dishonour of cheque paper essay business law

LAW RELATING TO DISHONOUR OF CHEQUES IN INDIA

P a g e | 1Priyanka Saxena

INDEX

1. Introduction ............................................................ 2

2. Statutory Analysis ................................................... 3

3. Judicial Analysis ..................................................... 6

4. Case Law ................................................................ 8

5. Conclusion .............................................................. 10

6. Bibliography ........................................................... 11


Introduction

The Negotiable Instruments Act, 1881 is an Act to define the law relating to promissory notes, bills of exchange and cheques. This Act has been amended several times commencing from 1885 till 2002. The most important amendment is by Act 66 of 1988 and by virtue of chapter XVII was introduced by the Banking, Public Financial Institutions and Negotiable Instruments laws (amendment) Act, which came into force from 01-04-1989. The introduction of Chapter XVII i.e., sections 138 to 142 of the Negotiable Instruments Act, for the prosecutions relating to the offences of dishonour of cheques.

The dishonour of cheques became popular and frequent in courts of law and the law relating to the same developed in such a rapid pace covering almost several aspects which may arise in the day to day disposal of such cases by the courts.

This article endeavours to elucidate the penal provision in light of the amendments and the judicial interpretations.


Statutory Analysis

Chapter XVII of Negotiable Instruments Act has been lastly amended by Negotiable Instruments (Amendment and Miscellaneous provisions) Act 55 of 2002 and the same has been came into force w.e.f., 06-02-2003

As per the latest amendments the imprisonment has been extended to 2 years. The issuing of notice within 30 days after the receipt from the bank regarding return of cheque as unpaid and further after amendment to Sec.142 of N.I. Act, the cognizance of complaint may be taken by the court after the prescribed period i.e., beyond 30 days after receipt of notice by drawer, that the complainants to satisfy the court that he had sufficient cause for not making a complaint within such period.

1. Sec .138 deals with the offence of dishonour of cheque and the punishment there for.2. Sec.139, deals with presumption that the holder of a cheque in discharge in whole or

in part of any debt or liability. 3. Sec. 140, the defence which may not be allowed in any prosecution under Sec.138.

The drawer that he had no reason to believe when he issued the cheque that it may be dishonoured on its presentation;

4. Sec.141, deals with offence by a company prescribing different burden and onus of proof between persons in-charge of and responsible to the company for the conduct of its business and persons, with whose consent or connivance or due to neglect on his part, the offence had been committed, may be stated to fall under evidence aspect

5. The amendments made to N.I. Act in 2002 also includes the insertion of new sections 143 to 147. The new sections deals with power of court to try cases summarily, mode of service of summons, evidence of affidavit, bank slip as prima-facie evidence and offences to be compoundable under N.I. Act.

I. CHEQUE:

Under the N.I. Act, a cheque is an instrument which is negotiable by delivery. The drawer is discharged when payment is made in due course. In simple terms, this means that when cheque is tendered there is a presumption that payment would be realised in due course, and hence the date of payment is considered to be the date on which the cheque is delivered, regardless of when the cheque is actually presented for payment.

The origin of cheques can be traced even from 17th century onwards in England. In the case of Stedman Vs. Gooch, it is observed that payment by negotiable instrument is a conditional payment, which means that if the negotiable instrument is dishonoured on presentation the creditor may consider it as wastepaper and resort to its original demand. It has been observed in Benjamen on Sale, 8th edition, it was stated that payment takes effect from the delivery of �the bill, but might get defeated by the happening of the condition of non payment at maturity. In Byles on Bills, 20th edition the position was summerised as A cheque, unless dishonoured is payment. Under the Common Law of England, the rule is to the effect that the sending of a cheque in payment of debt is subject to the condition subsequent that the cheque must be met on presentation.


In the High Authority of Royal Bank of Scotland Vs. Tottenham, 1894 LXXI Law Times Report 168, it was held that a cheque is contract between the parties, and it is for a judge at the trial to construe that contract by reading what is written upon it.

II. POST-DATED CHEQUE :

The post-dated cheque becomes a cheque under the Act on the date written on it and the six months period has to be reckoned for the purpose of sec.138 of N.I. Act from the said date. A post-dated cheque cannot be presented before the bank and as such the question of its return could not arise. It is only when the post-dated cheque become a cheque with effect from date shown on the date of cheque. A post-dated cheque carries with it an implied notice to the effect that for the present there are no deposits, but at the same time assuring that the funds will be available by the date it becomes due (1956 (1) Madras Law Journal 471).

Post-dating of bills of exchange is allowed both in English and American Law. There is no prohibition in the Indian Acts against post-dating and promissory not which is post-dated is thus an effective negotiable instrument through it cannot be sued upon till after that date passes. III. STOP PAYMENT OF A CHEQUE : In spite of the civil remedy, Sec.138 is primarily meant to prevent dishonesty on the part of a drawer. Sec.138 draws presumption that one commits the offence if he issues the cheque dishonestly and cheque has been drawn and issued to the payee and the payee as the presenter of cheque and thereafter , if any instructions are issued to the bank for non-payment and the cheque is return to payee with an endorsement payment stopped by drawer, it amounts to dishnour of cheque (1996 (2) SCC 739) =AIR 1996 SC 2339. Even if a cheque is dishonoured because of stop payment instruction to the bank, Sec. 138 would get attracted (1998 (3) SCC 249). The luxury of stop payment instructions by the drawer to cover-up real �insufficiency funds would no longer be available to drawer as per the law of the land. IV. RE-VALIDATION OF A CHEQUE : There is no provision in the Negotiable Instruments Act or in any other law which stipulates that a drawer of a negotiable instrument cannot re-validate it. It is always open to a drawer to voluntarily re-validate a negotiable Instrument, including a cheque (AIR 2002 SC 38). V. LEGALLY ENFORCEABLE DEBT : It is clear from the explanation to Sec.138 of the Act, that the cheque covered by the said section must be relatable to enforceable or debt which must be existing as on the date of issuing of the cheque. For the purposes of this section, debt or other liability means a legally �enforceable debt or other liability. In 1997 Crl. Law Journal 1942 A.P., it was held that on the date of issuing of cheque material was not supplied by complainant and the goods was found not of agreed quality. The cheque was presented third time after accused intimated about rejection of material. It was held that there was no infirmity in the reasoning of trial court that on the date of cheque there was no existing debt or liability and as such no offence was constituted u/s. 138 of N.I Act.


Where cheques issued as security, on dishonour of such cheque, not offence under Sec.138 of the Act (2001 (2) RCR (Crl.) 75 MP) also see 2002 (3) Crimes 145 ( Raj) . CONDITIONS TO INITIATE CRIMINAL. ACTION U/S.138 OF N.I. ACT : 1. A cheque must have been drawn by a person on an account maintained by him for

payment of any sum of money to another person from out of the account; 2. The cheque must have been issued for the discharge, either in whole or in part, of any

debt or other liability, though, in the absence of proof to the contrary, it shall be presumed that it was issued for the same;

3. The cheque shall be returned by the bank unpaid because 3.1. of insufficient funds to honour the cheque. 3.2. it exceeds the amount arranged to be paid from the account by an agreement with that

bank. Thus, the dishonour of the cheque by the bank under the above mentioned circumstances shall constitute an offence and the offender is liable to be punished u/s.138 of N.I. Act with imprisonment, which may extend to 2 years or with fine, which may extend to twice the amount of cheque, or with both.


Judicial Analysis

Of the ten sections comprising the chapter of the Act, section 138 creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker. Section 138 of the Act can be said to be falling either in the acts which are not criminal in real sense, but are acts which in public interest are prohibited under the penalty or those where although the proceeding may be in criminal form, they are really only a summary mode of enforcing a civil right. Normally in criminal law existence of guilty intent is an essential ingredient of a crime. However the Legislature can always create an offence of absolute liability or strict liability where ‘mens rea’ is not at all necessary.

While elucidating on this aspect the Kerala High Court in K. S. Anto v. Union of India held that:

"Knowledge or reasonable belief, that pre requisite could be statutorily dispensed with in appropriate cases by creating strict liability offences in the interest of the Nation."

Further the creation of the strict liability is an effective measure by encouraging greater vigilance to prevent usual callous or otherwise attitude of drawers of cheques in discharge of debts or otherwise attitude of drawers of cheques in discharge of debts or otherwise. The words as appearing in clause (b) of Sec. 138 cannot be construed even to imply failure without reasonable cause in view of the explicit language in which the provision is couched, the principle of strict liability incorporated in the main enacting clause.

Circumstances of dishonour:The circumstances under which dishonour of cheque takes place or that may contribute to the situation would be irrelevant and are required to be totally ignored.In Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar the Bombay High Court held that:

"A clear reading of Section 138 leaves no doubt in our mind that the circumstances under which such a dishonour takes place are required to be totally ignored. In such case, the law only takes cognizance of the fact that the payment has not been forthcoming and it matters

little that any of the manifold reasons may have caused that situation."

Ingredients and requirements of the penal provisions:Section 138 creates an offence for which the mental elements are not necessary. It is enough if a cheque is drawn by the accused 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 discharge in whole or in part, of any debt or other liability due. Therefore, whenever the cheques are on account of insufficiency of funds or reasons referable to the drawer’s liability to provide for funds, the provisions of section 138 of the Act would be attracted, provided the following conditions are satisfied:


1. Existence of a live account

Existence of a "live account" at the time of issue of cheque is a condition precedent for attracting penal liability for the offence under this section. A cheque cannot be issued de hors an account maintained by its drawer with the banker. When the cheque is returned by the bank unpaid because of the account of money standing to the credit of the cheque, to make demand for payment as provided for payment as indicated in clause (b) of the proviso. The words "that account" in the section denote to the account in respect of which the cheque was drawn. No doubt if any person manages to issue a cheque without an account with the bank concerned its consequences would not snowball into the offence described under section 138 of the Act. For the offence under section 138 of the Act there must have been an account maintained by the drawer at the time of the cheque was drawn.

2. Issue of Cheque in discharge of a debt or liability Accused issued cheque in discharge of debt of company - Held, accused is validly prosecution, conviction upheld. (J.Ramaraj Vs IIiyaz Khan) 2007(2) Civil Court Cases 458 (Karnataka) : 2007(2) Criminal Court Cases 726 (Karnataka).Where a cheque is issued not for the purposes of discharge of any debt or other liability, the maker of the cheque is not liable for prosecution under section 138 of the Act. A cheque given as a gift or for any other reasons and not for the satisfaction of any debt or other liability, partly or wholly, even if it is returned unpaid will not meet the penal consequences.If the above conditions are fulfilled, irrespective of the mental conditions of the drawer he shall be deemed to have committed an offence, provided the other three requisites are fulfilled:a) Presentation of the cheque within six months or within the period of its validity The cheque must have been presented to the bank within a period of six months from the date on which it is drawn or its period of validity, whichever is earlier. Thus if a cheque is valid for three months and is presented to the bank within a period of six months the provisions of this section shall not be attracted. However if the period of validity of the cheque is not specified or prescribed the cheque is presented within six months from the date the cause of action can arise. The six months are taken from the date the cheque was drawn.b) Return of the cheque unpaid for reason of insufficiency of funds The cheque must be returned either because the money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the arrangement made to be paid from that account by an agreement with the bank. Even if the cheque is returned with the endorsement "account closed" section 138 is attracted[15] c) Issue of the notice of dishonour demanding payment within thirty days of receipt of information as to dishonour of the cheque.The payee or the holder in due course of the cheque has to give a notice in writing making a demand for payment of the said amount of money to the drawer of the cheque. Such notice must be given within 30 days[16] of information from the bank regarding the return of cheque as unpaid[17].d) Failure of the drawer to make the payment within fifteen days of the receipt of the payment After the receipt of the above notice the drawer of the cheque has to make payment of said amount of money to the payee or to the holder in due course of the cheque within 15 days of the receipt of the notice. If the payment is not made after the receipt of the notice within stipulated time a cause of action for initiating criminal proceedings under this section will arise.


e) Issue of Cheque in discharge of a debt or liability of Father In case father of the accused, but not the accused owes debt to complainant, accused cannot be prosecuted (2003 (6) ALD (NOC) 64).

CASE LAW:

1. Account closed: Account closed was held to be the offence u/s.138 of N.I. Act (AIR 1999 SC 1952). The cheque returned on the ground of close of account is an offence (1998 (2) Law Summary 461). Where the cheque was dishonoured on ground of account closed, the accused cannot escape from liability of the offence (1998 (2) ALD (Crl.) 286 Kar). Complaint is maintainable. (A.K.Chaudhary & Ors. Vs Nandita Malhotra) 2007(4) Criminal Court Cases 593 (Delhi)

2. Presumption :In B. Mohana Krishna v. Union of India, the question came up for consideration that whether the presumption raised in section 139 that the holder of the cheque received the cheque of the nature referred to in section 138, unless the contrary is established is violative of Article 20 (3) of the Constitution of India. The Court while answering negative held that:

"Unless a person is compelled to be a witness against himself Article 20 (3) has no application. The person charged under section 138 is not compelled to be a witness against himself. The presumption of the nature incorporated in section 139 is a common feature in criminal statutes for example section 12 of the Protection of Civil rights Act. The presumption under section 139 in favour of holder of cheque would not, therefore be violative of Article 20 (3)."

Further such imposition of strict liability was put to judicial scrutiny on grounds of unreasonableness and arbitrariness in Mayuri Pulse Mills v. Union of India where the Bombay High Court held that:

"Normally in Criminal law existence of a guilty intent is an essential ingredient of a crime and the principle is expressed in the maxim ‘actus non facit rum nisi mens sit rea’. This is

a general principle. However the legislature can always create an offence of absolute liability or strict liability are justified and cannot be said to be unreasonable."

3. Maintainability of criminal charge with a civil liabilityThere is nothing in law to prevent the criminal courts from taking cognizance of the offence, merely because on the same facts, the person concerned might also be subjected to civil liability or because civil remedy is obtainable. Civil and criminal proceedings are co extensive and not exclusive. If the elements of the offence under section 138 of the Negotiable Instruments Act are made out on the face of the complaint petition itself, enforcement of the liability through a civil court will not disentitle the aggrieved person from prosecuting the offender for the offence punishable under section 138 of the Act. In K.S. Anto v. Union of India the question of double jeopardy as enshrined in Article 20 (2) in light of section 138 and section 420 of the Indian Penal Code where the court held that:

"Offences under section 138 of the Negotiable Instruments Act and section 420 of the Penal Code are different and the ingredients are different and the ingredients are also


different. Convictions for different offences separately is not barred under article 20 (2). In spite of prosecutions and convictions under section 138, there will be no constitutional bar in prosecution for an offence punishable under section 420 of the Penal Code and a

prosecution will be if such an offence is made

4. On behalf of:1. Complaint filed by husband on behalf of wife on the basis of authority letter -

Husband neither a general nor special power of attorney holder - In the authority letter it was no where undertaken that the executant would be bound by the acts done and conducted on her behalf in respect of the cheque - Held, complainant not competent to institute the complaint - Complaint quashed. (O.P.Mehra Vs Raj Kumari Bhalla & Anr.) 2007(1) Criminal Court Cases 847 (P&H) : 2007(2) Civil Court Cases 181 (P&H)

2. An employee filed complaint on behalf of company - Letter authorising employee to file complaint not filed - Though this is a curable defect but same not removed even during trial - Held, complaint not maintainable for want of authority letter. (Fragrant Leasing & Finance Company Ltd. Vs Jagdish Katuria & Anr.) 2007(3) Criminal Court Cases 840 (Allahabad) : 2007(4) Civil Court Cases 281 (Allahabad)


Conclusion

Though insertion of the penal provisions have helped to curtail the issue of cheque light heartedly or in a playful manner or with a dishonest intention and the trading community now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonoured cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine, the only option left with the complainant is to file civil suit. The provisions of the Act do not permit any other alternative method of realization of the amount due to the complainant on the cheque being dishonoured for the reasons of "insufficient fund" in the drawer’s account. The proper course to be adopted by the complainant in such a situation should be by filing a suit before the competent civil court, for realization/ recovery of the amount due to him for the reason of dishonoured cheque which the complainant is at liberty to avail of if so advised in accordance with law.


Bibliography

Business Law For Management By Mr.K R Bulchandani.

Business Law For Managers By Mr P K Goel

Principles of Business Law and Management By Dr Manmohan Prasad

dishonour of cheque paper essay business law

Documents