Of Penalties In Case Of Dishonour Of Certain Cheques For Insufficiency Of Funds In The Accounts

Introduction:
Law of Dishonour of Cheques:

• Ss. 138 to 142 by Act of 1988
• Ss. 143 to 147 by Act of 2002

Sections 91 to 99 of the Negotiable Instruments Act, 1881 deal with dishonour of negotiable instruments inter alia cheques as well and notice of the dishonour thereof. Before 1988 dishonour of cheques was regarded only a moral obligation, thus people were never sincere about honour (payment) of cheques issued by them, therefore cases of dishonour of cheques were rampant in society.

There were no provisions in the Act to deal effectively the cases of dishonour of cheques. This created a feeling of shy and fear among people accepting cheques as means of payment. The holder of the cheque aggrieved by dishonour was helpless because he had no remedy against the drawer of the cheque. This necessitated a new law on dishonour of cheques.

Thus, in 1988 a new CHAPTER XVII was incorporated for "penalties in case of dishonour of cheques due to insufficiency of funds" in the account of the drawer (account holder) of the cheque. New Sections 138 to 142 were added in the Act and in 2002 further Sections 143 to 147 were also added making a complete code on dishonour of cheques as an offence and cognizance thereof.

The objects of amendment were mainly:

1. to encourage the use of cheques, and
2. to enhance the credibility and acceptability of cheques.

Aims and objects of the Chapter
The main aim and object of the N.I. Act, 1881 has been to legalize the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods. The purpose of the Act was to present an orderly and authoritative statement of the leading rules of law relating to the negotiable instruments. The Act intends to legalize the system under which claims upon mercantile instruments could be equated with ordinary goods passing from hand to hand.

In the present economic scenario encouraging the culture of use of cheques and enhancing the credibility of the instruments has become prime necessity in modern commercial transactions and dealings in money. With this view, the N.I. Act, 1881 was amended in 1988 by the Banking Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988.

Broadly speaking the main objects and reasons of amending provisions are:

1. Firstly, to encourage the culture of use of cheques, and
2. Secondly, to enhance the credibility of the cheque in commercial transactions.

"The objectives of the proceedings of Section 138 of the Act are that the cheques should not be used by persons as a tool of dishonesty that then cheque is issued by a person, it must be honoured and if i is not honoured, the person is given an opportunity to pay the cheque amount by issuance of a notice and if he still does not pay, he must face the criminal trial and consequences..."

Further the purpose of amendment existing provisions and particularly of Sections 143 to 147 has been explained as:
We have indicated, Sections 138 to 142 of the Act were found to be deficient in dealing with the dishonoured cheques. In the said circumstances, the Legislature inserted new Sections 143 to 147 by the Negotiable Instruments (Amendment and Miscellaneous Provisions Act, 2002, which is brought into force w.e.f. 6th February, 2003. The object and reasons for the said Amendment Act are of some importance and are given below :-

The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque.

These provisions were incorporated with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument. The existing provisions in the Negotiable Instruments Act, 1881, namely, Sections 138 to 142 in Chapter XVII have been found deficient in dealing with dishonour of cheques.

Not only the punishment provided in the Act has proved to be inadequate, the procedure prescribed for the Courts to deal with such matters has been found to be cumbersome. The Courts are unable to dispose of such cases expeditiously in a time bound manner in view of the procedure contained in the Act.

Section-138: Dishonor of cheque due to insufficiency of funds in the account:

• When a person maintains his account with a banker. The person draws a cheque for payment of any amount of money to another person for discharge of any debt or liability in whole or in part out of that account.
• The payee or holder in due course of a cheque makes a demand for payment of money by giving notice in writing to the drawer within 30 days after receiving information from the bank regarding the return of cheque unpaid.
• The said cheque is returned by the bank because of insufficiency of funds or
• If the amount to be paid by cheque exceeds the payment limit fixed by the agreement between the person and the bank, such person shall be deemed to have committed an offence.

Such person shall be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to twice the amount of the cheque, or with both.

• The provisions of this section shall not apply when:
  • Not presented to the bank within six months from the date of issue of the cheque or within the period of validity of the cheque (which is three months), whichever is earlier.
  • The cheque has been returned without payment from the bank.
  • In case of dishonor of a cheque, notice of payment of the amount due should be given to the drawer of the cheque within thirty days of the receipt of the notice of dishonor.
  • The drawer of such cheque fails to pay the said amount to the payee or the holder in due course, within fifteen days of the receipt of the said notice.

Objective of section 138 of the Negotiable Instruments Act:
In this, there is a penal provision for dishonor of cheque and to maintain public confidence in it by strengthening banking proceedings and to bring credibility in the transactions through negotiable instruments.

Case:

• Kamlesh Kumar Vs. State of Bihar 2014 S.C. 660: Is an important case in which it was held by the Supreme Court that if the notice is not given within thirty days from the date of return of the cheque dishonored from the bank, the complaint shall not be maintainable.
  
  When the above conditions are fulfilled, the drawer of a cheque is deemed to have committed an offence, then the holder may apply to a Judicial Magistrate of the first class or a Metropolitan Magistrate within one month of the occurrence of the cause of action.
   
• NEPC Micon Ltd Vs. Magma Leasing Ltd. (1999) 4 SCC 253: The Supreme Court held that when a cheque is returned with the mark 'Account closed', it amounts to dishonour within the meaning of section 138 and hence it constitutes an offence under section 138.
   
• Dalmia Cement (India) Ltd. Vs Galaxy Traders Agency Ltd., (2001) 6 S.C.C. 643: In this case, after the dishonor, a notice of demand for payment was given within time. Notice was received or acceptance of service was also received. The drawer of the cheque argued that he received an envelope which was empty. There was nothing inside the envelope. The holder of the cheque presented the cheque again. On being dishonored again, he sent another notice to the drawer for payment. The complaint filed on the basis of this notice was held to be correct.

Cause of Action
When the holder of the cheque receive information that the cheque has been dishonored, he should give a written notice to the drawer within thirty days and makes a demand for payment of money. Notice of demand for payment may be given by fax or by registered post.

The liability to pay the cheque starts from the date on which the notice is received by the drawer. If the amount called for by the notice is paid within 15 days, then the liability under section 138 of the Drawer ceases. Provided that if the cheque drawer does not make the payment within the next 15 days after receiving the notice, then the provisions of section 138 will come into force and from the 16th day a cause of action arises.

The cause of prosecution arises only once:

• A cheque can be presented maximum three times up to 3 months from the date of issue of cheque, once the notice is issued after the dishonor, the time for initiation of proceedings starts from the time it is received by the drawer. That period cannot be extended by giving a new notice.
   
• S. L. Construction V. Alapathi Srinivasa Rao, 2009 (1) S.C.C. 500:
  In this matter, a cheque was presented thrice and each time dishonored, and notice was also issued thrice. The first two notices were sent to the wrong address. The second notice was withdrawn by the complainant on the objection of the Drawer himself. The correct address was mentioned on the third notice and was also received by him, but payment was not made within 15 days. It was held by the Supreme Court that the cause of action arose with reference to the third notice. The complaint was filed within a month of this. The preconditions for initiation of prosecution were fulfilled, so, the question of quashing the complaint did not arise.
   
• Mashraf Hussain Khan Vs. Bhagirath Engineering Ltd., 2006 (3) S.C.C. 658:
  In this matter, the Supreme Court held in respect of section 138 that the main object of the Negotiable Instruments Act is to strengthen the law to practice which seeks to facilitate the transfer of instruments as much as the transfer of goods. The dealings related to the instrument had to be presented by the force of law. There are some such provisions in the Act by the legislature in which the liability arising under the instrument can be enforced by special procedure.
   
• Suman Sethi vs Ajay K. Churiwal (2002) S.C.C. 380: The Supreme Court held that since the provisions of section 138 are penal, they should be strictly interpreted. If the dishonored cheque was signed by the joint holders, it was held that either the payee could have proceeded against all of them or against any one of them, or it was clear from the facts of the signature that all those joint holders were active partners. (Suresh Kallappa Makvi Madan Bindurao Desai A.I.R. 2009 NOC 130)

Exception:
One of the main components under Section 138 of the Negotiable Instruments Act is the issue of a cheque by person to another person in order to be discharged from his debt or liability, which is lawfully enforceable. Provided that if such cheque is for the fulfillment of a social obligation other than a debt or liability enforceable by law, such as:

1. Birthday Gifts,
2. Wedding gift
3. Gift etc.

And such cheque is dishonored on account of inadequacy in the account of the customer, the drawer shall not be deemed to be guilty of any offence.

M Abbas Haji v T N Channakeshva, (2019) 9 scc. 606:
In case of death of a person convicted of an offence under section 138, his legal heir is neither liable to fine nor to imprisonment. He has the right to challenge the conviction of his predecessor only for the purpose that he was not guilty of any offence.

Sicagen India Ltd. Vs Mahindra Vadineni, (2019) 4 SCC 271:
The Supreme Court held that the complaint of 'cheque dishonor' filed on the basis of second statutory notice issued after re-presentation of the cheque is maintainable.

Dashrath Roop Singh Rathod v State of Maharashtra, (2014) 9 SCC 129:
The Supreme Court held that a complaint of dishonor of a cheque can be filed only in a court within whose local jurisdiction the cheque has been dishonored by the bank on which it is drawn.

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 section138 for the discharge, in whole or in part, of any debt or other liability.

Mo. Rafiq Vs. Abdullah, A.I.R. 2009 N.O.C. 124 Bombay:
It was held by the Bombay High Court that the presumption under section 139 is rebuttable. It can be rebutted by the accused. It was alleged by the accused that his blank cheque was stolen by his servant who is a close friend of the complainant. Documentary evidence to this effect shall also produced. This was considered sufficient rebuttable.

140. Defence which may not be allowed in any prosecution under section 138:
It shall not be a defence in a prosecution for an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section.

Section-141 - Section 141 of the Negotiable Instruments Act provides for offences committed by a company.

Offences are committed by a company under section 138, then the following persons shall be liable for it:

• that company,
• the person responsible for the conduct of the business of the company,
• In-charge of the company. The aforesaid person may defend himself by proving that:
  • the offence was committed without his knowledge, or
  • he exercised all due diligence to prevent the commission of such offence.

Note: Where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, he shall not be liable for prosecution. Section 141(2) provides that where any offence under this Act is committed by a company, the following shall also be deemed guilty for such offence:

• Director
• manager
• Secretary
• Other officers

If it is proved that the offence is committed:

• with consent, or
• connivance, or
• neglect on the part of the above-mentioned persons.

G. Ramesh Vs. Kanike Harish Kumar Ujjwal Criminal Appeal No. 603 V 2019: The Supreme Court held that the expression 'company' used in section 141 includes a partnership firm or association of individuals.

Section: 142 – Cognizance of offence:

1. No court shall take cognizance of an offence punishable under section 138 unless the payee or the holder in due course makes a complaint in writing.

• Such complaint should be made within one month from the date on which the cause of action arises under proviso (c) of Sec. 138.

Note: If the complainant satisfies the court that due to sufficient cause he has not been able to make the complaint within the said period, then the cognizance of the complaint may be taken by the court even after the prescribed period. The offence mentioned in section 138 shall be tried by the:

• Metropolitan Magistrate
• Judicial Magistrate of the first class

2. An offence punishable under section 138 shall be inquired into and tried by such court within whose local jurisdiction:
   • the branch of the bank where payee or the holder in due course maintains the account is situated, or if the cheque is delivered for collection through an account,
   • the branch of the bank where the drawer maintains the account is situated, if the cheque is presented for payment by the payee or the holder in due course through the account.

Note: According to the proviso of section 142, cognizance of the complaint can be taken even after the time for making a complaint has elapsed if the complainant satisfies the court that due to any sufficient reason he could not present his complaint within the time limit. This proviso was inserted by the Amendment Act No. 55 of 2002.

Section: 142 A – Validation of transfer of pending cases:

1. All matters transferred to a Court having jurisdiction under section 142(2), as amended by the Negotiable Instruments (Amendment) Ordinance, 2015, shall be deemed to have been transferred under this Act as if that sub-section were in force at all material times.
2. Notwithstanding anything contained in section 142(1) or 142(2), the payee or the holder in due course has filed a complaint against the drawer of a cheque in a court having jurisdiction under section 142(2), or if the case under 142(1) has been transferred to that Court and such complaint is pending in that Court, then all subsequent complaints against that same drawer arising out of section 138 shall be filed before the same court irrespective of whether those cheques were delivered for collection or presented for payment within the territorial jurisdiction of the same court.
3. If on the date of commencement of the Negotiable Instruments (Amendment) Act, 2015 more than one prosecution filed by the same payee or holder in due course against the same drawer of cheques is pending before different courts, then when the said facts are brought to the notice of the Court, the Court shall transfer the matter, having jurisdiction under sub-section (2) of section 142, as amended by the Negotiable Instruments (Amendment) Ordinance, 2015, before which the first case was presented and is pending, as if that sub-section were in force at all material times.

Section: 143 - Power of court to try case summarily:

1. All offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 of the Code of Criminal Procedure shall apply to such trial.

Note: It shall be lawful, in case of any conviction in a summary trial, to pass a sentence of imprisonment for a term not exceeding one year and with a fine that exceeds five thousand rupees. Note: At the commencement of a summary trial under this section, if it appears to the Magistrate that the nature of the case is such that imprisonment for a term exceeding one year may have to be passed, or for any other reason, a summary trial of the case is undesirable, then the Magistrate shall after hearing the parties record an order to this effect and recall the witness, who may be examined and proceed to hear or re-hear the case in accordance with the Code of Criminal Procedure.

2. The trial of the case shall be continued day by day in the interest of justice.
3. Every trial shall be held as expeditiously as possible and an endeavor shall be made to conclude the trial within six months from the date of filing of the complaint.

Section 143-A - Power to direct interim compensation:

• The Court, while trying the offence under section 138, may order the drawer for the payment of interim compensation to the complainant in the following situations:
  • In a Summons case or a Summary Trial where the drawer does not plead guilty.
  • On framing of charge in other cases.
• The amount of interim compensation shall not exceed 20 per cent of the amount of the cheque.
• Such compensation shall be paid within sixty days from the date of the order or within such further period not exceeding thirty days.

Note: The Court may extend such period if sufficient cause is shown by the drawer of the cheque.

• If the drawer of the cheque is acquitted, the Court shall direct the complainant to repay to the drawer the amount of interim compensation along with interest at the bank rate published by the Reserve Bank of India or prevalent at the beginning of the relevant financial year.

Note: If the appellant is acquitted, the Court shall direct the complainant to repay the amount so released within sixty days from the date of the order or for such further period not exceeding thirty days on sufficient cause being shown with interest at the bank rate published by the Reserve Bank of India & prevalent at the beginning of relevant financial year.