Dishonour of cheque under Section 138 of NI Act

Banking is an important commercial activity. Dishonour of cheque not only causes injury and inconvenience to the payee but also effects credibility of business transactions involved therein. Section 138 of the Negotiable Instruments Act,1881 (‘the Act’) is the principal Section dealing with dishonour of cheques. 

The object of Section 138 is to facilitate smooth functioning of any transaction between the drawer and the drawee of the cheque. This provision provides great help in minimizing fraud and also helps us realize the importance of issuing a cheque as a financial instrument. The offence under Section 138 is not an offence dealt under criminal law like the Indian Penal Code,1970, but, it is an offence created by a legal fiction in a statute.

Q. What is negotiation?

A negotiable instrument may be transferred from one person to another in two ways, i.e. in the case of bearer instruments, simple delivery to the transferee is sufficient. In case of order instrument, two things are required for a valid transfer – endorsement or signature of the holder and delivery of the instrument. Negotiable instrument is an exception to the rule of nemo dat quod non habet (in the context of negotiable instrument it means no one can transfer a better title than he himself has). Even though person having better title/owner of the instrument he can transfer such instrument to another person.

Q. What is the law relating to Negotiable instruments?

The Negotiable Instruments Act, 1881 is the statute dealing with dishonour of negotiable instruments. The Act is based on the English Common Law relating to negotiable instruments and is a codification of the law of merchant on the subject with a few minor deviations and is also based on the system prevailing in India. The main object of the Act is to legalise the system of negotiable instruments that is passed on from hand to hand in the process of negotiation.

The 2018 Amendment to the Act was brought in to enhance the credibility of cheques. Sections 138 – 142, which dealt with penalties for dishonour of cheques, were found deficient in dealing with dishonour of cheques. To remedy this, the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, inter alia, amended Sections 138, 141 and 142 and inserted new Section 143 to 147 in the Act, which promises summary trials to provide speedy justice in case of dishonour of cheques and makes the offence compoundable. Punishment provided under Section 138 was enhanced from one year to two years.

Q. What preconditions should be met to file a complaint under Section 138 of the Act?

The important steps to follow before filing a complaint under Section 138 of the Act are –

1. Drawing the cheque.
    
2. Presentation of the cheque to the Bank.
    
3. Returning the cheque unpaid by the drawee/payee bank.
    
4. Payment demand notice/Legal Notice issued drawee to the drawer of the cheque (to be sent within 30 days from the date of return or dishonour of cheque).
    
5. Failure of the drawer to make payment within 15 days of the receipt of notice.

Q. How to determine the jurisdiction in Section 138 cases?

The provisions of Sections 138 to 147 of the Act indicates that the jurisdiction to try the case can be inferred from Criminal Procedure Code, 1973 (CrPC), i.e. under Sections 177 to 179 based on where offence is committed either wholly/partly. If there is uncertainty as to where, among different localities, the offence would have been committed wholly/partly, the case can be instituted in a court having jurisdiction over any of those localities.

The Apex Court in  K.Bhaskaran v. Sankaran Vaidhyan Balan and Anr, AIR (1999) 7 SCC 510, in its judgment dated September 29, 1999, observed that it is not necessary that all the 5 pre-conditions to filing (listed in the above answer) should have constituted at the same jurisdiction. It is possible that each of those acts happened at 5 different places and as per Section 178(d) of the Act, the courts in all these 5 places will have jurisdiction and the Complainant can choose from any of them.

However, this resulted in Complainants willfully choosing a place far away to trouble the Accused and have him travel far and long to defend himself. On August 1, 2014, 3-Judge Bench of the Supreme Court inDashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129, held that dishonour of cheque cases can be filed only to the court within whose local jurisdiction, the offence was committed i.e. where the cheque is dishonoured by the bank on which it is drawn, thus overruling K. Bhaskaran case. The amended Act under Section 142 (1) and 142 (2) provides that the complaint can only be filed before the court within whose local jurisdiction either a cheque is dishonoured or where the account is kept by the drawee.

Q. How to institute a suit under Section 138 of the Act?

If all the steps mentioned above are met, a private complaint under Section 200 of CrPC, read with Section 138 of the Act should be filed before the concerned Magistrate Court. The said complaint is to be filed within one month on the expiry of 15 days of the receipt of legal notice by the accused.

Q. What are the various stages of a Section 138 proceeding?

1. Filing a complaint:

The complaint should be filed before the trial court with relevant documents such as dishonoured cheque with the bank memo, legal notice with acknowledgment for the receipt or delivery, reply notice (if any) and proof of liability such as invoices. If the court finds evidence prima facie, then the Complainant will be called to make sworn statement before the court by filing a sworn statement affidavit. If the court is satisfied and finds substance in the Complainant, then the summons will be issued to the Accused to appear before the Court.

2. Appearance of Accused:

The Accused should appear in court in person or through his counsel. The court will verify whether the summons issued by the court is received by the Accused. In spite of the receipt of summons, if the Accused fails to appear before the court, then the court will issue an arrest warrant against him. The court will enquire if the Accused admits the charges made by the Complainant. In case of admission of guilt, the court will post the matter for punishment. If the Accused pleads not guilty at the stage of appearance, he must be offered bail with solvent sureties.

3. Evidence:

First, the Complainant shall present his evidence orally or as an affidavit and produce all documents including the originals in support of his complaint. The Complainant may also present his witnesses in support of his case. The Complainant and the other witnesses appearing in his support will be cross-examined by the Accused or his counsel. After this, the Accused is given a similar opportunity to lead his evidence.

4. Arguments:

The parties or their counsels should submit their arguments before the court.  During the argument, the counsel may submit the precedents from Supreme Court and High Court in support of their case. Usually, a written argument containing a gist of the oral arguments is also submitted before the court.

5. Judgment:

If the court decides in favour of the Complainant, then the Accused will be punished with fine or imprisonment under Section 142 of the Act. If Accused is convicted, he will be subjected to arrest or he can move a petition for suspension of his sentence for a period of 30 days, so that he can file an appeal before the session’s court under Section 372 of CrPC.
 

Q. What are the key changes introduced by the 2018 Amendment Act?

Section 143A has been inserted directing the drawer of the cheque to pay interim compensation of 20% of the cheque amount to the Payee in situations of a summary trial or summons case wherein the drawer pleads to be “not guilty”.

Section 148 specifies that in case the drawer files an appeal against his conviction, the appellate court has the power to direct the drawer to deposit a minimum amount of 20% of the fine or compensation that was awarded by the trial court. The appellate court may direct to release the amount deposited by the appellant to the complainant at any time during the pendency of the appeal. This amount shall be in addition to the compensation paid at the trial stage.

The interim compensation at the trial, as well as the deposit amount at the appellate stage (as the case may be), shall be paid within 60 days from the date of the order by the court trying the offence or the appeal. The concerned court may further extend this period by an additional time of 30 days subject to the sufficient reasons being shown.

In case of acquittal of the drawer/Appellant by the trial court or the appellate court, (as the case may be) the payee/Complainant shall be directed to repay the interim compensation or amount deposited (as may be applicable), to the drawer/Appellant along with such interest as may be fixed by Reserve Bank of India at the beginning of the relevant financial year. This amount shall be repaid within 60 days of the court’s order and this period may be further extended by another 30 days subject to sufficient reasons being shown.
 

Conclusion

Proceedings under Section 138 of the Act have a special character. They arise from a civil dispute relating to dishonoring a cheque, but may result in a criminal consequence. Even though the statute is punitive in nature, its spirit, intent and object is to provide compensation.  

The recent Amendment Act looks promising as it largely appears to focus on expediting the disposal of cases, bringing a wave of relief to the genuine holder of bounced cheques and also promises to aid in speedy trial in such cases. Thought it has a long way to go, we do hope that it brings sanctity to the system by reducing default of payments.

DISCLAIMER:The information provided in this article is for educational purpose only. The same cannot be construed as legal advice.