[Disclaimer: This note is for general information only. It is NOT to be substituted for legal advice or taken as legal advice. The publishers of the blog shall not be liable for any act or omission based on this note]
Introduction
Over the years there have been many important changes in the way cheques are issued/bounced/dealt with. Commercial globalisation has resulted in giving a big boost to our country. With the rapid increase in commerce and trade, use of cheque also increased and so did the cheque bouncing disputes.[1] The object of Sections 138-142 of the Negotiable Instruments Act, 1881 is to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques.[2]
Section 138 casts a criminal liability punishable with imprisonment or fine or with both on a person who issues a cheque towards discharge of a debt or liability as a whole or in part and the cheque is dishonoured by the bank on presentation.[3] Section 138 was enacted to punish unscrupulous drawers of cheques who, though purport to discharge their liability by issuing cheque, have no intention of really doing so. Apart from civil liability, criminal liability is sought to be imposed by the said provision on such unscrupulous drawers of cheques. However, with a view to avert unnecessary prosecution of an honest drawer of the cheque and with a view to give an opportunity to him to make amends, the prosecution under Section 138 of the Act has been made subject to certain conditions. These conditions are stipulated in the proviso to Section 138.[4]
In criminal law, commission of offence is one thing and prosecution is quite another. Commission of offence is governed by Section 138 of the Act. Prosecution is governed by Section 142 of the Act.[5] It is also noteworthy that Section 138 while making dishonour of a cheque an offence punishable with imprisonment and fine, also provides for safeguards to protect drawers of such instruments where dishonour may take place for reasons other than those arising out of dishonest intentions. It envisages service of a notice upon the drawer of the instrument calling upon him to make the payment covered by the cheque and permits prosecution only after the expiry of the statutory period and upon failure of the drawer to make the payment within the said period.[6]
Negotiable Instruments Act, 1881
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 extend 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 —
(a) 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;
(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.
Classification of Offence
An offence committed under Section 138 is a non-cognizable offence (a case in which a police officer cannot arrest the accused without an arrest warrant). Also, it is a bailable offence.
Cases
Ingredients
The ingredients of the offence under Section 138 are:
(a) cheque is drawn by the accused on an account maintained by him with a banker;
(b) the cheque amount is in discharge of a debt or liability; and
(c) the cheque is returned unpaid for insufficiency of funds or that the amount exceeds the arrangement made with the bank, the offence standing committed the moment the cheque is returned unpaid.
Further steps laid down by way of the proviso are distinct from the ingredients of the offence which the enacting provision creates and makes punishable. Thus, an offence within the contemplation of Section 138 is complete with the dishonour of the cheque but taking cognizance of the same by any court is forbidden so long as the complainant does not have the cause of action to file a complaint in terms of clause (c) of the proviso read with Section 142, Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129.
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 6 months [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, MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177.
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, Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
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, Rameshbhai Sombhai Patel v. Dineshbhai Achalanand Rathi, 2004 SCC OnLine Guj 469.
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, Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
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, Gunmala Sales (P) Ltd. v. Anu Mehta, (2015) 1 SCC 103.
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”, Nanda v. Nandkishor, 2010 SCC OnLine Bom 54.
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, ICDS Ltd. v. Beena Shabeer, (2002) 6 SCC 426.
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, Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129.
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, MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177.
“Stop payment” instructions by the drawer
A complaint under Section 138 can be made not only when the cheque is dishonoured for reason of funds being insufficient to honour the cheque or if the amount of the cheque exceeds the amount in the account, but also where the drawer of the cheque instructs its bank to “stop payment”. If the accused shows that in his account there were sufficient funds to clear the amount of the cheque at the time of presentation of the cheque and that the stop-payment notice had been issued because of other valid causes, then offence under Section 138 would not be made out, MMTC Ltd. v. Medchl Chemicals and Pharma (P) Ltd., (2002) 1 SCC 234.
Case of a post-dated cheque
On the faith of payment by way of a post-dated cheque, the payee alters his position by accepting the cheque. If stoppage of payment before the due date of the cheque is allowed to take the transaction out of the purview of Section 138, it will shake the confidence which a cheque is otherwise intended to inspire regarding payment being available on the due date, Goaplast (P) Ltd. v. Chico Ursula D’Souza, (2003) 3 SCC 232.
“Account closed” by the drawer
Return of a cheque on account of account being closed would be similar to a situation where the cheque is returned on account of insufficiency of funds in the account of the drawer of the cheque which squarely brings the case within Section 138, NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) 4 SCC 253.
“Signatures do not match”
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”, would constitute a dishonour within the meaning of Section 138 of the Act, Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375.
Notice under S. 138
When the notice is sent by registered post by correctly addressing the drawer of the cheque, the mandatory requirement of issue of notice in terms of clause (b) of proviso to Section 138 of the Act stands complied with. It is needless to emphasise that the complaint must contain basic facts regarding the mode and manner of the issuance of notice to the drawer of the cheque, C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.
Presumption as to service of Notice
It is clear from Section 27 of the General Clauses Act, 1897 and Section 114 of the Evidence Act, 1872 that once notice is sent by registered post by correctly addressing to the drawer of the cheque, the service of notice is deemed to have been effected. However, the drawer is at liberty to rebut this presumption, N. Parameswaran Unni v. G. Kannan, (2017) 5 SCC 737.
What if addressee refuses to receive Notice
The Supreme Court in a catena of cases has held that when a notice is sent by registered post and is returned with postal endorsement “refused” or “not available in the house” or “house locked” or “shop closed” or “addressee not in station” or “intimation served, addressee absent”, due service has to be presumed, N. Parameswaran Unni v. G. Kannan, (2017) 5 SCC 737.
Payment may be made within 15 days of receiving summons if Notice not received
Any drawer who claims that he did not receive the notice sent by post, can, within 15 days of receipt of summons from the court in respect of the complaint under Section 138, make payment of the cheque amount and submit to the court that he had made payment within 15 days of receipt of summons (by receiving a copy of complaint with the summons) and, therefore, the complaint is liable to be rejected, C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.
Presumption under S. 139
Once the execution of cheque is admitted, Section 139 creates a presumption that the holder of a cheque receives the cheque in discharge, in whole or in part, of any debt or other liability, Basalingappa v. Mudibassapa, 2019 SCC OnLine SC 491.
This presumption is no doubt rebuttable at trial but there is no gainsaying that the same favours the complainant and shifts the burden to the drawer of the instrument (in case the same is dishonoured) to prove that the instrument was without any lawful consideration, Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375.
Note: Presumption under Section 139 is frequently read with Section 118 providing presumption of consideration, presumption as to date on the instrument, etc.
Case of a blank cheque
If a signed blank cheque is voluntarily handed over to a payee, towards some payment, the payee may fill up the amount and other particulars. This in itself would not invalidate the cheque. The onus would still be on the accused to prove that the cheque was not in discharge of a debt or liability by adducing evidence. It is immaterial that the cheque may have been filled in by any person other than the drawer, if the cheque is duly signed by the drawer, Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197.
Case of a fiduciary relationship between complainant and accused [relationship of trust and confidence]
The existence of a fiduciary relationship between the payee of a cheque and its drawer, would not disentitle the payee to the benefit of the presumption under Section 139, in the absence of evidence of exercise of undue influence or coercion, Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197.
Rebutting the presumption
When an accused has to rebut the presumption under Section 139, the standard of proof for doing so is that of “preponderance of probabilities”. Therefore, if the accused is able to raise a probable defence which creates doubt about the existence of a legally enforceable debt or liability, the prosecution can fail. The accused can rely on the materials submitted by the complainant in order to raise such a defence and it is conceivable that in some cases the accused may not need to adduce evidence of his own, Rangappa v. Sri Mohan, (2010) 11 SCC 441.
Not necessary for accused to appear in witness box for rebuttal
It is not necessary for the accused to come in the witness box in support of his defence. Section 139 imposes an evidentiary burden and not a persuasive burden, Basalingappa v. Mudibassapa, 2019 SCC OnLine SC 491.
Complainant to prove financial capacity if disputed by accused
It is incumbent upon the complainant to prove his financial capacity to extend the loan in question, if the accused disputes the same, Basalingappa v. Mudibassapa, 2019 SCC OnLine SC 491.
Complaint by a company
The complainant has to be a corporeal person who is capable of making a physical appearance in the court. If a complaint is made in the name of an incorporeal person (like a company or corporation) it is necessary that a natural person represents such juristic person in the court. There may be occasions when different persons can represent the company, Associated Cement Co. Ltd. v. Keshvanand, (1998) 1 SCC 687.
Defect can be rectified later
Even if initially there was no authority given by the company in favour of the de facto complainant, still the company can, at any stage, rectify that defect. At a subsequent stage the company can send a person who is competent to represent the company, MMTC Ltd. v. Medchl Chemicals and Pharma (P) Ltd., (2002) 1 SCC 234.
Offence by companies and vicarious liability of officers of the Company
Three categories of persons can be discerned from Section 141 who are brought within the purview of the penal liability through the legal fiction envisaged in the section. They are: (1) the company which committed the offence, (2) everyone who was in charge of and was responsible for the business of the company, and (3) any other person who is a director or a manager or a secretary or officer of the company, with whose connivance or due to whose neglect the company has committed the offence, Anil Hada v. Indian Acrylic Ltd., (2000) 1 SCC 1.
Section 141 extends criminal liability on account of dishonor of cheque in case of a company to every person who at the time of the offence, was in charge of, and was responsible for the conduct of the business of the company. By a deeming provision contained in Section 141, such a person is vicariously liable to be held guilty for the offence under Section 138 and punished accordingly, SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.
Case against the Directors
A director of a company who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable for a criminal offence under the provisions, National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330.
Impleading the Company as accused necessary
The commission of offence by the company is an express condition precedent to attract the vicarious liability of others. For maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The only exception would be in a case where the company cannot be prosecuted against without obtaining sanction of a court of law or other authority. In such case, trial against the other accused may be proceeded against if ingredients of Sections 138 and 141 are otherwise fulfilled, Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661.
Necessary averments in complaint to put vicarious liability
For making directors liable for the offences committed by the company under Section 141, there must be specific averments against the directors, showing as to how and in what manner they were responsible for the conduct of the business of the company, National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330.
Case of a Managing Director and signatory of a cheque
Specific averments against the Managing Director or Joint Managing Director are not required to be made in the complaint. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under sub-section (2) of Section 141, SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.
Offence by a partnership firm and vicarious liability of partners
For the purpose of Section 141, a firm comes within the ambit of a company.
Partner of a firm is liable to be convicted for an offence committed by the firm if he was in charge of and was responsible to the firm for the conduct of the business of the firm or if it is proved that the offence was committed with the consent or connivance of, or was attributable to any neglect on the part of the partner concerned, Katta Sujatha v. Fertilizers & Chemicals Travancore Ltd., (2002) 7 SCC 655.
Online proceedings
At least some number of Section 138 cases can be decided online. If complaint with affidavits and documents can be filed online, process issued online and the accused pays the specified amount online, it may obviate the need for personal appearance of the complainant or the accused. Only if the accused contests, need for appearance of parties may arise which may be through counsel and wherever viable, video-conferencing can be used. Personal appearances can be dispensed with on suitable self-operating conditions. This is a matter to be considered by the High Courts and wherever viable, appropriate directions can be issued, Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
Interim compensation to the complainant
Section 143-A empowers the Court trying an offence under Section 138, to order the drawer of the cheque to pay interim compensation to the complainant which shall not be more than 20% of the amount of the cheque. Such interim compensation has to be paid by the drawer within a period of 60 days (extendable by 30 days) from the date of the order directing such compensation. Such compensation may be recovered as if it were a fine under Section 421 CrPC.
If the drawer of the cheque is acquitted, the complainant has to repay the amount of such compensation received within 60 days (extendable by 30 days) from the date of the acquittal order. The complainant has also to pay interest on such amount at the bank rate as published by RBI prevalent at the beginning of the relevant financial year.
Payment pending appeal against conviction
A drawer of cheque who is convicted under Section 138, may file an appeal against his conviction. In such a case, by the provision of Section 148, the Appellate Court can order him to deposit such sum which shall be at least 20% of the compensation or fine awarded by the trial court. Such amount is payable in addition to any interim compensation paid under Section 143-A. The Court can release such amount to the complainant at any time during pendency of the appeal.
In case of appellant’s acquittal, the complainant has to repay the amount to him in the same manner as mentioned above under “interim compensation to the complainant”.
Further Suggested Reading
1. Avtar Singh –
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