ABSTRACT

Nowadays cheques are used closely everywhere for many purposes which include loan repayment, salary & wage payment, bill payment, and fee payment, etc. so on a daily basis, banks process and clear the vast majority of cheques which is used to secure evidence of payment. However, cheques are still a very common mode of payment for all nowadays. It is always advisable to issue crossed “Account Payee Only” cheques in order to avoid its misuse.

A cheque is a type of negotiable instrument.  The cheques that are crossed and account payees are not negotiable by any person other than the payee. The cheques must be deposited into the payee’s bank account. The person who draws the cheque is known as the “Drawer,” the person in whose favor the cheque is drawn is known as the “Payee,” and the bank that is directed to pay the sum is known as the “Drawee Bank.”  The cheque bounces, on the other hand, are fairly common these days.  The cheques are occasionally returned by the drawee bank on which they were drawn, on various grounds including insufficient funds.

INTRODUCTION

In all kinds of commercial transactions, cheques have always been the most convenient and valued form of payment. If these cheques did not exist or were not accepted as a legitimate means of payment in business transactions, businesses would have come to a halt.

Similarly, if a cheque that was accepted in good faith is bounced, the payee will suffer because the cheque will lose its authenticity and confidence. In situations where there is a scarcity or inadequate funds in a drawer’s account, the provisions under Section 138-142 of the Negotiable Instruments (NI) Act, 1881, which deals with an element of dishonor of cheques, are attracted. According to the 213th Law Commission Report[1] and numerous newspaper reports, India has approximately 38 to 40 lakh cases of bounced cheques, which is causing the Indian justice system to stagnate. [2]

Chapter XVII, which contains Sections 138 to 142, was to instil trust in the effectiveness of banking operations and to lend legitimacy to negotiable instruments used in business transactions. If a party issues a cheque as a form of deferred payment and the payee accepts the cheque with the expectation of receiving payment on the due date, the payee does not suffer as a result of non-payment. [3]

The penal provisions of Sections 138 to 142 of the Act were enacted to ensure that liabilities incurred by the use of cheques as a form of deferred payment are met. Section 138 of the Act specifies the situations in which a case/petition for cheque dishonor can be filed in a court of law .1

The following are the ingredients required to comply with the provisions of Section 138:

  • A person must have drawn a cheque for payment of money to another for the discharge of any debt or other liability;
  • That cheque has been presented to the bank within a period of three months;
  • That cheque is returned by the bank unpaid, either because of  insufficient of funds or that it exceeds the amount arranged to be paid from that account by the bank;
  • The payee makes a demand for the payment of the money by giving a notice in writing to the drawer  of the cheque within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
  • The drawer fails to make payment to the payee within 15 days of the receipt of the notice.[4]

Overview of the NI Act, 1881

The Negotiable Instruments Act, 1881 governs the negotiable instruments, which are pieces of paper that reflects a sum of money owed to one person and can be transferred to another by delivery.

  • A negotiable instrument, as per Section 13 of this Act, is a promissory note, a bill of exchange, or a cheque payable to the bearer.
  • Promissory notes are described in Section 4 of NI, Act as a written instrument containing an unconditional undertaking signed by the creator to pay a sum of money to a specific individual or the bearer of the instrument. This isn’t a banknote or a currency note, either. The drawee may or may not be a real person.
  • A bill of exchange, also known as a draught, is a written document that contains an unconditional order, signed by the maker, and orders a specific individual to pay a specific sum of money to a specific person or the bearer of the instrument, as specified in Section 5 of this Act. A drawer, a drawee, and a payee are the parties to a bill of exchange. In the case of a bill of exchange, the drawee may be an individual or a bank. This is a representation of a debtor’s debt to a creditor.
  • A cheque is described in Section 6 of this Act as a bill of exchange drawn on a specific banker that is not payable otherwise on demand. It’s an order from a drawer or depositor on the bank. A drawee and a payee are the parties to a cheque. Only one bank can be the drawee.

The penal provisions of this Act start from Section 138 to Section 142 and make a cheque bounce or dishonor of a cheque illegal [5]

Section 138 of the Negotiable Instruments Act, 1881

The dishonor of a cheque for insufficiency fund, etc. in the account is covered by Section 138 of the Negotiable Instruments Act, 1881. When a person with a bank account issues a cheque to another person for the payment of a certain sum of money from that bank account to discharge, entirely or partially, any amount owed or due to any other liability, which is returned unpaid by the bank either because the amount of money in the credit in that bank account is insufficient to honor the cheque or because the amount of money arranged to be paid from that bank account by an agreement made with the bank by the account holder exceeds the amount of money arranged to be paid from that bank account by an agreement made with the bank.

Any individual or bank account holder shall be deemed to have committed a cheque dishonoring offense, and shall, without regard to any other provisions of the Negotiable Instruments Act,1881 be punished with a maximum sentence of Two year in prison or a fine of twice the amount specified in the cheque, or both.  An offense committed under Section 138 is a non-cognizable offense (a case in which a police officer cannot arrest the accused without an arrest warrant). Also, it is a bailable offense.[6]  A violation of this clause is both bail-able and non-cognizable.[7]

Conditions for constituting the offense under Section 138

1. The drawer’s check must have been delivered to the drawee bank during the cheque’s validity period, which is three months from the date it was released.

2. If the bank has returned the cheque unpaid for any reason, the payee must first have sent a demand notice in writing to the drawer within 30 days requesting payment for the said sum, copy of Bank’s memo as well as the details about the bank’s cheque bounce3. After receiving the said demand notice, the drawer has not paid the specified amount within 15 days of receipt of the notice.[8]

As a result, the above conditions must have been met in order for a cheque bounced to be considered a violation of Section 138 of the Negotiable Instruments Act, 1881. In the case of MSR Leathers v. S. Palaniappan, 2013, the court observed this. [9]

Jurisdiction

  • Section 142(2) (a) states that if a cheque is delivered for collection by an account, the case for a cheque bounce will be tried by a court not lower than a Metropolitan Magistrate or a Judicial Magistrate of the First Class/ Degree, whose local jurisdiction includes the branch of the bank where the account of the holder is located.
  • Section 142(2) (b) states that if the cheque is submitted for payment to the payee or holder in due course otherwise via an account, the case will be tried by a court not lower than a Metropolitan Magistrate or a Judicial Magistrate of the first class/degree, whose local jurisdiction includes the branch of the bank where the holder’s account is located.[10]

Section 139 of the Negotiable Instruments Act.

The payee would be believed to have issued the cheque referred to in Section 138 for the discharge, in whole or in part, of any debt or liability until the contrary is shown.

This assumption is undoubtedly rebuttable by the accused on the basis of the “preponderance of the proof.” The prosecution will fail if the accused can develop a probable defense that raises a reasonable doubt about the nature of a legally enforceable debt or liability and the accused can do so by relying solely on the prosecution’s materials or testimony; in many cases, the accused did not need to provide any additional or personal evidence.[11]

Virender Kumar vs.  Sumit 25th April 2018[12]

The accused was convicted in this case because he was unable to refute the accusation of legal responsibility. The accused will discharge his burden of proof and pass it to the prosecution by showing preponderance of probabilities and pointing out any flaws in the complainant’s tale or truth. Other defenses can exist, depending on the circumstances. However, Section 140 of the Negotiable Instruments Act clarifies that there is no such protection and that the drawer had no reason to suspect the cheque would be bounced at the time it was released.[13]

If a cheque is dishonored
when a cheque is returned unpaid, the drawee bank sends a ‘Cheque Return Memo’ to the payee’s banker, detailing the explanation for non-payment. The dishonored cheque and the memo are then sent to the payee by the payee’s banker. If the holder or payee assumes the cheque will be honored a second time, he or she will resubmit it within three months of the date on it. If the cheque issuer fails to make payment of the cheque amount or to make a deposit of the said amount, the payee has the right to take legal action against the drawer of the cheque.

Only if the sum mentioned in the cheque is towards the discharge of a debt or any other obligation of the defaulter towards the payee, the payee can legally sue the defaulter/drawer for the cheque dishonored. The drawer cannot be prosecuted if the cheque was given as a gift, loan, or the cheque amount was for illegal purposes.[14]

The procedure that is followed in matters with regard to Section 138 of the Act:

i. A legal notice containing all relevant information must be sent to the drawer by registered post/email within 30 days of the cheque being dishonored. The drawer has 15 days’ time to make the payment; if the payment is received, the dispute is resolved. If the payment is not made, the complainant must file a criminal case against the drawer under Section 138 of the Act within 30 days of the expiration of the 15 day period stated in the notice, with the concerned magistrate court within the jurisdiction. [15]

ii. The defendant or his designated representative must testify in the witness box and provide pertinent information for the complaint to be filed. If the court is convinced that the complainant’s allegations are true, the accused will be summoned to appear before the court.

iii. If the accused refuses to appear after being served with the summons, the court may issue a bailable warrant. If the drawer does not appear after this, a non-bail-able warrant may be issued by the court.

iv. If the drawer/accused appears, he will submit a bail bond to guarantee his presence at trial. After that, the accused’s plea is registered. If he enters a guilty plea, the case will be dealt with by the court for sentencing. If the accused denies the allegations, a copy of the complaint will be served on him.

v. The Complainant may present his evidence in the form of an affidavit and produce all documentation in support of his complaint, including the original documents. The accused or his attorney will cross-examine the claimant/ complainant.

vi. The accused will be given the chance to present his case. The accused would also have the ability to present evidence in support of his prosecution, as well as witnesses in his defense. The defendant will cross-examine the accused and his witnesses.

vii. The arguments are the final stage of the proceedings, in which the court will render a decision.

If the accused is acquitted, the case is closed; however, the complainant can appeal to the High Court, as per the judgment dated 23.8.2019 passed in the case of “kushal Kawaduji Singanjude vs. Ram Narayan Gurga Prasad Agarwal, and if the accused is convicted, he can appeal to the Sessions Court. Moreover, it is important to remember that the offense under Section 138 of the Act is now compoundable.[16]

Recent Supreme Court rulings for speedy disposal of cases under Section 138 of the Act:

The Supreme Court, in its judgment dated 1st August 2014, in the case of Dashrath Rupsingh Rathod versus State of Maharashtra and another (Criminal Appeal No. 2287 of 2009),

Held-  that the territorial jurisdiction for the dishonor of cheques is restricted to the court within whose local jurisdiction the offense was committed, which in the present context is where the cheque is dishonored by the bank on which it is drawn. The Supreme Court has directed that only those cases where post the summoning and appearance of the alleged accused, the recording of evidence has commenced as envisaged in section 145(2) of the Negotiable Instruments Act, 1881, will proceeding continue at that place. All other complaints (including those where the accused/respondent has not been properly served) shall be returned to the complainant for filing in the proper court, in consonance with an exposition of the law, as determined by the Supreme Court.

In the case of Dayawati v. Yogesh Kumar Gosain, 2017[17] the Delhi High Court considered whether a criminally compoundable offense under Section 138 could be resolved by mediation. The Court held that the Legislature had not expressly established an explicit legislative clause allowing the criminal court to refer the plaintiff and convicted parties to alternative dispute resolution mechanisms.

The Code of Criminal Procedure (“Cr.P.C.”) allows and recognizes arbitration without stipulating or limiting the method used to achieve it. Thus, there is no bar to using alternative conflict resolution procedures such as arbitration, mediation, and conciliation (recognized under Section 89 of the Civil Procedure Code, 1908) for the purpose of resolving conflicts involving offenses covered by Section 320 of the Cr.P.C. It also noted that the proceedings under Section 138 of the Act are distinct from other criminal cases and that they are more similar to a civil wrong with criminal overtones.[18]

After considering the intent of incorporating Section 138 and other Provision of chapter XVII of the act, the Honorable Supreme Court made the following observation in Meter and Instrument (P) Ltd. V. Kanchan Mehta. [19]

From the above discussion following aspects emerge:

The violation of Section 138 of the Act is mainly a criminal offense. In light of the presumption under Section 139, the burden of proof is on the accused, but the standard of proof is “preponderance of probability.” The case must be tried summarily in accordance with the rules of the Cr.P.C. with any modifications necessary for proceedings under Chapter XVII of the Act. As read, the theory of Section 258 Cr.P.C. will apply, and the Court will be able to close the case and discharge the accused if the amount of the cheque, as well as calculated costs and interest, has been paid and there is no need to pursue the punitive element.[20]

Compounding at the outset should be encouraged, but it is not prohibited at a later stage subject to reasonable compensation as determined by the parties or the Court.

Cases brought under Chapter XVII of the Act are usually tried in a summary manner. The Magistrate’s discretion under Section 143’s second proviso, to hold that it was undesirable to try the case summarily because a sentence of more than one year could be imposed, must be exercised after taking into account the fact that, in addition to the sentence of imprisonment, the Court has jurisdiction under Section 357(3) Cr.P.C. to award suitable compensation under a default sentence In certain cases, a jail term of more than one year might not be necessary with this strategy[21]

It is unnecessary for the Magistrate to record any further preliminary proof because evidence of the case may be submitted on affidavit, subject to the Court summoning and inspecting the individual giving the affidavit, and the bank’s slip being prima facie evidence of the dishonor of cheque. At any point of a trial or other case, such affidavit testimony may be used as evidence. The person giving the affidavit may be examined according to Section 264 Cr.P.C. Except where exercising power under Section 143’s second proviso becomes required, the scheme will follow summary procedure. Where a one-year sentence may be necessary and compensation under Section 357(3) is deemed insufficient, taking into account the amount of the cheque, the accused’s financial ability, and his or her actions, or any other circumstances.”[22]

AMENDMENT

The Negotiable Instruments (Amendment) Act, 2018,[23] which took effect on September 1, 2018, requires a court trying a case involving cheque bouncing to order the drawer to pay interim compensation to the claimant of not more than 20% of the cheque sum within 60 days of the trial court’s order.

This interim fee can be charged in a summary trial or a summons case in which the drawer pleads not guilty to the allegations in the lawsuit, or upon the framing of a charge in some other case. Furthermore, the Amendment allows the Appellate Court to order the claimant to deposit a minimum of 20% of the fine/compensation awarded, in addition to temporary compensation, while hearing appeals against convictions under Sec. 138.[24]

LEGAL ACTION

As per the provision of section 138 of Negotiable Instrument Act, 1881 Cheque dishonor is a criminal offense punishable by up to two years in prison, a monetary penalty, or both,  Or If the payee chooses to act lawfully, the drawer should be given the opportunity to refund the check balance immediately. This opportunity can only be granted in the form of a written notice. The payee has 30 days from the date of receiving the bank’s “Cheque Return Memo” to deliver the notice to the drawer. The notice should state that the balance of the cheque must be paid to the payee within 15 days of the drawer receiving the notice. The payee has the right to file a criminal complaint under Section 138 of the Negotiable Instruments Act if the cheque issuer fails to make payment under the demand notice within 30 days of receiving the notice. However, within a month of the notice period expiring, the case must be filed in a magistrate’s court. To move further in this situation, it is important to consult an attorney who is well-versed and knowledgeable in this field of law.[25]

Condition for prosecution

In order to use Section 138’s rules, certain legal requirements must be met. The drawer should have drawn the cheque on a bank account he controls. Since there were insufficient funds in the drawer’s account, the cheque should have been returned or dishonored. The cheque is given to pay off for loan amount or legal obligation. If the drawer fails to make the payment within 15 days of receiving the demand notice, he commits an offense under Section 138 of the Negotiable Instruments Act.[26]

Punishment & penalty

1. The court will issue summons and hear the case after receiving the complaint, as well as an affidavit and related paper trail. If found guilty, the defaulter can be punished/disciplined with a monetary penalty of twice the value of the cheque, or imprisonment for a period of up to two years, or both. For repeated bounced cheque offenses, the bank has the right to suspend the cheque book facility and close the account.

2. If the drawer pays an amount of the cheque within 15 days of receiving the notice, the drawer is not guilty of any offense. Otherwise, the payee has one month from the notice’s expiration date to file a lawsuit in the jurisdictional magistrate’s court. [27]

Conclusion 

By penalizing the offense of a cheque bounce, the Negotiable Instruments Act helps to discourage the abuse of cheques and ensure that transactions go smoothly. In addition, the accused has defenses available to prevent fake cases of cheque bounce or dishonor. However, when dealing with cases of cheque bounce, one must exercise extreme caution since they entail several technicalities and necessitate extremely precise proof of the transactions. It’s not the same as other criminal cases.

Note :

1. Research scholar at Infra Legal Services Noida

2.  https://economictimes.indiatimes.com/news/economy/policy/traders-move-to-nirmala-sitharaman-over-40-lakh-pending-cases-on-bounced cheques/articleshow/73979479.cms#:~:text=According%20to%20the%20213th%20Law,40%20lakh%20cheque%20bounce%20cases.&text=This%20mistrust%20of%20cheques%20encouraged,untaxable%20money%2C%E2%80%9D%20Khandelwal%20said.

3. https://www.legalbites.in/cheque-bounce-concept-rules-notice-penalty/

4. Available at https://legislative.gov.in/sites/default/files/A1881-26.pdf Last Visited 1 May 2021

5. Available at https://www.mondaq.com/india/financial-services/812822/section-138-of-negotiable-instruments-act-overview Last Visited 1 May 2021.

6. Available at https://legislative.gov.in/sites/default/files/A1881-26.pdf Last visited 1 May 2021.

7. https://www.scconline.com/blog/post/2019/05/07/dishonour-of-cheque-s-138-ni-act-and-allied-sections/

8. https://legislative.gov.in/sites/default/files/A1881-26.pdf

9. https://legislative.gov.in/sites/default/files/A1881-26.pdf

10. https://indiankanoon.org/doc/110319578/

11. https://indiankanoon.org/doc/110319578/

12. https://indiankanoon.org/doc/110319578/

13. https://indiankanoon.org/doc/164823378/

14. https://blog.ipleaders.in/defend-negotiable-instruments-act-case/

15. Available at https://legislative.gov.in/sites/default/files/A1881-26.pdf Last Visited 1 May 2021.

16. https://legislative.gov.in/sites/default/files/A1881-26.pdf

17. https://indiankanoon.org/doc/171370472/

19. https://legislative.gov.in/sites/default/files/A1881-26.pdf

20. https://indiankanoon.org/doc/160848531/#:~:text=Few%20Facts%3A%20The%20Respondent%20Kanchan,for%20want%20of%20sufficient%20funds.

21. https://legislative.gov.in/sites/default/files/A1974-02.pdf

22. https://legislative.gov.in/sites/default/files/A1974-02.pdf

23. https://legislative.gov.in/sites/default/files/A1974-02.pdf

24. http://egazette.nic.in/WriteReadData/2018/188048.pdf

25. https://www.mondaq.com/india/financial-services/812822/section-138-of-negotiable-instruments-act-overview

26. https://legislative.gov.in/sites/default/files/A1881-26.pdf

27. https://legislative.gov.in/sites/default/files/A1881-26.pdf

28. https://www.indiainfoline.com/article/research-articles-personal-finance/cheque-dishonoured-a-step-by-step-guide-for-legal-recourse-113111500895_1.html

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Location: Ghaziabad, Uttar Pradesh, India
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