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This article is written by Swati Mishra pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

The Negotiable Instrument Act was first drafted in 1866 and came into force in 1881. It is originally a colonial law, still widely in practice. After a century, Chapter XVII, Section 138 to 142  were inserted in the Act vide Section 4 of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, (Act 66 of 1988). Section 138 of the Act deals with the punishment for the dishonour of the cheque. The cheque is a negotiable instrument drawn on a specified banker and not expressed to be payable otherwise on demand. Section 6 of the NI Act makes it clear that this definition of a cheque includes an electronic image of a truncated cheque and a cheque in electronic form. Concerning the dishonour of cheque, the criminal proceedings against the accused is a recent addition; before this, there were only civil and alternate dispute resolution available to the drawee. There are still both the remedies available to the drawee. The civil remedy is the filing of a civil suit for the recovery of damages and the criminal remedy available under Section 138 of the NI Act does not preclude the institution of a civil suit. also incorporate the aim of your article.

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Section 138 of Negotiable Instruments Act

Section 13 of the Negotiable Instruments Act defines negotiable instruments as “a promissory note, bills of exchange or cheque payable either to order or to bearer”. A negotiable instrument is a kind of document that guarantees its bearer a sum of money to be payable on demand or at any future date. Section 138 of the NI Act is a penal provision that deals with the punishment of dishonour of cheque. Dishonour of cheque is not an offence in itself but to become an offence, the following ingredients should be there:

  1. There should be a drawer that draws the cheque.
  2. The cheque drawn should be in discharge of some liability.
  3. Presentation of the cheque to the drawee bank.
  4. The cheque returned by the bank unpaid on account of insufficient funds.
  5. The cheque should be presented within six months from the date on which it was drawn or within the period of its validity, whichever is earlier.
  6. Within thirty days of receiving a memo of return from the bank, a notice should be served to demand the payment of the said money.
  7. The drawer fails to pay the said money within 15 days of the receipt of the said notice.

It is to be noted here that if the drawer pays the debt within 15 days, there would be no offence. The offence is said to be committed under Section 138 of the NI Act, only when he fails to pay the debt within 15 days and such person shall be punishable with imprisonment for a term which may be extended to two years, or with a fine which may extend to twice the amount of the cheque, or with both.

To understand the provision under Section 138 of the NI Act, it is very important to understand the time frame, which can be well understood from the table below:

The time frame for the offence under Section 138 of the NI Act

Material things Period of limitation Judgement
Presentation of cheque to the bank Within 3 months from the date on which it was drawn or the validity of cheque, whichever is earlier Ansh Chugh vs Pradeep Gupta, 2020 
Demand for payment of the due amount by giving notice 30 days from the receipt of the memo from the bank Bodal Lal vs. Krishna Kuma, 2019
Payment of the debt by the drawer  Within 15 days from the receipt of the notice K. Bhaskaran v. Sankaran
Filing of the complaint Within 30 days of the following day on which the 15th day of notice period expires i.e., excluding the 15th day Saketh India Ltd. v. Indian Securities Ltd

Few important points relating to dishonour of the cheque

  • Status of premature complaint

In ‘Yogendra Pratap Singh v Savitri Pandey’, the Hon’ble Supreme Court held that no cause of action is said to have arisen until the period of 15 days elapsed. Therefore the Court is barred from taking cognizance of a complaint made before the expiry of 15 days.

  • Successive presentation of cheques

In ‘MSR Leathers v. S. Palaniappan’, it was observed that the payee can present a cheque many times for its encashment before the expiry of 3 months from the date on which it was drawn or within its validity, whichever is earlier.

  • Who can file a complaint? 

Section 142 of the act mandates that the complaint must be filed by the payee or holder in due course of the cheque. Where a payee is a natural person he can file a complaint and when the payee is a firm or company or a juristic person, it must be represented by a natural person. [Sankar Finance and Investment v. State of A.P. & Others]

  • Death of the complainant

In ‘Chand Devi Daga & Ors. v. Manju K. Humatani & Ors’ it was held that the legal heirs of the complainant can move an application under Section 302 of CrPC.

  • Insufficiency of funds

In ‘Laxmi Dyechem v. State of Gujarat and Ors.’, it was held that insufficiency of funds includes “account closed”, “payment stopped”, “referred to the drawer”.

  • Time barred debt

Time barred debt is not legally enforceable.[Ramakrishnan v.Parthasaradhy]

What is quasi-criminal?

In a civil suit, the judge only orders payment of damages. It is to be appreciated that Indian civil law does not recognise punitive damages. In civil suits the defendant has two options either to pay damages or if he lacks money his property can be attached and auctioned by the court to pay off the creditors. In case if the attached property is not sufficient to pay the debt the defendant can still be sent to the debtor’s jail under the code of civil procedure. In ‘Jolly George Verghese v. Bank of Cochin,’ The Supreme Court declined to strike down the provision of debtor’s prison. 

When a civil suit or equity proceedings has some but not all elements of a criminal proceeding are said to be quasi-criminal. In this kind of suit, the court may punish an accused for his actions or omissions as if it were a criminal case. quasi-criminal proceedings include proceedings relating to violation of law or ordinances, family court proceedings, motor vehicle actions, regulatory offences, psychiatric matters and equity proceedings such as contempt of court proceedings, writs etc. In quasi-criminal proceedings, there is provision for the regular criminal jail instead of the debtor’s jail. 

Quasi-criminal nature of Section 138 of NI Act

Recently in P Mohanraj v. Shah Brothers, a bench comprising of Justices RF Nariman, Navin Sinha and KM Joseph while deciding upon the question of whether moratorium under Section 14 of IBC bars proceedings under Section 138 of NI Act against the corporate debtors made the spellbinding comment that proceedings under Section 138 of NI Act can be called a “civil sheep” in a “criminal wolf’s clothing”. Shri Lekhi, an Additional Solicitor General, argued that the proceedings under Section 138 can only be described as ‘criminal proceedings’ not as ‘quasi-criminal proceedings’. The court rejected the contention and called it a ‘misnomer’.  The bench sought to ascertain the true nature of the proceedings under Section 138 of the Negotiable Instruments Act,1881. The following observations have been made by the court while ascertaining the nature of Section 138 of the NI ACT.

  1. The provision contains both punitive punishment and fine which is double the amount of cheque to compensate the complainant of the amount of the dishonoured cheque, its interest and cost of the proceedings. The court noted that it is a hybrid provision to ensure payment of the bounced cheque if it is otherwise enforceable in civil law.
  2. The provision aims at allowing the drawer to pay back the amount of cheque to the complainant, by providing statutory provision of serving notice to the drawer.
  3. The offences under Section 138 of the NI Act lack mens rea.
  4. The proceedings under Section 138 of the NI Act come under the ambit of Section 14 of IBC.

The quasi-criminal nature of Section 138 of the NI Act can be better understood in two ways. One the inclusion of punitive punishment of imprisonment up to two years and a fine which may extend to twice the amount of cheque and the second adoption of code of criminal procedure while dealing with such cases.

1. Punishment for the offences under Section 138 of Negotiable Instruments Act, 1881

A person convicted for an offence under Section 138 of the Negotiable Instrument Act, 1881 shall be punished with imprisonment for a term which may extend to 2 years and with a fine which may extend to twice the amount of the cheque, or with both. The provisions from Section 138 to 142 were introduced with an object to increase the credibility of a cheque for easy settlement of liabilities. Though the Act is primarily a civil law to ensure smooth functioning of any transaction penal punishments were added.

It is worth pointing here that Section 29 of CrPC deals with the power of the magistrate to pass the sentence. So, for instance, a Judicial Magistrate of First Class would not be able to impose a fine of more than 10000/-. This difficulty was removed by Amendment Act No.55 of 2002 thereby inserting Section 143(1) of the NI ACT and subsequently empowered the magistrates to impose a fine exceeding their limits ceiling being twice the amount of cheque.

2. Follows Code of Criminal Procedure

  • Compounding of offence 

Offences under Section 138 of the NI Act are compoundable under Section 147 of the NI Act. In Damodar S. Prabhu v. Sayed Babalal H, the court laid down certain guidelines as to the compounding of offences under Section 138 of the NI Act. These are:

  1. The summons should make it clear to the accused that he can apply for the compounding offence at the first or second hearing of the case.
  2. If an application for compounding is made at a subsequent stage, it can be allowed on a condition that the accused will be required to pay 10% of the cheque amount as a condition for compounding to be deposited with the Legal Services Authority, or such authority as the court deems fit. 
  3. If such an application is made before sessions or the High Court, in revision or appeal, it may be allowed on the condition that the accused will be required to pay 15% of the cheque amount by way of costs. 
  4. If the application is made before the Supreme Court, the figure would increase to 20% of the cheque amount.  

“What If the complainant denies either compounding of the offence under Section 147 of NI Act or withdrawing of the complaint under Section 257 of CrPC?” The answer to this can be found in a Judgement given by the Supreme Court In ‘M/S. Meters and Instruments Pvt. Ltd. & ANR. vs. Kanchan Mehta’ [Criminal Appeal No. 1731 of 2017]. The Honourable Supreme Court laid down that, the court on being satisfied that the complainant has been duly compensated and it is in the interest of justice, can in its discretion close the proceedings and discharge the accused even in the absence of consent. 

  • Offences under Section 138 of NI Act to be tried summarily

Section 143 of the NI act says that offences under chapter XVII of the NI Act shall be tried summarily if he believes that he is not going to pass a sentence of more than one year and a fine of more than 5000 rupees. In J.V. Bahurani v. State of Gujarat, the Supreme Court observed that if it appears to the magistrate that the nature of the case requires punishment exceeding one year or for any other reason then the trial is to be conducted on a day to day basis as it is undesirable to try it summarily.  

  • Applicability of Section 319 of Criminal Procedure Code, 1973

Section 319 of CrPC, 1973, provides that from the evidence it appears to the trial court that a person who is not being accused has committed an offence the court may proceed against such person. There is no exception to the applicability of Section 319 of Crpc to the Offence under Section 138 of the NI Act. In N. Harihara Krishnan v. J. Thomas, the Supreme Court laid down that the offence under Section 138 is person-specific hence cognizance against the person not being accused till now has to be taken in the same manner in which cognizance was first taken against the earlier accused. The burden to fulfil the conditions laid down in the proviso to Section 138 NI Act for the newly added accused would lie upon the complainant. The essentials that form offence under Section 138 of the NI Act cannot be bypassed to initiate prosecution. 

  • Compensation to be recoverable as fine

Section 431 of CrPC provides that any money other than a fine, method of recovery of which is not expressly provided, ordered by the court under code of criminal procedure, shall be recoverable as fine. Also, Section 64 of the Indian Penal Code, says that the court is competent to impose a sentence in default of payment of the same [Kumaran v. State of Kerala 2017, R. Mohan v. A.K. Vijaya Kumar,2012]. So, compensation awarded under Section 138, N.I. Act by the court is recoverable as a fine.

When an order for the compensation has been passed by the court, recovery of the compensation should be pursued. In Vijayan v. Sadanandan K, the court held that the provisions of Sections 357(3) and 431 CrPC read with Section 64 IPC, empower the court to include a default sentence in case of non-payment of the compensation while making an order for payment of the same.

Recently in Kumaran v. State of Kerala, 2017 [7 SCC 471], the court held that even though the convict has suffered the default sentence yet, compensation would be recoverable in the manner provided under Section 421(1). This would, however, be without the necessity for recording any special reasons.

Whether conviction absolves drawer’s civil liability?

If an act of a person exposes him to both civil and criminal liability, he can’t escape any, he would have to suffer both. Therefore, the conviction in the criminal proceeding under Section 138 of the NI Act will not absolve a person’s civil liability.

In Golden Menthol Export Pvt. Ltd. v. Sheba Wheels (P) Ltd. the Guwahati High Court held that the criminal proceedings under Section 138 of the NI Act cannot be taken as an alternative to civil suit for the realisation of money on dishonour of cheque. Also, the conviction under Section 138 NI. The Act will never absolve the drawer of the cheque from civil liability.

Legal liabilities for the dishonour of cheque in different countries

It is important to analyse the different ways adopted by different countries in cheque bounce cases. The judicial trend in five countries are as follows:

1. Australia 

Australian legal system introduced the Cheque Act 1986, to deal with cheque bounce cases that prescribed civil remedies. The drawee has an option to file a civil suit for the recovery of damages.

2. United Kingdom 

In the UK also there is a civil remedy available under the Bill of Exchange Act,1882 and gives an option to the payee to file a civil suit.

3. Singapore 

No criminal liability is imposed, only civil liability is to be imposed on the drawer.

4. France 

It has a master database called the Fichier Central des Chèques (FCC) which stores data of persons who issued more than one dishonoured cheque and subsequently bans them from issuing a cheque for another five years.

5. United States of America

Like India, in the USA also there is provision for imposition of both civil and criminal liability. The fine can be up to twice or thrice the amount of the cheque issued.   

Decriminalization of dishonour of cheque 

We saw that most of the countries of the world have considered the dishonour of cheque as a civil wrong. In India, Section 138 of the NI Act is an embarrassment to its legal system where a person is being sent to jail due to his inability to pay off the debt. India is a party to the International Covenant on Civil and Political Rights which forbids sending of a person to prison for failing to discharge his contractual obligations. The Ministry of Finance on 8th June 2020 proposed to decriminalise several economic offences one of which is Section 138 of the NI Act.  It can be seen as an attempt to improvise a tedious legal system and provide ease of doing business. 

Conclusion

The spirit of the NI Act is that it is predominantly a civil law but to ensure that the drawer discharges his liability, a tint of criminal law has been added to it, which makes it quasi-criminal law. Failure on the part of the drawer to pay the cheque amount may expose him to penal provision provided under the Act. A provision relating to ‘notice’ has been added to protect the honest drawer and give him a chance to rectify his omission. This shows that the primary intent of the legislature was not to make it a criminal law. When the drawer fails to discharge his liability within fifteen days of ‘receipt of the notice’, it gives the cause of action to the complainant to file the complaint. 

In P Mohanraj V. Shah Brothers, the court held that the primary object of the provision of Section 138 of the NI Act is not to penalise the wrongdoer but to compensate the victim. The Hon’ble Court referring to the case of CIT v. Ishwarlal Bhagwandas observed that it is not necessary that every civil proceeding begins with the filing of the suit and culminates in the execution of the decree. It is worth understanding here that the procedures being followed while dealing with the offences under Section 138 of the NI Act are procedures enumerated in the code of criminal procedure. Though the legislature has started making attempts to decriminalise the cheque bounce it is still a quasi-criminal offence.

References

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