This article is written by Gursimran Kaur Bakshi. The article is meant to explain the recent cases on dishonouring of cheques and its related aspects.
The Negotiable Instrument Act, 1881 (N.I. Act) is the legislation concerning the dishonour of cheques. As per the Act, the meaning of cheque for the purpose of the Act has been defined under Section 6 as a bill of exchange drawn on a specified banker and payable on demand.
According to Section 138, dishonouring of cheques is punishable with imprisonment which may extend to two years in case of endorsement of insufficient funds. In recent cases, it has been frequently observed that the cases relating to the dishonour of cheques remain pending for a long time. A delay in the completion of trials for offences under Section 138 has decreased the sanctity of the legislation. Given below are certain cases that deal with different aspects of dishonour of checks.
Important provisions on dishonour of cheques under the Negotiable Instruments Act
- Dishonour of cheques is a punishable offence under Section 138 for a period of one year or a fine. The imprisonment may extend to two years.
- The procedure for taking cognizance of an offence under Section 138 is present in Section 142. Whereas, Section 147 makes the offences under the Act compoundable.
- Section 139 sets the presumption in favour of the drawee that the cheque received by him is for the discharge of any debt or liability of the drawer. This discharge of debt can be in whole or in parts.
- Section 143 deals with the trial of cases under Section 138 which is summary proceedings notwithstanding anything contained in the Criminal Procedure Code, 1973 (CrPC). Section 143 was added by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002. Section 143(3) specifically mentions that efforts must be taken to complete the trial proceedings within six months from the date of filing the complaint by the drawee.
- Section 140 states that the drawer cannot take this defence of not knowing that the cheque may be dishonoured on presentation.
Judgments on dishonour of cheques in India
On condition precedent that should be fulfilled before an offence under Section 138 is made out
MSR Leathers v. S. Palaniappan and Anrs (2012) is an important judgment laying down the condition of precedents that should be followed before an offence under Section 138 is made out. According to the case, the first condition is that a cheque must be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. However, the validity of the cheque was reduced to three months as per the 2011 Reserve Bank of India’s notification.
As per the second condition, the payee or the holder must make a demand for the payment of the said amount by giving a notice in writing. It should be presented to the drawer of the cheque within thirty days of the receipt of the information by them from the bank regarding the return of the cheque as unpaid.
The last condition is that the drawee of such cheque should have failed to make payment of the said amount of money to the payee or the holders, as the case may be, in the due course of the cheque within fifteen days of the receipt of the said notice.
On why cases are pending under the N.I Act
In Re: Expeditious trial of cases under Section 138 of the N.I. Act 1881 (2020) is the latest landmark case of the N.I Act. The Supreme Court through this case took a suo moto cognizance over the pending cases of the N.I Act. The Court recognised that a lot of cases on dishonouring of cheques have been pending for the last 20 years at different levels. The Court ordered that certain steps should be taken to expedite the process of trial.
An Amicus Curiae or friend of the Court was appointed to prepare a report on the reasons pertaining to the delay in the summary trials under Section 138. On the basis of the preliminary report, it was found that out of the total number of criminal cases pending till the end of 2019 which was 2.31 crores, 35.16 lakh belongs to cases under Section 138.
The reasons for the delay are namely:
- A delay in serving the summons.
- Conversion of summary trials to summon trials without recording cogent reasons.
- Inconsistency in deciding whether the issuance of process under Section 202 of the CrPC requires preliminary inquiry on the part of the Magistrate.
- Offences committed as part of the same transaction are not jointly tried under Section 220 CrPC.
It was ordered that the Magistrate should conduct an inquiry on the receipt of complaints under Section 138. It will allow the Magistrate to arrive at sufficient grounds to proceed against the accused person if that person resides beyond the territorial jurisdiction of the Court.
The evidence of the witnesses on behalf of the complainant shall be permitted to be taken on the affidavit for the purpose of the conduct of inquiry under Section 202 of the CrPC. However, the Magistrate can restrict the inquiry to the examination of documents only in suitable cases.
There must be practice directions issued by the High Courts to the Magistrate to record reasons for converting summary trials to summon trials for the purpose of Section 138.
The practice directions must also be issued to treat the service of summons in one complaint to be a part of all complaints forming a part of the same transaction under Section 138.
For the sake of avoiding multiplicity of the proceedings, amendments must be made to the present Act to join different proceedings arising out of the same transaction into one that has taken place within the period of 12 months. The Court has also proposed the establishment of temporary Courts to expedite the trials under the N.I Act.
On offences under Section 138 to be person-specific
This is an important case on the point of understanding the law as laid down in Section 138 was dealt with in N Harihara Krishnan v.J. Thomas (2017). A cheque to pay for the sum of thirty-nine lakhs was dishonoured on the ground that the account on which the cheque was withdrawn has been closed. A notice for the same was sent to the respondent to pay the amount within 15 days from the receipt of the notice. However, neither the payment was made nor any response to the notice was communicated.
The issue in this case which also became a concern of the appeal was that the cheque was withdrawn against the person and not the company on whose behalf a person has signed the cheque. The person liable should be the company and not the individual who was represented in the capacity of the Director.
The Court clarified that the offences under Section 138 are offender specific and not offence specific and that is why it is not enough that the cognizance of the offence has taken place. The Magistrate will have to find out who the real offenders are. That is why the name of the Director was required as a factual necessity for the prosecution to initiate a trial but that does not mean that it was not clear that the cheque was drawn in the name of the company. This reasoning was reiterated in Balasubba Naidu v. Gnnprakasam (2020).
On when the intention of the drawer to not pay is clear
In Ravi Dixit v. State of UP & Anr (2020) the Allahabad High Court observed that the drawee does not have to wait for a period of fifteen days to initiate a prosecution under Section 138 if the intention of the drawer to not pay is clear. Section 138(c) stipulates that the drawer should be given a minimum period of fifteen days to make the payment which is bona fide in nature to avoid unnecessary hardship to him if he wants to make a payment.
In this case, the intention of the drawer was clear based on the reply to the notice for payment. The Court held that the proviso to Section 138 is there to delay the prosecution of offence but that does not mean that the same cannot be initiated when the intention of the drawer to not honour the liability is clear.
On maintainability of security cheque
In Cc No. 9832/2016 M/S East-West Fire v. M/S Vasu Infosec (2021), the Court observed that the term ‘security cheque’ is not statutorily defined in the N.I. Act. The Court cannot get away with the liability incurred under Section 138 by taking the defence that the dishonoured cheque was a security cheque. The same is maintainable for incurring liability under Section 138. The reasoning of the Court was based on the judgment of Suresh Chandra Goyal v. Amit Singhal (2015). The term security cheque refers to honouring debts that may be due and confirmed in future.
On interim compensation under Section 143-A
Section 143A was added through the 2018 amendment and it allows the Court to grant compensation during the pendency of the proceedings under Section 138. Under the Section, the drawer of the cheque will have to pay interim compensation if he has not pleaded guilty to the accusations made against him under Section 138. The compensation under Section 143A shall not exceed 20% of the given amount of the cheque.
On the value of compensation
In M/s. Kalamani Tex vs. P. Balasubramanian (2021) where the issue was related to the presumption of liability under Section 139, the Court also emphasised the need to have a consistent approach in granting compensation by the accused to the drawer of the cheque. Since the Act deals with both criminal liability and civil liability, the compensation awarded for an offence under Section 138 should be twice the amount of the cheque along with the simple interest of 9% per annum. This uniform method of compensation was held in R. Vijayan vs Baby & Anr (2012).
On the retrospective effect of Section 148 on Section 138
In Surinder Singh [email protected] Col.S.S Deswal v. Virender Gandhi (2020), the Supreme Court observed that Section 148 of the N.I Act can be retrospectively applied to the criminal proceedings in Section 138 of the N.I Act for the offences that were filed prior to the 2018 amendment Act. The N.I (Amendment) Act, 2018, was introduced to enact provisions for interim compensation.
In this regard, Section 148 was introduced to empower the Appellate Court to direct the accused person to deposit a minimum of 20% of the fine or compensation awarded by the trial court in cases where the same has been challenged at the appellate stage. This amount would be in addition to the interim compensation allowed under Section 143A. The issue before the Court, in this case, is whether the same is applicable for the proceedings that are already initiated before the amendment.
The Court interpreted the amendment purposely and observed that the same will be applicable to proceedings that were initiated before the amendment. The retrospective effect of Section 148 was also observed by the Chhattisgarh High Court.
The Court also observed that the amendments to Section 148 were made because it was found out that the filing of appeals and obtaining stay order on the dishonour of cheque proceedings is easy and that is what frustrates the objective of the N.I. Act.
On compensation and sentence under Section 138
In a Supreme Court case of Kumaran v. State of Kerala (2017), it was held that dishonour of cheques does not only result in imprisonment but also compulsory fine. Hence, the accused person will have to pay a fine mandatorily.
On the presumption of debt
In ANNS Rajshekhar v. Augustus Jeba Ananth (2019), the Supreme Court observed that the presumption under Section 139 of the N.I. Act is rebuttable on the existence of a legally enforceable debt for the purpose of Section 138. To rebut the presumption, the test of proportionality will be applicable.
On a similar note, in RohitBhai Jivanlal Patel v. State of Gujarat (2019), it was held that once the presumption of legally enforceable debt is drawn, the complainant need not prove the source of debt.
On why the issuance of a blank cheque with signatures attracts Section 139
In M/s. Kalamani Tex vs. P. Balasubramanian (2021), the Court stated that a blank cheque bearing the signature attracts the presumption that the same has been drawn in favour of the holder/drawer to discharge the liability for the purpose of prosecution under Section 138.
The Court referred to the case of Bir Singh v. Mukesh Kumar (2019) wherein it was observed that if the accused person under Section 138 has handed over the cheque to the holder which is voluntarily signed by him to discharge some payment, then the presumption under Section 139 would be applicable. Unless the accused has any other evidence to prove the contrary. Further, the presumption under Section 139 is a presumption based on law and not based on facts. The same position has also been reiterated by the Supreme Court in Triyambak S. Hedge v. Sripad (2021).
On the burden of proof
Further, in cases concerning Section 138, a mere denial on the part of the accused of debt or liability is not enough to discharge the burden of proof. This was held in Kishan Rao v. Shankargouda (2018).
On financial capacity
In Basalingappa vs. Mudibasappa(2019), it was held that when a summary trial takes place and evidence from both sides are led, the complainant must explain his financial capacity.
On the subject matter of litigation under Section 138
The claim for fee-based on the percentage of the decretal amount is not a subject matter of litigation under Section 138 of the N.I. Act. This was held in B. Sunitha v. State of Telengana (2017).
Other updates on the N.I. Act related to the dishonour of cheques
On 8th June 2020, the Department of Financial Services, Ministry of Finance proposed to decriminalise certain minor economic offences including Section 138 of the N.I. Act. It is true that the decision to criminalise or decriminalise an offence is a matter of legislative policy, however, to decriminalise an offence at a time when there is a huge pendency of cases will only create more complexity.
The legislative intent at the time of criminalising the dishonour of cheques was to increase the efficacy of banking operations and to maintain the sanctity of cheques as a financial instrument as explained in Makwana Mangaldas Tulsidas v The State Of Gujarat (2020). The reasoning of the government to decriminalise Section 138 is based on the ground that it is blocking investments in the country and thereby hurting economic growth. However, the government failed to consider the fact that decriminalisation of the dishonour of cheques means the return of the debtor’s paradise. This is going to disbalance the rights of both parties in a business transaction.
Cheques are widely used for formal financial instruments in business transactions and the fact that a party depends on them for consideration cannot be ignored. Since it is a criminal offence, that works as a security for the party to avail consideration if the other party fails to pay in the due course of the business. At this moment when business transactions involve a huge amount of monetary considerations, it cannot be expected to make the other party entirely unstable without any guarantee. This concern can also be substantiated from the fact that one of the factors giving rise to the high pendency is that there is a delay on the side of the accused person while appearing before the court.
Further, there is another concern why the same should not be decriminalised. Decriminalising the provision would mean that the livelihood of a certain class of advocates will be at stake. Strong objections have been raised by the Delhi Bar Council and Maharashtra Bar Council since a lot of lawyers practice in this field of law. A better approach to this would be to analyse the recommendations made by the committee in the In Re Expeditious case.
The cases pending under Section 138 are humongous because of the various reasons that have contributed to the complexity of the proceedings. The law on the same is frequently getting more refined. However, reducing the number of cases is a bigger challenge before the Courts currently. The move to decriminalise the offence may not prove effective at this moment since the cases pending for many years cannot be dropped midway. It would mean the return of the debtor’s paradise which will only create more burden to the economy since this would disbalance the equilibrium of the protection for the debtor and the creditor. A better approach would be to make amendments to the present Act at the same time encourage pre-litigation settlements to lighten the burden of the Courts.
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