Section 138 of Negotiable Instruments Act
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This article has been written by Oishika Banerji, an undergraduate law student from Amity Law School, Amity University Kolkata. This is an exhaustive article dealing with various judgments on Section 138 of the Negotiable instruments Act.

Introduction

In this fast-growing world, the business has an important role to play. With the development of business practices, various ways of financial transaction are also being born. Negotiable instruments have introduced favourable ways of business modes breaking away from the traditional procedure of transfer of cash by means of exchanging goods and services. The coming of the Negotiable Instruments Act, 1881 has made transaction procedures easier and simpler than before. The Act has come about with the aim to safeguard the use of several modes of payments like cheques usage, bill of exchange, promissory notes and highlights each of them individually thereby providing the relevance as to how they are to be applied as has been laid down under Section 13(1) of the said Act. 

A widely used model of payment nowadays in the form of cheques is post-dated cheques which provide a certain amount of understanding to the drawer of the cheque. What needs to be looked after is that the same drawer should not misuse the arrangement provided to him. This is when the requirement of legislation arises. 

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Chapter XVII of the concerned Act includes Sections 138 to 142 which plays the role of implanting confidence in the potency of operations associated with banking along with providing credibility to the negotiable instruments that have been put to work in carrying out business negotiations.  

Respecting the mode of deferred payment in the form of cheques is the reason for the existence of Section 138 of the Act. 

Section 138 of the Negotiable Instruments Act

In the case of Modi Cements Ltd v Kuchil Kumar Nandi (1998), the intention of Section 138 of the Negotiable Instruments Act, 1881 has been declared to increase the efficiency of functioning of banks and establish credibility in business transactions through the medium of cheques. Section 138 of the Act formulates a statutory wrong concerning the matter of disgrace oriented cheques based on the grounds of insufficiency of available funds in the account of the person that has been maintained with the concerning banks. Further, the amount greater than the one arranged to be delivered which is in the form of an agreement with the bank also falls within the ambit of Section 138. Dishonour of cheques amounts to a criminal offence in the form of enforcing a civil right. Therefore, both civil and criminal liabilities come into play when dishonour of cheques takes place. 

  1. The civil liability associated as laid down in Section 138 of the Negotiable Instruments Act, 1881 is charging a fine twice of what the amount was in the dishonoured cheque. In case of civil liability the interference of court takes place if the concerned payee files a suit under Order 37 of the Code of Civil Procedure, 1908, the court decides a judgment favouring the payee and in such a case the drawer is eligible to pay the same amount as mentioned by the court.
  2. In case of criminal liability, Section 138 comes along with the punishment of two consecutive years and the prosecution of the drawer takes place under the provisions of Indian Penal Code, 1860, namely Section 417 and  Section 420. The offences acquired are bailable, compoundable and non-cognizable by nature. 

In order to constitute the wrong under Section 138 of the Act the following grounds need to be considered which were framed in the case of Kusum Ingots And Alloys Ltd vs Pennar Peterson Securities Ltd (2000):

  1. The drawer of the cheque should possess a legally bound debt towards the payee or the holder and the same is discharged by drawing a cheque.
  2. There is a return of the cheque either due to deficient funds or greater amount that the bank agreed to provide with.
  3. The presentation of the concerned cheque should be carried out within a period of six months or within the stipulated time frame.
  4. The drawer must receive prior notice from the bank within a period of 30 days informing the former regarding the insufficiency of funds. 
  5. The payee does not receive the payment within a period of 15 days from the day of sending a notice to the drawer himself. 

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Landmark Judgments

Negotiable Instruments Act, 1881 comes with an object that is sustainable by nature and therefore judgments that have been passed for the cases that revolve around this Act play an important role in guiding the Act towards a path of betterment, growth and upliftment. This is the sole reason why the necessity of landmark judgments needs to be discussed and thrown light.

Dalmia Cements v. Galaxy Trading Agencies

The case of M/s. Dalmia Cement (Bharat) Ltd. v. M/s.Galaxy Traders & Agencies Ltd. & Ors. is one of the cases whose judgment became a landmark for the Supreme Court, in this case, reasoning behind the enactment of Section 138 of the Negotiable and Instruments Act, 1881 was given. The facts of the case revolve around dishonouring of the cheque because of which notice was issued to inform the accused. When the same was received by the complainant by that time the period of filing the complaint was given to expire. The same thing happened for the second time as well with the accused failing to provide with the amount.

The court basing its judgement on the existing facts said that Section 138 of the Act has been made keeping in concern any kind of infringement of legal right of the person whose payment has not been issued and therefore if any such situation arises which will make it impossible for the person to get the payment then in such case, the section should function the way it has been laid down to keep the objective of the Act. Thus, in this case, the court ordered actions to be carried out against the respondent as laid down in the Act.

Canara Bank v. Canara Sales Corporation

The case of Canara Bank v. Canara Sales Corporation (1987) serves as a basis of understanding the relationship shared between the banker and its customers that are tied with threads of duties and equity, during the times of negligence by either party or in case either party is involved with fraudulent activities. 

In this case, the respondent had a current account in the plaintiff’s bank which was eventually found to be linked with fraudulent activity for the cheques which were encashed and didn’t bear the initials of the managing director, the respondents. Thus, forgery also took place in the given case. A suit was filed by the respondents to compensate with the amount that has been lost.

The Court highlighted that there was negligence on the part of both the creditor as well as the debtor but the beam balance of negligence weighed more for the banker than the company. Thus, mere negligence on the part of the bank cannot be a ground for not using the same. The court finally ruled that the company is eligible for compensation thereby dismissing the case.

M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta

The case of M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta (2017) was where the Supreme Court took into concern the object associated with Section 138 along with other statutory provisions laid down in Chapter XVII of the Negotiable Instrument Act, 1881 and passed its verdict.

The facts of the case go as such that the complainant, Kanchan Mehta under Section 138 of the Act had filed a complaint against the plaintiff on grounds that the latter who was supposed to pay an amount to the former on monthly basis according to an existing agreement between the two of them had failed to do so. The company had provided a cheque to the complainant thereby discharging their legal liabilities. The same cheque returned back for the presence of insufficient funds. Legal notices were provided to the company for the completion of their payment but the same was not fulfilled and the company was responsible for the offence under Section 138 of the concerned Act. Further, when the director of the company was willing to pay the complainant, there was a refusal of the demand draft from the laters end. Thus, the company filed a suit against the complainant under Section 147 of the Act which was the provision for compoundable offences. The same was rejected by the concerned High Court on grounds that there was the absence of the consent of the complainant for holding the offence to be compounding by nature. 

The Supreme Court passed a verdict saying that whatever offences have been laid down in Section 138 are civil by nature. Further, the provision of compoundable offence is present in Negotiable Instruments (Amendments and Miscellaneous Provision Act), 2002  which does require the consent of both the parties in concern. In the present case, as the company was willing to compensate the complainant, the court in the sake of proper delivery of justice thought of discharging the accused for the complainant was compensated with the amount that was necessary to be provided with. 

                  

Beyond the above-mentioned judgements, there are a number of case laws associated with the concerned Act. Questions aroused in the matter of jurisdiction of courts to handle cases associated with Section 138 the Act. The apex court in the case of Harman Electronics Pvt. Ltd.v National Panasonic India Pvt. Ltd. ( 2004) was of the decision that no action will be taking place by legal notice but only by the acceptance of such notice. It went on saying that Section 138 is just a condition laid down for taking cognizance and therefore a particular court cannot be provided with territorial jurisdiction just for a notice. 

The court in the case of Smt. Asha Baldwa v. Ram Gopal where the petitioner had filed a suit under Section 482 of the Code of Criminal procedure for being handed with a dishonoured cheque held that only handing of such a cheque does not amount to an offence laid down under Section 138 of the Negotiable Instruments Act,1881 for it is not a reasonable ground. With each day passing by, development is taking place in a negotiable industry. In 2017, the verdict of the Delhi High Court in the case of Mayawati v. Yogesh Kumar Gosain approached a new pathway called the alternate dispute resolution mechanism to decide offences labelled under Section 138 of the Act which is criminally compoundable by nature. This verdict brought not only a change in dealing with the Act but also a change for the Indian judicial system. It further highlighted that as the offences labelled under the Negotiable Instruments Act, 1881 are different from other criminal offences, they can be given a preference to be resolved differently and in a speedy way.

Conclusion

Section 138 of the Act enforces strict liability towards the default of payment and is, therefore, a necessary weapon for the regulation of the Act. A lot of steps are being taken towards developments in accordance with the Negotiable Instruments Act, 1881. The Negotiable Instruments (Amendment) Act, 2018, which was brought about on 1st  September 2018, widens the ambit of negotiation in India. It provides the court that is hearing an offence on matters of cheque bouncing to issue direction for the drawer to compensate about 20% of the amount on which the cheque was made to the payee within a period of 60 days of such decision. The amendment version of the Act also authorizes the Appellate Court which is hearing appeals under the provision of Section 138  to direct the drawer to deposit 20% of the original compensatory amount. Although the legislature bringing about amendments are all working towards one goal of improvement, one must not forget the realities associated with the same. Thousands of cases related to the dishonour of cheques are coming up to the court making the court burden the same. Remedying injustice has become a serious issue when it comes to a commercial dispute in our country. While this is one side of the coin the other side of the coin brings in a lot of positivity as well for a lot of payers have received the compensatory amount on the stipulated frame of the time period. Thus, although there are inconveniences, solutions for resolving the same come along with it. 

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