positivity as well for a lot of payers have received the compensatory amount on the stipulated frame of the time period. Thus, although there are inconveniences, solutions for resolving the same come along with it.
The amendments to the Act are a great effort aimed at strengthening efficacy and expediency. It will help in the speedy disposal of cases and also discourage frivolous and unnecessary litigation. Further, it upholds the interests of the complainant by providing interim compensation and ordering payment by the accused in case of an appeal against conviction. Credit is given on trust and good faith. It is in the interest of the justice system that these reforms are brought as expeditiously as possible to further ease the process of doing business in India. Section 138 of the Act should not be used by a person who borrows money on credit to delay his commitment to pay and it is the duty of the Court to ensure that it is not made a party to such dilatory tactics.
