• Dishonour of Cheque under Section 138

Section 138 of the Negotiable Instrument Act, 1881 was introduced in Chapter XVII of the Act which was inserted by Section 4 of the Banking, Public Financial Institutions and the Negotiable Instruments Laws (Amendment) Act, 1988.[2] Section 138 and Chapter XVII were implemented to make cheques as more desirable instrument of payment and settlement of liabilities by making the drawer liable for penalties, where the cheque drawn was dishonoured due to insufficiency of funds, etc.

There isa plethora of reasons for which a cheque may be dishonoured, say for instance insufficiency of funds in the account, irregular signatures on the cheque, alterations on the cheque etc. However, Section 138 of the Negotiable Instruments Act, 1881 specifically deals with dishonour of cheque for insufficiency of funds and cases where the amount mentioned in the cheque exceeds the amount agreed upon by the drawer and the drawee-bank.

• Object & Purpose of Section 138

The object and purpose of Section 138 can be culled out by making a reference to the Statement and Object of the Amendment Act of 1988. There are a number of objects and purposes that the Section aims at achieving, which are:

1. Enhancing the acceptability of cheques in the settlement of liabilities,[3]
2. Inculcating confidence in the effectiveness of banking operations and in the credibility of negotiable instruments,[4]
3. Promoting greater vigilance in order to avoid the usual clumsy attitude of cheque drawers in terms of discharge of liability or debt,[5] and
4. Providing a prompt remedy to avoid injury or inconvenience to the payee or the endorsee due to the apprehension of incalculable loss likely to be suffered by such parties.[6]

• Dishonour of cheques prior to introduction of Chapter XVII

1. Civil liability before the introduction of Chapter XVII - Before the passing of the Amendment Act of 1988 by which Sections 138 to 142 were added in the Negotiable Instruments Act, 1881, there was no specific mention of criminal liability for dishonour of cheques in the Act. The dishonour of cheque and the consequent non-payment of the amount due thereon vested a right in the payee or in the holder in due course of the said cheque to recourse to the civil courts for the recovery of the said amount and seeking compensation for damages, if any.
   
2. Criminal liability could be fastened before the Amendment - It is not the case that prior to the incorporation of Section 138, no criminal liability could be attached to a drawer whose cheque was eventually dishonoured for insufficiency of funds.[7]As there was no specific criminal offence in the Act dealing with punishment for dishonour of cheques, prior to the 1988 amendment, whether the drawer could be prosecuted was contingent upon the interpretation and application of the relevant provisions from the Indian Penal Code, 1860. The drawer of a worthless cheque could be made criminally liable under Section 420, read with Section 415 of the Indian Penal Code, 1860, which deal with the commission of the offence of cheating.
   
3. Intention to cheat was quintessential - Every dishonour of cheque cannot constitute the offence of cheating. To charge a drawer under these provisions, it needs to be shown that he “cheated” the payee or the holder in due course within the meaning of Section 415 of I.P.C. Intention to cheat and consequently dishonour the cheque therefore, has to be demonstrated and essentially proved before charging a drawer for cheating. It had been held before incorporation of 1988 amendment, that the drawer of a cheque could not be attributed criminal liability for cheating, merely on the ground that the cheque was dishonoured for insufficiency of funds etc. Such dishonour would only result in breach of contract by the drawer.[8]
   
   
4. Protection of fundamental principles of criminal law by heavy reliance on presence of mens rea or the guilty intention–There was seldom conviction for the offence of cheating under I.P.C and the trial usually ended in acquittal. All the ingredients of the offence had to be proved and a very heavy burden was cast on the prosecution to prove the mens rea i.e. the guilty intention at the time of issue of cheque, the burden of which it rarely was able to discharge. Therefore, great emphasis was supplied on making a drawer criminally liable only in the circumstances where intention of deception was apparent, thereby protecting the fundamental principle of criminal law of presence of intention to commit a crime.

• Interaction of Section 138 with Criminal Law: Post Amendment era

Infringements under Section 138 of the Act and Section 420 of the I.P.C. have been held to be distinct, and conviction for an offence under either provision does not prevent prosecution under the other one,[9]and where an offence is committed pursuant to Section 138 of the Act, an offence under Section 420 of the I.P.C. may also be committed if the essentials/ingredients are satisfied.[10]Where a complaint under Section 138 of the Act is filed before the Court on the same set of facts as under Section 420 of I.P.C and FIR is lodged by the police, that alone is not a reason to quash the said FIR.[11]

• Civil Remedies and Section 138

In due course, the civil remedies have always been available to the payee or the holder and he can file a civil suit to recover the dishonoured check amount.In no manner has the inclusion of Chapter XVII revoked the right to this civil remedy.The Court ruled that civil and criminal proceedings against the drawer could be conducted at the same time.[12] Additionally, it has been held that the civil and criminal remedies are not mutually exclusive but are co-extensive.[13]

• Mens Rea not essential under Section 138

Mens rea is usually an essential component of the crime, but the legislature can always generate an offense of absolute or strict liability.[14]
In the cases of Rajinder Steels v. Union of India,[15]B. Mohan Krishna v. Union of India,[16]Mayuri Pulse Mills v. Union of India[17] etc., the Courts held that for an offence under Section 138, mens rea is not essential and that the legislature by incorporating absolute liability or strict liability under Section 138 has tried to accomplish the object sought to be achieved by the Section, as mentioned above.

• Problems associated with criminal liability under Section 138

1. Exclusion of mens rea is not justified: Application of principle of ejusdem generis - Every criminal offence needs the existence of a certain state of mind before an individual can be held guilty of such offense. The existence of the required mens rea is crucial for charging an individual, although the same may not have been provided for under certain laws.[18]Mens rea (the guilty intention) and actus reus (the guilty mind) together form the concept of crime. However, there are certain exceptions created by the legislature where absence of mens rea may not affect the criminal liability, say for e.g. prosecution under NDPS Act, liquor licensing, selling alcohol to minors etc. Now, applying the principle of ejusdem generis, there seems to be no reasonable basis as to why criminal liability without presence of mens rea may be attributed to cases of dishonour of cheque for insufficiency of funds etc.
   
   
2. Quantum of punishment is unreasonable and disproportionate – Section 138 provides for imprisonment for a maximum period of 2 years or fine or both for dishonour of cheque for insufficiency of funds etc. Cheques are modes of payment and are negotiable by nature. They are commonly used in banking operations and transacting business of negotiable instruments. Thus, the use of cheques essentially happens in a civil environment and therefore, 2 years of imprisonment for mere dishonour of cheque (a civil transaction) is not justified even when weighed against the object and purpose of Section 138 of the Act, as mentioned earlier.[19]

• Comparative analysis of dishonour of cheques

It is essential to analyse how other nations and justice systems cope with the problem of dishonouring of cheques, especially to see whether their techniques can help induce efficient suggestions for India. Legal liabilities have been analysed for dishonouring of cheque in the justice systems of the following five nations:

1. Australia -

   The Australian legal system prescribes civil remedies for dishonoured cheques under the Cheques Act of 1986.[20] To claim damages, the payee has the choice to file a civil suit though there is no specific provision attributing criminal liability in such cases.
   

2. United Kingdom -

   The United Kingdom makes accessible to the payee only a civil remedy and provides them the choice to file a civil suit for damages under the Bills of Exchange Act, 1882.[21]

3. Singapore -

   Singapore's legal system places civil liability on drawers that dishonour checks. There is no provision imposing criminal liability.[22]
   

4. France -

   While France also imposes civil liability on check dishonour instances, an interesting scheme has been put in place to register those who have given more than one dishonoured cheque to a master database called the Fichier Central des Chèques (FCC) and prohibitssuch drawers from drawing a cheque for a period of five years.[23]
   

5. United States of America -

   The United States of America's check dishonour legislation differs from state to state.Both civil as well as criminal liability are imposed by different states differently.[24]Civil liability includes payment of an amount being double or triple the amount of the cheque, while criminal liability includes imprisonment and imposition of fines. Also, it is pertinent to note here that majority of the states in USA impose civil liability only in cases of dishonour of cheque

• Reverting back to Civil Liability but with certain amendments

By referring to the procedure adopted by other countries for dealing with cases of dishonour of cheques and also to the history of the provision before incorporation of Chapter XVII, the conclusion that we must revert back to civil liability i.e. suit for recoveryof amount along with criminal liability only in the cases where strong burden of proving the guilty intention to cheat is discharged, stands warranted.

Application of principle of ejusdem generis is indicative of the fact that strict criminal liability cannot be attributed to the cases of dishonour of cheque and it is for this very reason that other jurisdictions provide for civil liability only.

Proposed amendment in civil liability by the author - The criminal liability for dishonour of cheque therefore, must be done away with and the previous position of law i.e. civil liability must be brought into force again but with certain changes drawing inspiration from France’s procedure of dealing with cases of dishonour of cheque. A similar the system can be brought in place which registers those drawers who have drawn more than one dishonored cheque and exempt them from drawing a cheque for the following year. In this way, the object intended to be achieved by incorporation of criminal liability under Section 138 will be achieved without actually imposing criminal liability on the drawers.

Therefore, this is a win-win situation where the fundamental principles of law and the object of enhancing the acceptability of cheques in the settlement of liabilities stand balanced and protected.

End-Notes:

1. 138, The Negotiable Instruments Act, 1881; § 4, Banking, Public Financial Institutions and the Negotiable Instruments Laws (Amendment) Act, 1988.
2. SadanandanBhandaran v. Madhavan Sunil Kumar, A.I.R. 1998 S.C. 3043.
3. M/s Dalmia Cement (Bharat) Ltd. v. M/s Galaxy Traders & Agencies Ltd., (2001) 1 B.C. 684 S.C.; NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) S.C.C. (Crl.) 524.
4. Rajinder Steel Ltd. v. Union of India, (2000) 100 Comp Cas 274 D.B.
5. Y Krishnamurthy v. Sharnappa, (1998) 2 Kar L.J. 1; B Harikrishna v. Macro Links Pvt. Ltd., Bangalore, (2000) 2 B.C. 313.
6. Khergamwala, The Negotiable Instruments Act, 22ndedn.
7. MM St. Chidambaram Chettiar v. Shanmugham Pillai, A.I.R. 1938 Mad 129.
8. K.S. Anto v. Union of India, (1993) 76 Comp Cas 105.
9. Meenakshi Sudersan Textile Ltd. v. GokulchandRakhabchand, (2002) 2 Crimes 432.
10. Rajat Mittal v. State, (2002) 1 BC 250.
11. Harbhajan Singh v. State of Uttar Pradesh, (2005) 1 J.C.C. 69 (All.).
12. M/s Medchl Chemicals & Pharma (p) Ltd. v. M/s Biological E Ltd., A.I.R. 2000 S.C. 1869.
13. Khergamwala, The Negotiable Instruments Act, 22ndedn.
14. Rajinder Steels v. Union of India,(2000) 100 Comp Cas 274 (D.B.)
15. B. Mohan Krishna v. Union of India, (1996) 86 Comp Cas 487.
16. Mayuri Pulse Mills v. Union of India, (1996) 86 Comp Cas 121.
17. Bhashyam&Adiga’s, The Negotiable Instruments Act, 19thedn.
18. Ramya Sridhar Tirumalai, Promise to Pay: An Analysis of Cheque Dishonour Cases.
19. Division 2 and Division 3 of the Cheques Act, 1986, available online at https://www.legislation.gov.au/Details/C2017C00074.
20. Sections 43 and 44 of the Bills of Exchange Act, 1882, available online at http://www.legislation.gov.uk/ukpga/Vict/45-46/61.
21. Sections 43 and 44 of the Bills of Exchange Act, Chapter 23.
22. BIS. 2012. ‘Payment, Clearing and Settlement Systems in France’available athttps://www.bis.org/cpmi/publ/d105_fr.pdf.
23. National Check Fraud Center, available online at http://www.ckfraud.org/penalties.html.

Written By: Abhinav, a 2nd year law student at National Law University, Jodhpur. Abhinav takes a keen interest in writing on the topics of legal importance and eminence. His legal skills are also demonstrated in the form of moot court competitions.
He may be contacted at: E-Mail - [email protected]