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negotiable-instruments:note:section-138

Dishonour of cheque

Section 138 of the Negotiable Instruments Act,1881.

Dishonour of cheque for insufficiency, etc., of funds in the account. Dishonour of chequeWhere any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless:

(a) the cheque has been 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;
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation. For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

The Negotiable Instruments Act was enacted as an attempt to consolidate the law relating to promissory notes, bills of exchange and cheques. The main object of the Act was to legalize the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods. Another purpose of the Act was to encourage the culture of use of cheques and enhancing the credibility of the instrument.

Following a century of the enactment of the N.I. Act, Sections 138 to 142, Chapter XVII, 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). These sections came into force w.e.f. 29.3.1989.

The purpose behind the incorporation of Section 138 of the N.I. Act is to lend credibility for cheque transactions. For establishing the requirements in Section 138, there is no burden on the part of the complainant to prove before court the entire details of the transaction resulting in issuance of cheque.1)

In Musaraf Hossain Khan vs Bhagheeratha Engg. Ltd. & Ors2) the Hon'ble Supreme Court of India observed that:

It is now well known that the object of the provision of Section 138 of the Act is that for proper and smooth functioning of business transaction in particular, use of cheques as negotiable instruments would primarily depend upon the integrity and honesty of the parties. It was noticed that cheques used to be issued as a device inter alia for defrauding the creditors and stalling the payments. It was also noticed in a number of decisions of this Court that dishonour of a cheque by the bank causes incalculable loss, injury and inconvenience to the payee and the entire credibility of the business transactions within and outside the country suffers a serious setback. It was also found that the remedy available in a civil court is a long-drawn process and an unscrupulous drawer normally takes various pleas to defeat the genuine claim of the payee.”

Section 138 of the Act was enacted to punish those unscrupulous persons who purported to discharge their liability by issuing cheques without really intending to do so, which was demonstrated by the fact that there was no sufficient balance in the account to discharge the liability. Apart from civil liability, a criminal liability was imposed on such unscrupulous drawers of cheques. The prosecution, however, was made subject to certain conditions. With a view to avoid unnecessary prosecution of an honest drawer of a cheque, or to give an opportunity to the drawer to make amends, the proviso to Section 138 provides that after dishonour of the cheque, the payee or the holder of the cheque in due course must give a written notice to the drawer to make good the payment.

The drawer is given 15 days time from date of receipt of notice to make the payment, and only if he fails to make the payment he may be prosecuted. The object which the proviso seeks to achieve is quite obvious. It may be that on account of mistake of the bank, a cheque may be returned despite the fact that there is sufficient balance in the account from which the amount is to be paid. In such a case if the drawer of the cheque is prosecuted without notice, it would result in great in-justice and hardship to an honest drawer. One can also conceive of cases where a well intentioned drawer may have inadvertently missed to make necessary arrangements for reasons beyond his control, even though he genuinely intended to honour the cheque drawn by him. The law treats such lapses induced by inadvertence or negligence to be pardonable, provided the drawer after notice makes amends and pays the amount within the prescribed period. It is for this reason that clause (c) of proviso to Section 138 provides that the section shall not apply unless the drawer of the cheque fails to make the payment within 15 days of the receipt of the said notice. To repeat, the proviso is meant to protect honest drawers whose cheques may have been dishonoured for the fault of others, or who may have genuinely wanted to fulfil their promise but on account of inadvertence or negligence failed to make necessary arrangements for the payment of the cheque. The proviso is not meant to protect unscrupulous drawers who never intended to honour the cheques issued by them, it being a part of their modus operandi to cheat unsuspecting persons.3)

Essential requirements of section 138

The ingredients of the offence as contemplated under Sec.138 of the Act are as under :

  1. The cheque must have been drawn for discharge of existing debt or liability. Legally recoverable debt: In Somnath vs. Mukesh Kumar4) it was held by Hon'ble High Court the complaint under Section 138 is not maintainable when the cheque in question had been issued qua a time barred debt. Similarly, supari money for commission of crime is not legally recoverable debt and complaint under Section 138 is not maintainable in such a case.
  2. Cheque must be presented within 6 months or within validity period5) whichever is earlier.
  3. Cheque must be returned unpaid due to insufficient funds or it exceeds the amount arranged.
  4. Fact of dishonour be informed to the drawer by notice within 30 days.
  5. Drawer of cheque must fail to make payment within 15 days of receipt of the notice.

The Reserve Bank of India vide Notification No, DBOD.AML BC.No.47/14.01.001/2011-12 has made the period of validity of a cheque to be three months now.

Chain of events in a cheque dishonour

First there is a dishonor of the cheque. Next is the legal notice to be sent to the drawer within 30 days of the payee receiving an intimation from the Bank of the dishonor of the cheque. Such legal notice in writing has to be addressed to the drawer at the address of the drawer available with the complainant such notice. Such notice has to be received by the drawer and he should fail to make payment within 15 days after receipt of such notice. This chain thereafter continues into the next stage following the failure to make the payment. The complainant or the drawee then approaches the criminal court with a complaint in which he will implead as the accused, the drawer of the cheque, with the address being shown as the same to which the legal notice was sent.

Contents of complaint

One need not repeat the very words found in section 138 of the Act. That is not the object of the Act. If the allegations in the complaint make out such a meaning that would be sufficient. One need not necessarily extract and put the very words in the section to comply with the requirement of the section. There need not be any such ritualistic repetition in the complaint.6)

Reason for dishonour

A cheque may be returned unpaid by a banker for various reasons and among them only for the reasons specifically stated in the Section 138 of the Act we can initiate proceedings under that section. The reasons enumerated in the Section 138 of the Act are as follows:

  1. “… the amount of money standing to the credit of that account is insufficient to honour the cheque…”
  2. “… the amount of money to be paid through the cheque exceeds the amount arranged to be paid from that account…”

However, from time to time our Hon’ble courts of record have been interpreting the above stated two reasons so as to cover other contingencies on which the Cheque is returned unpaid by a banker which would attract the vice of the Section 138 of the Act.

Even if a Cheque is dishonoured for the reason either “Signature differs” or “Payment stopped by the drawer” or “Account Closed”, the proceedings under Section 138 of the Act is maintainable but the conviction depends upon the facts and circumstances of the each case.

Successive presentation of cheques for encashment

A payee or the holder in due course has a right to present the cheque as many number of times for encashment within a period of six months or within its validity period, whichever is earlier. A prosecution based on second or successive dishonor of the cheque is also permissible so long as it satisfies the requirements stipulated under the proviso to Section 138 of the N.I. Act.7)

Second demand notice

In Tameeshwar Vaishnav v. Ramvishal Gupta8), it was observed that after the notice issued under clause (b) of Section 138 of N.I. Act is received by the drawer of the cheque, the payee or holder of the cheque, who does not take any action on the basis of such notice within the period prescribed under section 138, N.I. Act, is not entitled to send a fresh notice in respect of the same cheque and, thereafter, proceed to file a complaint.

Prosecution based upon second dishonour of the cheque

In M.S.R. Leathers -Vs.- S.Palaniappan and others9) the full bench of Hon'ble Supreme Court held that:

“….we have no hesitation in holding that a prosecution based on a second or successive default in payment of the cheque amount should not be impermissible simply because no prosecution based on the first default which was followed by a statutory notice and a failure to pay had not been launched. If the entire purpose underlying Section 138 of the Negotiable Instruments Act is to compel the drawers to honour their commitments made in the course of their business or other affairs, there is no reason why a person who has issued a cheque which is dishonoured and who fails to make payment despite statutory notice served upon him should be immune to prosecution simply because the holder of the cheque has not rushed to the court with a complaint based on such default or simply because the drawer has made the holder defer prosecution promising to make arrangements for funds or for any other similar reason. There is in our opinion no real or qualitative difference between a case where default is committed and prosecution immediately launched and another where the prosecution is deferred till the cheque presented again gets dishonoured for the second or successive time.”

The Supreme Court held thus that the prosecution based upon second or successive dishonour of the cheque is also permissible so long as the same satisfies the requirements stipulated in the proviso to Section 138 of the Negotiable Instruments Act. An earlier contrary decision of a two-judge bench of the Supreme Court in the case of Sadanandan Bhadran v. Madhavan Sunil Kumar10) was overruled by the three-judge bench in the above MSR Leathers v. S. Palaniappan case.

Single complaint for several cheques

In Naresh Chander vs State Of Rajasthan And Anr.11) the Hon'ble Rajasthan High court held that:

”…it may be stated that the dishonour of seven cheques does not give rise to seven causes of actions. A reading of the complaint shows that all the seven cheques were drawn against one account and though they were payable on different dates yet the complainant presented all of them on one date i.e. on 10-12-96 and all of them were returned under one intimation dt. 16-12-96 and one notice was given in respect of dishonour of all the cheques. It is obvious that the facts constitute only one offence. It cannot be said that seven offences have been committed by the accused. As such Section 219, Cr.P.C. does not come in the way of the Court to try the case.“

Mens rea

Section 138 of the Act excludes mens rea by creating strict liability and this is explicit from the words “such person shall be deemed to have committed an offence”. The returning of the cheque by the bank either because the amount of money standing to the credit of the drawer of the cheque is insufficient or the amount covered by the cheque is in excess of the amount arranged to be paid from that account by an agreement with the bank are the two necessary conditions creating strict liability. If the cheque is dishonoured on any other ground, the offence is not made out.

In B. Mohan Krishna vs Union Of India And Orson 27 January12) the Hon'ble Andhra Pradesh High Court observed that:

As already noticed supra, section 138 of the Act creates strict liability. When the two requirements constituting the offence, as specified in the section, are present, then the drawer of the cheque shall be deemed to have committed the offence. Section 140 in clear terms excludes the defence that the drawer had no reason to believe, when he issued the cheque, that it may be dishonoured on presentment for the reasons stated in section 138. The exclusion of mens rea as a necessary ingredient of the offence under section 138 is thus clear and explicit. There is no room for any ambiguity or doubt as regards the intention of the Legislature in creating the offence in question.“

The court further held that;

absence of mens rea in section 138 of the Act for fastening criminal liability is not arbitrary, violative of article 14 of the Constitution of India.

Can a Demand Notice be Sent by Fax or Email?

The notice under section 138 of N.I. Act is required to be served on the accused within 30 days of intimation of dishonour of cheque but no specific format for it has been prescribed. Hence, it can be issued by e-mail as well. As per section 4 of Information Technology Act, it will be recognised as valid proof of being sent in writing. At this juncture, it would be appropriate to cite the judgment of the Supreme Court in M/S. Sil Import, Usa vs M/S. Exim Aides Silk Exporters13) wherein the Supreme Court held:

Chapter XVII of the Act, containing Sections 138 to 142, was inserted in the Act as per Banking Public Financial Institution and Negotiable Instruments Laws (Amendment) Act, 1988. When the Legislature contemplated that notice in writing should be given to the drawer of the cheque, the Legislature must be presumed to have been aware of the modern devices and equipment already in vogue and also in store for future. If the court were to interpret the words giving notice in writing in the section as restricted to the customary mode of sending notice through postal service or even by personal delivery, the interpretative process would fail to cope up with the change of time.

Facsimile (or Fax) is a way of sending hand-written or printed or typed materials as well as pictures by wire or radio. In the West such mode of transmission came to wide use even way back in the late 1930s. By 1954 International News Service began to use Facsimile quite extensively. Technological advancement like Facsimile, Internet, E-mail etc. were on swift progress even before the Bill for the Amendment Act was discussed by the Parliament. So when Parliament contemplated notice in writing to be given we cannot overlook the fact that Parliament was aware of modern devices and equipment already in vogue. So if the notice envisaged in clause (b) of the proviso to Section 138 was transmitted by fax it would be in compliance with the legal requirement.”

Though the aforesaid judgment discusses the validity of issuance of demand notice by fax, the rationale behind it can be imported and applied to issuance of notices by emails as well.14)

Liability of Guarantor under section 138, N.I. Act

What happens if a guarantor issues a cheque on behalf of the principal debtor and the same gets dishonoured? Should debt or liability necessarily be of drawer himself and not of any other person? Will the guarantor be liable for prosecution under section 138, N.I. Act. The answer will have to be in the affirmative.

Section 138, N.I. Act penalizes the dishonour of any cheque which has been issued in the discharge of the whole or part of “any debt or other liability”. And the liability of the guarantor and principal debtor is co-extensive. Hence, the guarantor cannot escape liability under section 138, N.I. Act if he has issued a cheque for the discharge of the liability of the principal debtor.

In P.R. Shankar Rao vs Joseph And Joseph Regis15) the Hon'ble Madras High Court observed that:

The requirement for offence to be made out under this section is that the cheque must be drawn “for the discharge, in whole or in part, of any debt or other liability”. This section does not say that the cheques should have been drawn for the discharges of any debt or other liability of the drawer towards the payee. Even in Section 139 of the Negotiable Instruments Act, by which a legal presumption is created, the Parliament has only fixed the presumption that the cheque was issued “for the discharge, in whole or in part, or any debt or other liability”. This would mean that the debt or other liability includes the due from any other person. It is not necessary that the debt or liability should be due from the drawer himself. It can be issued for the discharge of any other man's debt or liability. Legally enforceable debt or liability would have a reference to the nature of the debt or liability and not the person against whom the debt or liability can be enforced.

When does the limitation period under 138(c) start?

The period of 15 days envisaged by section 138(c) of the Negotiable Instruments Act, 1881 will begin to run on the day next to the day on which the service of notice has been effected.16)

Case Laws on Section 138

In Krishan Lal More and another vs. M/s Bibby Financial Services India Pvt. Ltd. And another17) it was held by the Hon'ble High Court that the provision of Section 202 Criminal Procedure Code are not applicable to the complaints filed under Section 138 of the Negotiable Instrument Act.

In Ashok Kumar vs. Jagdish Ram alias Jagdish Rai18) it was held by the Hon'ble High Court that in case of acquittal of accused in cheque dishonour case by trial Magistrate, appeal against acquittal is not maintainable before Sessions Court. Complainant can approach High Court seeking leave to appeal.

In Rajan Singhal vs. State of U.T. Chandigarh and Ors19) it was held by the Hon'ble High Court that when accused issues a cheque drawn on an account which is already closed, mala fide intention was clear in the case. Both offences of cheating under Section 420 IPC and Section 138 of NIT Act are made out and accused can prosecuted for both the offences.

In Vishal Sharma vs. Balkaran Singh20) and Yogender Pratap Singh vs. Savitri Devi21) it was held by the Hon'ble Court that the Complaint filed before expiry of 15 days from the date of receipt of notice by the accused is not maintainable.

In Damodar S. Prabhu Vs. SayedBabalal H22) it was held by Hon'ble Supreme Court that if parties compound the offence in trial court accused will have to pay 10% of cheque amount as cost of compounding. Cost of compounding will be 15% in High Court and 20% in Supreme Court. However, in Madhya Pradesh State Legal Services Authority vs. Prateek Jain and another23) it was held by the Hon'ble Supreme Court that where settlement is made in Lok Adalat, the Lok Adalat can waive the same for reasons to be recorded.

Meter and Instruments Private Limited v. Kanchan Mehta. Sc laid down and iterated the principles and guidelines that are usually followed in cases pertaining to Section 138 of the Negotiable Instruments Act, 1881.The object of introducing Section 138 and other such provisions, is to enhance the acceptability of cheques in the settlement of liabilities. The offence punishable under Section 138 of the Act of 1881 is primarily related to a civil wrong and the Amendment [The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002] of 2002 specifically made it compoundable.

Bhaskaran Nair v. Abdul Kareem24). The Kerala High Court held that the defence that a signed blank cheque was handed over by an account holder is intrinsically suspicious one and must be appreciated with great care and caution. No account holder is expected to deal with a cheque in such a casual, careless, irresponsible and indifferent manner and such a defence is impossible.

Moideen v. Johny25). The Kerala High Court held that by issuing a signed blank cheque the drawer conveys an implied authority to fill up the cheque and present the same for encashment.

Lillykutty v. Lawrance26). The Kerala High Court held that the mere fact that the payee’s name and amount shown are not in the hand writing of the drawer does not invalidate the cheque. No law provides that body of the cheque has to be written by drawer only in his own handwriting. What is material is the signature of the drawer only and not the body of the instrument.

I.C.D.S. Ltd. v. Beena Shabeer27). The Apex Court held that a cheque given as security for the liability of the accused or for the liability of any person would also fall under the mischief of offence punishable under Section 138 of the N.I. Act.

Kaushalya Devi Massand v. Roopkishore28). The Supreme Court held that the offence under Section 138 of the N.I. Act is almost in the nature of civil wrong which has been given criminal overtone, and imposition of fine payable as compensation is sufficient to meet the ends of justice.

M/S. Mandvi Co-Op Bank Ltd vs Nimesh B.Thakore on 11 January, 2010. Apex court took notice of the fact that cases under section 138 of the Act have been coming in such great multitude that even the introduction of such radical measures to make the trial procedure simplified and speedy has been of little help and cases of dishonoured cheques continue to pile up giving rise to an unbearable burden on the criminal court system.

Pawan Kumar Ralli vs. Maninder Singh Narula29). The High Court was not right in quashing the complaint merely on the ground that complaint is barred by limitation, that too a plea which was taken for the first time before the High Court. On the other hand, the High Court ought to have remanded the matter to the Trial Court for deciding the issue of limitation.

Vijayan v. Baby30). The Supreme Court held that the direction to pay the compensation by way of restitution in regard to the loss on account of the dishonor of the cheque should be practical and realistic. So, in a prosecution under Section 138 of the N.I. Act, the compensatory aspect of remedy should be given much priority over punitive aspect.

Smt.P. Vijaya Laxmi vs Smt. S.P. Sravana And Another on 27 October, 2017. As regards the remedy of appeal available to complainants against orders of acquittal in cases pertaining to any other offense, it may be noted that the right of appeal given to victims under the proviso to Section 372 of the Code is a general remedy provided to all such victims.

1)
Joseph Jose vs J. Baby And State Of Kerala, 2002 CriLJ 4392
2)
AIR 2006 SC 128
3)
D. Vinod Shivappa vs Nanda Belliappa on 25 May, 2006, AIR 2006 SC 2179
4)
2015(4) Law Herald 3629 (P&H)
5)
3 months as per RBI Notification.
6)
Hansa vs B. Muralidharan, 1994 81 CompCas 315 Mad
7)
MSR Leathers v. S. Palaniappan reported in AIR 2014 SC 642.
8)
2010(1) LCR 86(SC)
9)
CDJ 2012 SC 662
10)
1998 6 SCC 514 : 1998 SCC (Cri) 1471
11)
2000 CriLJ 5090
12)
1995 (1) ALT 468
13)
AIR 1999 SC 1609
14)
The law relating to the offence under section 138, Negotiable Instruments Act written by Sarfraz Nawaz, Judicial Magistrate First Class, Hojai.
15)
2001 (2) ALD Cri 137
16)
Patel Dinneshkumar Shivram vs Patel Keshavlal Mohanlal on 31 March, 2000 CriLJ 3546
17)
2016(2) RCR (Criminal) 603 (P&H)
18)
2016(2) RCR (Criminal) 281 (P&H)
19)
2015(4) RCR (Criminal) 809 (P&H)
20)
2015(4) RCR (Criminal) 916 (P&H)
21)
2014 (4) CCC 305 (SC)
22)
2010(2) RCR (Criminal) 851 (SC)
23)
2014(4) RCR (Criminal) 178 (SC)
24)
2006 (4) KLT 48
25)
2006 (3) KLT SN 62
26)
2003 (3) KLT 721
27)
2002 (3) KLT 218 (SC)
28)
AIR 2011 SC 256
29)
2014 15 SCC 245
30)
2011(4) KLT 355