Dishonour of Cheque - Sec. 138 of NI Act

Before 1988 there being no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them in the vent of such cheque not being honoured by their bankers and returned unpaid. Of course on dishonour of cheques there is a civil liability accrued. However in reality the processes to seek civil justice becomes a long drawn process and recovery by way of a civil suit takes an inordinately long time. To ensure prompt remedy against defaulters and to ensure credibility of the holders of the negotiable instrument a criminal remedy of penalty was inserted in 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 attempts to elucidate the penal provision in the light of the amendments and the judicial interpretations. 
 Many issues arise under this section such as what happens in case of default, who will be liable to the holder of the cheque, what are the procedures involved to make the case adept in the eyes of the magistrate, etc. in this paper the researcher has attempted to look at all these issues comprehensively and analyse them with sufficient illustrations.
 The Negotiable Instruments Act, 1881 [hereinafter ‘N.I.Act’] was amended in the year 1988 to add – Chapter XVII which pertains to “penalties in case of dishonor of certain cheques for insufficiency of funds in the accounts’ and contains sections 138 to 147.
  But prior to getting into a study as to the penalties imposed on indiscriminate use of this particular species of Negotiable Instruments, it becomes pertinent to understand, though a in a brief manner what is a Negotiable Instrument – According to Willis a Negotiable Instrument is Property which is acquired by anyone who takes it bonafide – for value, notwithstanding any defect of title in the person from whom he took it.
  A more comprehensive Definition has been attempted by Prof. Avtar Singh “Negotiable Instrument is a piece of paper while entitles a person to a sum of money and which is transferable from person to person by mere delivery or by endorsement or delivery. A person taking a Negotiable Instrument in good faith and for value becomes the true owner even if he takes from a thief or finder.
  A cheque is a species of negotiable instrument act as per S. 6 of the Act. In Recent times cheques have become the standard payment procedure in business transactions for discharge of liability – but many a cases of indiscriminate use of cheques have come to light – where cheques given are not honoured, Chp. 17 of the N.I.Act (brought by 1988 Amendments) w.e.f from 1st April, 1989, empowers the court to the visit such a defaulter with penal consequences.
  This penal provision & the judicial approach to the various issues arising out of it forms the subject matter of the present work.
  Section – 138 of the Negotiable Instruments Act, 1881 – An Introduction
  Section 138 – reads: 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 2["a term which may extend to two year"], 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 induce 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, 3["within thirty days"] of the receipt of information by him from the bank regarding the return of the cheques 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 purpose of this section, “debt or other liability” means a legally enforceable debt or other liability].
Prior to the introduction of this chapter, the drawer of a dishonoured cheque could be criminally prosecuted under S.420 of the Indian Penal Code[1]. However, even today prosecution under the general for the offence of ‘cheating’ is maintainable. The offence under S.138 of the Act and S.420 of the IPC are different in nature, therefore conviction of offence under one provision does not bar prosecution under the other.[2] The full bench of the Andhra Pradesh High court has held that when a person issues a cheque or a post-dated cheque, he impliedly represents to the payee that in the ordinary course of events, the cheque on its presentation to the bank would be met. In such a circumstance, even with the introduction of S.138 of the Act, prosecution under S.420 IPC is maintainable if dishonest intention at the time of the issuance of the cheque is established.[3]
What then is the advantage of S.138 of the Negotiable instruments Act? What we see is that under criminal law for a crime of dishonour of cheque to be made out there is need for the prosecution to first establish dishonest intention on the part of the drawer from the inception of the instrument. The crime of cheating cannot be constituted if the cheque is dishonoured by itself. Thus failure of the prosecution to prove this element of deception usually led the court to hold that the matter was of civil nature. Also another problem arising under criminal law is the necessity to prove the dishonest intention beyond reasonable doubt.[6] Thus S.138 does away with this formalistic rigour of criminal law. If a cheque is dishonoured for paucity of fund, the offence under S.138 is constituted, notwithstanding the intention of the person issuing the cheque.
Prior to this section remedy for dishonoured cheques – was an ordinary civil suit – which took years to decide due to the processual delays associated with civil litigation, or a penal action for cheating u/s 415 etc. Penal Actions rarely bore any fruits as the standard of proof required to bring home the offence to the accused by proving the mens rea requirement was too much in some cases to fulfill, as in some cases the cheques were indeed given with bona fide intention but later could’not be honoured for some reason or the other.
Hence there was a need to introduce provision he aforesaid Section was brought to tackle the mischief of cheques drawn w/o sufficient funds in accounts – increasing work loads in Bank unnecessarily because of dishonor of cheques and to encourage culture of proper use of this payment expedient. The New provision notably while providing penal consequences for failure to honour obligation also does away with the requirement of proving distinct mental condition on the part of drawee of the cheque, and hence goes a long way to serve the purpose it was enacted for.
 Let us examine the basic essentials of S.138 :
 1.    Cheque Drawn by the person who has a account in the Bank i.e existence of Bank-Customer Relationship.
 2     Cheque Drawn in discharge – debt or liability.
 3.    Discharge may be of full – part liability.
4.     Cheque returned unpaid.
(returned to Payee/Holder/Person entitled to receive money)
 Reasons for Return
5. Insufficiency of Funds
Means either the balance was insufficient – or it exceeded the amount arranged to be paid for overdraft.
                      The above essentials being fulfilled – the proviso lays down certain conditions that need to be satisfied before an offence u/s 138 is made out :-
 6. Cheque presented in bank within 6 months from date of cheque.
7. Payee gave notice to drawer within 30 days of the refund of the cheque.
(notice of demand for payment)
8. Drawer must make payment within 15 days from receipt of notice.
9. Cause of Action arises on 16th Day.  (S.12(1) Limitation Act – excludes 16th Day)
 If the above condition are fulfilled the offence u/s 138 is made out – the Cognizance of which would then be taken by Metropolitan Magistrate/ Judicial Magistrate 1st Class as per S.142.
 According to S.142 – the complaint has to be made to the JM1 of the MM concerned within 1 months from the accrual of Cause of Action as per S.138 – Proviso (c). However the proviso enables the court to take cognizance even if the complaint is made after the lapse of 1 year provided sufficient cause is given for the delay. (it is to be noted that this provision is pari material to S.5 of the Limitation Act & may safely be accorded a similar interpretation)
 S.142 further lays down that the procedure followed would be the same as following in  complaint cases.
 It is also pertinent note here that by Virtue of S.147 – the offence is compoundable.
  • Maximum 2 years (earlier it was 1 year – to make the act more stringent vide 2002 Amendments – to was extended to the present 2 years.
  • Upto twice the amount of cheque as FINE.

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