The negotiable instrument act,1881
Author: Shrankhala Parwar, School of Law, DAVV, Indore & Anubhuti Aggrawal, School of Law, JLU, Bhopal.
Introduction to Negotiable Instruments
In the world of business and finance, negotiable instruments are a very important tool. They provide the parties with an ease of doing business. And they can also be a source of finance when in need of funds. Let us learn more about negotiable instruments and their advantages. Negotiable Instruments Act, 1881 is an act in India dating from the British colonial rule, that is still in force largely unchanged.
The history of the present Act is a long one. The Act was originally drafted in 1866 by the 3rd Indian Law Commission and introduced in December 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law in which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission, the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (Act No.26 of 1881) The applicability of this Act and the objectives of the Act -The Negotiable Instruments Act extends to the whole of India. It came into force on 1st March 1882.
Objectives of the Act
● It facilitates the settlement of payments in business as they pass freely from holder to holder due to easy transferability of the value of the instrument.
● It provides legal protection to different mercantile instruments.
● It presents an orderly and authoritative statement of leading rules of law relating to a negotiable instrument.
● It provides for the special procedure in case the obligations which have to discharge under the instruments.
● It regulates the different types of negotiable instruments which include Promissory notes, Bills of Exchange and Cheques.
● It explains the capacity and liabilities of the parties to the instrument.
● It provides an understanding of different topics under the Act that are negotiation, assignment, endorsement, etc.
● It inculcates faith in the efficacy of banking operations and credibility in transacting business on the negotiable instruments.
What is the meaning of a negotiable instrument?
‘Negotiable’ means ‘transferable by delivery’ and the word ‘instrument’ means ‘a written document by which a right is created in favor of some person’
Thus the term ‘Negotiable Instrument’ literally means ‘a written document transferable by delivery’
According to Sec. 13 of the Act, a negotiable instrument means ‘a Promissory Note, Bills of Exchange or Cheque payable either to order or to bearer’.
The instruments should follow the given condition of negotiability that are:
● Easy negotiability.
● The transferee can sue in his own name without giving notice to the debtor.
● Better title to a bona fide transferee for value.
What are the different kinds of negotiable instruments? It is covered under two heads that are:
● Negotiable Instruments by Statue: Promissory note, Bills of exchange and Cheque.
● Negotiable Instruments by Usage: Banknote, draft, Share warrants, Bearers, Debentures, Dividend warrants, and Treasury bill. 1. Promissory Note– According to sec. 4 of the Act a promissory note is an instrument in writing (not being a bank or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a certain person or to the bearer of the instrument. 2. Bills of Exchange- According to sec. 5 of the Act an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person, or to the bearer of the instrument.
● Cheque – According to sec. 6 of the Act, a cheque is an order by the customer of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.
What are the different kinds of cheques? – A cheque should be written instrument, unconditional order on a specified banker only and a certain sum of money paid to a payee that should be payable on demand.
It can be of different types that are:
1. Bearer Cheque 2. Cross Cheque 3. Order Cheque 4. Ante and Post-dated Cheque 5. Banker Cheque 6. Travelers Cheque 7. Truncated Cheque (E-Cheque)
Who are the parties in different Negotiable Instruments? Parties to Bills of Exchange Drawer: The maker of a bill of exchange is called the ‘drawer’. Drawee: The person who is to pay the money by the drawer is called the ‘drawee’, Acceptor: If someone else accepts the money in place of the drawee then he is called the ‘acceptor’. Payee: Payee is the person to whom the money is to be paid as directed by the instrument. He is considered to be the actual beneficiary. Where he signs his name and makes the instrument payable to some other person, that other person does not become the payee. Endorser: When the holder transfers the instrument to someone else, the holder becomes the ‘endorser’. Endorsee: The person to whom the bill is endorsed is called an ‘endorsee’. Holder: A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a ‘holder’.
Parties to a Promissory Note Maker-He is the person who promises to pay the amount stated in the note. He is the debtor. Payee- He is the person to whom the amount is payable which is the creditor. Holder– He is the payee or the person to whom the note might have been endorsed. Parties to a Cheque Drawer-He is the person who draws the cheque, i.e., the depositor of money in the bank. Drawee- It is the drawer’s banker on whom the cheque has been drawn. Payee- He is the person who is entitled to receive the payment of the cheque.
In what way the negotiation can be done and what are the different types of endorsements? – The transfer of an instrument by one party to another so as to constitute the transferee a holder thereof is called ‘negotiation’.
It can be done by every maker, drawer, payee or endorsee – provided the negotiability is restricted.
Modes of Negotiation –
● Negotiation by mere delivery
● Negotiation by endorsement and delivery. Section 15 talks about the endorsement of instrument when the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annex thereto, or so signs for the same purpose a stamp paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the “endorser.”
An endorsement is completed by the delivery of the instrument to the endorsee.
“An endorsement means an endorsement completed by delivery.”
Types of Endorsement is given under Sec.16(1)
1. Blank of General endorsement: The effect of blank endorsement is to convert the order instrument into a bearer instrument which may be transferred merely by delivery.] 2. The endorsement in full or special endorsement 3. Partial endorsement – Sec.56 prohibits 4. Restrictive endorsement (Sec.50) – [ the endorsee cannot further negotiate] 5. Conditional endorsement (Sec.52): The law permits a conditional endorsement and therefore, therefore, it does not in any way affect the negotiability of the instrument. 6. Sans recourse endorsement (Sec.52) – The endorser expressly excludes his own liability on the NI to the endorsee or any subsequent holder in case of dishonor of the instrument. 7. Facultative endorsement: The endorser expressly gives up some of his rights under the Act. Who are holder and holder in due course? Holder (Sec.8):
● He must be entitled to the possession of the instrument in his own name.
● He must be entitled to receive or recover the amount due thereon from the parties liable thereto.
● Where an NI is a bearer one, any person who is in the possession of such an instrument.
● Where an NI is in the name of a partner of a firm, it naturally becomes a holder. Holder in due course (Sec.9):
● Any person who for the consideration paid becomes the possessor of a NI, before its maturity, in good faith; and
● Without any sufficient reason to believe that any defect existed in the title of the person from whom he obtained it. Essentials:
● He must be holder in due course.
● He must be holder for valuation consideration.
● He must become a holder of the NI before the date of maturity.
● He must become a holder of the NI in good faith.
What is dishonor of cheque and what are the penalties in case of dishonor of cheque due to the insufficiency of funds in the account? – Law relating to dishonor of cheque is mentioned from sec.138 to 142 of the Act as amended by Negotiable Instruments (Amendment) Act 2015 which is as follows:
● A person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account.
● The cheque has been issued for the discharge in whole or in part of any debt or other liability.
● The cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity whichever is earlier.
● That the cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of the account id insufficient to honour the cheque or that it exceeds the amount to be paid from that account by an agreement made with the bank
● The payee or the holder in due course of the cheque makes a demand for the said payment by giving notice in writing to the drawer of the cheque within 30 days of the receipt of the information by him from the bank regarding the return of the cheque as unpaid.
● Drawee fails to make the payment within 15 days of the receipt of the said notice.
● When a cheque is presented in the concerned bank by the drawee within the stipulated time i.e within the three months from the date of issue the drawee bank issue ‘ Check Return Memo’ to the payee mentioning the reason for non – payment. Reasons for Dishonour of Cheque.
● Insufficient Funds
● Signature not matching
● Account Closed
● The cheque was presented after three months.
● Payment stopped by the account holder.
● The disparity in the words and figures mentioned in the cheque.
● In the case of a joint account where both signatures are required but only one is there.
● Death of the customer
● The insanity of the customer
● Crossing limit of the overdraft
Features of Negotiable Instruments
Types of Negotiable Instruments
Let us take a look at some of the most common types of negotiable instruments.
● Promissory Note: In this case, the debtor is the one who makes the instrument. And he promises unconditionally to the creditor (or the bearer of the document) a certain sum of money on a specific date.
● Bills of Exchange: This is an order from the creditor to the debtor. This instrument instructs the drawee (the debtor) to pay the payee a certain amount of money. The bill will be made by the drawer (the creditor)
● Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And such a cheque is only payable on demand. It is basically the depositor instructing the bank to pay a certain amount of money to the payee or the bearer of the cheque.
● Easily Transferable: A negotiable instrument is easily and freely transferable. There are no formalities or much paperwork involved in such a transfer. The ownership of an instrument can transfer simply by delivery or by a valid endorsement.
● Must be Written: All negotiable instruments must be in writing. This includes handwritten notes, printed, engraved, typed, etc.
● Time of Payment must be Certain: If the order is to pay when convenient then such an order is not a negotiable instrument. Here the time period has to be certain even if it is not a specific date. For example, it is acceptable if the time of payment is linked with the death of a specific individual. As death is a certain event.
● Payee also must be certain: The person to whom the payment is to be made must be a specific person or persons. Also, there can be more than one payee for a negotiable instrument. And “person” includes artificial persons as well, like body corporates, trade unions, chairman, secretary, etc.
● Others: There are other instruments such as government promissory notes, railway receipts, delivery orders, etc. These can be negotiable instruments by custom or practice of the trade.
Advantages of Negotiable Instrument
● One of the biggest advantages of bills of exchange is that the consideration between the debtor and the creditor is presumed. So we will assume that the purchaser is in debt of the seller, the seller need not prove this fact. Since the bill has been accepted by the debtor the court will assume that such debt legitimately exists.
● The creditor does not have to wait for the maturity period to get the money. He can immediately opt for bill discounting. Or he can endorse the bill to a creditor of his. So his money does not get locked in.
● Accommodation bills enable the businessmen to obtain funds at a low rate of interest to meet any temporary financial shortfalls that may arise from time in business.
Section 138 of the Negotiable Instrument Act
Introduction The object of Sections 138-142 of the Negotiable Instruments Act, 1881 is to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques. Negotiable Instruments Act, 1881
Section 138. Dishonour of cheque for insufficiency, etc., of funds in the account.—Where 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 provision of this Act, be punished with imprisonment for a term which may extend 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.
Classification of Offence An offence committed under Section 138 is a non-cognizable offence (a case in which a police officer cannot arrest the accused without an arrest warrant). Also, it is a bailable offence.
The ingredients of the offence under Section 138 are: (a) cheque is drawn by the accused on an account maintained by him with a banker; (b) the cheque amount is in discharge of a debt or liability, and (c) the cheque is returned unpaid for insufficiency of funds or that the amount exceeds the arrangement made with the bank, the offence standing committed the moment the cheque is returned unpaid.
Conditions precedent for constituting an offence under S. 138 There is three distinct conditions precedent, which must be satisfied before the dishonour of a cheque can constitute an offence and become punishable. (i) The cheque ought to have been presented to the bank within a period of 6 months [3 months]* from the date on which it is drawn or within the period of its validity, whichever is earlier. (ii) The payee or the holder in due course of the cheque, as the case may be, ought to make a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid. (iii) The drawer of such a cheque should have failed to make 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 15 days of the receipt of the said notice. It is only upon the satisfaction of all the three conditions mentioned above and enumerated under the proviso to Section 138 as clauses (a), (b) and (c) thereof that an offence under Section 138 can be said to have been committed by the person issuing the cheque, MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177.
Sentence The sentence prescribed under Section 138 is up to two years or with fine which may extend to twice the amount or with both. What needs to be noted is the fact that power under Section 357(3) CrPC to direct payment of compensation is in addition to the said prescribed sentence, if the sentence of fine is not imposed. The direction to pay compensation can be enforced by default sentence under Section 64 IPC and by recovery procedure prescribed under Section 431 CrPC, Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
Compounding of offence [recording of compromise between the parties] Section 147 makes offence punishable under the provisions of NI Act compoundable.
If the original complainant comes to the Court and says that he is withdrawing himself from prosecution on account of compromise and he has compounded the matter, then the conviction and sentence have to be set aside. No formal permission to compound the offence is required, Rameshbhai Sombhai Patel v. Dineshbhai Achalanand Rathi, 2004 SCC OnLine Guj 469. Though compounding requires consent of both parties, even in absence of such consent, the court, in the interests of justice, on being satisfied that the complainant has been duly compensated, can in its discretion close the proceedings and discharge the accused, Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
Quashing of complaint by the High Court under S. 482 CrPC [inherent powers] If an accused wants the process under Sections 138 and 141 to be quashed by filing a petition under Section 482 CrPC , he must make out a case that making him stand the trial would be an abuse of process of court, Gunmala Sales (P) Ltd. v. Anu Mehta, (2015) 1 SCC 103 . Where to file a case for S. 138 offence?
If cheque delivered for collection through an account If the cheque is delivered for collection through an account, the case will be tried by the court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class within whose local jurisdiction the branch of the bank where the payee or holder in due course, as the case may be, maintains the account is situated. [Section 142(2)(a)]
If cheque presented for payment by payee or holder in due course otherwise through an account In such a situation, the case will be tried by the court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class within whose local jurisdiction the branch of the drawee bank where the drawer of the cheque maintains the account is situated. [Section 142(2)(b)]
Debt or other liability Explanation to Section 138 is abundantly clear that the dishonoured cheque must have been received by the complainant against a “legally enforceable debt or liability”, Nanda v. Nandkishor, 2010 SCC OnLine Bom 54.
Liability of a guarantor The words “any cheque” and “other liability” in Section 138 clarifies the legislative intent. If the cheque is given towards any liability which may have been incurred even by someone else (such as in a case of a guarantor), the person who draws the cheque is liable for prosecution in case of dishonour of the cheque, ICDS Ltd. v. Beena Shabeer, (2002) 6 SCC 426.
Mens rea not required for offence under S. 138 The objective of Parliament was to strengthen the use of cheques, distinct from other negotiable instruments, as mercantile tender and therefore it became essential for Section 138 to be freed from the requirement of proving mens rea [guilty state of mind]. “Stop payment” instructions by the drawer
Case of a post-dated cheque On the faith of payment by way of a post-dated cheque, the payee alters his position by accepting the cheque. If stoppage of payment before the due date of the cheque is allowed to take the transaction out of the purview of Section 138, it will shake the confidence which a cheque is otherwise intended to inspire regarding payment is available on the due date, Goaplast (P) Ltd. v. Chico Ursula D’Souza, (2003) 3 SCC 232.
“Account closed” by the drawer Return of a cheque on account of account being closed would be similar to a situation where the cheque is returned on account of insufficiency of funds in the account of the drawer of the cheque which squarely brings the case within Section 138, NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) 4 SCC 253.
“Signatures do not match” The expression “amount of money … is insufficient” appearing in Section 138 of the Act is a genus and dishonour for reasons such as “account closed”, “payment stopped”, “referred to the drawer” are only species of that genus. Just as dishonour of a cheque on the ground that the account has been closed is a dishonour falling in the first contingency referred to in Section 138, so also dishonour on the ground that the “signatures do not match” or that the “image is not found”, would constitute a dishonour within the meaning of Section 138 of the Act, Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375.
Notice under S. 138 When the notice is sent by registered post by correctly addressing the drawer of the cheque, the mandatory requirement of issue of notice in terms of clause (b) of the proviso to Section 138 of the Act stands complied with. It is needless to emphasize that the complaint must contain basic facts regarding the mode and manner of the issuance of notice to the drawer of the cheque, C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.
Presumption as to service of Notice It is clear from Section 27 of the General Clauses Act, 1897 and Section 114 of the Evidence Act, 1872 that once notice is sent by registered post by correctly addressing to the drawer of the cheque, the service of notice is deemed to have been affected. However, the drawer is at liberty to rebut this presumption, N. Parameswaran Unni v. G. Kannan, (2017) 5 SCC 737.
What if the addressee refuses to receive Notice? The Supreme Court in a catena of cases has held that when a notice is sent by registered post and is returned with postal endorsement “refused” or “not available in the house” or “house locked” or “shop closed” or “addressee not in station” or “intimation served, addressee absent”, due service has to be presumed, N. Parameswaran Unni v. G. Kannan, (2017) 5 SCC 737.
Payment may be made within 15 days of receiving summons if Notice not received
Any drawer who claims that he did not receive the notice sent by post, can, within 15 days of receipt of summons from the court in respect of the complaint under Section 138, make payment of the cheque amount and submit to the court that he had made payment within 15 days of receipt of summons (by receiving a copy of complaint with the summons) and, therefore, the complaint is liable to be rejected, C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.
The presumption under S. 139 Once the execution of cheque is admitted, Section 139 creates a presumption that the holder of a cheque receives the cheque in discharge, in whole or in part, of any debt or other liability, Basalingappa v. Mudibassapa, 2019 SCC OnLine SC 491. This presumption is no doubt rebuttable at trial but there is no gainsaying that the same favours the complainant and shifts the burden to the drawer of the instrument (in case the same is dishonoured) to prove that the instrument was without any lawful consideration, Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375. Note: Presumption under Section 139 is frequently read with Section 118 providing a presumption of consideration, the presumption as to the date on the instrument, etc.
Case of a blank cheque If a signed blank cheque is voluntarily handed over to a payee, towards some payment, the payee may fill up the amount and other particulars. This in itself would not invalidate the cheque. The onus would still be on the accused to prove that the cheque was not in discharge of a debt or liability by adducing evidence. It is immaterial that the cheque may have been filled in by any person other than the drawer if the cheque is duly signed by the drawer, Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197.
Case of a fiduciary relationship between complainant and accused [relationship of trust and confidence]
The existence of a fiduciary relationship between the payee of a cheque and its drawer, would not disentitle the payee to the benefit of the presumption under Section 139, in the absence of evidence of the exercise of undue influence or coercion, Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197.
Rebutting the presumption When an accused has to rebut the presumption under Section 139, the standard of proof for doing so is that of “preponderance of probabilities”. Therefore, if the accused is able to raise a probable defence which creates doubt about the existence of a legally enforceable debt or liability, the prosecution can fail. The accused can rely on the materials submitted by the complainant in order to raise such a defence and it is conceivable that in some cases the accused may not need to adduce evidence of his own, Rangappa v. Sri Mohan, (2010) 11 SCC 441.
Not necessary for the accused to appear in the witness box for rebuttal It is not necessary for the accused to come in the witness box in support of his defence. Section 139 imposes an evidentiary burden and not a persuasive burden, Basalingappa v. Mudibassapa, 2019 SCC OnLine SC 491.
Complainant to prove financial capacity if disputed by accused It is incumbent upon the complainant to prove his financial capacity to extend the loan in question if the accused disputes the same, Basalingappa v. Mudibassapa, 2019 SCC OnLine SC 491.
Complaint by a company The complainant has to be a corporeal person who is capable of making a physical appearance in the court. If a complaint is made in the name of an incorporeal person (like a company or corporation) it is necessary that a natural person represents such juristic person in the court. There may be occasions when different persons can represent the company, Associated Cement Co. Ltd. v. Keshvanand, (1998) 1 SCC 687.
Offence by companies and vicarious liability of officers of the Company Three categories of persons can be discerned from Section 141 who are brought within the purview of the penal liability through the legal fiction envisaged in the section. They are: (1) the company which committed the offence, (2) everyone who was in charge of and was responsible for the business of the company, and (3) any other person who is a director or a manager or a secretary or officer of the company, with whose connivance or due to whose neglect the company has committed the offence, Anil Hada v. Indian Acrylic Ltd., (2000) 1 SCC 1. Section 141 extends criminal liability on account of dishonor of cheque in case of a company to every person who at the time of the offence, was in charge of, and was responsible for the conduct of the business of the company. By a deeming provision contained in Section 141, such a person is vicariously liable to be held guilty for the offence under Section 138 and punished accordingly, SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.
The case against the Directors A director of a company who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable for a criminal offence under the provisions, National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330.
Impleading the Company as accused necessary The commission of offence by the company is an express condition precedent to attract the vicarious liability of others. For maintaining the prosecution under Section 141 of the Act, the arraigning of a company as an accused is imperative. The only exception would be in a case where the company cannot be prosecuted against without obtaining the sanction of a court of law or other authority. In such a case, the trial against the other accused may be proceeded against if ingredients of Sections 138 and 141 are otherwise fulfilled, Aneeta Hada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661.
Necessary averments in a complaint to put vicarious liability For making directors liable for the offences committed by the company under Section 141, there must be specific averments against the directors, showing as to how and in what manner they were responsible for the conduct of the business of the company, National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330.
Offence by a partnership firm and vicarious liability of partners for the purpose of Section 141, a firm comes within the ambit of a company. Partner of a firm is liable to be convicted for an offence committed by the firm if he was in charge of and was responsible to the firm for the conduct of the business of the firm or if it is proved that the offence was committed with the consent or connivance of, or was attributable to any neglect on the part of the partner concerned, Katta Sujatha v. Fertilizers & Chemicals Travancore Ltd., (2002) 7 SCC 655.
Online proceedings At least some number of Section 138 cases can be decided online. If a complaint with affidavits and documents can be filed online, process issued online and the accused pays the specified amount online, it may obviate the need for the personal appearance of the complainant or the accused. Only if the accused contests, need for the appearance of parties may arise which may be through counsel and wherever viable, video-conferencing can be used. Personal appearances can be dispensed with on suitable self-operating conditions. This is a matter to be considered by the High Courts and wherever viable, appropriate directions can be issued, Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
Interim compensation to the complainant Section 143-A empowers the Court trying an offence under Section 138, to order the drawer of the cheque to pay interim compensation to the complainant which shall not be more than 20% of the amount of the cheque. Such interim compensation has to be paid by the drawer within a period of 60 days (extendable by 30 days) from the date of the order directing such compensation. Such compensation may be recovered as if it were a fine under Section 421 CrPC. If the drawer of the cheque is acquitted, the complainant has to repay the amount of such compensation received within 60 days (extendable by 30 days) from the date of the acquittal order. The complainant has also to pay interest on such amount at the bank rate as published by RBI prevalent at the beginning of the relevant financial year.
Payment pending appeal against conviction
A drawer of cheque who is convicted under Section 138, may file an appeal against his conviction. In such a case, by the provision of Section 148, the Appellate Court can order him to deposit such sum which shall be at least 20% of the compensation or fine awarded by the trial court. Such amount is payable in addition to any interim compensation paid under Section 143-A. The Court can release such amount to the complainant at any time during the pendency of the appeal. In the case of the appellant’s acquittal, the complainant has to repay the amount to him in the same manner as mentioned above under “interim compensation to the complainant”.
Mediation for Offence under Section 138 of Negotiable Instruments Act, 1881
Case name: Dayawati v. Yogesh Kumar Gosain (Delhi High Court)
In a remarkable judgment passed by the Delhi High Court, the Court has drawn a distinction between traditional criminal cases and offence under Section 138 of Negotiable Instruments Act, 1881 (hereinafter referred to as NI Act) to hold that it is legal to refer a criminal compoundable case as one under Section 138 of NI Act to mediation.
The Court in the case also expounded the procedure that is to be followed in cases of mediation for offences under Section 138 of NI Act and also delineated the contents of the settlement.
In the case, the Court held that it is legal to refer a criminal compoundable case as one under Section 138 of NI Act to mediation.
SC Issues Directions for Speedy Disposal of Dishonor of Cheque Cases
Case Name: M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta
In this case, the Two-Judge Bench of Supreme Court made some key observations regarding dishonor of cheque cases and also issued directions for speedy disposal of cheque cases under Section 138 of NI Act.
Use of modern technology for speedy disposal of cases– The Court took into consideration the use of modern technologies for enabling speedy disposal of cases under Section 138 of NI Act and noted that the use of modern technology needs to be considered not only for paperless Courts but also to reduce overcrowding of Courts. There appears to need to consider categories of cases that can be partly or entirely concluded “online” without the physical presence of the parties by simplifying procedures where seriously disputed questions are not required to be adjudicated. Traffic challans may perhaps be one such category.
At least some number of Section 138 cases can be decided online. If a complaint with affidavits and documents can be filed online, process issued online and accused pays the specified amount online, it may obviate the need for the personal appearance of the complainant or the accused. Only if the accused contests, need for the appearance of parties may arise which may be through Counsel and wherever viable, video conferencing can be used. Personal appearances can be dispensed with on suitable self-operating conditions.
Only Handing over of Dishonored Cheque does not Attract Offence under Section 138 of NI Act
Case name- Smt. Asha Baldwa v. Ram Gopal
In the case, the Petitioner had instituted petition under Section 482 of CrPC for quashing of the entire proceeding of criminal case qua the petitioner for offence under Section 138 of NI Act.
In the case, it was alleged that the dishonored cheque was handed over to the present respondent by the petitioner and, therefore, she was a consenting party to the act of giving the cheque and hence responsible for any proceedings in consequence of giving the cheque.
The Petitioner in the case contended that as per Section 141(2) of the Negotiable Instrument Act, 1881 the allegation can only be leveled against the Company or its partners or its Directors only when the offence was committed with the consent or connivance or, is attributable to, any neglect on the part of, any director, manager, secretary or partners.
Case to be Instituted at the Place where Branch of the Bank on which Cheque was drawn is located
Case name: Dashrath Roopsingh Rathod Vs. State of Maharashtra & Anr.
In this case, the Supreme Court changed the basic criteria under Section 138 of Negotiable Instruments Act which is to prosecute a person who had presented the cheque which had been returned due to the insufficiency of funds or if the amount exceeds the amount in the bank of the payer.
Earlier, a case under Section 138 could be initiated by the holder of the cheque at his place of business or residence. But, a bench of justices TS Thakur, Vikramjit Sen, and C Nagappan ruled that the case has to be initiated at the place where the branch of the bank on which the cheque was drawn is located.
And the judgment would apply retrospectively. This means lakhs of cases pending in various courts across the country would witness an interstate transfer of cheque bouncing cases.
The bench said: “In this analysis, we hold that the place, situs or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank is located.”
Supreme Court on Object behind Enactment of Section 138 of NI Act
Case name: Dalmia Cement (Bharat) Ltd vs M/S.Galaxy Trades & Agencies Ltd.
The Supreme Court in the case while stressing on the object behind the enactment of Section 138 of NI Act stated that the provision was incorporated with a specified object of making a
special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned. The law relating to a negotiable instrument is the law of commercial world legislated to facilitate the activities in trade and commerce making provision of giving sanctity to the instruments of credit which could be deemed to be convertible into money and easily passable from one person to another. In the absence of such instruments, including a cheque, the trade, and commerce activities, in the present day would, are likely to be adversely affected as it is impracticable for the trading community to carry on with it the bulk of the currency in force.
Bank’s Role when Signature on the Cheque is Forged
Case Name: Canara Bank vs Canara Sales Corporation & Ors.
The Supreme Court while analyzing the Supreme Court’s role in the case stated that “when a cheque which is presented for encashment contains a forged signature the bank has no authority to make payment against such a cheque. The bank would be acting against law in debiting the customer with the amounts covered by such cheques.
Bhaskaran v. Shankaran Vaidhyan Balan
In this case, the Two-Judge Bench of the Supreme Court had held that the offence under Section 138 of the NI Act can be completed only with the concatenation of a number of acts. However, this ruling was overruled by the Supreme Court’s judgment in the Dashrath Roop Singh case.
A negotiable instrument is supposed to be dishonored when the drawee declined to receive it or to make a sum upon it. In both cases, the holder is entitled to sue in contradiction of the drawer and endorser. Notice of dishonor is given to all parties except maker of the note, acceptor of bill or drawee of the cheque. Notice of dishonor designates that the instrument has been dishonored and that the person served with the notice will be held liable. Notice of dishonor is not necessary to give where it is distributed with by the party entitled to it, or where the party charged could not suffer damage for want of notice.