SECTION 138 OF NEGOTIABLE INSTRUMENTS ACT

SECTION 138 OF NEGOTIABLE INSTRUMENTS ACT

History:

Earlier to 1988 the dishonour of cheque was only a civil liability. But the amendment introduced by Amendment Act No.66/1988 which was published in the gazette of India part-II, dated 19.12.1988, introduced Section 138 and 142 of the Negotiable Instruments Act which made it a criminal offence. This amendment was a new offence in the commercial filed, it was brought out of necessity in order to bring sanctity to the common business transactions

What amounts to an offence u/s.138 of Negotiable Instrument Act:

Section 138 reads as follows

“….138. Dishonour of cheque for insufficiency, etc., of funds in the accounts
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 a term which may extend to one 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 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 fifteen 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 purpose of this section, "debt or other liability" means a legally enforceable debt or other liability.”

Thus Section 138 of N.I.Act, states that when a person issues a cheque to be encashed and the cheque so issued is issued towards payment of a ‘debt’ or liability and it is returned unpaid for want of funds, the person issuing such a cheque shall be deemed to have committed an offence. Section 138 presupposes three conditions for prosecution of an offence they are:

a. Cheque shall be presented for payment within six months from the date of issue or before expiry of its validity.

b. The holder shall issue notice demanding payment in writing to the drawer with in one month of the receipt of information of the bounced cheque, and

c. The drawer inspite of the demand notice fails to make payment within one month of the receipt of the notice.

If the above three conditions are satisfied the holder in due course gets the cause of action to launch prosecution against the drawer of the bounced cheque.

How should the complaint for dishonour of cheque be lodged for the offence punishable u/s.138 of the Negotiable Instrument Act?

Sec.142 of the Act envisages the method of lodging the complaint for the offence punishable u/s.138 of the Negotiable Instrument Act.

Cognizance of offences:

As per this Section notwithstanding anything contained in the Code of Criminal Procedure:

a. no court shall take cognizance of any offence punishable u/s.138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque,

b. such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to Sec.138,

[Provided that the cognizance of the complaint may be taken by the court after the prescribed period, if the complainant satisfies the court that he had sufficient cause for not making a complaint within such period]

c. no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class shall try any offence punishable u/s.138.

The cases filed under sec.138 of the Negotiable Instrument Act are tried summarily. Thus for an offence to be made out and to set the criminal law in motion for the offence punishable u/s.138 of the Negotiable Instrument Act One should lodge a complaint in writing made within 30 days from the date of cause of action by the payee or holder in due course has to file a complaint before the Jurisdictional court u/s.200 of Cr.P.C.. When the complaint is presented for the said offence the court has to follow the procedure prescribed u/s.200 of Cr.P.C[i]. Which reads as follows

If the complaint so filed is made within limitation(time) and preconditions prescribed u/s.138 are complied with, court has to take cognizance of the offence and record sworn statement, then process shall be issued to the accused. The Magistrate shall not refer the complaint to the police for investigation u/s.156(3) of Cr.P.C. as the offence u/s.138 of the Negotiable Instrument Act is non-cognizable offence[ii].

Presumption regarding the offence u/s.138 of Negotiable Instrument Act in favour of holder:

When a complaint is file under Section 138 the court presumes that unless contrary is proved, the holder of cheque received the notice and failed to make necessary payment as referred to in Sec.138 for the discharge in whole or in part any legally valid ‘debt’ or ‘liability’. So, there is presumption that

PREMATURE COMPLAINT:

The Supreme Court[iii] has held that even though a complaint is presented prematurely, the Court need not dismiss it and on the other hand it should wait till maturity or it may return the complaint to the complainant for presenting it later. The same matter again arose in a different situation before the Hon’ble High Court of karnataka[iv] . In that case, after trial, the Magistrate dismissed the complaint on the ground that it was premature and acquitted the accused. Before the Hon’ble High Court, relying upon Narasingh Das Tapadia’s case, it was contended that the Magistrate was bound to return the complaint when it was premature. But the Hon’ble High Court did not accept that contention and held that it was not mandatory for the Magistrate to return the complaint on the ground that it was premature and in that situation he had no alternative except to acquit the accused.

HOW MANY TIMES CHEQUE COULD BE PRESENTED?

A Division bench of our Hon’ble High Court of Karnataka[v] has held that till the expiry of the period of validity i.e.., 6 months a cheque could be presented any number of times, but, however, successive notices for purposes of determining the cause of action are not contemplated and therefore the complaint will have to be filed within one month from the date on which the cause of action arises. Similar is the view taken by the Supreme Court in the decision reported in AIR 1998 SC 3043 (SADANANDAN BHADRAN VS. MADHAVAN SUNIL KUMAR). In that case it is held that though a cheque can be presented any number of times during the period of its validity, the cause of action to file the complaint arises only once. In 2001 AIR SCW 2567=AIR 2001 SC 2825 (M/S. UNIPLAS INDIA LTD., VS. STATE (Govt. of NCT of Delhi), on facts the decision in ILR 1998 sC 3043 has been distinguished and it has been held that if within 15 days, notice of dishonour is not issued by the complainant, then he can create a fresh cause of action by presenting the cheque again.

NOTICE OF DISHONOUR:

It is held[vi] by courts that if the notice is not signed by the Advocate, it cannot be said that it is no notice. Further it has also been held that what is required under Sec.138(b) is that the notice of dishonour of cheque should be given within 15 days from the date of receipt of information from the bank and it is not necessary that the notice also should be served on the accused within the said 15 days. The Supreme Court in (SUMAN SETHI VS. AJAY K. CHURIWAL)[vii] it is held that if in the notice sent under Sec.138(b) in addition to the cheque amount any other sum by way of interest, cost etc., is also claimed, it cannot be said that notice is not a valid one. Following this decision, Karnataka Hon’ble High Court[viii] has taken a similar view. However, High Court held that a combined notice issued on behalf of the complainants in two different cases, though the complainants are related to each other as husband and wife, in respect of separate cheques is not valid if in those notices the claim has been combined. In 2001 AIR SCW 2352 (UNITED CREDIT LTD., VS. ASO SALES INDIA AND OTHERS) the decision in Suman Sethi’s case referred to above has been followed and it has been again held that merely because in addition to the cheque amount, interest and costs are also claimed in the notice, the same is not invalid.

In the decision reported in 1997 (3) KLJ 271 (M/s. SAVITHA ENTERPRISES VS. K.RAVINDRA NATH SHETTY) the Hon’ble High Court has held that what is required is that a complaint is to be presented within 30 days from the date on which the cause of action arises and if at the request of the drawee the cheque is presented again and it is bounced, it cannot be contended by the accused that a fresh notice should have been issued when the cheque was dishonoured again.

In ILR 1998 Kar. 1841 (SRIDHAR M.A. VS. METALLOY N. STEEL CORPORATION) and 1999 Cri.L.J. 4606 (K.BHASKARAN VS. VAIDHYAN BALAN) the Supreme Court was concerned with the question as to when the service of notice could be inferred and it was held that if there is an endorsement like “not available in the house”, “house locked”, “shop closed”, “un claimed”, the service should be deemed to have been effected. These decisions of the Supreme Court have been recently followed by our Hon’ble High Court in the decision reported in ILR 2000 Kar. 1255 (A. SATHYANARAYANA VS. C. NAGARAJA) in which case the notice of dishonour was returned with an endorsement that the accused was not found on all the seven dates on which it was taken for service.

POWERS AND LIABILITIES OF POWER OF ATTORNEY HOLDER:

In ILR 1997 Kar. 1747 (P.A. VERGHEES VS. M/S. CAMPION BUSINESS ASSOCIATES PVT. LTD.,) it was held that a complaint presented by a power of attorney holder is valid. In ILR 2001 Kar. 2833 (S.RAMESH VS. BASANTH KUMAR PATIL) and in ILR 2001 Kant. 3909 (M.RAMAIAH VS. M/S. RAMANIKA SILKS PVT. LTD.,) it has been held by our Hon’ble High Court that a power of attorney holder of the payee or holder in due course can present a complaint under Sec.138 of the Act.

In ILR 1999 Kar. 1655 (G.M. GURAPPA REEDY VS. M/S. A.S. FINANCE & INVESTMENTS) it was held that even if a cheque is given by a person as power of attorney holder of another or for the liability of another, he is still liable to be prosecuted.

CAN THE DIRECTORS OF A COMPANY BE PROSECUTED UNDER SECTION 138 FOR DISHONOUR OF CHEQUE:

The question whether it is permissible to prosecute all the directors of the company for an offence under Sec 138 of the N.I. Act was considered by our Hon’ble High Court in the decision reported in ILR 1997 Kar. 3239 = 1998 (2) KLJ 337 (NUCOR WIRES LTD., & OTHERS VS. H.M.T. (INTERNATIONAL) LTD.,) and it has been held that to launch a prosecution against the Directors of the company, there must be specific allegation in the complaint as to the part played by them in the transaction. Further, it is held that if the cheque is issued by the Managing Director who represents the company, then the case can be proceeded only against the company and the Managing Director. It is also stated that the Court has to find out as to who are all the persons incharge of and responsible for the conduct of the business of the company or firm as the case may be.

In AIR 2000 SC 145 (ANIL HADA VS.INDIAN ACRYLIC LTD.,) it was held that if a company could not be prosecuted for any reason, (in that case winding up proceedings had been ordered) there was no bar to proceed against the Directors, but, however, in such a case the complainant had to establish that the offence was actually committed by the company. It is also held in that case that in such a case, the accused can show that the company has not committed the offence though it is not made an accused and hence the accused who has been prosecuted is not liable to be punished. It is further held that prosecution of the company is not a sine quo non for prosecution of the other persons.

In ILR 2000 Kar. 1415 (R.GURUSWAMY VS. M/S. BALAJI COTTON INDUSTRIES) one of the directors of the company had issued cheques in question and the notice was issued calling upon the company to make good the amount for which the cheques had been issued. A contention was urged that the particular director alone could not have been prosecuted. The contention was overruled by the Hon’ble High Court and it was observed as to what was the consequence of not impleading the other directors was not a thing which could be speculated upon, at the stage of issuing process.