INTRODUCTION:
"Cheque" has become a widely used instrument in the financial industry. Although verification is widely used by many people due to its accuracy, low risk, and security, it is worth noting that it can also bring some problems and unexpected situations. An example of this is when the account balance may not be sufficient when the check is drawn. Sections 138 to 142 of the Negotiable Instruments Act, 1881 were added to protect usury and ensure justice.
The NI Act was passed in 1881. More than a century later, in 1988, the law was expanded to include Chapter 17, which includes sections 138 through 142. A check is defined as "a bill of exchange drawn on a specified banker and not expressed to. be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form." The definition of a cheque in Section 6 (2) of the Act is very clear and the cheque can also be made electronically.
The terms are used when a check is written for the benefit of others and taken to the bank to receive cash and bounce. If the check is returned due to insufficient funds, penal sanctions will be imposed under Section 138 of the Negotiable Instruments Act, of 1881. If the check is returned because insufficient funds have arrived from the drawer, this will be a violation of Section 138 of the NI Act.
ANALYSIS:
The Hon'ble Court in the case of Dalmia Cement Bharat Limited v. M/s Galaxy Traders and Agencies Limited and others stated that "The negotiable instruments are the instruments of credit being convertible on account of the legality of being negotiated and are easily transferable from one person to another. The legislature, in its wisdom, did consider this point that a provision in the Act be conferred which would have the privileges concerning the mercantile instruments considered under it and provide special penalties and procedures in case the obligations under the instruments are not discharged."
Conditions to commit an offense under Section 138:
Negotiable Instruments are documents that guarantee a certain sum of money that is payable on demand or any future date.
"The section itself contains the components for the circumstances that render dishonoring a cheque an offense. It also offers the following:
- There should be an existence of liability, that a person as a drawer should draw the cheque for the payment to another person who is entitled to such payment.
- The drawee of the cheque should present the cheque to the bank and the same should be returned by the bank due to insufficient or lack of funds.
- The cheque should be presented to the bank by the drawee within six months from the day that it was drawn or within the period of validity, whichever is earlier.
- A "cheque return memo" has to be immediately given to the drawee by the bank in case a cheque is dishonored.
- The cheque holder, who is the payee, is then required to send a demand notice to the cheque drawer requesting the return of the unpaid cheque within 30 days of receiving it.
- The drawer is required to make the payment within 15 days of getting this notice. If the payment is not made within that time frame, the payee may file a lawsuit within 30 days of the 15 days having passed."
If the drawer can make the payment within the allotted 15 days, no penalty will be committed against them. Section 138 of the Act would govern the imposition of punishment solely in situations when the debtor is unable to make payments within the allotted 15 days.
"Section 142 of the Negotiable Instrument Act makes it compulsory that the complaint must be filed by the payee or holder in due course of the check where a Payee is a natural person he can file a complaint and when the pay is a form of a company registered person it must be represented by a natural person."1
Liability under Section 138:
1. Civil
According to section 138 of the Negotiable Instrument Act, a drawer must pay the amount ordered by the court if the payee files a suit under order 37 of the Code of Civil Procedure, 1908, to recover the amount, and the judgment is in the payee's favor. The penalty is twice the amount of the complaint. Offenses punishable under Section 138 may be better described as administrative offenses because backchecking is often similar to civil offenses and its consequences are more limited to the private parties involved.
"The object of bringing Section 138 on statute appears to be to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. 33 Despite civil remedy, Section 138 intended to prevent dishonesty on the part of the drawer of a negotiable instrument to draw a cheque without sufficient funds in his account maintained by him in a bank and induces the payee or holder in due course to act upon it."2
2. Criminal
In case of criminal liability, Section 138 of the Act stipulates imprisonment and a fine. It may extend to two years or a fine which may extend to twice the amount of cheque or both. Section 417 of the Indian penal code, which punishes cheating, and section 420 of the same law will be applied to the drawer of the cheque. The offense is bailable compoundable and non-cognizable.
A "Metropolitan Magistrate" or a "Judicial magistrate First Class" may take cognizance of the case. According to Section 29 of the Criminal Procedure Code, a judicial magistrate of the first class is not allowed to fine more than Rs. 10,000. Therefore, Section 143 (1) of the Negotiable Instrument Act was inserted by the Amendment Act Number 55 of 2002, giving magistrates the authority to fine more than the maximum amount specified by the code, up to twice the amount of a cheque.
Jurisdiction:
Section 138 of the NI Act 1881 provides guidance on which jurisdiction is appropriate for filing a criminal complaint. However, the act does not specify which jurisdiction is appropriate because the Criminal Court has the authority to take up the matter and use Criminal Procedure Code 1973 sections 177 and 178 to resolve it (d).
In 2014 in the case of Dashrath Rup Singh Rathod v. State of Maharashtra and Anr,3 the Hon'ble Supreme Court held that "there is a discernibly defined difference between the commission of an offence and cognizance of the offence. Cognizance leads to cause of action. For Section 138 complaints the cause of action arises only when the drawer fails to pay the defaulted payment."
The Hon'ble Supreme Court further held that "The Complaints can be filed only in the courts within whose jurisdiction the check is presented for encashment."
The Negotiable Instruments (Amendment) statute of 2015 states that "a complaint can be filed under the section 138 of Negotiable Instrument Act for dishonor of cheque at a court within whose local jurisdiction the branch of the bank is located and the payee or the holder maintains an account."
Following are the Practice Directions (Guidelines) issued by the High Court of Andhra Pradesh:4
1. Filing and Scrutiny:
Once the complaint has been filed under Section 138, it shall be scrutinized and it must be accompanied by an affidavit, and documents, if any, and then only cognizance may be taken and further summons may be issued.5
2. No other complaint:
The complainant must mandatorily disclose that no other complaint has been filed relating to the same matter. It must be disclosed through an affidavit which should accompany the complaint filed under Section 200 of Cr.P.C.
3. Physical presence not mandatory:
The physical presence of the complainant or the witness is not mandatory. The Magistrate can reply upon verifications given in the form of an affidavit filed by the complainant in support to the complaint under S. 138.
4. Power of Attorney:
A complainant can be filed through a power of attorney under S. 138 of the NI Act. The POA holder must have witnessed the transactions as agent of the payee/drawee and should have due knowledge of the transaction.6
5. Section 202(1) of Cr.P.C.:
In the case where the accused is staying beyond the territorial jurisdiction of the Court where the complaint is filed, under S. 202 of the Cr.P.C. the court is mandated to an inquiry to decide whether or not there is sufficient ground for proceeding against the accused.7
6. Summary Trials:
Whenever a complaint is filed under S. 138, it must be registered as a Summary Trial as given under Section 143 of the Act. It further states that Sections 262 to 265 of the Criminal Procedure Code shall also apply. The second proviso gives the magistrate the authority to change the summary trial into a summons trial if he believes that a sentence longer than a year may need to be passed or that, after documenting the reasons, a summary trial of the matter is not acceptable. A summary trial is converted to a summons trial in a mechanical manner.
When a case is tried summarily and the accused does not plead guilty, the magistrate only needs to document the main points of the evidence and issue an order that includes a brief justification for his conclusions. The complaint will only be heard as a summons trial if the magistrate determines that it could be necessary to sentence the accused to a term longer than a year. The goal of Section 143 of the Act is to expedite the resolution of complaints under Section 138 by, to the greatest extent feasible, adhering to the Code's authorized method for summary trial.
7. Summons:
The following points are to be considered while issuing summons:
The summons must be properly addressed. In case, it is received back unserved then, immediate follow-up action should be taken.8
In every summons issued, it may be indicated to the accused that if he deposits the dishonored amount, which would later be evaluated by the court concerning the cost or interest of the cheque as specified in the summons and by the specified date then the accused may not be needed to be appear unless otherwise required. In furtherance, if the accused complies with the summons and intimates the court regarding the same, the court can after ascertainment of certain facts, close the proceedings.9
8. Affidavits in lieu of examination:
The court may accept affidavits of witnesses rather than examine the witnesses in the court. However, the witnesses to the complaint and the accused must be available in case of cross-examination as and when required by the court.10
It was held in the case of Mandvi Cooperative Bank Ltd v. Nimesh B. Thakore (2010) that the accused shall not be permitted to file his chief examination evidence in the form of an affidavit.11
9. Mediation:
In cases where there is an appeal against the judgments in complaints under Section 138 of the NI Act, the court shall strive to settle such disputes through mediation.12
10. Compounding:
Dishonoring cheques is a compoundable offense. Compounding has to be encouraged at the initial stages; however, this does not debar compounding at later stages.
Although both parties must agree to compound, even in the absence of such consent, the court may, in the interests of justice, close the case and release the accused, exercising its authority under Section 143 of "the Act" read with Section 258 of the Cr.P.C., provided that the accused pays the court-assessed amount, along with interest and costs, by a specific date.13"
Indian Bank Association and Others v. Union of India and Others:14
In this case, the Hon'ble Supreme Court while dealing with a matter related to S. 138 of the NI Act, laid down certain directions to be followed by the Magistrates which are as follows:
- "When a complaint is registered under Section 138 of the NI Act, then the Metropolitan Magistrate/ Judicial Magistrate shall scrutinize the complaint, affidavits, if any, and take cognizance of the same and direct the issuance of summons.
- The Magistrate has to adopt a pragmatic approach while directing the issuance of summons. The summons must be properly addressed and sent by post as well as the email address from the complainant. It may also take assistance from the police or nearby court to serve notice to the accused. In case the summons is received back unserved, immediate follow-up action has to be taken.
- The Court may indicate in the summons that if the accused makes an application for compounding of offenses at the first hearing of the case and, if such an application is made, the court may pass appropriate orders at the earliest.
- The court should direct the when he appears to furnish a bail bond, to ensure his appearance during the trial and ask him to take notice under Section 251 CrPC to enable him to enter his plea of defense and fix the case for defense evidence, unless an application is made by the accused under Section 145(2) for recalling a witness for cross-examination.
- The Court concerned must ensure that examination-in-chief, cross-examination, and re-examination of the complaint must be conducted within three months of assigning of the case. The court has the option of accepting affidavits of the witnesses instead of examining them in the court. The witness to the complaint and the accused must be available for cross-examination as and when there is direction to this effect by the court."15
CONCLUSION:
In conclusion, the Negotiable Instruments Act guarantees equitable treatment for payees and upholds financial integrity. Sections 138 to 142, in particular, address cheque dishonor. It describes what constitutes an offense, the penalties under criminal and civil laws, the boundaries of jurisdiction, and the steps involved in filing complaints and getting them resolved.
The Act ensures that legal processes are carried out in the proper courts by providing instructions on where criminal complaints for cheque dishonor can be filed about jurisdiction. Affidavits, filing complaints, scrutiny processes, mediation, and compounding of offenses are all made clear by procedural standards found in the Act and its later amendments. These rules are intended to facilitate court proceedings, advance equitable settlements, and stimulate payment of debts.
All things considered, the Negotiable Instruments Act, and especially Sections 138 to 142, is vital to upholding accountability and confidence in financial transactions, offering legal protection to those impacted by dishonored checks, and enhancing the effectiveness and dependability of business transactions.
References:
Gunjan Pathak & Pallavi Jain, Critical Analysis of Section 138 of Negotiable Instruments Act, 1881, 2 INDIAN J. INTEGRATED RSCH. L. 1 (2022).
Nandini Bagri, Judiciary Determining the Ambit of Section 138 of Negotiable Instruments Act, 1881, 5 INDIAN J.L. & LEGAL RSCH. 1 (2023).
Important decisions On Negotiable Instruments Act (Prepared by Chandrashekhar U, District Judge) (As on 07-07.2022)
Practice Direction, Circular: 01/2022, ROC No. 14/SO/2022, High Court of Andhra Pradesh.
Cases:
Dalmia Cement Bharat Limited v. M/s Galaxy Traders and Agencies Limited and others 2001 (6) SCC 463.
Shankar Finance Investment v. State of Andhra Pradesh, 2008 AIR SCW 7493.
Dashrath Rup Singh Rathod v. State of Maharashtra and Anr, 2014 (9) SCC 129.
Indian Bank Assn. v. Union of India (2014), 5 SCC 590.
A.C. Narayan v. State of Maharashtra (2014) 11 SCC 790.
Re Expeditious Trial of Cases under Section 138 N.I. Act 2021 SCC Online SC 325.
Meters and Instruments (P) Ltd. v. Kanchan Mehta (2018) 1 SCC 560.
Mandvi Cooperative Bank Ltd v. Nimesh B. Thakore (2010) 3 SCC 83.
Re Expeditious Trial of Cases under Section 138 N.I. Act 2021 SCC Online SC 325.
Footnotes
1. Shankar Finance Investment v. State of Andhra Pradesh, 2008 AIR SCW 7493.
2. Electronics T. and T.D. Corpn. Ltd., M/s v. Indian T. and E. Pvt Ltd, AIR 1996 SC 2339.
3. Dashrath Rup Singh Rathod v. State of Maharashtra and Anr, 2014 (9) SCC 129.
4. Practice Direction, Circular: 01/2022, ROC No. 14/SO/2022, High Court of Andhra Pradesh.
5. Indian Bank Assn. v. Union of India (2014), 5 SCC 590.
6. A.C. Narayan v. State of Maharashtra (2014) 11 SCC 790.
7. Re Expeditious Trial of Cases under Section 138 N.I. Act 2021 SCC Online SC 325.
8. Supra Note 2.
9. Meters and Instruments (P) Ltd. v. Kanchan Mehta (2018) 1 SCC 560.
10. Supra Note 2.
11. Mandvi Coperative Bank Ltd v. Nimesh B. Thakore (2010) 3 SCC 83.
12. Re Expeditious Trial of Cases under Section 138 N.I. Act 2021 SCC Online SC 325.
13. Supra Note 6.
14. Indian Bank Association and Others v. union of India and Others, (2014) 5 SCC.
15. Indian Bank Association and Others v. Union of India, (2014) 5 SCC.
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