Section 138 of the Negotiable Instruments Act, 1881 – the law, leading judgments of 2012 and the lacunae
The objective of criminalising the dishonour or bouncing of cheques is but obvious, to ensure the credibility of the instrument, i.e., the cheque and also to uphold the integrity of the overall transaction. A mere civil penalty would not be deterrent enough and thus the Section embodies the criminal offence element as well The advent of increased economic transactions which relied...
The objective of criminalising the dishonour or bouncing of cheques is but obvious, to ensure the credibility of the instrument, i.e., the cheque and also to uphold the integrity of the overall transaction. A mere civil penalty would not be deterrent enough and thus the Section embodies the criminal offence element as well
The advent of increased economic transactions which relied on cheques as a medium of payment demanded that the law evolved accordingly. The principal legislation governing cheques, the Negotiable Instruments Act, 1881 – thus underwent significant change in this regard with the passing of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act in 1988 which inserted Sections 138-142 into the Act, which dealt with the dishonour of cheques for insufficiency of funds.
Of these 5 sections, Section 138 commands the high ground, as it establishes a criminal offence for the dishonour of a cheque, for want of funds in the bank account of the person issuing the cheque, thereby holding the drawer of such cheque liable to be punished with imprisonment up to one year or a fine, which may extend to twice the amount of the dishonoured cheque or both. The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 further amended Section 138 to provide a maximum imprisonment of 2 years as compared to the earlier 1 year and also introduced Sections 143-147. These 10 Sections, collectively fall under Chapter XVII of the Negotiable Instruments Act titled "Of Penalties In Case Of Dishonour Of Certain Cheque for Insufficiency Of Funds In The Account."
While, Section 138 of the Negotiable Instruments Act has done much to improve the situation viz. cheque bouncing, the law still needs to evolve. Usually the time prescribed by the Act for fast disposal in Section 138 matters is 6 months but unfortunately the matters are not disposed within the said timeframe as the courts are flooded with matters. With cases under Section 138 of the Negotiable Instruments Act increasing with each passing day, the legislature should work towards imposing a more stringent as well as a deterrent punishment, which in turn will create a fear in the mind of the drawer before issuing such cheques - which are not going to be honoured.
The objective of criminalising the dishonour or bouncing of cheques is but obvious, to ensure the credibility of the instrument, i.e., the cheque and also to uphold the integrity of the overall transaction.
A mere civil penalty would not be deterrent enough and thus the Section embodies the criminal offence element as well. Over the course of the last 15 years, various High Courts have passed numerous judgements on different points of law arising from Section 138, at times conflicting as well and from time to time, the Supreme Court has passed far reaching judgements to clear the air in this regard. Through the course of this article, we will touch upon the salient features of the Section, critique two landmark judgements of 2012 and also discuss the lacunae in the law.
In order to draw out and say that an offence has been committed under Section 138 of the Negotiable Instruments Act, the following conditions must be fulfilled:
- Existence of a ‘live account’ is a necessary prerequisite, which should be in existence at the time at which the cheque is issued, in order to attract the provisions of Section 138.
- The cheque should have been given by the drawer in discharge of a legally enforceable debt or legal liability, whether in whole or in part
- The cheque should be presented to the bank by the holder of such cheque within six months from the date mentioned on the same. The latest directive of the Reserve Bank of India provides that the validity of a cheque has been reduced to 3 months.
- The bank should have returned the cheque unpaid on the ground that the money in the account of the drawer is insufficient, or exceeds the credit arrangement so extended by the bank to the drawer. The Supreme Court has given an extended meaning to this in the broadest possible sense.
- The payee or the holder in due course, as the case may be, must within thirty days from the date on which the bank has returned the cheque unpaid, make a demand on the drawer for the amount of the cheque in writing.
- The drawer thereafter should fail to make the payment of the amount of the cheque to the payee or the holder in due course, within a period of 15 days from the receipt of the above mentioned demand.
- The payee or holder in due course is mandated to file a criminal complaint in writing within a period of one month from the expiry of the above mentioned period of 15 days.
The year 2012 has seen two extremely pertinent judgements passed by the Supreme Court viz Section 138 matters, laying down an extremely important precedent. We will discuss both judgements in brief:
Sangeetaben Mahendrabhai Patel v. State of Gujarat: The Supreme Court held in this case that when a cheque has bounced; besides the proceeding that can be initiated under Section 138 of the Negotiable Instruments Act, the aggrieved party may also initiate proceedings under Section 406 (Criminal Breach of Trust) and Section 420 (Cheating) of the Indian Penal Code. The Court, while drawing the distinction between such dual proceedings and double jeopardy reasoned that under double jeopardy as envisaged under Article 20 (1) of the Constitution, there must be identity of ingredients as compared to identity of allegations.
The ingredients of the offence under Section 138 of the Negotiable Instruments Act defer from the ingredients of the offence under Section 406 and Section 420 of the Indian Penal Code. The distinguishing factor based on the above mentioned principal is evident as under offences of the Indian Penal Code, there is no legal presumption of antecedent liability against the drawer of cheque and no fine is imposed to meet a legally enforceable liability. Further, for offences under the Indian Penal Code, the presence of Mens Rea is a key ingredient as compared to the view taken by the Courts with respect to offences falling under Section 138 of the Negotiable Instruments Act.
M/s Laxmi Dyechem vs. State of Gujarat & Ors.: The Supreme Court of India held in this case that the ambit of Section 138 of Negotiable Instruments Act, 1881 extends to the dishonour of cheques due to mismatch of signature of the drawer of the cheque when the specimen signature is available with the bank. The Supreme Court overruled the judgment of the Gujarat High Court which gave a strict interpretation to Section 138 stating that dishonour of cheques due to mismatch of signature will not attract the provisions of Section 138 as envisaged under the Negotiable Instruments Act, as in order to attract provisions of this Section, insufficiency of funds or the credit arrangement so extended to the drawer being insufficient is the only ground.
The principal reasoning of the Court, was drawn from its judgement in the NEPC Micon Ltd. v. Magma Leasing Ltd.3 where it was held that the expression “amount of money… is insufficient” as appearing in Section 138 of the Negotiable Instruments Act is a “genus” and dishonour of cheque on grounds such as “account closed”, “payment stopped”, “referred to the drawer” which ultimately result in the dishonour of cheques issued by the drawer form different “species” of this “genus”. The Supreme Court therefore gave a similar interpretation to the dishonour of cheques due to mismatch of signature or due to “image is not found” and held that these grounds are also a different “species” of the aforementioned “genus”.
The Supreme Court opined that a change of authorised signatory or deliberate mismatch of signatures may be done with the intention of dishonestly or fraudulently resulting in the dishonour of the cheque. Thus, irrespective of whatever may be the reason, if a certain act is done or omitted to be done with a purpose of preventing the honour of a cheque issued by the drawer, it will necessarily fall within the scope of Section 138 of the Negotiable Instruments Act. However, in order to protect bona fide acts, the Supreme Court also held that even in case of a mismatch of signatures, all such conditions as prescribed for drawing out an offence under Section 138 need to be fulfilled.
Likewise, the Legislature may also consider the Dubai model wherein if the cheque is bounced, the drawer is first put behind bars, and thereafter, he or she may be released subject to payment of the cheque amount, while at the same time, nothing stops the drawer from going to his or her defence.More preventive mechanisms need to be incorporated which are currently lacking. It must be considered that companies which are convicted of cheque bouncing offences should pay the price of the same with respect to further transactions. For example, if a drawer is a company and the cheque issued by the company is dishonoured and if the said company is convicted, then the company should be blacklisted by the Registrar of Companies and such other relevant authorities, thereby ensuring that whomsoever dealing with such a company will take precautions before executing transactions. This blacklisting could be for a specific period of time, ensuring that the offence is taken most seriously.
Footnote:
1 2012) 7 SCC 621 2 Criminal Appeal Nos. 1870-1909 of 2012 (Arising out S.L.P. (Crl.) Nos. 1740-1779 of 2011) with Criminal Appeal Nos. 1910-1949 of 2012 (Arising out S.L.P. (Crl.) Nos.1780-1819 of 2011) decided on 27th November 2012 3 (1999) 4 SCC 253
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.