litigation strategy for 138 NI matters
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This article is written by Sudarshan Roy, pursuing a Certificate Course in Advanced Criminal Litigation & Trial Advocacy from LawSikho.

Introduction

The Negotiable Instruments Act, 1881 is the statute that regulates the transferable instruments such as the bill of exchange, promissory notes and cheques in this country. In the modern globalized and industrialized world, properties invested in instruments such as cheques are very very important in terms of economic transactions. Thus instruments should be protected. This is the reason section 138 came into effect. So that it can work as a deterrent to the increasing tendency of intentionally causing cheque bounce. Now in today’s scenario when banks and other financial institutions are suffering from the problem of recovery of loans, litigation under section 138 is also on rise. The courts today are overwhelmed with 138 cases. So here I am discussing different litigation strategies which can be adopted to make an effective defence under 138. 

Who is the drawer, drawee and payee

The person who issues the cheque is called the drawer. Upon whom the cheque is drawn is called the drawee (in case of Cheque it’s always the bank), Payee is the one who is entitled to the amount mentioned in the cheque.

What is dishonour of cheque

The cheque is said to be dishonoured by the drawer bank, when it refuses to pay the mentioned amount (in the cheque) to the payee and disobeys the order of the drawer. 

What is section 138 NI Act

Section 138 state that the drawer of a cheque (in case it gets dishonoured by the bank) for the reason of insufficiency of funds in the bank account of the drawer or any other prescribed reason, then in that case the drawer can be sentenced up to two years of imprisonment or fine which can be twice the amount of the cheque or both. 

What are the other reasons of cheque getting dishonoured

  • When the account of the drawer is closed. 
  • Signature mismatch.
  • Validity of cheque gets expired. 
  • Amounts or digits mismatching. 
  • Payment getting stopped by the account holder, etc. 

Procedure after the dishonour of cheque 

When the cheque gets dishonoured the payee gets the cheque back with the ‘cheque return memo’ stating the exact reason for the dishonour of the cheque. After that the payee has to dispatch a demand letter or notice stating the fact that the instrument has been dishonoured. This demand letter has to be sent within 30 days of receiving the dishonoured cheque. The payee also demands the payment of the said amount within 15 days from the date of receiving the notice by the drawer. If the drawer fails to pay the amount within stipulated time then the payee files a complaint under section 138 of NI Act to the magistrate. 

Strategies to effectively deal with 138 cases

  1. When the demand notice is served after stipulated time or defects in the demand notice:

As the procedure goes, the complainant has to dispatch a demand notice to the drawer within 30 days of receiving the dishonoured cheque. Now in this case two scenarios are possible. One is, if there are serious errors of facts in the demand notice such as mistakes in the cheque amount or cheque number. Secondly, the notice that has been served beyond the period of 30 days. The magistrate then summons the accused and under section 251 of Cr.P.C record his statements. Thereafter the framing of notice is done and if the accused pleads guilty then magistrate lists the matter for trial. Now here comes the thing, In the judgement of Arvind Kejriwal Versus Amit Sibbal, it was held that the magistrate has the power to dismiss the case and discharge the accused if he finds out that there are for any reason the case is not maintainable. When the summon is issued and the accused appear before the magistrate the defects in the cheque and if the cheque is issued beyond the timeframe – these facts should be brought before the magistrate. 

  • If the cheque gets dishonoured, to convict the accused a precondition is that the cheque must have been issued in discharge of a legally enforceable debt. Now to successfully defend an accused it is important to prove that the cheque issued was not in discharge of some legally enforceable debt. There are several ways to prove that in different conditions. 
  • When cheque bounced, was given as a security: 

It is somewhat a popular belief that security cheque do not attract the provision of section 138 but that’s not the truth. Security cheques are just normal cheques which are issued to ensure the due performance of a contract. But it is not issued to, “ discharge a legally enforceable debt”. As the name suggests this kind of cheques are issued as security for prompt repayment. In Shreyas Agro Services Pvt Ltd. Versus Chandrakumar S.B., it was held that, for the words, “discharge of any debt or other liability”, under section 138 of NI Act should be interpreted to mean, “current existing and past ascertained liabilities”. So, it is evident that cheque issued on a future liability not in existence at the time of issuance of the cheque would not attract the offence of 138 NI Act. So in these kind of cases, the proceeding is not maintainable.

It is not important if the cheque is a security cheque or not but what makes a defence is, the circumstances in which the cheque has been issued. The word ‘security check’ is not defined in the NI Act. So merely naming a cheque as a ‘security cheque’ is not really helpful to the client. 

Once a cheque is bounced by the virtue of section 139 of NI Act the court will presume that the cheque was issued in discharge of a debt or any other liability. The accused needs to rebut this presumption. In the case of M.S.Narayana Menon Alias Mani Vs State of Kerala and Anr.

It was held, “for rebutting such presumption what is needed is to raise a probable defence”. 

In The Credential Leasing and Credits Ltd. Vs Shruti Investments and Anr. 2015(151) DRJ. 147 held as under, “it would need examination on a case to case basis as to weather on the date of presentation of the dishonoured cheque the ascertained or crystalized liability did not exist. The onus to raise a probable defence wound lie on the accused, as the law raises a presumption in favour of the holder of the cheque that the dishonoured cheque was issued in respect of a debt or other liability.” 

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  • Friendly loan in cash and unaccounted money:

As mentioned earlier, section 139 NI Act presumes that, ‘the cheque issued is in discharge of a debt or other liability”. In case of a friendly loan given in cash and when the money is unaccounted the defence the accused has to take is that, the cheque has not been issued in discharge of any existing loan or liability which is legally enforceable.

  • Now as it is a friendly loan, there are no documentation/paperwork. 
  • If the complainant has advanced such loan to the accused then the complainant must have withdrawn the amount from the bank. So a bank statement disclosing the transaction would be there. 
  • If the loan amount exceeds rupees 20,000/- in cash then it attracts 269 SS of the Income Tax Act. Section 269 bars the advance of more than rupees 20,000/- as loan. Section 271-D lays penalties regarding failure to comply with the provisions of section 269. 
  • If the loan amount has been mentioned in the income tax report or not. If it has been mentioned then what documentation has been done to support the fact/transaction.
  • If the loan amount has not been mentioned in the income tax report then the money is unaccounted which is a clear contravention of provisions of the Income Tax Act. In this case, such a loan is not legally recoverable debt. 

These factual pointers are very crucial in the process of defending the accused in such a case. These pointers may be raised during cross-examination of the complainant. 

A very important judgement in this regard is Sanjay Mishra V Kanishka Kapoor, where the acquittal of the accused had been ordered and the judge also considered the admission of the appellant that the amount advances was an unaccounted amount which was not disclosed to the income tax authority. 

2. Compounding of offences:

In case, the cheque has been issued in discharge of a legally enforceable debt then it’s better to opt for a settlement as the offence under section 138 of NI Act is compoundable. Basically section 138 is punitive but the object of introducing this section was to provide relief to the sufferer or we can say the object was to compensate and this spirit of the provision should prevail over the punitive aspect.

A very celebrated judgement in this regard is of the case of “Dayawati Vs Yogesh Kumar Gosain” passed in a criminal reference, Number 1 of 2016, has set out the law relating to 

  • “The legal permissibility of referring a complaint case u/s 138 of NI Act for amicable settlement through mediation”.
  • “procedure to be followed upon settlement”. 
  • “Legal implication of breach of the mediation settlement”. 

The Delhi High Court has clearly stated that “it is legal to refer a criminal compoundable case as one u/s 138 of the NI Act to mediation.” The High Court also stated that, “ mediation and conciliation rules, 2004 would guide the process to be followed even in references to mediation arising u/s 138 of the NI Act.”

Conclusion

These defences are not exhaustive. There are many other defences available in different circumstances. Preparing a litigation strategy for 138 NI, depends on the depends on the circumstances of each case. These are some general strategies which are largely followed in this field of litigation. But as far as India is concerned people are not that much legally aware about the different approaches they have to fight their cases in terms of cheque bounce matters. A detail study of the facts of the case and through case research very very needed to prepare a litigation strategy. Getting updates with latest judgements regarding this arena and not only Supreme Court or high court judgements but reading of trial court judgements also prove to be effective regarding developing a strategic thinking. 


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