G S Rao
Recently the Supreme Court in M/s Laxmi Dye Chem Vs State of Gujarat & Ors set aside the order of high court of which quashed the Complaints filed before the trial court u/s 138 of the Negotiable Instruments Act,1881 (NI Act) for dishnour of cheques. The Apex court by this judgment enlarged the scope for making out an offence under NI Act by holding that dishnour of cheque due to signature variance would also constitutes an offence subject to rebuttal. This article analyzes the above judgment and shifts focus to the trend of the judgments of Supreme court in cheque dishonour cases under Section 138 of the N I Act .
Before we examine the trend of judgments which are indicative of shift in the interpretation of the section 138 of the N I Act, it would be useful to refer to the essential ingredients of offence under N I Act for dishnour of cheque. NI Act.
When an Offence under the N I Act is committed?
Offence under Section 138 of the N I Act,1881 shall be deemed to have been committed, if the following conditions are satisfied:
– Cheque must have been drawn by a person(the drawer) in favour of a payee on his bank account in settlement of a legally enforceable debt in full or part of it
– Cheque must have been dishonoured by the Banker due to insufficient funds or it exceeds the arrangement drawer had with the bank.
– Within 30 days of receipt of intimation of dishnour, the payee or holder in due course must demand payment in writing
– Drawer fails to pay the dishonored cheque amount within 15days of receipt notice.
Time limit for filing of complaint:
Section 142 of NI act stipulates that no court shall take cognizance of any offence unless a complaint in writing made by the payee within one month from the date on which cause of action arises. As per Clause (c) of section 138, cause of action arises on failure of the drawer making payment within 15 days from receipt of notice and complaint has to be filed within 30 days from the date of cause of action.
It would be clear from the above that one of the essential ingredients for making out an offence, is that cheque must have been dishonored due to insufficiency of funds or it exceeds the arrangement had with the bank and Complaint has to be filed within 30 days from the date of cause of action.
Facts of M/s Laxmi Dye chem Vs State of Gujarat & Ors
M/s Laxmi Dyechem (Appellant) is a proprietorship firm engaged in the business of sale of chemicals. In settlement of dues arising out of series of transactions of supply of chemicals, the Respondent issued several post dated cheques to the Appellant. These cheques when presented were dishonored with a remark “signatures were incomplete or that no image was found or that the signatures did not match. The Appellants sent a notice u/s 138 informing about the dishnour and demanded payment of cheque amounts. However the demanded amount was not paid although Respondents promised to issue fresh cheques with signatures as per mandate. Hence the appellants filed criminal complaints before the learned trial court which took cognizance of the offence and issued notice to the accused persons. One of the accused filed an application u/ 482 of the Crpc before Gujarat high court for quashing of the complaints on the ground that no offence was committed as per Section 138 of the NI act and contended that signature variance would not constitute an offence under Section 138 of the Negotiable. And the Apex court set aside the order of High court and directed the trial court to proceed with complaints. The Apex court has observed that any strict interpretation of section should not help the dishonest drawer of cheque as it would defeat the legislative intent of the provisions of the NI Act.
Enlarged Reasons for dishnour:
There may be cases where dishnour of cheque has taken place due to stop payment instruction when there is sufficient balance in the account. Similarly there may be cases where cheque has been issued and without waiting for its clearance, drawer of cheque closes the accounts. These type of cases prima facie do not exactly fit in the cases of dishnour due to insufficiency of funds, but SC in its judgments held that even in these cases, an offence has been committed. The apex court expressed its view that any narrow interpretation it would defeat the purpose of the Act and will allow mischievous persons to take advantage of the exact interpretation.
Let us now examine some of the landmark judgments which over ruled earlier judgments and enlarged the scope for making out an offence under the NI act.
Electronics Trade and Technology Development Corporation Ltd., ( AIR 1996 SC 2339) (1996)2SCC739
Issue : Whether Dishnour of cheque due to stop payment instruction constitutes an offence ?
The drawer of cheque issued instruction to the bank for stoppage of payment after the cheque is issued. In this case it was contended by the accused that stoppage of payment due to instruction does not amount to an offence. Memo however indicated that cheque was dishonored for reasons “1 referred to drawer, 2. Instructions for stopping payment and 3 exceeds arrangements”. The memo remarks confirm beyond doubt that the cheque was dishonored by the Bank for want of funds only. SC held that since the accused has not made the payment within 15 days from the date of the receipt of the notice demanding payment, the dishonest intention can be inferred from those facts. Accordingly, the ingredients as contained in Section 138 have been prima facie made out in the complaint. However the following observation made at para 7 is not in harmony with the object of the Act
“Suppose after the cheque is issued to the payee or to the holder in due course and before it is presented for encashment, notice is issued to him not to present the same for encashment and yet the payee or holder in due course presents the cheque to the bank for payment and when it is returned on instructions Section 138 does not get attracted.”
This decision was however overruled subsequently by three judge bench in Modi cements case written below.
Modi Cements Ltd V Kuchil Kumar Nandi :AIR 1998 SC1057: (1998) 3 SCC 249:
Issue: Whether stop payment instruction issued before presentation of cheque constitutes an offence u/s 138 and whether Quashing of complaint u/s 482 of Crpc is justified on this ground ?
Three judge bench of the Apex court over ruled the judgment in “Electronics Trade technology” case. In this case, SC held that even if notice is issued stopping payment before the payee deposited the cheque in his bank, offence is complete. SC held that once the cheque is issued by the drawer, a presumption under S. 139 in favour of holder must follow and merely because the drawer issues a notice to the drawee or to the Bank for stoppage of the payment, it will not preclude an action u/s 138 by the drawee or the holder of a cheque in due course. Thus defence under the strict interpretation of “insufficiency of funds” is diluted to some extent.
NEPC Micon Ltd. v. Magma Leasing Ltd. AIR 1999 SC 1952: (1999) 4 SCC 253:
Issue: Whether closure of account before presentation of cheque will amount to dishnour due to insufficiency of funds?
In this case the drawer of the cheque closed the account in the Bank before presentation of the cheque. When the cheque was presented, it was returned by the Bank with the remark “account closed”. SC observed that the expression “the amount of money standing to the credit of that account is insufficient to honour the cheque” is a genus of which the expression “that account being closed” is specie. SC took a view that 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 and an offence is committed.
M.M.T.C. Ltd. and Anr. Vs Medchl Chemicals and Pharma (P) Ltd. and Anr. ( AIR 2002 SC182) : (2002)1 SCC 234
Issue: Whether complaint u/s 138 is maintainable when Stop payment instruction is issued to banker /Quashing of complaint u/s 482 of CrPc is permissible ?
In this case SC held that even if the cheque is dishonored on account of the drawer giving an instruction for stop payment to its banker, complaint u/s 138 is still maintainable and drawer of cheque is liable for the punishment. The onus lies on the accused to show that stop payment instruction has been issued not because of insufficiency of funds but for other valid causes such as cheque was not issued against a legally enforceable debt. In other words, the presumption as to existence of legally enforceable debt is rebuttable as per Section 139. It further held that even a payee or the holder in due course of the cheque can file a complain under Section 142 of NI Act and it need not necessarily be by a Director or duly authorised officer as the defect can be cured later. Complaint can not be quashed
Goaplast(P) Ltd V Chico ursual D’Souza and Anr: AIR 2003SC 2035 : (2003) 3 SCC 232
Issue: Whether Stop payment of post dated cheque instruction will absolve the drawer from offence u/s 138 ?
In this case a post dated cheque has been issued and drawer has issued stop payment instruction to bank before its presentation. SC expressed its view that the purpose of post dated cheques is to accommodate a drawer of cheque and he should not be allowed to abuse the accommodation given to him by the creditor. If allowed, it would render Section 138 a dead letter and will provide a handle to persons trying to avoid payment under legal obligations undertaken by them through their own acts which in other words can be said to be taking advantage of one’s own wrong.
SC on the Dishonest ways adopted by drawer :
The Apex court in number of cases had taken a view that strict interpretation should not defeat the objective of the NI Act or help a dishonest drawer who puts up a defence on technical grounds to avoid liability. The following are some of those judgments picked up for making the point that noose has been tightened on the dishonest drawers.
K Bhaskaran Vs SankaranVaidyan balan: AIR 1999SC 3762: (1997)7 SCC 510
Issue : If notice is unclaimed, how it is to be interpreted and jurisdiction to try the offence
Sc held that any one of the courts can exercise jurisdiction in whose area any one of the acts namely drawing of cheque, presentation of cheque, return of cheque unpaid, place of issuance of notice and place of failure to make payment, occurred. It further made it clear that once a notice demanding payment bears the correct address and is dispatched by post, it will be deemed service of notice. The onus shifts to drawer to rebut the presumption. When notice is returned by the drawer of cheque, 15 days notice period allowed to drawer for making payment is to be counted from the date of refusal or unclaimed”
Dalmia Cement Bharat Ltd : AIR2001 Sc 676
Issue : Whether a cause of action can arise out of second notice especially when accused denied receipt of first notice and complain filed on second notice ( on 2nd dishnour) is maintainable or not ?
In this case notice sent by the complainant, was acknowledged by the accused but he claimed that he received a blank envelope without a demand letter. The complainant therefore presented the cheque once again and on second dishnour, he filed complaint within 30 days from the date of cause of action that arose from second notice. In the high court, the accused succeeded in getting the complaint quashed on the ground that the complaint was not filed within 30 days from the date of cause action that arose from first notice. The Apex court however set aside the order of High court and held that it is not the ‘giving’ of the notice which makes the offence but it is the ‘receipt’ of the notice by the drawer which gives the cause of action to the complainant to file the complaint within the statutory period. Therefore first notice is not a notice since receipt of notice for making payment is denied and no cause of action has arisen. It is only on receipt of second notice which is received by the accused, cause of action has arisen for filing of the complaint and order of the high court quashing complaint is set aside.
Conclusion: Sections 138 to 142 of NI Act were incorporated to enhance the acceptability of cheques and to prevent dishonest drawers from indulging in mischief in business transactions. Narrow interpretation of section 138 and 142 in the earlier judgments led to a situation which helped the dishonest drawers to avoid punishment. However the latest judgments of Apex court plugged the loop holes and minimized the chances for quashing of complaints. Even the recent judgment of Supreme court in MSR Leathers Vs S Palinappan, which held that cheque can be presented any number of times and cause of action arises for each dishnour, is another indicator of the trend. This trend is most welcome. However the delay in disposal of 138 cases is still a cause for concern as such delay helps the dishonest drawers.
Author- G S Rao, Deputy General Manager (Legal) OCL India Limited, Email – [email protected]