Home Cheque bounce Section 138 of Negotiable Instruments Act, 1881

Section 138 of Negotiable Instruments Act, 1881

August 19, 2024

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This article is written by Isha Garg. It explores the legal prerequisites for lodging a complaint under Section 138 and discusses in detail the key ingredients of the section. It also incorporates the latest and landmark rulings from the Supreme Court to offer a thorough understanding of the legal framework and its practical implications.

Table of Contents

Introduction

With the advent of globalisation, securing transactions became the need of the hour. Initially, trade was conducted through the barter system, which was later replaced by cash transactions. However, the introduction of negotiable instruments, such as cheques and bills of exchange, has revolutionised trade. These instruments facilitated the exchange of credit, allowing businesses to conduct transactions without the physical transfer of cash. With the development of the banking sector, cheques have become a more convenient mode of transaction. But there is a possibility that cheques are issued with insufficient or no amount in the account of the drawer of the cheque, which results in the dishonouring of cheques. To protect the drawee or payee of a cheque, it was deemed necessary that dishonour of a cheque be made a punishable offence. Although civil remedies existed under the Negotiable Instruments Act, of 1881 (hereinafter referred to as the NI Act), the legislature opined that to suppress such acts, there was a need for deterrent punishment. Therefore, additional criminal remedies were inserted under Sections 138 to 142 of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act of 1988. The purpose behind these remedies was to encourage the use of cheques and strengthen their validity. Section 138 of the Negotiable Instruments Act of 1881 confers the benefit solely for the protection of the payee or holder in due course of a dishonoured cheque. This section plays a crucial role in ensuring the trustworthiness and reliability of transactions done through cheques in commercial and financial dealings. This section has undergone various amendments to adapt to the evolving business environment. The last amendment to Section 138 was made in 2002.

Objective behind Section 138 of Negotiable Instruments Act, 1881

In the commercial world, cheques were losing credibility due to the lack of accountability on the part of drawers. Therefore, in general, Section 138 of the Act aims to uphold the reliability of cheques in commercial transactions, deterring the issuance of cheques with insufficient funds or with fraudulent intent. In particular, the following are the objectives of this section:

Deterrence: To restrain and deter individuals from issuing cheques without sufficient balance or with intent to defraud.
Legal Accountability: In order to ensure legal recourse for the payee, it aims to hold people criminally liable for dishonour of cheques.
Promote trust: To promote trust and confidence in financial transactions by providing legal mechanisms to address the misuse of cheques.
Financial Discipline: To encourage financial discipline among individuals and businesses, safeguard business transactions by ensuring that cheques are honoured responsibly.
Speedy Resolution: To facilitate a swift resolution process for cheque dishonour cases, thereby reducing litigation time compared to civil remedies and enhancing judicial efficiency.

Explanation of Section 138 of Negotiable Instruments Act, 1881

Section 138 of the Act provides for the circumstances under which a case for dishonour of cheques is filed. According to Section 138, where any cheque drawn by a person on his banker for payment of any amount of money in the discharge of whole or any part of debt or liability is dishonoured due to insufficiency of funds to meet that amount mentioned in the cheque or it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person, that is, drawer of the cheque is deemed to have committed an offence. Under this section, he shall be liable for punishment for a term that may extend to two years or with a fine that may extend to twice the amount of the cheque or both.

To establish an offence under this section, the following essentials shall be proved:

Legally enforceable debt or liability

The cheque must have been drawn for the discharge of an existing debt or liability that is legally enforceable. However, a cheque given as a gift or donation, in the discharge of a moral obligation or for an illegal consideration would not be considered a debt or liability for the purposes of this section.

In the case of Somnath vs. Mukesh Kumar (2015), the High Court of Punjab and Haryana ruled that if the cheque has been issued for a time-barred debt, then it will not be considered a legally enforceable debt for the purpose of Section 138.

Insufficient funds

The cheque must be returned unpaid due to insufficiency of funds in the account or if it exceeds the amount arranged to be paid from that account by an agreement with the bank. However, Section 138 does not cover cheques that are dishonoured due to technical reasons such as the irregularity of an endorsement or a discrepancy between amounts stated in words and figures. But if the drawer honestly believes that the cheque would be paid or has no reason to believe that the cheque would not be paid, there is no defence for escaping the liability under this section.

Presented within 3 months

The cheque must have been presented within 3 months from the date on which it was drawn or within the validity period, whichever is earlier. The period for presenting the cheque was shortened from 6 months to 3 months by an R.B.I. notification dated 4th November, 2011.

Legal notice

Proviso (b) to Section 138 provides that within thirty days of receipt of information from the bank about the dishonour of cheque, the payee or holder, in due course, should make a demand in writing on the drawer for payment of the amount of money mentioned in the cheque.

Proviso (c) provides that the notice should mention that the amount written in the cheque must be paid within 15 days from the date when the drawer received the notice. If he fails to pay, then he can file a criminal complaint under this section. Hence, the cause of action arises on the 16th day after serving the notice of cheque dishonour to the drawer.

No particular mode of serving the demand notice has been provided under Section 138 of the Negotiable Instruments Act, 1881. Thus, it can be served either by post or through any electronic form.

Notice by registered post

If the notice is served by a registered post and returned unserved, then there is a presumption of service. The Punjab and Haryana High Court, in the case of Som Nath vs. State of Punjab and Anr. (2007), held that in the following cases, the presumption of due service can be raised:

Unclaimed
Refused the service
Drawer was not present

In the case of K. Bhaskaran vs. Shankaran Vaidhyan Balan and Anr. (1999), the Supreme Court of India held that service of legal notice is not the same as receipt of notice. Giving notice entails a process, while the receipt of notice marks its completion. The payee must send the notice to the correct address and once the notice is sent, his responsibility ends. It is established that if the notice is returned unclaimed rather than refused, it is presumed to be delivered unless the recipient proves the contrary.

Further, in the case of C.C. Alavi Haji vs. Palapetty Muhammed and another (2007), the Apex Court ruled that if the complainant serves the notice upon the drawer without mentioning the date of service, under Section 114 of the Indian Evidence Act of 1872 and Section 27 of the General Clauses Act of 1897 , the court can still presume that a notice was served in a timely manner. This is because a letter sent by registered post is considered to be delivered in the ordinary course of business.

Notice through email or WhatsApp

In the significant ruling of the Allahabad High Court in the case of Rajendra vs. State of U.P. (2024), the Court held that a demand notice served upon the drawer through email or WhatsApp for the dishonour of the cheque, is a valid notice. It will be deemed to be dispatched and served on the same date, provided it fulfils the requirements of Section 13 of Information and Technology Act, 2000.

The Apex Court in the case of M/s.Saketh India Ltd. vs. M/s. India Securities Ltd. (1999), held that the period of one month is to be reckoned according to the British calendar as provided under Section 3(35) of the General Clauses Act, 1897, and the date on which the cause of action arose must be excluded for this purpose.

Cheque bounce notice format

Although the law does not mandate a specific format for a cheque bounce notice under Section 138. But here are some key points to consider while drafting a legal notice:

Name and address of the person who drew the cheque, that is, drawer;
Name and address of the person in whose favour such cheque has been drawn, that is, payee; and in case of a company, it must be addressed to the company as well as to the persons responsible for the administration and business of such company;
Details of the cheque;
The exact amount for which the cheque was drawn may also include charges for dishonour or legal fees;
Reasons for dishonour, as mentioned in the return memo;
The date on which cheque was returned;
Mention the cheque bounce notice period;
Reference of Section 138.

Grounds of dishonour

Generally, Section 138 provides two grounds for the dishonour of the cheque:

Insufficiency of funds
The cheque amount exceeds the amount specified in the agreement

Besides these, numerous other legal grounds have emerged from the judicial pronouncements to establish the offence under the said section.

Account Closed: In the case of Nepc Micon Ltd. and others vs. Magma Leasing Ltd. (1999), the Supreme Court held that even this ground would be covered under Section 138 as no account would ultimately lead to insufficient money or no money in an account.

Liability of the Guarantor: In the case of ICDS vs. Beena Shabbir (2006) 6 SCC 426, the Apex Court held that Section 138 uses the words “any cheque” and “other liability.” This means that it also includes the liability of the guarantor

Signature mismatch: In the case of M/s. Lakshmi Dyechem vs. State of Gujarat and Ors. (2012), the Supreme Court held that if the cheque is dishonoured due to mismatching of signatures, then it would be covered under Section 138.

Security Cheque: This cheque is given as a security and there is also a promise that if parties fail to make payment, the cheque issued for security will be deposited. In the case of Sampelly Satyanarayan Rao vs. Indian Renewable Energy Development (2016), a cheque was given as security for the loan but it was also promised that in the event of payment by cash, the cheques would be returned. In such a case where no cash was paid and, in default, the cheque was deposited, it was held that since the liability was outstanding, the offence under Section 138 was made out.

Punishment mentioned under the provision

Earlier, the punishment for dishonour of a cheque under Section 138 was imprisonment for a term that may extend to one year or a fine that may extend to twice the amount of the cheque. But, through the Negotiable Instruments (Amendment and Miscellaneous provisions Act) 2002, the legislature extended the term of imprisonment up to two years.

It is pertinent to note that under Section 357(3) of the Code of Criminal Procedure, 1973 (CrPC), the order for payment of compensation is in addition to the punishment provided under this Section. Also, the court in the case of M/S Meters and Instruments (P) Ltd. vs. Kanchan Mehta (2017) held that the order of compensation can be enforced by a default sentence under Section 64 of the Indian Penal Code, 1860 and a recovery procedure under Section 431 of the Code of Criminal Procedure.

Although a criminal element has been introduced in cases of cheque dishonour, its compensatory nature should not be overlooked. In the case of Damodar S. Prabhu vs. Sayed Babalal H. (2010), the Supreme Court held that the compensatory nature of the section takes precedence over its punitive aspect.

Further, the Apex Court gave a landmark decision in M/s.Gimpex Private Ltd. vs. Manoj Goel (2021), ruling that Section 138 is quasi-criminal in nature. Moreover, in a prosecution under this section, the complainant’s primary concern is the recovery of money and the conviction of the accused serves very little purpose.

Nature of offence

The offence under Section 138 is characterised as quasi-criminal, encompassing both civil and criminal aspects. Civil remedy enables an aggrieved party to recover a cheque amount with interest and cost, whereas criminal remedy creates a deterrent effect upon the accused.

The offence under this section is bailable, compoundable, and non-cognizable, meaning a person cannot be arrested by a police officer without a warrant.

Cause of action

Under Section 138, a cause of action arises when a demand notice is served upon the drawer and he fails to make payment within 15 days from the receipt of the notice. The limitation on filing a complaint is one month from the date when the cause of action arises. However, after the Amendment Act of 2002, the court is empowered to take cognizance even after the expiry of one month by condoning a delay if sufficient cause is shown to the satisfaction of the court.

Presumptions

Under Sections 118 and 139 of the NI Act, 1881, a presumption is raised in favour of the holder of the cheque. Unless the contrary is proved, it is presumed that a cheque is issued for the discharge of legal debt or liability. The section uses ‘shall presume’ which means the court is duty bound to raise the presumption of law. It is a rebuttable presumption. The burden on the accused is not as light as it is in the cases of Section 114 of the Indian Evidence Act, 1872. The presumption that existing legal debt or liability is legally recoverable is not covered under Section 139. It merely presumes that a cheque is issued for the discharge of a debt or any other liability.

Jurisdiction of offences under Section 138 of Negotiable Instruments Act, 1881

To understand the concept of jurisdiction under Section 138, first of all we need to understand what constitutes an offence under this section. Unlike other statutes, this section does not expressly mention the territorial jurisdiction of the courts in which cases of cheque dishonour have to be filed. As the legislature has left loopholes in the matters of territorial jurisdiction, different benches of the Supreme Court of India have attempted to address them using different approaches over time.

The first case on territorial jurisdiction was K. Bhaskaran vs. Sankaran Vaidhyan Balan and Anr. (1999) in which the two judges bench of the Apex Court observed that an offence under Section 138 can be completed only after a series of the following acts:

drawing of cheque
presentation of the cheque to the bank
payee’s bank returned the cheque unpaid
payee gives notice to the drawer for the payment of the cheque amount
drawer fails to make payment within 15 days of receipt of the notice

The Court in this case ruled that the complainant can file a case in any of the courts having jurisdiction over any of the local areas where the aforesaid five acts have taken place. The Court relied upon Sections 177–179 of the CrPC of 1973. This judgement highlights that if the notice is given from a place where the cheque is not bounced, even then the court will have jurisdiction over the said place. If a cheque is bounced in a particular area of Punjab but notice has been given from Delhi, the courts of Delhi would have jurisdiction. This is also called forum shopping.

But in, M/s.Harman Electronics (P) Ltd. vs. M/s. National Panasonic India Ltd. (2008), the two judge bench of the Supreme Court held that the concept of cause of action that is applicable in civil matters can be applied in criminal matters. Therefore, the Court ruled that the notice would not give jurisdiction and that the cause of action would arise at the place where the cheque got bounced.

Thus, one of the acts established under K. Bhaskaran vs. Sankaran Vaidhyan Balan and Anr. (1999) was removed from the list in the Harman Electronic case.

Following the judgement in the Harman Electronic case, courts have adopted its precedents in all subsequent cases. But the cases that were pending before 2009 were continued and the judgement in the Harman Electronic case was of no help with regard to the pending cases.

Ultimately, to solve this conundrum, the matter was referred before the three judge bench of the Supreme Court in the case of Dashrath Rupsingh Rathod vs. State of Maharashtra and Anr. (2014). The decision, in this case, worsened the matter by holding that only that court will have jurisdiction in whose local area the drawer maintains the bank account. This judgement created some practical problems because, after this judgement, the complainant was forced to actively pursue the accused for the recovery of money.

Moreover, under Section 142 (1)(c) of the NI Act, 1881, the prosecution can be set in motion only after the cause of action has arisen in accordance with clause (c) of the proviso to Section 138. It states that cause of action arises when the drawer fails to pay the cheque amount within 15 days of receipt of notice.

Therefore, to resolve the confusion surrounding jurisdiction, the Union Government brought an amendment in 2015. Section 142(2) was added by the Negotiable Instruments (Amendment) Act 2015, which states that the offence shall be inquired into and tried by the court in whose local jurisdiction the bank branch of the payee is situated, that is, where the payee presents the cheque for encashment.

Trial under Section 138 of Negotiable Instruments Act, 1881

Section 138 of the Negotiable Instruments Act, 1881, addresses complaint cases that are governed by the Code of Criminal Procedure, 1973. Such cases are tried summarily. As it is a complaint case, the magistrate himself conducts the inquiry. He examines the complainant along with other witnesses, and after scrutinising the documents, if he finds sufficient grounds to proceed, the court issues the process. This scrutiny by the magistrate is known as the pre-summoning stage. After the summons are issued, the post-summoning stage begins. This entire process is lengthy, which can frustrate the objective of the Act.

Therefore, the Supreme Court, in the case of Indian Bank Association & Ors. vs. Union of India & Anr. (2014), laid down guidelines for trial under the said section.

The magistrate, having determined that all the necessary elements to constitute an offence were present, should issue summons.
Summons should be properly addressed and may be sent by post, email or WhatsApp.
The summons must indicate that the offence is compoundable in nature.
The accused shall furnish a bail bond and plead a prospective defence by filing an application under Section 145(2).
The court, after hearing arguments on the application, may allow the examination of witnesses.
The courts must ensure that the examination is complete within 3 months.

Decriminalisation of Section 138 of Negotiable Instruments Act, 1881

On June 8, 2020, the Ministry of Finance proposed the decriminalisation of various offences. It justified its viewpoint on the grounds that it would improve business sentiments and unclog the court processes. These offences also include Section 138 of the NI Act, 1881.

There were arguments both supporting and opposing decriminalisation.

As discussed earlier, Section 138 of the Act establishes criminal liability. The offence under this section is a cognizable and bailable offence. Also, the offence can be made compoundable between both parties, provided both parties consent to it and there is no formal permission required from the court of law.

Arguments in favour of decriminalisation

To promote ease of doing business and support the “AtmaNirbhar Bharat” initiative as envisioned by Prime Minister Narendra Modi in 2020.
To attract foreign investments.
To alleviate the burden of pending cases in Indian courts.

It is important to note that, according to the 213th Report of the Law Commission in 2008, nearly 20 percent of pending litigation involves cheque dishonour disputes under Section 138 of the Negotiable Instruments Act, 1881. The report observed the difficulties the payee faces due to the unscrupulous practice of drawers issuing cheques without any intention of honouring them. Furthermore, the lengthy trials are adding to the struggle of such payees and, synchronously, attacking the credibility attached to the cheques. It also added that the fast track courts should be formed at the ministerial level. The reason being that this approach would leverage added infrastructure and the focused expertise of the magistrate, thereby enhancing efficiency in case disposal.

Arguments against decriminalisation

Making the act of dishonouring punishable has a deterrent effect on society. Thereby, it reduces the risk of fraud and cheating.
The primary reasons for timely payments were the apprehension of imprisonment, legal charges, and a fine.
The credibility of the investors would be compromised if there is no recourse for dishonoured cheques.
If there would be no punishment, then the defaulting party would take advantage of the situation, and it would defeat the purpose of the Act.
The habit of non-compliance can only be curbed with a stringent framework of punishments in place.

Therefore, it is not advisable to decriminalise this section, as its primary intent was to enhance creditors’ confidence and bolster credibility in the cheque system.

Alternatives to Section 138

An aggrieved person, that is, the drawer, can institute a civil suit under the Code of Civil Procedure, 1908 or can opt for any of alternative dispute resolutions like conciliation, arbitration, lok adalats, judicial settlement, etc.

Latest RBI guidelines in respect of Section 138

In India, bankers traditionally made payments by cheques and drafts only, which were presented in banks within a period of 6 months from the date of issuance. The Reserve Bank of India (RBI) was informed by the Government of India that people were exploiting and taking undue advantage of the said practice of banks encashing cheques, drafts or pay orders within a period of six months from the date of issuance as these instruments were being circulated in the market like cash for six months. In the public interest and to improve banking policy, the RBI was satisfied that it was mandatory to reduce the period of encashment of cheques, drafts and pay orders from six months to three months from the date of issuance.

Thus, from April 1, 2012, banks were directed not to honour these instruments if presented beyond three months from their date. Banks were required to strictly comply with this directive and inform customers of the change by printing or stamping the new presentment period on the instruments issued on or after April 1, 2012.

Practical relevance of cheque dishonour complaints

Before the introduction of Section 138 of the NI Act, individuals often defrauded investors by issuing cheques without any intention of honouring them. The only recourse available was to file civil suits, a lengthy and costly procedure. Due to the overburdened court system, resolving disputes took an extended time, often leaving parties in a state of limbo for years. To avoid this complex process, parties would attempt to resolve the issue personally, repeatedly demanding payment from the drawer. This pursuit often extended beyond the limitation period, leaving the aggrieved party without any legal remedy.

The foundation of Section 138 provided a comprehensive solution for cases of cheque dishonour. It established a legal framework for payees to seek redress, deterring potential offenders from engaging in negligent and fraudulent transactions. Despite the penal provisions, courts are inclined towards resolving disputes through amicable settlements between the parties. The Supreme Court has emphasised that imprisonment should be imposed only in exceptional cases, with a primary focus on granting monetary compensation, enabling the payee to recover the cheque amount. In cases where courts impose punishment, it does not discharge an accused from payment of a cheque amount. Therefore, the dual approach provides a comprehensive relief to the aggrieved party. They can pursue criminal proceedings for making the defaulting party liable and simultaneously seek financial compensation through civil courts, ensuring that justice is served on multiple fronts.

The legal framework under Section 138 encourages prompt settlement of dues. It provides 15 days to the defaulting party for the payment of the cheque amount after receipt of the notice. This statutory timeline promotes quick resolution and often results in the drawer arranging the funds to avoid further legal action. It ensures that dues are settled proficiently without prolonged disputes.

For consumers, Section 138 provides a shield against fraudulent practices. It ensures that individuals who receive cheques are not left uncompensated in cases of dishonour. This legal safeguard instills confidence among consumers to accept cheques, knowing that there is legal recourse to address defaults.

Overall, this section contributes to the health of the economy by ensuring that financial transactions are conducted with integrity and accountability. In cheque-based transactions, this ensures the smooth functioning of commerce and trade by promoting trust and reliability.

Latest judgements of Supreme Court of India

Harpal Singh vs. State of Haryana (2024)

The Supreme Court unanimously ruled in the case of Harpal Singh and Ors. vs. State of Haryana (2024) held that in cheque bounce cases under Section 138, the defence that a sufficient amount was available in the other bank’s accounts cannot be appreciated.

In this case, Dharam Singh, the complainant, filed a complaint against the accused for cheque dishonour. Dharam Singh invested in the company of the accused and was assured returns. The accused provided cheques as payment for the agreed amount, but one of the cheques was dishonoured due to insufficient funds in the bank. The complainant filed a complaint under Section 138 of the NI Act and Section 420 of the Indian Penal Code. The trial court convicted the accused but the High Court modified the conviction. The case reached the Supreme Court, where the accused’s argument that funds were available in other accounts was rejected. The Court gave the reasoning that if the cheque is tied to a specific account, then it should not be related to other accounts.

Upasana Mishra vs. Trek Technology India Pvt. Ltd. (2024)

In the case of Upasana Mishra vs. Trek Technology India Pvt. Ltd. (2024), the Supreme Court found that the respondent served the notice to the appellant by making a demand of Rs 6,50,000 in addition to the demand of interest at the rate of 12 percent per annum from the date of returning the cheque, Rs. 50000 as damages and Rs. 5500 as notice fees.

The Court relied upon the judgement given in the case of Suman Sethi vs. Ajay K. Churiwal and Anr.(2000) and found that a notice issued under Section 138 of the Negotiable Instruments Act, 1881, is omnibus in nature and further reiterated that if in the notice, breakup of the claim specifies the cheque amount, interest, damages, etc. separately and these additional claims are severable, such a demand would not invalidate the notice. In short, a notice of demand made under the section should make a clear and specific demand for the cheque amount; otherwise, the notice would not be valid.

Therefore, the Supreme Court in this case held that the demand made by the respondent was omnibus in nature, that is, invalid, thus quashing the proceedings of cheque dishonour.

Ghanshyam Gautam vs. Usha Rani (Since deceased) Through L.R.S. Ravi Shankar (2024)

In the case of Ghanshyam Gautam vs. Usha Rani (Since deceased) Through L.R.S. Ravi Shankar (2024) the Supreme Court, after considering all the facts and circumstances of the case, found that a settlement has arrived between the parties and the complainant has signed an agreement accepting the full and final settlement of the default amount. Therefore, the court held that once the amicable settlement has arrived, the proceedings under Section 138 are liable to be quashed.

Ajitsinh Chehuji Rathod vs. State of Gujarat and another (2024)

The case of Ajitsinh Chehuji Rathod vs. State of Gujarat and another (2024), emphasises the tangled interplay between the Indian Evidence Act, 1872 and the NI Act, 1881. The Supreme Court noted that in a complaint under Section 138 of the NI Act, 1881, if the accused disputes the signature on the cheque, certified signatures from the bank can be summoned to compare them with the signature of the cheque. The court also explained that the endorsements on the cheque carry a presumption of genuineness under Section 118(e) of the same act. Therefore, it is the responsibility of the accused to present evidence to rebut the presumption of the genuineness of the signatures.

The Court further explained that a certified copy of a document issued by a bank is itself admissible under the Banker’s Books Evidence Act, 1891. It means the mere issuance of a certified copy from a bank is sufficient and there is no requirement to produce formal proof before the court. Hence, in proper cases, the certified copy of the specimen signature maintained by the bank can be obtained, and a request can be made to the Court to compare it with the signature on the cheque, utilising powers under Section 73 of the Indian Evidence Act of 1872.

Atamjit Singh vs. State (NCT of Delhi) (2024),

The Apex Court in the case of Atamjit Singh vs. State (NCT of Delhi) (2024), determined the question of whether the High Courts should decide if a cheque issued pertains to a time-barred debt in proceedings under Section 482 of the Code of Criminal Procedure.

The Court relied on the decision given in the case of Yogesh Jain vs. Sumesh Chadha (2022) and held that once a cheque is issued in regard to a debt or liability and, upon getting dishonoured, a legal notice is issued, the accused has the burden to rebut a presumption raised under Sections 118 and 139 of the NI Act. The question of whether the cheque is issued in respect of time barred debt or not, is a matter of evidence and cannot be decided by any High Court while exercising powers under Section 482 of the CrPC.

Prem Raj vs. Poonamma Menon & Anr. (2024)

In the case of Prem Raj vs. Poonamma Menon & Anr. (2024), the court made its decision based on the following facts:

Mr. X. issued a cheque for the amount of Rs. 2 Lakhs as security for the outstanding debt. However, the cheque was dishonoured on the grounds of insufficiency of funds. As a result, Mr. X initiated civil proceedings restraining Mr. Y from encashing the cheque because it was issued for security purposes and not for encashing. The Civil Court decreed the suit in favour of Mr. X and they restrained Mr. Y from encashment. On the other hand, Mr. X initiated criminal proceedings for cheque dishonour under Section 138 of the Negotiable Instruments Act. The criminal trial court convicted the accused for cheque dishonour and awarded the punishment under the said section. Aggrieved by the decision of the criminal court, he filed an appeal before the Supreme Court.

The question to be determined was whether the decision of the Civil Court is binding upon the lower Criminal Court to the extent of damages and sentence. Therefore, the Apex Court ruled that the ‘cheque’ was the subject of dispute in both civil and criminal proceedings. Once the civil court restrained the encashment of the cheque, the decision of the civil court would be binding on the criminal cases initiated under the NI Act, 1881. Consequently, the punishment awarded by criminal law is not maintainable in law. Hence, the criminal court is bound to set aside the conviction.

Raj Reddy Kallem vs. The State of Haryana & Anr. (2024)

The Supreme Court in the case of Raj Reddy Kallem vs. The State of Haryana & Anr. (2024) held that no matter whether the accused has compensated the aggrieved party by paying the cheque amount, he still cannot escape the criminal liability imposed under Section 138 of the NI Act, 1881. Moreover, the complainant cannot be forced to agree to the compounding of the offence.

Conclusion

Section 138 of the NI Act of 1881 is a foundation in the framework of financial law in India. It deals with the issue of dishonoured cheques, a common and notable problem which exists in commercial transactions. This provision plays a significant role in maintaining trust and reliability in the use of cheques as a mode of payment. It seeks to discourage the casual issuance of cheques without any intention of honouring them. Earlier law provided only a civil remedy, but later on, by Amendment of 1988, the provision of a criminal remedy was introduced. By criminalising the act of cheque dishonour, the statute aims to protect the interests of the payee and holder in due course.

There are certain legal requirements that need to be fulfilled to attract criminal liability under Section 138. It ensures that the legal process is followed in proper courts by providing instructions on the matter of jurisdiction. It also provides a stringent yet fair mechanism to address the issue, balancing penal consequences with opportunities for settlement. Moreover, in addition to the law provided by the legislature, judicial pronouncements also contributed to the development of a law on dishonouring cheques. Judicial interpretations have clarified its application, reinforcing its role in promoting financial discipline.

Frequently Asked Questions (FAQs)

Is a power of attorney holder liable under Section 138 of the Negotiable Instruments Act?

Yes, the power of attorney is liable for cheque dishonour cases under Section 138. He assumes the role of the payee or holder in due course or the drawer, as the case may be. Therefore, the complaint filed by him is maintainable under the said section. Provided such power of attorney has knowledge of the transaction so as to be able to bring on record the truth of grievance or offence.

Is compounding of the offence of dishonour permitted under Section 138?

Yes, an offence under Section 138 can be compounded by the complainant. However, the courts cannot compel the complainant to compound the payment of the cheque amount. Because punishing an accused is one thing, and recovery of the cheque amount is another thing. Paying the amount does not absolve an accused of a penalty.

Whether post-dated cheques are covered under Section 138 of the Act?

Post-dated cheques are covered under this section, provided all requirements are fulfilled as stated in Dalmia Cement (Bharat) Ltd. vs. M/s.Galaxy Traders & Agencies Ltd. (2001). It states that in cases of post-dated cheques if there is a stop payment, then indeed the offence is made out under the said section.

How many times can a cheque be deposited?

There is no bar on the number of times a cheque can be deposited. In the case of M.S.R. Leathers vs. S. Palaniappan (2013), the Supreme Court laid down that a cheque should be allowed to be deposited any number of times and the aggrieved party should not be eager to serve a notice upon the accused but if even after 3 months a person is not paying the cheque amount, then obviously legal action can be initiated.

Whether a handwritten notice is valid or not?

In the case of Pawan Kumar Ralli vs. Maninder Singh Narula (2014), it was held that the real purpose of a notice is to give knowledge to the person that the cheque that was issued has bounced and the form of the notice is not a matter of concern. It shall only contain the particulars about the bounced cheque and if a handwritten notice consists of all of them then it is a valid notice.

Whether complaints under Section 138 can be withdrawn ?

Yes, complaints under Section 138 can be withdrawn at any stage of the proceedings, with the permission of the court. This can occur in cases where parties reach a settlement or any other sufficient reason. The court is satisfied that there is reasonable cause to do so in the interest of justice.

References

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