Section 138 of the Negotiable Instruments Act - Overview

This article is written by Narender Lodiwal, Advocate Delhi High Court  and edited by Sarabjeet Singh Narula, Advocate.

In today scenario most difficult and TDS job to get back or extract money from any person either you gave him/her on loan or receiving money regarding the job done by you for consideration of money. As we all aware of long and difficult process of litigation under the process of civil suit to extract money. So, to ease the process of long time taking process of litigation negotiable instrument came into existence. Best possible way to get back your money is to receive the payment through cheque.

The essential ingredient of a cheque or promissory note are defined in section – 4 of Negotiable Instrument Act ,1881 which are as follows:-

a. Cheque must be in writing.

b. Cheque has to be an unconditional order.

c. The cheque must explicitly specify the bank.

d. The payment that has to be made must be directed to an identified person/organization.

e. Cheque must be payable on demand.

f. Cheque must be for a specific sum of money.

g. Cheque must bear clear signature of the drawer.

For information read Kerala High Court judgement¹ 

According to section 6 of the NEGOTIABLE INSTRUMENT ACT,1881(herein after called as NI ACT), Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. DISHONOR OF CHEQUE means it is a condition in which bank refuses to pay the amount of cheque to the payee due to insufficiency of funds etc.

There are two benefit of receiving payment through cheque are:-

a. It creates an evidential proof towards dues and liability of drawer.

b. It shortens the process the long time taking process of Civil Suit by bringing the act of drawer under criminal proceeding.

In case of non-releasement of payment i.e. cheque bounce you can approach to court for shorter process under criminal complaint under section-138 of Negotiable Instrument Act 1881.

When will cheque will be terms as cheque bounce?

A cheque bounce is when on unpaid cheque is returned back by the bank, also known as dishonor of cheque.

Cheque bounce can eventuate because of lot of reason, for instance due to insufficiency of funds in the accounts of the drawer and money other reasons.

Dishonour of cheque due to insufficiency of funds in a bank account or due to amount of cheque exceeding the arrangement with a bank, gives rise to a criminal liability against drawer of such a cheque. If a drawer has intention to cheat and to obtain delivery of property by issuing a cheque knowing well that it will not be honoured due to insufficiency of funds in the bank account, it amounts to the criminal offence of cheating as defined in section 415 of the Penal Code, 1860 (IPC) punishable under section 420 IPC. The punishment provided for such cheating under section 420 IPC is imprisonment upto seven years and fine. Intention to cheat is sine qua non and mens rea is an essential constituent of an offence of cheating.

Cheques are dishonoured for a variety of reasons. Some of them are: signatures of drawer on a cheque may differ with specimen signatures with the bank; the date of a cheque may be some future date so that it cannot be honoured on its presentment on an early date (post-dated cheque); there may be interpolations and corrections not signed by a drawer; the validity period of cheque may have expired; there may be insufficiency of funds in the bank account; amount of a cheque may exceed arrangement which a drawer may have made with the bank (overdraft facilities); there may be difference of amount as recorded in words and figures; payment of a cheque may have been stopped by a drawer; payee's endorsement may be irregular; a cheque may be mutilated and a bank account may be already closed. On one or some of these grounds, a cheque is bound to be dishonoured but it does not necessarily give rise to a criminal liability. Amount of such a cheque can always be recovered through process of civil law subject of course to law of limitation and other legal exceptions. 

Note:

The bank always issues a cheque return memo with the specific reason non-payment as soon as the cheque gets bounced or dishonor.

In strict legal sense , the individual / organization issuing the cheque is called a ‘drawer ‘ and the individual / organization in whose favor the cheque has been issued is called ‘ drawee ‘.  Defined in section -7 of Negotiable Instrument Act, 1881.

S 138- NI Act-

“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 extend to 2 [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—

(a) the cheque has been presented to the bank within a period of six months* (three months) from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) 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, [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) 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.

Explanation.—For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

Notes ► Effect of Negotiable Instruments (Amendment) Act, 2015.—The Act vide Section 142(2) r/w Section 142-A appears to have modified the law as laid down in Dashrath Rupsingh Rathod v. State of Maharashtra², whereby it was held that the territorial jurisdiction for filing of cheque dishonour complaint is restricted to the court within whose territorial jurisdiction the offence is committed i.e., which is the location where the cheque is dishonoured or returned unpaid by the bank on which it is drawn. Place of issuance or delivery of the statutory notice or where the complainant chooses to present the cheque for encashment by his bank as per Dashrath Rupsingh Rathod² case were not relevant for purposes of determining territorial jurisdiction for filing of cheque dishonour complaints.

The question that fell for determination was whether dishonor of a cheque would constitute  an offence only in one of the two contingencies envisaged under Section 138 of the act.

While interpreting a penal provision which is also remedial in nature a construction that would defeat its purpose or have the effect of obliterating it from the statute book should be eschewed and that is more than one constructions are possible the court ought to choose a construction that would preserve the work-ability and efficacy of the statute rather than an interpretation that would render the law otiose or sterile.

The two contingencies envisaged under section 138 of the act cannot be interpreted strictly or literally. The expression “amount of money… is insufficient” appearing in section 138 of the act is a genus and dishonour for reasons such as “as account closed”³ , “payment stopped”⁴ , “referred to the drawer”⁵ 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 “signature do not match”⁶  or that the “image is not found”, which too implies that the specimen signature do not match the signatures on the cheque would constitute a dishonour within the meaning of section 138 of the act. There are 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 dishonour of the cheque issued by them.

For instance, it 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 changing the mandate of those authorised to sign the cheque 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 previously authorised signatories. There is no qualitative difference between a situation where the dishonour take 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.

Conditions precedent for constituting an offence under S. 138

There are three distinct conditions precedent, which must be satisfied before the dishonour of a cheque can constitute an offence and become punishable.

(i) The cheque ought to have been presented to the bank within a period of 3 months from the date on which it is drawn or within the period of its validity, whichever is earlier.

(ii) The  payee or the holder in due course of the cheque, as the case may be, ought to make 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.

(iii) The drawer of such a cheque should have failed to make 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 15 days of the receipt of the said notice.

It is only upon the satisfaction of all the three conditions mentioned above and enumerated under the proviso to Section 138 as clauses (a), (b) and (c) thereof that an offence under Section 138 can be said to have been committed by the person issuing the cheque.⁷ 

Sentence

The sentence prescribed under Section 138 is up to two years or with fine which may extend to twice the amount or with both. What needs to be noted is the fact that power under Section 357(3) CrPC to direct payment of compensation is in addition to the said prescribed sentence, if sentence of fine is not imposed. The direction to pay compensation can be enforced by default sentence under Section 64 IPC  and by recovery procedure prescribed under Section 431 CrPC.⁸ 

Compounding of offence [recording of compromise between the parties]

Section 147 makes offence punishable under the provisions of NI Act compoundable.

If the original complainant comes to the Court and says that he is withdrawing himself from prosecution on account of compromise and he has compounded the matter, then the conviction and sentence have to be set aside. No formal permission to compound the offence is required.⁹ 

Though compounding requires consent of both parties, even in absence of such consent, the court, in the interests of justice, on being satisfied that the complainant has been duly compensated, can in its discretion close the proceedings and discharge the accused.¹⁰ 

Quashing of complaint by the High Court under S. 482 CrPC [inherent powers] 

If an accused wants the process under Sections 138 and 141 to be quashed by filing a petition under Section 482 CrPC , he must make out a case that making him stand the trial would be an abuse of process of court.¹¹ 

Where to file a case for S. 138 offence?

If cheque delivered for collection through an account

If the cheque is delivered for collection through an account, the case will be tried by the court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class within whose local jurisdiction the branch of the bank where the payee or holder in due course, as the case may be, maintains the account is situated. [Section 142(2)(a)]

If cheque presented for payment by payee or holder in due course otherwise through an account

In such a situation, the case will be tried by the court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class within whose local jurisdiction the branch of the drawee bank where the drawer of the cheque maintains the account is situated. [Section 142(2)(b)]

Debt or other liability

Explanation to Section 138 is abundantly clear that the dishonoured cheque must have been received by the complainant against a “legally enforceable debt or liability”.¹² 

Liability of a guarantor

The words “any cheque” and “other liablity” in Section 138 clarifies the legislative intent. If the cheque is given towards any liability which may have been incurred even by someone else (such as in a case of a guarantor), the person who draws the cheque is liable for prosecution in case of dishonour of the cheque.¹³ 

Mens rea not required for offence under S. 138

The objective of Parliament was to strengthen the use of cheques, distinct from other negotiable instruments, as mercantile tender and therefore it became essential for Section 138 to be freed from the requirement of proving mens rea [guilty state of mind]. This has been achieved by deeming the commission of an offence dehors mens rea not only under Section 138 but also by virtue of the succeeding two sections. Section 139  carves out the presumption that the holder of a cheque has received it for the discharge of any liability. Section 140 clarifies that it will not be available as a defence to the drawer that he had no reason to believe, when he issued the cheque, that it would be dishonoured.¹⁴ 

Can a case be filed if the cheque is presented for encashment more than once?

The holder or payee of the cheque may present the cheque for encashment on any number of occasions within the period of its validity [three months from the date of issue]. A dishonour, whether based on a second or any successive presentation of a cheque for encashment, would be a dishonour within the meaning of Section 138.¹⁵ 

“ A cheque can be presented any number of times during the period of its validity by payee. 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 such right under Cl (b) of sec. 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.”

How to file a cheque bounce case?

In India a cheque bounce or dishonor is a criminal offence stipulated under section – 138 of the Negotiable Instrument Act, 1881. However in case of cheque dishonor the aggrieved party can file a criminal as well as a civil suit against the accused. Section-138 of Negotiable Instrument Act states that “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 provisions of this Act, be punished with imprisonment for [“a term which may extend to two year”], or with fine which may extend to twice the amount of the cheque, or with both.”

The legal steps must be taken by the drawee/complaint of a cheque are as follows:-

a. Sending a demand notice:- is a first and foremost steps towards litigation after the cheque has been returned by the bank. By sending a formal demand legal notice within the stipulated time of 30 days from the date cheque was presented and returned back by the bank to the drawee. Defines in section 93 of Negotiable Instrument since there is no established format for such a notice, it should simply the demanding and relevant.¹⁶ 

In failure of sending the demand notice within the stipulated time frame, the cheque can be presented again before the bank for the purpose of clearance.

There are some key point which must be present in the Legal Notice as defined in section-94 of Negotiable Act 1881.

(i) It should specifically state that the cheque was presented in the bank within the stipulated time-period.

(ii) It must clearly provide the statement of debt as well as drawer’s legal liability.

(iii) The notice must provide the information provided by the bank on cheque return memo regarding the dishonor of cheque. A copy of the said cheque could also be enclosed.

(iv) Explicit demand for the payment of due with interest if liable to be paid within 15 days of receiving the notice.¹⁷

How to draft a complaint?

A complaint is only affected when the drawer has not replied to the demand notice within a period of 15 days from the delivery of the notice or has been delaying payment unnecessarily or has out rightly refused to pay the amount. A complaint is to be filled in the court which would have the jurisdiction over the dispute within the prescribed time limit of 30 days (from the date of receipt of the demand notice by the drawer). The things must be specific under criminal-138 of N.I Act

a) The scope of business of complaint / drawee.

b) The scope of business of accused / drawer.

c) The point of contact or where meet up with accused.

d) The reason why drawer/accused made the cheque for the complaint/ drawee.

e) When the cheque was presented and when it get dishonored by bank with all relevant, amounts and returned memo.

f) Lastly specific jurisdiction of the court and afore said court has be affixed.

These are the following documents which are essential along with criminal complaint under-138-N.I Act are:

1) Check list

2) Index

3) Memo of Parties

4) Criminal complaint 138 NI Act

5) Affidavit

6) Affidavit of 65 (B) Indian Evidence Act.

7) List of witness

8) List of documents

a) Photocopies of cheque returned by the bank

b) Memo of returned cheque

c) Copy of the Legal Notice

d) Original postal receipt

e) Internet generated tracking report.

Jurisdiction

It is pertinent to understand which court the drawee should approach in a cheque bounce case. The drawee can register the complaint in a court within whose local of jurisdiction any of the following incidents may have arisen.¹⁸ 

i) Place where the cheque was drawn.

ii) Place where the cheque was presented.

iii) Place where bank returned the cheque.

iv) Place where the notice of demand of payment was served by the drawee.

SETTLEMENT DURING TRIAL

The payment by the accused of the full cheque amount during the pendency of trial under sec 138 does not absolve the accused of his liability for the offence of dishonour of cheque. However, the courts take a lenient view in such cases and the accused is set free or punished lightly.¹⁹

The Delhi High Court has also held that if during the pendency of a dispute under sec 138 NI Act the parties enter into a settlement, it should be respected by the courts as proceedings under sec 138 are quasi criminal in nature.¹⁹

EXAMINATION OF COMPLAINANT ON OATH

“The non-obstante clause in sec. 142 or 145 of the NI Act does not override the provisions of sec. 200 CrPC and it is mandatory for the magistrate to examine the complainant who has filed the same under sec 138 of the NI Act though with an affirmation as regards truthfulness of the contents of the complaint. It, therefore, follows that the magistrate is obliged and duty bound to examine upon oath the complainant and his witnesses before issuance of process under section 204 of CrPC though there is a solemn affirmation at the foot of the complainant by the complainant.”²⁰

POST DATED CHEQUE

Post dated cheque – Is not a “cheque” on the date it is drawn – It becomes a “cheque” only on the date written on it – Till that date post-dated cheque remains a bill of exchange.
The post-dated cheque becomes a cheque within the meaning of section 139 on the date which is written thereon and not the 6 months period is to b reckoned for the purposes of proviso (a) to sec 138 from the date. Thus in case of a pot-dated cheque, six months period is to be reckoned from the date mentioned on the face of the cheque and not any earlier date on which the cheque was made over by the drawer to the drawee.²¹

PRESUMPTION UNDER SECTION 139 NI ACT

Section 139 Negotiable Instruments Act provides:

139. Presumption in favour of holder:

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.

“The effect of these presumptions is to place the evidential burden on the accused of proving that the cheque was not received by the complainant towards the discharge of any liability. Because both sections 138 and 139 require that the court shall presume the liability of the drawer of the cheques for the amounts for which the cheques are drawn…it is obligatory on the courts to raise this presumption in every case where the factual basis for the raising of this presumption had been established. It introduced an exception to the general rule as to the burden of proof in criminal cases and shifts the onus on to the accused.”²²

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REFERENCES:

1. SANDHYA RANI G VS STATE OF KERALA ORS. CRL. MC NO. 1310/2019

2. (2014) 9 SCC 129

3. (NEPS MICON LTD. AND OTHERS  VS.  MAGMA LEASING LTD.1999 ISJ (BANKING) 0433; 1999 (1) APEX C.J. 0624; 1999 AIR (SCW) 1637)

4. (MAHENDR S. DADIA VS. STATE OF MAHARASHTRA; I (1999) BANKING CASES (BC) 133 (17/03/1998) )

5. (LILY HIRE PURCHASE LTD. VS. DARSHAN LAL,; (1997) 89 COMPANY CASES 663 (10/01/1997) )

6. (LAXMI DYECHEM V. STATE OF GUJARAT, (2012) 13 SCC 375.)

7. MSR LEATHERS VS. S. PALANIAPPAN , (2013) 1 SCC 177

8. METERS AND INSTRUMENTS (P) LTD. V. KANCHAN MEHTA, (2018) 1 SCC 560.

9. RAMESHBHAI SOMBHAI PATEL V. DINESHBHAI ACHALANAND RATHI, 2004 SCC ONLINE GUJ 469.

10. METERS AND INSTRUMENTS (P) LTD. V. KANCHAN MEHTA, (2018) 1 SCC 560.

11. GUNMALA SALES (P) LTD. V. ANU MEHTA, (2015) 1 SCC 103

12. NANDA V. NANDKISHOR, 2010 SCC ONLINE BOM 54.

13. ICDS LTD. V. BEENA SHABEER, (2002) 6 SCC 426

14. DASHRATH RUPSINGH RATHOD V. STATE OF MAHARASHTRA, (2014) 9 SCC 129.

15. MSR LEATHERS V. S. PALANIAPPAN, (2013) 1 SCC 177 AND ALSO IN AIR 1998 SUPREME COURT 3043

16. (KAMLESH KUMAR VS STATE OF BIHAR 2014(2) SCC 424).

17. C.C. ALAVI HAJI V. PALAPETTY MUHAMMED, (2007) 6 SCC 555

18. DASHRATH RUPSINGH RATHOD VS STATE OF MAHARASHTRA, 2014 AIR (SC) 3519

19. AIR 2007 (DOC) 264 DELHI

20. AIR 2007 (NOC) 1372 (BOM) ; 2007 (3) AIR BOM R 181 (DB)

21. AIR 2001 SUPREME COURT 1315

22. AIR 2001 SUPREME COURT 3897