The article is written by Clara D’costa. This article discusses the case of M/s Laxmi Dyechem v. State of Gujarat (2012) in detail including the issues raised, arguments of the parties, judgement and the rationale behind the judgement. It analyses the debate regarding whether the dishonour of the cheque was due to the respondent company’s signatories having done the signatures that were inconsistent or that no image was found or that there was an inconsistency regarding the signatures on the cheque and the bank records did not match would constitute an offence and attract penal liability as per Section 138 of the Negotiable Instruments Act, 1881.

Introduction

Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as “N.I. Act, 1881”) holds a significant importance in the realm of commercial transactions and financial dealings. It specifically deals with the dishonour of a cheque due to insufficient funds in the account of the drawer. Under this Section, the recipient of the bounced cheque has the legal right to initiate legal proceedings against the drawer. The primary objective of Section 138 is to ensure credibility and trustworthiness in financial transactions, thereby safeguarding the interests of the parties involved.

The Laxmi Dyechem vs State of Gujarat(2012) talks about the legal provisions of the N.I. Act, 1881, mainly Section 138, which deals with the dishonour of cheques. Laxmi Dyechem (the appellants) raised arguments challenging the decision of the lower court in Gujarat. A total of hundred and seventeen cheques given by the respondents were dishonoured and sent back by the bank as they did not match the signatures on the record of the respondent. This compelled the appellants to take legal action against the Company and its authorised signatories before the District and High Court but the orders were given in the favour of the respondent. 

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Therefore, Laxmi Dyechem appealed before the Supreme Court wherein the Court emphasised on the main essential of Section 138 of the N.I. Act, 1881 and allowed it. This case presents a significant legal challenge that has drawn attention from legal experts and professionals alike. 

Details of the case

  • Case name: M/s Laxmi Dyechem v State of Gujarat (2012)
  • Bench: Justice T.S. Thakur and Justice Gyan Sudha Mishra
  • Type of case: Criminal appeal 
  • Appeal no.: 1910- 1949 of 2012 filed in the Supreme Court of India (arising out of S.L.P. (Crl.) No. 1780-1819 of 2011)
  • Date of the judgement: 27th November 2012
  • Laws discussed: Section 138 and Section 139 of the N.I. Act, 1881, Section 482 of the Code of Criminal Procedure, 1973

Facts of Laxmi Dyechem v. State of Gujarat (2012) 

  • M/s Laxmi Dyechem located in Gujarat was involved in the production and manufacturing of chemicals where they were supplying Naphthalene Chemicals to the respondent- for a few years. The respondents had an ongoing transaction account with the appellants wherein the value recorded of the goods supplied amounted to ₹ 4,91,91,035/- (Rupees four crore ninety one lakh ninety one thousand and thirty five). 
  • The respondent-company issued several post-dated cheques under the signatures of its authorised signatories towards the sum payable to the appellants. However, to the dismay of the appellants one hundred and seventeen cheques returned dishonoured. The Bank notified the appellants that the signatures of the respondent-company’s signatories weren’t complete or the signatures on the cheque did not match with their bank records and no image was found.
  • Upon receiving the notification from the bank, the appellant informed the respondents through a notice sent under clause (b) of Section 138 of the N.I. Act, 1881 to pay their dues. The respondents further sent the appellants a letter dated 30th December, 2008 informing the appellants to return the old cheques in exchange for new ones. However, the cheques were never issued to the appellants as respondents argued that fresh cheques were subject to account settlement due to the new bank mandate. 
  • The respondents therefore did not end up paying the due amount despite notices being issued by the appellants giving rise to forty different complaints that were then filed against the respondents under Section 138 of the N.I. Act, 1881.
  • Further, the court acknowledged the offence and issued summons to the respondents for presenting themselves before the court. At this stage, Shri Mustafa Surka, one of the accused, filed special criminal applications No. 2118 to 2143 of 2009 backed by the prayers to end the trial against the authorised signatories appointed by the respondent-company. Further, the respondents argued that dishonour on the grounds that the signatures were ‘incomplete’ or ‘no image found’ would not attract penal liability under Section 138 of the N.I. Act. This argument was accepted by the High Court of Gujarat and it ruled in the favour of the appellants through order dated 19th April, 2010. 
  • Thereafter, special criminal applications No. 896 to 935 of 2010 were then filed by the remaining signatories thereby challenging the lawsuit that was initiated against them. They challenged the proceedings under the same grounds that were taken by Shri Mustafa Surka.
  • The High Court of Gujarat further allowed the said petition by a common order dated 27th August 2010 on the grounds that the endorsement that the cheque has bounced due to ‘incomplete or different signature of the drawer’ or ‘no image of the signature found’ do not fall under the conditions mentioned in Section 138 of the N.I. Act, 1881.
  • A case was then initiated before the High Court of Gujarat to exercise powers given under Section 482 of the Code of Criminal Procedure, 1973 and the order was passed in favour of the accused signatories from the respondent-Company and the Gujarat High Court held that the lawsuit initiated against the respondents did not stand.
  • The High Court of Gujarat had taken into consideration the provisions mentioned as per Section 138 of the N.I. Act, 1881 and stated that since the dishonour was due to the signatures being inconsistent, it did not come under the ambit of Section 138.
  • This led the appellants to appeal before the Supreme Court of India wherein the Supreme Court accepted the appeal and revoked the order of the High Court of Gujarat and dismissed the Special Criminal Application filed by the respondents–authorised signatories.The trial court was then ordered by the Supreme Court to proceed with the lawsuit that the appellants filed against the respondents.

Issue raised

Whether the dishonour of a cheque due to the signatures of the drawer being incomplete or that no picture was found or that the cheque and the bank records of the authorised signatories were inconsistent would constitute an offence and attract penal liability under the provisions of Section 138 of the N.I. Act, 1881?

Arguments raised by the parties

Appellant’s arguments:

  • The Appellant’s counsel argued that the respondent company issued cheques to settle their accounts with the appellants but the cheques were returned as dishonoured from the bank as the signatures of the signatories were incomplete, did not match and no image was found.
  • The appellants immediately issued a statutory notice to the respondents under Section 138 of the N.I. Act, 1881. The respondents asked the appellants to give the old cheques back and assured newly issued cheques in exchange. However, they failed to do so despite a notice being given to them and hence a lawsuit under Section 138 of the N.I. Act 1881 was filed against them.
  • They also argued that the respondents, despite ensuring payments towards their accounts in the books of Laxmi Dyechem, did not further pay towards them.

Respondent’s arguments:

  • The respondents claimed that the cheques were being rejected by the bank due to a ‘change in the mandate’ and no other reason under Section 138.
  • The counsel for the respondent further argued for quashing the proceedings against the respondents stating that the signatures ’were incomplete’ or ‘signatures were different’ or ‘no image found’ cannot be considered as offences under Section 138 of the N.I. Act, 1881.
  • Further, they also contended that they had offered to issue new cheques and even pay a substantial amount towards the settlement of their accounts.
  • On behalf of the signatories, the respondent’s counsel argued that the dishonour had taken place due to a change in the mandate and after the accused had resigned from their respective positions.
  • Furthermore, they also argued that failure of the company to pay towards the settlements of their dues cannot be considered as dishonesty of the person drawing the cheques.

Laws discussed 

Section 138 of the Negotiable Instruments Act, 1881

The main objective while presenting this Section was to inculcate faith in the efficiency of banks and to make the negotiable instruments more reliable by making dishonour of these instruments an offence. 

The Section talks about a cheque which is drawn on an account held by a person with the bank for payment of funds to another person from that account, for the discharge of all or part of any debts or other liabilities and is returned to the bank without payment. In case the dishonour of the cheque is due to the balance on the credit account being insufficient for the cheque to be paid or if the amount is more than the amount agreed to be paid from the account by the bank, the cheque shall be deemed to have been dishonoured. Without prejudice to the provisions of this Section, a person shall be liable to a term of imprisonment of up to two years or to a fine of up to twice the cheque’s value, or both.

While Section 138 penalises dishonour of a cheque, it also provides security to the drawers for reasons wherein the dishonour has taken place without a malicious intention of the drawer. It visualises the administration of a notice to be sent to the signatory of the dishonoured instrument and grants prosecution only after the statutory period has expired and when the drawer fails to make the payment that is due within the time period.

Section 139 of the Negotiable Instruments Act, 1881

This Section states that unless the contrary is proved, it shall be presumed that the holder received the cheque of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability.

It was further discussed in this case that under Section 139, the presumption made is rebuttable during the trial but it cannot be denied that it is in the favour of the complainant as it shifts the burden to the person drawing the particular instrument when it is dishonoured.

Section 482 of the Code of Criminal Procedure

This Section states that nothing in the code shall be considered to limit or affect any inherent powers of the High Court to make such orders as may be necessary to give effect to

  • an order under this code,
  • prevent abuse of the process of any court, or
  • secure the ends of justice.

Judgement in Laxmi Dyechem v. State of Gujarat (2012)

Whether the dishonour of a cheque under this case would constitute an offence and attract penal liability according to Section 138 of the Negotiable Instruments Act, 1881.

  • The Supreme Court allowed the appeal and disposed of the orders of the High Court of Gujarat while dismissing the Special Criminal Applications that were filed by the respondents.
  • The Supreme Court decided that while relying on the cases mentioned below, evidence and provisions that the appeal shall be allowed and the criminal applications filed by the respondents shall be set aside.
  • The trial court was further ordered to continue with the lawsuit filed by the appellants.
  • The court held that since dishonour of a cheque on the grounds that accounts have been closed attracts penal liability under Section 138 of the N.I. Act, 1881, dishonour on the grounds that ‘signatures are inconsistent’ or that the ‘picture is not found’ will constitute dishonour under Section 138 of the N.I. Act, 1881.

Rationale behind and precedents relied on 

The Supreme Court while deciding the judgement relied on the NEPC Micon Ltd. v. Magma Leasing Ltd. (1999), wherein the appellants issued cheques to discharge the liability which was returned with the comments as “account close”. The issue raised here was if dishonour due to this reason was culpable under Section 138 of the N.I. Act, 1881. While the appellants argued that it did not fall under the contingencies of Section 138, the court noticed a clear gap in the opinions of various High Courts throughout the country and held that dishonour due to “account close” also attracted the penal liability under Section 138 of the N.I. Act, 1881.

The contention that Section 138 of the N.I. Act 1881 should be interpreted strictly or should not be in disregard of the object that is sought to be achieved by the statute that was rejected by the Supreme Court.

The court further relied on the decision given in the Kanwar Singh v. Delhi Administration (1965) and Swantraj v. State of Maharashtra (1975) and held that the drawer’s suggestion of a narrow interpretation would result in the loss of the intent of the provision.

The Supreme Court then relied on the judgement given in the State v. M.K. Kandaswami (1975), where the court asserted that the intent of a penal provision which is remedial in nature should not be sidelined. If there are multiple constructions, then the court should sideline the interpretation that would defeat the statute’s purpose and go forth with the one that will protect the efficacy and workability of the statute.

The Supreme Court also relied on the observation of Lord Denning in the Seaford Court Estate Ltd. vs. Asher (1949) where he stated that the English language does not have mathematical precision and therefore the Judges should consider the social conditions and effect of their interpretation. They should also make sure that the basic legislative intent is not defeated.

The court further referred to the verdict in the M.M.T.C. Ltd. and Anr. v. Medchl Chemicals and Pharma (P) Ltd. and Anr. (2002) where there was a dishonour due to “stop payment” directions of the drawers. Therefore, there would be a presumption under Section 139 of the N.I. Act, 1881 for the cheque being under consideration. 

This is also observed in the verdict given in the Goaplast (P) Ltd. v. Chico Ursula D’souza and Anr. (2003) and Modi Cements Ltd. v. Kuchil Kumar Nandi (1998). Here, the court noted that even if the cheque was dishonoured on the grounds of “stop payment”, it would still attract a penalty and presumption under Section 138 and Section 139 of the N.I. Act, 1881 respectively. The authority shows that despite being dishonoured for “stop payment”, the court should presume the cheque being drawn was in whole or in part, for any debt or liability. This can further lead to a rebuttal by the accused on the grounds that the “stop payment” wasn’t initiated because of insufficiency in funds although the onus probandi lies upon the accused. The court can therefore not quash a complaint in this regard.

Further, relying upon the above mentioned judgements, the court agreed that there was no further reason to strictly interpret the two contingencies mentioned under Section 138 of the N.I. Act, 1881. The court held that since dishonour of a cheque on the grounds that accounts have been closed attracts penal liability under Section 138 of the N.I. Act, 1881, dishonour on the grounds that ‘signatures are inconsistent’ or that the ‘picture is not found’ will constitute dishonour under Section 138 of the N.I. Act, 1881.

Furthermore, the court concluded that it is possible to derive an equivalent outcome about the bank’s specimen signature being changed by the drawer of the cheque or in the case of an organisation- the mandate of those authorised to sign the cheques on its behalf being changed. These modifications could be brought upon with a fraudulent and malicious intention which ultimately leads to dishonour of the cheque signed by the signatories.

According to the court, there is no difference when dishonour of the cheque has taken place due to modification of the authorised signatories which lead to dishonour or wherein the drawer changed his own signatures or issued instructions to the bank for stopping payment.

As long as the changes made resulted in the cheque being dishonoured, it would attract penal liability under Section 138 of the N.I. Act, 1881 subject to any additional conditions. In occasions when the drawer did not intend to invite such dishonour shall not directly be in the purview of Section 138 of the N.I. Act, 1881 as it has to be preceded by a statutory notice where the drawer is given an opportunity to make changes and arrange for the payment that is due.

However, the court stated that if the drawer does not clear the dues in the time given under the statute, then the dishonour shall constitute an offence and will be punishable. In cases where there was a lawful recovery of debt or discharge of liability, the trial court will examine by relying on the evidence produced keeping in view the statutory presumption- unless rebutted the cheque is considered to have been issued for a valid consideration.

The learned counsel for the respondent had argued that the offer made by the respondent company was in exchange for the old dishonoured cheques. They also argued that the cheques that were issued fraudulently by the authorised signatories had then resigned from their positions therefore dishonour cannot be construed as an act of dishonesty. Matters wherein the cheques are given for amounts in excess of the payable amount is a matter for examination at the trial. As the cheques were issued by authorised signatories appointed by the respondent company, it gave rise to the presumption that they were meant to discharge a lawful debt or liability. It was also stated that such allegations of fraud are matters that are beyond the scope of a court under Section 482 of the Code of Criminal Procedure, 1973 and shall be decided at the trial itself.

The court further stated that the proceedings against the signatories of the cheques cannot be quashed merely due to the different lines of defence taken by them. The decisions of the court in the National Small Industries Corporation Limited v. Harmeet Singh Paintal and Anr. (2010) and S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. (2005) stated that the authorised signatories are liable to be prosecuted along with the company.

The Supreme Court allowed the appeal, revoked the orders passed by the High Court of Gujarat along with dismissing the Special Criminal Applications filed by the respondents.

Analysis of Laxmi Dyechem v. State of Gujarat (2012) 

This case involved legal arguments regarding what exactly constitutes an offence under Section 138 of the N.I. Act,1881. The main legal issue at hand was whether dishonour on grounds that the signatures on the cheques were missing, image was not found and the signatories’ signatures on the given cheques being inconsistent with those recorded in the bank constituted as an offence culpable under Section 138 of the N.I. Act, 1881. 

In this case, the key aspect was the interpretation of Section 138 of N.I. Act, 1881. It was concluded by the court that strict interpretation of Section 138 can often lead to ignorance of the main legislative intent which is to provide justice. The court delved and examined the evidence presented by both the parties in order to determine the intent behind the dishonour of the cheque. While relying on the Modi Cements v. Kuchil Kumar Nandi (1988), the court stood firm on the statement that the “amount of money…is insufficient to honour the cheque” is an expression that is the genus and “account closed” is its species.

Current relevance of the case 

This case highlighted the importance of adhering to legal obligations when making a transaction that involved issuing and handling cheques. The court therefore after a thorough analysis upheld justice by quashing the order of the High Court of Gujarat and enforced accountability on both the signatories and the respondent company. Overall, the Laxmi Dyechem vs State of Gujarat (2012) served as a significant reference point in understanding the importance of correct interpretation of the law, preserving the legislative intent and holding the accused accountable.

It is crucial to understand the implications of this judgement in the current legal landscape as Section 138 of the N.I. Act,1881 holds significance in shaping commercial transactions and business dealings. By examining the implications of this judgement, we can gain valuable insights into how contractual agreements and payment obligations are enforced within the Indian legal system. Furthermore, this judgement serves as a reminder of the significance of adhering to legal frameworks and honouring business agreements to maintain trust and stability in commercial relationships

Conclusion

In an era where financial frauds with respect to negotiable instruments have been on a constant rise, it was necessary to have a judgement that would set a benchmark to avoid the loss of justice. It gave effect to the intention behind the framework of the N.I. Act, 1881 and its provisions thereby making sure that the wrongdoers do not escape from the clutches of the legal system.

Adoption of a correct interpretation and holding the signatories accountable for culpability under Section 138 of the N.I. Act, 1881 protected the rights of the appellants. The court reviewed the relevant law and judgements related to dishonour of cheques in order to make an informed decision and keep the legislative intent behind the framing of Section 138 of the N.I. Act,1881 as a priority.

This case highlighted and emphasised the importance of keeping legal intent of a statute intact and maintaining accountability in case of dishonour of a cheque.

Frequently Asked Questions (FAQs)

Should insufficiency of funds be the only ground that attracts penal liability under Section 138 of the N.I. Act, 1881?

It was directed in the Laxmi Dyechem vs State of Gujarat (2012) that dishonour of cheques due to a mismatch in signature and non-payment of dues despite issuance of notice shall also constitute an offence under Section 138. 

Furthermore, even in the Goaplast (P) Ltd. v. Chico Ursula D’souza and Anr. (2003) and Modi Cements Ltd. v. Kuchil Kumar Nandi (1998), it was held that even if the cheque was dishonoured on the grounds of “stop payment”, it would still attract a penalty under Section 138 of the N.I. Act, 1881. In the case of NEPC Micon Ltd. v. Magma Leasing Ltd. (1999) wherein the cheques that were issued by the appellants in discharge of its liability were returned by the company with the comments as “account close” also attracted the penal liability under Section 138 of the N.I. Act, 1881.

What is Legal Notice under Section 138 of the Negotiable Instruments Act, 1881?

A Legal notice is a formal document that is sent to a person or an organisation in order to inform the receiver about one’s intention to undertake legal action against them. Generally, a legal notice is sent to address an issue to the opposite party. A legal notice is the first step to make the opposite party aware of one’s grievance and take the necessary actions to correct it. In the Laxmi Dyechem v. State of Gujarat (2012), the respondent did not pay the dues even after a duration of 15 days from the date of the receipt of that legal notice and hence it gave rise to penal liability under Section 138 of the N.I. Act, 1881.

A legal notice under Section 138 of the N.I. Act, 1881 visualises the administration of a notice to be sent to the signatory of the dishonoured instrument and grants prosecution only after the statutory period has expired and when the drawer fails to make the payment that is due within the time period.

References

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