Introduction
A “Cheque bounce,” as defined by Section 138 of the Negotiable Instruments Act, is when a bank refuses to honour a cheque that is offered for payment for any number of reasons, including insufficient funds. If the issuer of the bounced cheque does not pay the payee within the allotted period after receiving a notification of dishonour, they may be subject to penalties and even jail time.
The Negotiable Instrument Act of 1881, Section 138, addresses the dishonouring of a cheque due to insufficient funds in the account. It also describes the components, exclusions, penalty, and fine.
An Overview of the Section 138, NI Act.
In the business world, negotiable instruments are among the easiest ways to transfer funds. They have been used for a long time. Prior to 1988, neither a harsh penalty nor an efficient legal framework existed to stop people from writing cheque for amounts they did not have enough money in their accounts. For example, the failure to pay cheque resulted in a legal obligation. It was determined that cheque dishonour should be regarded as a criminal offense in order to protect the cheque’s drawee. For that reason, Secs. 138 to 142 were added by the Banking, Public Financial Institutions, and Negotiable Instruments Laws (Amendment) Act of 1988.
This was achieved by making the drawer liable for fines in the event that the cheque bounced owing to insufficient funds, while also putting in place adequate safeguards to prevent misuse of the truthful drawer. But as time went on, it became clear that the courts were unwilling to settle the cases quickly and effectively. The 2002 amendment closed the loopholes and made the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 a law. Sections 138, 141, and 142 were amended, and the provisions of sections 143 to 147 were added.
The purpose of this amendment act was to promote increased financial vigilance and regulate the expanding business, exchange, commerce, and industrial activities. additionally to safeguard the confidence that creditors have in the cheque box. “The object of Chapter XVII, containing Sections 138 to 142, is to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques,” the Hon’ble SC ruled in the case of Modi Cements Ltd. v. Kuchil Kumar Nandi [1998] 3 SCC 249.
Presumptions exist in favor of the recipient of the cheque under Sections 118 and 139 of the Negotiable Instruments Act, stating that the cheque was drawn to settle obligations. It is, however, rebuttable, and the victim will disprove it without going to the witness box through cross-examination. Additionally, it is the complainant’s responsibility to demonstrate that the cheque was written for a legally enforceable obligation or liability. In comparison to proceedings conducted under section 114 of the Evidence Act, the burden of proof in this case will be greater for the accused.
Section 27 of the General Clauses Act, 1897, and Section 114 of the Evidence Act, 1872 state that until notice is sent by registered mail to the correct addressee of the cheque, the operation of notification is considered to have taken place. In contrast, the drawer has the right to contest this assumption in accordance with Paraeswaran Unniv. G. Kannan 2017.
It was decided in the case of, Basalingappa v. Mudibasappa (2018) 8 SCC 165 that Section 139 requires the holder of a cheque to collect the cheque in discharge, in whole or in part, of any debt or other obligation until the execution of the cheque is admitted. It’s common to receive postdated or blank cheque.
The Supreme Court ruled in Bir Singh v. Mukesh Kumar (2019) 4 Scc 197that the payee is free to fill in the balance and other details if a signed blank cheque is voluntarily given to them for any payment. By itself, this won’t render the cheque invalid.
The Supreme Court determined the essential elements of the crime as contemplated under Section 138 of the Act in the case of Kusum Ingots and Alloys Ltd v. Pennar Peterson Securities Ltd , holding that “an individual must have drawn a cheque on a bank account that he maintains for transfer of a certain sum of money to another person from that account for the discharge of some debt or other liability; the cheque was issued to the bank within six months of the date on which it was drawn, or within the validity limit of the cheque, whichever comes first; RBI guidelines have shortened the validity duration of cheques, demand drafts, pay orders, and banker’s cheuqes from six to three months as of April 1, 2012, from the date of the instrument. The cheque is returned by the bank as unpaid. The payee or issuer of the cheque makes a case for reimbursement of the said sum of money by sending a written note to the drawer of the cheque within 30 days of receiving details from the bank about the return of the cheque as outstanding; within 15 days of receiving the said note, the drawer of the cheque refuses to allow delivery of the said sum of money to the payee or the holder of the cheque in the proper course of the cheque.”
Time for the offence under Section 138 of the NI Act.
1. Presentation of cheque to the bank.
- Period of limitation – Within 3 months from the date on which it was drawn or the validity of cheque, whichever is earlier.
- Judgement passed under the Ansh Chugh vs Pradeep Gupta, 2020 case.
2. Demand for payment of the due amount by giving notice.
- Period of limitation- 30 days from the receipt of the memo from the bank.
- Judgement passed under the Bodal Lal vs. Krishna Kuma, 2019 case.
3. Payment of the debt by the drawer
- Period of limitation- Within 15 days from the receipt of the notice
- Judgement passed under the case K. Bhaskaran v. Sankaran.
4. Filing of the complaint.
- Period of limitation- Within 30 days of the following day on which the 15th day of notice period expires i.e., excluding the 15th day.
- Judgement passed under the case Saketh India Ltd. v. Indian Securities Ltd.
Landmarks Judgement by the Hon’ble Court
K. Bhaskaran vs Sankaran Vaidhyan Balan And Anr on 29 September, 1999
The three-judge bench of T.S. Thakur, Vikramjit Sen, and C. Nagappan, JJ., considered the territorial jurisdiction of the complaint regarding dishonor of cheques. They concluded that, due to the Bhaskaran case’s liberal approach, Section 138 of the Negotiable Instruments Act, 1881 (NIA) needs to be interpreted more strictly because it has been misapplied in terms of the choice of place of suing. Being the sons of the same parents, the complainant and the accused are siblings in this case. The dishonoured cheque is the source of their argument.
Dashrath Rupsingh Rathod v. State of Maharashtra CRIMINAL APPEAL No.717 OF 2015 (Arising out of SLP(Crl.)No.8540 of 2013)
In this appeal, the Respondent-accused issued the disputed chequee, drawn on UCO Bank, Tangi, Orissa, after purchasing electronic items from the Appellant-company. The Complainant-company presented the cheque at the State Bank of India, Ahmednagar Branch, Maharashtra, since its branch office was situated there. UCO Bank, Tangi, Orissa, refused to honor the cheque. A complaint was brought before Ahmednagar’s JMFC. The Respondent-accused filed an application under Section 177 CrPC, challenging the jurisdiction of the JMFC Ahmednagar.
Judgement– a three-judge Supreme Court bench took a firm stance in this case of Dashrath Rupsingh Rathod v. State of Maharashtra, ruling that local authority under section 138 should be determined and found exclusively by the location of the offense. All that’s required to violate section 138 is for the drawer bank to return the cheque.
The most recent modifications, the Negotiable Instrument (Amendment) Act, 2015, completely changed the legal landscape with regard to the geographic jurisdiction of the courts in cases of cheque dishonour, and they went into effect on July 15, 2015.
M/s Meters and Instruments Private Ltd and Anr. v. Kanchan Mehta [(2018) 1 SCC 560]
The respondent filed a lawsuit in the case of M/s Meters and Instruments Private Ltd and Anr. v. Kanchan Mehta, alleging that the appellants had promised to pay her a certain amount each month. Due to insufficient funds, a cheque intended to settle civil obligations was returned unpaid.
In this case, a two-judge bench of the Supreme Court made several fundamental observations regarding cheque dishonour and offered recommendations for the prompt resolution of cheque cases in accordance with Section 138 of the NI Act.
Judgement– The court held that at least some Section 138 cases ought to be handled electronically and that new technologies should be considered for both paperless courts and alleviating court overcrowding.
Shankargouda v. Kishan Rao, (2018) 8 SCC 165
Issue – Both the respondent (the accused) and the appellant (the complainant) were well-known to one another. The accused requested a loan of Rs. 2,00,000 from the complainant to cover his business expenses, promising to pay it back in a month. The complainant paid the loan amount of Rs. 2,00,000 on December 25, 2005. In order to repay the loan, the accused sent a postdated cheque for Rs. 2,00,000 in the complainant’s name on January 25, 2006. The cheque was brought to the Bank of Maharashtra branch in Gulbarga for collection, but there was not enough money to cash it. The accused requested that the cheque be presented again for collection on March 1, 2006, but the bank returned it on March 2, 2006, noting that there were “insufficient funds.”
Judgement- Two ethical arguments were discussed by the Supreme Court in Shankargouda v. Kishan Rao. First, the Apex Court ruled on the High Court’s revisional jurisdiction. It stated that the High Court could not overturn the Magistrate’s order unless it was blatantly unfair or perverse, or if the relevant content had not been taken into account, and that the order could not be overturned just because a different conclusion could be possible.
Second, the court has held that the accused may provide evidence to refute the presumption in favor of the cheque issuer under Section 139 of the NI Act; however, merely denying the existence of the debt would not be sufficient.
Uttam Ram Vs. Devinder Singh Hudan Cr. Appeal No.431 of 2018
In this matter of Uttam Ram, To transport apple crops acquired from various farmers, the appellant, Uttam Ram, had loaned the respondent some packaging materials. It was found that the respondent owed money, which was settled with a cheque. But the claimant’s cheque bounced, so she filed a lawsuit. The defendant, unlike in a civil court, could not be required to prove the amount owed, according to the Supreme Court’s decision. Instead, under Section 138 of the Negotiable Instruments Act, the burden of proof in a cheque bounce situation is on the accused to refute the assumption of debt.
Recent Developments Under Section 138 NI Act
“The Supreme Court had taken notice of the massive backlog of cheque bounce cases in March of last year, and on Friday issued orders to expedite the resolution of such cases, which numbered 35.16 lakh as of December 31, 2019, out of a total of 2.31 crore pending criminal cases in the world,” the court said. It also requested that the Center amend laws to provide for the clubbing of trials in such cases if they are filed against the same individual within a year and are linked to the same transaction.
In an effort to lighten the load on the criminal courts’ caseload, a five-judge Constitution bench led by Chief Justice S. A. Bobde issued a common order directing the high courts to give practice instructions to magistrates handling cases involving cheque dishonour, instructing them to document their justifications before converting complaints under Section 138 of the (Negotiable Instruments) Act from summary trial to summons triage.
In a case prosecuted summarily under the Code of Criminal Procedure (CrPC), where the victim is not permitted to enter a plea of guilty, it is appropriate for the judge to take testimony and issue a verdict right away.
If the complainant declined to enter a plea of guilty, the judicial officer would be in charge of conducting the hearings and recording testimony in a summons tribunal under the CrPC.
Judges L Nageswara Rao, B R Gavai, A S Bopanna, and S Ravindra Bhat made up the bench, which suggested amending the (NI) Act to allow for a single trial against an individual for multiple offenses under Section 138 of the Act committed within a year, disregarding the Section 219 of the Code’s limitation.
Bench took into account the amicus curiae submissions in addition to a CrPC provision that stated a defendant may face up to three prosecutions in one courtroom if found guilty of multiple offenses of the same nature committed within a 12-month period. It noted the suggestion that the Center amend the laws pertaining to cheque bounce in order to avoid filing duplicate lawsuits in cases where cheque are issued for a single purpose.
According to CJI Bobde, who penned the 27-page order for the bench, the investigation will be carried out upon receipt of complaints under Section 138 of the Act to determine appropriate grounds to move against the accused, where such accused lives beyond the geographical jurisdiction of the court.
The rule states that the testimony of witnesses on behalf of the defendant must be taken on affidavit prior to calling the accused. In appropriate cases, the magistrate may also decide to restrict the investigation to record inspection rather than requiring witness examination. To ensure that time is not wasted serving the summons to an accused in cheque bounce situations, it asked the high courts to give practice directions to the trial magistrates to consider service of a summons in one lawsuit under Section 138 being part of a transaction as considered service in respect of all other complaints before the same court issued as part of the same transaction.
Additionally, it upheld earlier decisions, holding that trial courts might not have the “inherent capacity” to change their minds about summons decisions made during cheque bounce procedures. We stress that Trial Courts lack the inherent power to review or recall summons-related matters. It stated that this would not affect the Trial Court’s ability to review the matter of procedure order under Section 322 of the Code in the event that the court is informed that it is no longer able to try the complaint.
The Supreme Court ordered a committee headed by former Bombay High Court judge Justice R.C. Chavan to investigate the issues not covered in the ruling. The committee was established on March 10.According to the statement, a three-judge bench will now take up the suo motu task of guaranteeing that cases involving cheque bounces are settled in eight weeks. The directive specified that the Chavan panel will take into account various suggestions to stop the outburst of cases on the docket.
The aforementioned Committee would take into consideration the recommendations made by the Amicus Curiae regarding the relationship between bank account numbers and cheque numbers, pre-summons mediation, and any other issues included in the written submissions and preliminary notice from the knowledgeable Amici Curiae. The Committee was directed to investigate whether new courts are required to hear cases filed under Section 138 of the Act.
In the past, the Supreme Court called the backlog of more than 35 lakh cases involving cheque bounces “disgusting” and recommended that the Center pass legislation designating extra courts to hear these cases for a predetermined amount of time.
On March 5, 2020, the Supreme Court filed a suo motu case and committed to creating a “concerted” and “coordinated” procedure for the swift resolution of cases of that nature.
Recent Case Studies
- Ajay Kumar Radheyshyam Goenka vs Tourism Finance Corporation Of India (15 March, 2023)
A demand-cum-legal notice was issued on April 19, 2016, on behalf of the Respondent, under Section 138 of the Negotiable Instruments Act, 1881, requesting that the company, identified as Accused no. 1, and the Appellant, identified as Accused no. 2, settle the debt that was advanced through a corporate loan dated March 27, 2012. In a reply dated April 28, 2016, the accused acknowledged their obligation to repay the loan balance. Since the money was not paid, on May 16, 2016, Criminal Complaint No. 632982/2016 was submitted in accordance with Section 190 of the 1973 Code of Criminal Procedure, as well as Sections 138, 141, and 142 of the NI Act, to the Court of Chief Metropolitan Magistrate, Saket Courts, New Delhi.
Judgement- Justice Pardiwala relied upon P. Mohanraj and Ors vs Shah Brothers Ispat Private Limited which was upheld in Narinder Garg and Ors vs Kotak Mahindra Bank Limited and Ors. and additionally opined that the NIA Proceeding had already commenced and cognizance upon the complaint was already taken and during the pendency, the Accused Company is facing CIRP, the directors/signatories cannot escape from their penal liability by citing its dissolution. Only the Accused Company is dissolved, not the personal penal liability of the signatory/director under Section 141 of the NI Act. He relied upon second proviso to section 32A (1) of the IBC and held that even though the Accused Company is dissolving and its liability has been ceased, the former signatory/director (Appellant herein) cannot be permitted to go scot-free after the approval of the resolution plan.
He further held that after passing of the resolution plan under Section 31 of the IBC and in light of Section 32A of the IBC, the criminal proceedings under Section 138 of the NI Act will stand terminated only in relation to the corporate debtor if the same is taken over by a new management.
- M/S Lyka Labs Limited And Ors vs State Of Maharashtra And Anr on 8 March, 2023
Issues –
If the person authorized by the “Company” signs the cheque, is that person the “drawer” and if so, is that person subject to a directive to provide interim compensation under section 143A of the Negotiable Instruments Act of 1881 while they are not employed by the company?”
Whether, in an appeal filed by someone other than the “drawer” against the conviction and sentence under section 138 of the NI Act, a deposit of at least 20% of the fine or compensation is required under Section 148 of the NI Act.
Judgement –
According to section 143A of the NI Act, the signatory of the cheque, who has been given authorization by the “Company,” is not the drawer and cannot be ordered to provide interim compensation. A deposit of at least 20% of the fine or compensation is not required in an appeal under section 148 of the NI Act filed by individuals other than “drawer” against the conviction under section 138 of the NI Act.
- M/S Aarti Industries vs State Of U.P. And Another on 12 April, 2023
The amount payable under the disputed cheque was not paid within the period contemplated under the Act after receipt of notice, complainant-opposite party 2 filed a complaint dated 08.09.2021 in terms of Section 138 of the N.I. Act through the power of attorney holder namely Neeraj Kumar.
the Court finds that no specific pleading has been raised in the letter of authority, and the affidavit of the power of attorney holder that he has personal knowledge of the facts giving rise to the proceedings under section 138 NI Act. The complaint is totally silent regarding the above. A conjoint reading of the averments made in the letter of authority and the affidavit of the power of attorney holder under section 200 Cr.P.C. clearly go to suggest that the power of attorney holder is not having personal knowledge of the facts giving rise to the proceedings under section 138 NI Act, even though he is working as Manager of the firm. This being the position, the submissions urged by the learned senior counsel in support of present application are liable to be accepted as they create a dent in the proceedings impugned in present application.
This case is about a dispute related to dishonor of cheque under Section 138 of the Negotiable Instruments Act, where the trial court had convicted the accused (M/S Paramount Tech Fab Industries) based on the presumption under Section 139 of the Negotiable Instrument. The accused appealed against the conviction in the High Court, which was dismissed. So, the accused then filed a Special Leave Petition (SLP) in the Supreme Court against the High Court order. Which later, the Hon’ble Supreme Court, in its judgment dated March 9, 2021, dismissed the SLP filed by the accused and upheld the conviction. The Supreme Court reiterated that once the issuance of the cheque and its dishonor are proved, the presumption under Section 139 shifts the burden on the accused to rebut the presumption of existence of a legally enforceable debt or liability.
In 2012, Respondent No. 2 placed an order for a “Promotec Fiber Laser Cutting Machine” with the appellant’s company, M/s Farmax, paying an advance of Rs. 1.55 crore. When M/s Farmax failed to deliver the machine, the appellant issued five cheques to return the advance. Some cheques were dishonored, leading Respondent No. 2 to initiate proceedings under Section 138 of the Negotiable Instruments Act (NI Act) in late 2013. In January 2014, Respondent No. 2 also filed a complaint under Section 156(3) of the Criminal Procedure Code (CrPC), resulting in FIR No. 35 of 2014 under Sections 406, 420, and 120B of the Indian Penal Code (IPC).
In the NI Act case, the appellant was convicted and sentenced to two years of rigorous imprisonment in May 2015. During the appeal, a settlement was reached in the Lok Adalat where the appellant agreed to repay the entire amount of Rs. 1.55 crore within 16 months. Failure to meet this settlement led the Additional Sessions Judge to declare the settlement frustrated in July 2016.
Between 2016-2020, the appellant sought extensions to pay the amount. In 2019, the Supreme Court directed the appellant’s wife to deposit Rs. 20 lakhs, which was not complied with, leading to the dismissal of the SLP. Subsequently, the appellant presented a Demand Draft of Rs. 20 lakhs to the trial court in February 2020, which was refused. The High Court later dismissed the appellant’s application under Section 482 CrPC in November 2022.
In 2023, the Supreme Court directed the appellant to deposit Rs. 20 lakhs, which was complied with. An additional Rs. 10 lakhs was also deposited as interest. Despite the appellant’s payment, Respondent No. 2 remained unwilling to settle, leading to continued litigation.
Finally, the Supreme Court acknowledged that the appellant had paid the due amount and additional interest, resulting in the closure of criminal proceedings under Section 138 of the NI Act and FIR No. 35 of 2014 under Sections 406, 420, and 120B of IPC. The Court exercised its powers under Article 142 of the Constitution to quash all pending criminal appeals and set aside the appellant’s conviction and sentence. The trial court was directed to hand over the deposited Demand Drafts totaling Rs. 30 lakhs to the complainant.
CONCLUSION
A promissory note, bill of exchange, or cheque payable to order or to bearer is referred to as a Negotiable Instrument under section 138 of the Negotiable Instrument Act. The above list contains numerous provisions of the Negotiable Instrument Act that deal with a director’s, corporation’s, or individual’s responsibility in the event that a cheque is dishonored. There has been mention of landmark decisions to help clarify the process, accountability, and compounding. The earlier amendments to the Act mark a noteworthy effort to raise performance and efficacy. It would discourage unnecessary and pointless lawsuits while also assisting in the swift resolution of disputes. In the event that the conviction is contested, it further safeguards the complainant’s rights by requiring the convicted party to make restitution and providing interim relief. In addition, a significant advancement in cheque dishonour cases will be the recent SC directive to permit “one trial for multiple cases from the single transaction in a trial off cheque cases”.
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