dishonour of cheque

Case BriefsHigh Courts

Bombay High Court: Rohit B. Deo, J. allowed a petition filed against the order of the trial court whereby it had issued process against the accused-petitioners for the offence punishable under Section 138 (dishonour of cheque) of the Negotiable Instruments Act, 1881.

The accused were a company registered under the Companies Act and its Managing Director and Chief Financial Officer. The accused contended that the company was registered with the Board for Industrial and Financial Reconstruction (BIFR), and was declared a “sick unit” on 16-7-2009, and a direction under Section 22-A of the Sick Industrial Companies (Special Provision) Act, 1985, restraining the company from disposing of its assets was issued.

The company entered into certain contracts with the complainant-respondent and issued 12 cheques in complainant’s favour in regard to the said agreements. Subsequently, the complainant presented the cheques for encashment which were dishonoured and therefore after codal formalities, the complaint was filed under Section 138 NI Act. The trial court passed an order issuing process under the said offence. The accused challenged the order of the trial court on several grounds. The thrust of the submissions of Senior Counsel Anil Mardikar, representing the accused was that in view of the decision Kusum Ingots &Alloys Ltd. v. Pennar Peterson Securities Ltd., (2000) 2 SCC 745, the ingredients of offence punishable under Section 138 were not established. This submission was on the premise that in view of the proceedings under SICA and the orders passed by the BIFR therein, the accused were precluded from honoring the cheques, even if it is assumed that the cheques were issued towards satisfaction of the existing and legally enforceable debt.

The High Court noted that in Kusum Ingots, the Supreme Court articulated that if before the date on which the cheque was drawn or expiry of the statutory period of 15 days after notice, a restraint order of BIFR under Section 22-A was passed against the company, then it cannot be said that the offence under Section 138 of the Act was completed. The reasoning of the Supreme Court was that the failure to make the payment would be for reasons beyond the control of the accused and it may also be contended that the amount claimed is not recoverable from the assets of the company in view of the ban order passed by the BIFR.

However, Shilpa Tapdiya, Advocate appearing for the complainant contended the provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 came into force in 2016, the proceedings pending before the BIFR stood abated in view of the provisions of Section 4(b) of the Repeal Act. The submission was that in view of the repeal, the proceedings initiated under Section 138 of the Act were not barred and no exception could be taken to the order of issuance of process dated 20-04-2018.

The High Court found itself unable to countenance the said submission. It was held: “The statutory immunity available under Section 22 of the SICA Act may not be available w.e.f. 1-12-2016. However, in view of the observations in Para 19 of Kusum Ingots, it must be held that the offence under Section 138 of NI Act was not complete and the order of issuance of process is unsustainable. The offence is not complete, not because there was a statutory bar, but as explained by the Supreme Court, because the directors of the company were prevented by reasons beyond their control from honouring the cheques. The repeal of SICA, cannot breathe life in the complaint which was still born since the offence was not complete as on the date of the issuance of process by the learned Magistrate.”

In view of that the effect of the restraint order under the SICA which was in force prior to the issuance of the cheque, and in any event prior to the expiry of the statutory period and having found merit in the submission that the offence under Section 138 of the NI Act was not complete, it was held that the order of issuance of process was liable to be quashed. Orders were made accordingly.[NRC Ltd. v. Fuel Corpn. of India, 2019 SCC OnLine Bom 1222, decided on 09-07-2019

Case BriefsHigh Courts

Himachal Pradesh High Court: Vivek Singh Thakur, J. disposed of a petition relating to dishonour of cheques wherein the petitioner wilfully confessed on payment of the remaining amount to the respondent.

In the instant case, the petitioner/accused was convicted by the learned Judicial Magistrate 1st Class, Shimla and had served simple imprisonment for six months and was subjected to payment of a fine amount for dishonour of cheques. The petitioner had borrowed money from respondent which was due from his end. 

The counsel representing the petitioner, Parmod Singh Thakur stated that the amount of compensation that was awarded by the lower court being Rs 65,000, Rs 10,000 of which has been paid by cash and the remaining amount was deposited with the Registry of the High Court in installments and thereby, he intends to compound the matter and not contest the matter any further. The Counsel also submitted that the interest amount was also deposited to the Himachal Pradesh State Legal Services Authority and requested the Court to release the amount deposited in favour of the respondents.

The counsel representing the respondents, Seema Guleria, did not object to the compounding of the case and the compromise arrived and stated that the compromise arrived between the parties was out of the free will and no coercion, pressure, or threat was involved therein.

The High Court took note of the submissions of both the parties and directed the Registry to release the amount in favour of the respondents. The High Court also considered the entire amount deposited by the petitioner and the part amount being handed to the respondents by cash and the 15% of cheque amount payable to the Himachal Pradesh State Legal Services Authority.[Mohan Lal v. Golf Link Finance and Resort Ltd., 2019 SCC OnLine HP 912, decided on 02-07-2019]

Case BriefsHigh Courts

Bombay High Court: V.M. Deshpande, J. dismissed an appeal filed against the order of the trial judge whereby he rejected the appellant’s application for condonation of delay in filing a complaint for an offence under Section 138 (dishonour of cheque) of the Negotiable Instruments Act, 1881.

Firstly, a complaint was filed for offence under Section 138 of the Negotiable Instruments Act by the appellant. Thereafter, he filed an application under Section 143(b) and the said was registered separately.

Notices on the said applications were issued. No step was taken by the appellant to serve the non-applicants. Not only that, he remained continuously absent. Consequently, the trial judge found that the appellant was not interested in prosecuting the case and, therefore, dismissed the application for condonation of delay as well as the complaint. Against the said, the present criminal appeal was filed.

The High Court observed: “When the complaint and/or proceedings are filed by the litigant before the Court of law, it is the onerous duty to prosecute the same diligently. The applicant cannot be dormant for years together as observed in the present case.” The Court opined that unless and until the non-applicants were served in the proceedings before the trial court, the said proceedings could not proceed further. Since it was a private complaint, it was the duty of the appellant to take all necessary steps to serve the non-applicants. It was said: Unnecessary filing of complaints and/or after filing of complaints, no step is taken and, therefore, the Courts are unnecessarily burdened and learned Judge below is unable to devote time for the litigants who are diligently prosecuting their proceedings has to remain in the queue.”

In such view of the matter, the Court dismissed the present appeal imposing costs of Rs 5000 on the appellant. [Ramzan Khan v. Khadim Tours and Travels, 2019 SCC OnLine Bom 709, decided on 24-04-2019]

Case BriefsHigh Courts

Bombay High Court: K.K. Sonawane, J. dismissed a criminal application filed under Section 432 CrPC seeking relief of quashing the order passed by Additional Sessions Judge directing the applicant to deposit Rs 2 lakhs towards part of the compensation awarded by Magistrate (First Class) while convicting him for an offence punishable under Section 138 (dishonour of cheque) of the Negotiable Instruments Act, 1881.

The applicant was convicted for an offence of dishonour of cheque and he was awarded a sentence 1-year simple imprisonment along with deposition of compensation amounting to Rs 6.5 lakhs. The applicant appealed against the order of the trial court. The Additional Sessions Judge, while admitting his appeal, suspended the sentence of imprisonment and directed him to deposit Rs 2 lakhs as part of the compensation before the next date.

Sharikh Mazhar A. Jahagirdar, Advocate for the applicant contended that the Appellate Court had no jurisdiction to impose the condition of part payment of compensation, pending the appeal. Per contra, M.L. Sangeet, Advocate represented the respondent.

The High Court was of the view that the submissions made on behalf of the applicant were not sustainable. The Court relied on the Supreme Court decisions in Hari Singh v. Sukhbir Singh, (1988) 4 SCC 551, Dalmiya Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd., (2001) 6 SCC 463; and Stanny Felix Pinto v. Jangid Builders (P) Ltd., (2001) 2 SCC 416. Considering the law laid down in these cases, the High Court observed that: “it is evident that while suspending the sentence for the offence under Section 138 of NI Act, it is advisable that the appellate Court imposes the condition of deposit of compensation, keeping in mind the provisions of Section 138 of NI Act. When the amount of compensation is heavy, the Court can direct the deposit of a reasonable amount. Only in exceptional cases, the Appellate Court can grant interim protection without requiring a deposit of compensation amount.”

In such view of the matter, finding no reason to interfere in the impugned order, the Court dismissed the application. [Rahul Kisan Khande v. Samir Salim Shaikh, 2019 SCC OnLine Bom 834, decided on 02-04-2019]

Case BriefsHigh Courts

Tripura High Court: The Bench of Arindam Lodh, J. allowed a revision petition under Section 397 read with Section 401 of Code of Criminal Procedure, 1973 and set aside the lower courts’ order acquitting the accused in a case filed under Section 138 of the Negotiable Instruments Act, 1881.

Petitioner herein (complainant before lower court) gave a loan of Rs 3.6 lakhs to the accused in three installments against which the respondent issued three post-dated cheques. When the petitioner tried to encash these cheques, they were dishonoured with the remark ‘insufficient funds’ in the account of the respondent. The petitioner served a statutory demand notice upon the respondent which went unresponded. Thereafter, he filed a complaint in the Trial Court charging the accused for dishonour of cheque. The Trial Court dismissed the case holding that the demand notice was invalid as it did not bear the signatures of petitioner’s Advocate.  Respondent’s acquittal was affirmed and upheld by the learned Sessions Judge. Aggrieved thereby, the instant revision petition was filed.

The Court opined that the decisions arrived at by the lower courts were perverse and unwarranted on both the points of facts and law, hence not sustainable. It was held that Section 138 proviso (b) does not stipulate that the notice is to be sent through an advocate. Further, each page of the demand notice had been signed by the complainant himself, and thus it was a valid notice in terms of Section 94 of the NI Act. It was observed that the object of notice of dishonor of cheque to endorser is not to demand payment, but to indicate to the party notified that his contract arising on the negotiable instrument has been broken and he is liable for payment.

Reliance was placed on Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd., 2016 SCC Online SC 954, where it was held that a post-dated cheque issued as security towards payment of installments of a loan transaction falls within the purview of Section 138 NI Act. In view thereof, it was held that the respondent was liable under Section 138 of NI Act, and he was ordered to pay a fine of Rs 3,60,000 to the petitioner as compensation, failing which, he would be sentenced to simple imprisonment of six months.[Subal Chandra Ghosh v. State of Tripura, 2019 SCC OnLine Tri 134, decided on 25-04-2019]

Law made Easy

[Disclaimer: This note is for general information only. It is NOT to be substituted for legal advice or taken as legal advice. The publishers of the blog shall not be liable for any act or omission based on this note]

Introduction

Over the years there have been many important changes in the way cheques are issued/bounced/dealt with. Commercial globalisation has resulted in giving a big boost to our country. With the rapid increase in commerce and trade, use of cheque also increased and so did the cheque bouncing disputes.[1] 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.[2]

Section 138 casts a criminal liability punishable with imprisonment or fine or with both on a person who issues a cheque towards discharge of a debt or liability as a whole or in part and the cheque is dishonoured by the bank on presentation.[3] Section 138 was enacted to punish unscrupulous drawers of cheques who, though purport to discharge their liability by issuing cheque, have no intention of really doing so. Apart from civil liability, criminal liability is sought to be imposed by the said provision on such unscrupulous drawers of cheques. However, with a view to avert unnecessary prosecution of an honest drawer of the cheque and with a view to give an opportunity to him to make amends, the prosecution under Section 138 of the Act has been made subject to certain conditions. These conditions are stipulated in the proviso to Section 138.[4]

In criminal law, commission of offence is one thing and prosecution is quite another. Commission of offence is governed by Section 138 of the Act. Prosecution is governed by Section 142 of the Act.[5] It is also noteworthy that Section 138 while making dishonour of a cheque an offence punishable with imprisonment and fine, also provides for safeguards to protect drawers of such instruments where dishonour may take place for reasons other than those arising out of dishonest intentions. It envisages service of a notice upon the drawer of the instrument calling upon him to make the payment covered by the cheque and permits prosecution only after the expiry of the statutory period and upon failure of the drawer to make the payment within the said period.[6]

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.

Cases

Ingredients

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.

Further steps laid down by way of the proviso are distinct from the ingredients of the offence which the enacting provision creates and makes punishable. Thus, an offence within the contemplation of Section 138 is complete with the dishonour of the cheque but taking cognizance of the same by any court is forbidden so long as the complainant does not have the cause of action to file a complaint in terms of clause (c) of the proviso read with Section 142, Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129.

 Conditions precedent for constituting an offence under S. 138

There are 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 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 liablity” 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]. This has been achieved by deeming the commission of an offence dehors mens rea not only under Section 138 but also by virtue of the succeeding two sections. Section 139  carves out the presumption that the holder of a cheque has received it for the discharge of any liability. Section 140 clarifies that it will not be available as a defence to the drawer that he had no reason to believe, when he issued the cheque, that it would be dishonoured, Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129.

Can a case be filed if the cheque is presented for encashment more than once?

The holder or payee of the cheque may present the cheque for encashment on any number of occasions within the period of its validity [three months from the date of issue]. A dishonour, whether based on a second or any successive presentation of a cheque for encashment, would be a dishonour within the meaning of Section 138, MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177.

“Stop payment” instructions by the drawer

A complaint under Section 138 can be made not only when the cheque is dishonoured for reason of funds being insufficient to honour the cheque or if the amount of the cheque exceeds the amount in the account, but also where the drawer of the cheque instructs its bank to “stop payment”. If the accused shows that in his account there were sufficient funds to clear the amount of the cheque at the time of presentation of the cheque and that the stop-payment notice had been issued because of other valid causes, then offence under Section 138 would not be made out, MMTC Ltd. v. Medchl Chemicals and Pharma (P) Ltd., (2002) 1 SCC 234.

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 being 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 proviso to Section 138 of the Act stands complied with. It is needless to emphasise 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 effected. However, the drawer is at liberty to rebut this presumption, N. Parameswaran Unni v. G. Kannan, (2017) 5 SCC 737.

 What if 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.

 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 presumption of consideration, presumption as to 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 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 accused to appear in 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.

Defect can be rectified later

Even if initially there was no authority given by the company in favour of the de facto complainant, still the company can, at any stage, rectify that defect. At a subsequent stage the company can send a person who is competent to represent the company, MMTC Ltd. v. Medchl Chemicals and Pharma (P) Ltd., (2002) 1 SCC 234.

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.

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, 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 sanction of a court of law or other authority. In such case, 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 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.

Case of a Managing Director and signatory of a cheque

Specific averments against the Managing Director or Joint Managing Director are not required to be made in the complaint. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under sub-section (2) of Section 141, SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.

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 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 personal appearance of the complainant or the accused. Only if the accused contests, need for 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 pendency of the appeal.

In case of 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”.

Further Suggested  Reading

1. Avtar Singh –

2. Bimal N. Patel – Banking Law and Negotiable Instruments Act [Buy here]

3. Surendra Malik and Sudeep Malik – Supreme Court on Dishonour of Cheques And Negotiable Instruments (in 2 Volumes)[Buy Here]

4. Sumeet Malik – P.L. Malik’s NEGOTIABLE INSTRUMENTS ACT, 1881 with Exhaustive notes on Dishonour of Cheques [Buy Here]

Read also from SCC Online Archives

Del HC | No reason to stay proceedings under S. 138 NI Act where trial in another FIR involving the parties is pending

Kar HC | Presence of a legally recoverable debt at the time of issuing cheque is a necessity for an action under S. 138 NI Act

Madras HC | Presumption under S. 139 NI Act not available in case of principal-agent relationship between accused and complainant

NCLAT | Section 138 NI Act proceedings not covered within the period of moratorium under Section 14 IBC

P&H HC | Section 138 of NI Act and Section 420 IPC not exclusive to each other, a person can be charged with both offences simultaneously

† Assistant Editor (Legal), EBC Publishing Pvt. Ltd.

[1] Law Commission of India, 213th Report, Fast Track Magisterial Courts for Dishonoured Cheque Cases, November 2008.

[2] Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249.

[3] SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.

[4] C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.

[5] William Rosario Fernandes v. Cabral & Co., 2006 SCC OnLine Bom 918.

[6] Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375.

* The period of “six months” mentioned in S. 138 proviso (a) remains unchanged as there has been no amendment in this regard. However, RBI vide Circular RBI/2011-12/251 DBOD AML BC No. 47/14.01.001/2011-12, dated 4-11-2011, has changed the default period within which a cheque may be presented for payment, from a period of six months from the date of the instrument, to a period of only three months from such date, w.e.f. 01-04-2012.

Case BriefsHigh Courts

Delhi High Court: Sunil Gaur, J. dismissed a petition seeking quashing of a complaint filed under Section 138 (dishonour of cheque) of the Negotiable Instruments Act, 1881, with a liberty to the petitioner to raise his pea before the trial court.

The petitioner sought quashing of the complaint by recourse to Section 142(1)(a). Rakesh Taneja, Advocate for the petitioner submitted that the subject cheques were issued in the name of one Raj Pal Kapoor, but the complaint was filed by Kapoor Jewel mines (P) Ltd. It was pointed out that there were no averments in the complaint as to how Kapoor Jewel Mines became a holder in due course of the subject cheques. Per contra, Harjinder Singh and Ravinder Singh, Advocates for Kapoor Jewel Mines contended that the present petition deserved dismissal.

The High Court held that ascertaining how the holder of the subject cheques became a holder in due course is an aspect which cannot be pre-judged at the initial stage, and is required to be considered after the evidence is recorded. It was said: “Section 9 of the Negotiable Instruments Act, 1881 defines the ‘holder in due course’ and its import cannot be pre-judged.”

The Supreme Court in Laxmin Dychem v. State of Gujarat, (2012) 13 SCC 375, has reiterated that unless the contrary is proved, the presumption shall be made that the holder of a negotiable instrument is the holder in due course. Applying the dictum to the present facts, the High Court did not find it to be a fit case to quash the complaint as the plea raised by the petitioner was required to be tested at the trial. Thus the petition was dismissed. The petitioner was however given liberty to raise his plea before the trial court at the appropriate stage. [Jagdish Chander v. Kapoor Jewel Mines (P) Ltd., 2019 SCC OnLine Del 8292, decided on 24-04-2019]

Case BriefsHigh Courts

Madras High Court: G. Jayachandran, J., dismissed an appeal directed against the judgment of the first Appellate Court whereby it had reversed the conviction and sentence of the respondent-accused awarded by the trial court for an offence punishable under Section 138 of the Negotiable Instruments Act, 1881 (dishonour of cheque).

As per the appellant-complainant, he had lent Rs 10 lakhs to the accused, who issued three cheques in his favour for discharging his liability. However, on presentation to the bank, the cheques were returned dishonoured with an endorsement “account closed”. Subsequent to codal formalities, a case was filed against the accused and the trial court convicted him for an offence punishable under Section 138. On appeal by the accused, the first Appellate Court acquitted him. Aggrieved thereby, the complainant filed the present appeal.

The High Court noted that the first Appellate Court found that the cheques in question were given to the complainant for payment of taxes and compensation to tenants for vacating certain premises. And a criminal complaint was also filed against the complainant for misappropriation of blank cheques and jewels. On perusing the record, the Court held that a principal-agent relationship was clearly established between the parties. It was observed, “When there is principal-agent relationship, unless and until the material evidence are placed to prove legally enforceable debt, mere issuance of cheques cannot lead to the presumption under Section 139 of the Negotiable Instruments Act.” Stating that the trial court failed to properly consider the defense exhibits, the Court held that there was no merit in the appeal and the impugned order passed by the first Appellate Court required no interference. [G. Dhanasekar v. T.A. Jayaprakash, 2019 SCC OnLine Mad 820, decided on 19-03-2019]

Case BriefsHigh Courts

Delhi High Court: Sanjeev Sachdeva, J., dismissed a petition assailing the Appellate Court’s order whereby it had set aside the judgment of conviction passed against the accused (respondent) by the trial court for an offence under Section 138 of the Negotiable Instruments Act, 1881 (dishonour of cheque).

The complainant (petitioner) alleged that he gave a friendly loan of Rs 4.90 lakhs to the accused and in discharge of such liability, the accused issued a cheque. However, when the cheque was presented to the bank for encashment, it was returned unpaid with the endorsement “insufficient funds”. Subsequently, a complaint under Section 138 was filed and the matter went to trial. The trial court convicted the accused but on appeal, the Appellate Court acquitted him. Aggrieved thereby, the complainant filed the present petition.

The accused was represented by H.G.R. Khattar, Advocate. His defence was that the complainant was employed in the shop of one Subhash Aggarwal. He alleged that the subject cheque was issued in blank to Subhash Aggarwal and the same had been misused. Further, the complainant and his wife earned a monthly income of Rs 15,000 each and they could not have extended a loan of Rs 4.90 lakhs to him.

The High Court was of the view that no error could be found with the Appellate Court’s order. It was observed, “it is very surprising that a person who earns only Rs 15,000 per month would make an arrangement of Rs 4,90,000/- and give the same as a friendly loan. No date of extending the loan or rate of interest at which such loan was extended, has been mentioned. Neither there is any document executed nor the date when the loan was and of its repayment is mentioned.” In the Court’s opinion, the defence raised by the accused was probable and rightly rebutted the statutory presumption. In such view of the matter, the petition was dismissed and the impugned order was upheld. [Sanjay Verma v. Gopal Halwai, 2019 SCC OnLine Del 7572, decided on 15-03-2019]

Case BriefsHigh Courts

Calcutta High Court: Asha Arora, J., allowed a criminal revision petition filed against the order of conviction and sentence awarded to the petitioners for the offence under Section 138 of the Negotiable Instruments Act, 1881 (dishonour of cheque).

To cut the matter short, the present was a cheque bounce matter. The complainants had filed under Section 138 against the petitioners alleging that Alok Bhagat (Petitioner 2), who was the authorised signatory of Adeptics, a partnership firm, issued a cheque for Rs 1.5 lakhs for receiving goods from complainant’s factory. However, when presented to the bank, the said cheque got dishonoured with the endorsement–payment stopped by the drawer. A demand notice was sent but the petitioners failed to make payment. The matter went to trial and the petitioners were convicted and sentenced. In the appeal, their conviction was maintained but the sentence was modified. Aggrieved still, the petitioners filed the present revision petition.

The petitioners were represented by Ayan Bhattacharya, Ozair Elahi and Sharequl Haque, Advocates. It was pointed out that the cheque was issued by the firm and signed by Mr Bhagat as an authorised signatory. It was argued that to fasten liability upon the partners/directors of a firm/company, impleading it as an accused is imperative. Per contra, Kajal Mukherjee, Surajit Basu and Bikash Chakraborty, Advocates appearing for the complainant opposed the present petition.

The High Court noted that the cheque does not show that it was issued by Mr Bhagat in his personal capacity. It was signed on behalf of the firm as authorised signatory. After discussing Sections 7 and 138 along with Aneeta Hada v. Godfather Travels and tours (P) Ltd., (2012) 5 SCC 661, the High Court observed, “Curiously enough, though the cheque clearly shows that it was issued on behalf of Adeptees, no notice of demand was served on the said firm and the complaint was filed only against the petitioners without the mandatory requirement of impleading the company/firm as one of the accused.” Complainants argued that no such plea was taken before the trial court or the lower appellate court. However, relying on Ajit Balse v. Ranga Karkare, (2015) 15 SCC 748, the High Court rejected the argument. Resultantly, the revision petition was allowed and the impugned judgments were set aside. [N.K.Bhagat v. Biswanath Dey, 2019 SCC OnLine Cal 326, dated 11-03-2019]

Case BriefsHigh Courts

Delhi High Court: The Bench of R.K. Gauba, J. interfered with the impugned order passed by Metropolitan Magistrate and quashed the summon issued against petitioner.

Petitioner was a Non-Executive Nominee Director of Vasan Health Care (P) Ltd. A complaint was filed against certain persons including petitioner under Section 138 of the Negotiable Instruments Act, 1881 for dishonour of cheque which was issued on the account of Vasan Health Care. In regard to the same, summoning orders were issued against the petitioner.

Sushil Bajaj and Shalin Arthwan, Advocates for the petitioner contended that proceedings against him were an abuse of the process of law as his position in the company was only that of aNon-Executive Nominee Director and he had no role to play in day-to-day affairs of the company.

The High Court served notice of the petition on the respondent but they did not file any reply and nor did they appear before the Court. As such, the Court accepted as indisputable the documents filed by the petitioner confirming his position in the company as claimed by him. Relying on Pooja Ravinder Devidasini v. State of Maharashtra, (2014) 16 SCC 1, the Court held that since at the relevant time, the petitioner could not be said to be at helm of the affairs of the company, therefore no vicarious liability could be fastened on him. As such, the summoning order issued against the petitioner was quashed. [Bhardwaj Thirvenkata Venkatavaraghavan v. PVR Ltd., 2019 SCC OnLine Del 6774, dated 29-01-2019]

Case BriefsHigh Courts

Delhi High Court: The Bench of Sunil Gaur, J. refused to invoke the inherent extraordinary jurisdiction of the High Court under Section 482 CrPC.

Petitioners, represented by Akshay Bhatia and Avinash Das Advocates, had prayed for quashing of complaints filed under Section 138 of the Negotiable Instruments Act, 1881 (for dishonour of cheque). The quashing was sought on merits.

N.K. Aggarwal and Priya Pachouri, Advocates appeared for the respondents. It was informed to the Court that notice under Section 251 CrPC had been already framed and petitioners had also given their defence.

Since petitioners had an efficacious remedy to assail the notice framed under Section 251, the High Court refrained from invoking its inherent extraordinary jurisdiction under Section 482. The petitioners were given liberty to assail the notice before the Revisional Court within a period of four weeks. The petition was disposed of accordingly without commenting on merits. [Anand and Associates v. Jugal Kishore Jain, 2019 SCC OnLine Del 6708, Order dated 15-01-2019]

Case BriefsHigh Courts

Madras High Court: The Bench of M.V. Muralidharan, J. upheld the order of respondent’s acquittal for an offence punishable under Section 138 of Negotiable Instruments Act, 1881 while holding that “the different ink, pen, and manipulation of the amount would show that the complainant had failed to demonstrate due execution of the cheque.”

The present appeal was directed against the judgment of acquittal passed by the Additional District Judge reversing the conviction of the respondent under Section 138 (for dishonour of cheque).

Appellant submitted that respondent borrowed a sum of Rs 1,50,000 from him and issued a cheque drawn on ING Vysya Bank towards his liability to repay the same. However, the cheque was dishonoured. The appellant initiated the process under Section 138 and the trial court convicted the respondent holding him guilty. The respondent appealed to the ADJ who reversed his conviction as mentioned above.

The High Court observed that presumption in favour of complainant contemplated under Sections 118 and 139 of NI Act comes to play only on the satisfaction of Court that the cheque in question was duly executed. It was explained that “execution” of the cheque does not mean the mere handing over a “blank cheque”, but it means that the cheque is given in the full form, ” the complainant cannot be justified in doing material alteration beyond the knowledge of the accused.”

It was stated, it would be certainly unlawful if a complainant is allowed to fill up details of cheque beyond the knowledge of the accused such as filling up date and amount in a blank cheque.” In the present case, figure denoting the amount was found to be written in different inks and also the handwriting in as much as digits and words were concerned also differed. In such view of the matter of the Court did not find any illegality in the impugned order. Thus, the petition was dismissed. [E. Dhanuskodi v. D. Sreedhar, 2018 SCC OnLine Mad 5124, dated 08-11-2018]

Case BriefsHigh Courts

Delhi High Court: The Bench of Sunil Gaur, J. held that the trial court did not commit any error while summoning the petitioners in relation to a complaint under Section 138 of the Negotiable Instruments Act, 1881 (dishonour of cheque).

Petitioners were independent directors of the accused company. MIC Electronics Ltd. They challenged the complaint filed under Section 138 and the consequent summoning order against them the ground that they were not in charge of the day-to-day business of MIC Electronics.

Vikas Gupta and Vipin Kalra, Advocates representing the petitioners submitted that they cannot be summoned in the complaints in question. Per contra, Satinder Singh Mathur, Advocate for the complainant submitted that there was an allegation that petitioners responsible for the day-to-day functioning of MIC Electronics.

The High Court referred to Standard Chartered Bank v. State of Maharashtra, (2016) 6 SCC 62 wherein the Supreme Court had permitted summoning of directors of the accused company. In the present case, since there were allegations against the petitioners as mentioned above, therefore the Court found no case to quash the complaint and summoning order. The petitions were disposed of by giving liberty to the petitioners to appear through their attorneys and counsels. [Somendra Khosla v. State, 2019 SCC OnLine Del 6585, Order dated 09-01-2019]

Case BriefsSupreme Court

Supreme Court: In the matter where the question as to whether the dishonour of a post-dated cheque given for repayment of loan installment which is also described as “security” in the loan agreement is covered by Section 138 of the Negotiable Instruments Act, 1881, was before the bench of Dipak Misra and A.K. Goel, JJ, it was held that the dishonour of cheque for discharge of existing liability is covered by Section 138 of the Act. The Court further explained that the question whether a post-dated cheque is for “discharge of debt or liability” depends on the nature of the transaction. If on the date of the cheque liability or debt exists or the amount has become legally recoverable, the Section is attracted and not otherwise.

As per the facts of the case, the loan agreement in question recorded that post-dated cheques towards payment of installment of loan (principal and interest) were given by way of security. The clause of the Agreement that came up for consideration was “The loan together with the interest, interest tax, liquidated damages, commitment fee, upfront fee prima on repayment or on redemption, costs, expenses and other monies shall be secured by deposit of Post-dated cheques towards repayment of installments of principal of loan amount in accordance with agreed repayment schedule and installments of interest payable thereon.”

Interpreting the word “security” is used in the said clause, the Court held that the said expression refers to the cheques being towards repayment of installments. The repayment becomes due under the agreement, the moment the loan is advanced and the installment falls due. Once the loan was disbursed and installments have fallen due on the date of the cheque as per the agreement, dishonour of such cheques would fall under Section 138 of the Act. [Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd., , 2016 SCC OnLine SC 954, decided on 19.09.2016]

Supreme Court

Supreme Court: In the present appeal, under special leave, against the decision of the Bombay High Court which rejected the petition of the appellant for quashing complaints, filed against her under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 accruing vicarious liability for the dishonored cheques granted in the name of company of which she was a director, was allowed.

The counsel for the appellant argued that the appellant was a mere house-wife and had no active role in the working of the company or decisions of the board as a non-executive director. Moreover on the time of issuing of cheques the appellant had resigned from the functions of company, and new directors were appointed in her place, all the more her resignation was approved by the board of directors and she was arbitrarily dragged into criminal proceedings despite the knowledge of the said fact.

The respondent argued that the resignation of the appellant was a disputed. The respondents had made loans made to the company based on her personal guarantee as director of the company, cheques in lieu of payment of which were dishonored.

The bench headed by Sudhansu Jyoti Mukhopadhyay and N.V. Ramana,JJ., held that to pose vicarious liability on appellant it was necessary to object specific averments towards her. Liability does not arise only because of the reason that the person is director of the said company if the person was not active in everyday working of the company and decisions of the board as laid down by the Court vide its decision in National Small Industries Corporation v. Harmeet Singh Paintal, (2010) 3 SCC 330.  Moreover, from the evidence it was quite clear that the appellant had not been a director when the cheques were issued from the fact that they did not had sign of the appellant. Further the respondents included names of new directors in the complaint but did not excluded the name of the appellant which signifies the intentional abuse of the process of law. It rapped the High Court and Trial Court for allowing the criminal proceedings and said that criminal proceedings cannot be instituted as a matter of course and the trial and appellate judge had to consider the allegations made and evidence cautiously before calling on such proceedings. Pooja Ravinder Devidasani v. State of Maharashtra, 2014 SCC OnLine SC 1020, decided on 17.12.2014

Supreme Court

Supreme Court: While deciding as to whether mere “bald assertion” under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 that the directors were at the time when the offence was committed in charge of and responsible for the conduct and day-to-day business of the company is sufficient to maintain the said complaint, a bench of Ranjana P. Desai and N.V. Ramana, JJ ruled that company’s directors are personally liable to be prosecuted for a bounced cheque unless they furnish “incontrovertible evidence” that they had no role in issuing it.

In the instant case, on the default of repayment of the amount due by the accused company, the appellants filed a complaint in the Court of Chief Metropolitan Magistrate against the directors of the said company. Aggrieved with the order of the magistrate, the respondents moved to the High Court of Calcutta, which held that apart from making mere “bald assertion”, the complainant has as state as to what part was played by the directors and how they were responsible for the finances of the Company, issuance of cheques, and whether they has control over the funds of the company.

Gurukrishna Kumar, the counsel for the appellant, contended that High Court erred in quashing the proceeding as it is not incumbent upon the complainant to elaborate the role played by each of the directors in the complaint. The Court stated that if any director wants the process to be quashed by filing a petition under Section 482 of the CrPC on the ground that only a “bald assertion” is made in the complaint and that he or she is not concerned with the issuance of the cheque, he or she must furnish “sterling incontrovertible material” or “acceptable circumstances” to substantiate the contention and would have to make out a case that making him stand trial would be an abuse of the process of court. The Court upheld the appeal and remitted the matter to the High Court to hear the parties and consider the matter afresh. Gunmala Sales Pvt. Ltd. v. Anu Mehta, 2014 SCC OnLine SC 848, decided on October 17, 2014.