The document discusses the theoretical background of negotiable instruments law in India. It provides context on the importance of cheques in commercial transactions and defines key concepts like negotiable instruments, dishonor of cheques, and Section 138 of the Negotiable Instruments Act which imposes criminal liability for issuing cheque without sufficient funds. The summary introduces the topic and highlights the significance of cheques and amendments to laws governing cheque bouncing to improve their use in commercial activities.
The document discusses the theoretical background of negotiable instruments law in India. It provides context on the importance of cheques in commercial transactions and defines key concepts like negotiable instruments, dishonor of cheques, and Section 138 of the Negotiable Instruments Act which imposes criminal liability for issuing cheque without sufficient funds. The summary introduces the topic and highlights the significance of cheques and amendments to laws governing cheque bouncing to improve their use in commercial activities.
The document discusses the theoretical background of negotiable instruments law in India. It provides context on the importance of cheques in commercial transactions and defines key concepts like negotiable instruments, dishonor of cheques, and Section 138 of the Negotiable Instruments Act which imposes criminal liability for issuing cheque without sufficient funds. The summary introduces the topic and highlights the significance of cheques and amendments to laws governing cheque bouncing to improve their use in commercial activities.
Introduction: The law relating to negotiable instruments is not the law of one country or of one nation, it is the law of the commercial world in general, for, it consists of certain principles of equity and usages of trade which general convenience and commonsense of justice had established to regulate the dealing of merchants and mariners in all the commercial countries of the civilized world. Even now the laws of several countries in Europe are, at least so far as general principles are concerned, similar in many respects. Of course, on questions of detail, different countries have solved the various problems in different ways, but the essentials are the same, and this similarity of law is a pre-requisite for the vast international transactions that are carried on among the different countries. 1
The Negotiable Instruments Act, 1881 was basically introduced to define the law relating to the various aspects of the different negotiable instruments like Promissory Notes, Bills of Exchange and Cheques. But the increasing use of these negotiable instruments necessitated the introduction of a number of amendments in the Negotiable Instruments Act with the main aim of making the use of the negotiable instruments easy. Amongst all the amendments made in the Negotiable Instruments Act the amendment responsible for the insertion of the Chapter XVII into the Act can be considered to be the most important one as it helped in bringing about a revolutionary change with respect to the use of cheques. Prior to this amendment the scope of misuse of the power to issue cheques was on a rise in spite of the available civil remedy and the criminal remedy under Sec 420 of the Indian Penal Code. And the cheques being a part and parcel of the commercial transactions people started losing faith in the cheque system at large. So there was a need to curb down such misuse of the power to issue cheques and the insertion of the Chapter XVII by the Banking, Public Financial Institutions and Negotiable Instruments Laws ( Amendment) Act, 1988 (66 of 1988) was blessing in disguise for the
1 The Negotiable Instrument Act- Bhashya & Adiga, 13th Ed. p. 1
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payee, the people who were the worst affected in case of such misuse. Chapter XVII as a whole deals with Penalties in case of Dishonour of Certain Cheques for insufficiency of funds in the accounts of the drawer of the cheques. This chapter consists of a total of ten sections amongst which Section 138 is of utmost importance. Section 138 speaks of dishonour of cheques for insufficiency, etc. of funds in the account of the drawer. This section imposes criminal liability on the person who is responsible for issuing a cheque to another person for the fulfilment of his liability without having sufficient funds in his account. This section actually forces a person to think twice before issuing a cheque if he has minimal funds in his accounts as because such issuance of cheques may land the drawer of the cheque in jail even if he had no dishonest intention to cheat the payee.
1.1 Concept of cheques and importance in Commercial World: The word cheque is a very well-known concept and every individual who operates an account in a bank is familiar with the concept of cheques. It is a very famous negotiable instrument which is very much essential in world of commerce. In simple words cheque can be said to be a written order instructing a financial institution which is a bank to pay a certain sum of money to a particular person on demand. Cheque as a negotiable instrument is a piece of paper which promises to pay its owner the amount written over it either on demand or as per the date mentioned on it. So the cheque can be said to be a negotiable instrument which is negotiable by delivery. It is generally presumed that once the cheque is delivered to the payee by the drawer of the cheque the payment of money to the payee will be made in due course of time and so the date on which the cheque is delivered is considered to be the date on which the payment is made irrespective of the fact as to when the cheque is presented for payment. The cheques play a vital role in the commercial world as because it relieves the businessmen from the burden of carrying currency notes to each and every place they go to carry on their business. From this public can understand that cheques actually have undertaken the function of money. Cheques have actually oiled the wheels of
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commercial transactions by faciliating quick and prompt commercial transactions. In a developing Country like India cheques have really helped in the development of the economy by faciliating quick commercial transactions which would not have been possible in case of absence of cheques. The importance of cheques in the commercial world can be understood from the fact of introduction of electronic cheques by Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002. The concept of electronic cheque is defined as a cheque which contains the exact mirror image of a paper cheque and is generated, written and signed in a secured system ensuring the minimum safety standards with the use of digital signature (with or without biometric signature and asymmetric crypto system).The Electronic Cheques are valid as a paper cheque itself. These cheques are safer and secure in comparison to the paper cheques and these cheques do not even require the payee to personally approach the banker to pay the debt of the drawer. These cheques are basically sent by mail to the person to whom the drawer has an intention to make the payment in order to fulfill his debt or liability and that person deposits the same with the banker. On deposition of such cheque with the banker the banker is obliged to make a transfer of payment from the account of the drawer who actually issued the cheque into the account of the person to whom the cheque was credited. This process of cheque transfer makes process of commercial transactions quite easy and feasible. So we can say that the introduction of cheques is actually a blessing in disguise for the commercial trade. A Negotiable Instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Negotiable Instruments Act, 1881 in India there are just three types of negotiable instruments i.e. promissory note, Bill of exchange and cheque. Cheque also includes Demand Draft. A cheque drawn by the drawer is presented for payment with the banker by the payee and the banker refuses to satisfy the claim of the payee then such a process is known as dishonour of cheques. The dishonour of cheque or refusal to satisfy the claim of the payee by the banker may be due to varied type of reasons like insufficiency of
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funds in the drawers account, closure of the account of the drawer due to any legal reasons etc. This process of dishonour of cheque gives a right to the person in whose name the cheque is issued to take the issuer of the cheque to the Court of Law for not being able to discharge his debt or liability either due to insufficiency of funds or due to closure of account. Prior to the introduction of Section 138 by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988) all the issues relating to dishonour of cheque and the consequent non-payment of the debt vested a right to the holder of cheque to approach the civil courts for recovery of the amount which was due. The legal machinery relating to the dishonour of a cheque comes into motion for the protection of cheque holder if cheque is dishonoured. The Code of Criminal Procedure states that every offence shall ordinarily be enquired into and tried by Court within whose local jurisdiction it was committed. The complaint can be filed in a Court within the jurisdiction of which the cheque has been drawn or the place where the cheque is presented for collection and received an endorsement about the dishonour of the cheque or the place where the cheque is dishonoured. After the issue of notice to the drawer of the dishonour of his cheque petitioner filed a civil suit denying his liability to pay and, therefore, contending that Section 138 was not attracted and obtained an interlocutory injunction retraining the payee of the cheque from proceeding under Section 138. The grant of the injunction was held to be illegal. Civil and criminal proceedings are simultaneously possible. It is settled law that pendency of the criminal matter would not be an impediment to proceed with the civil suits. The criminal Court would deal with the offence punishable under the Act. On the other hand, the Courts rarely stay the criminal cases and only when the compelling circumstances require the exercise of their power. The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein
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a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument which have been found deficient in dealing with dishonour of cheques. Not only the punishment provided in the Act has proved to be inadequate, the procedure prescribed for the Courts to deal with such matter has been found to be cumbersome which resulted delay in disposing the cases. 1.2 HISTORICAL DEVELOPMENT IN RESPECT OF A CHEQUE Origin of the word Cheque in England It is very difficult to trace out the origin of cheque. There is no definite view regarding the original of the cheque. The different thinkers have different views relating to its origin. The origin of word Cheque is obscure. According to J.W.Gilbert 2
The word Cheque is derived from the French Eches meaning Chess. The Chequers placed at the doors of public houses were intended to represent Chess-boards, and originally denoted that the game of Chess was played in those houses. Similar tables were employed in reckoning money, and hence came the expression to check an account; and the Government office where the public accounts were kept, was called the Exchequer. There is also another explanation. It is said that the word `Cheque arose from the consecutive numbers which were placed upon the official forms to act as a check or means of verification. Similarly Dr. Bett 3 says: This word cheque is the same as check and appears to have been at first applied to the counterfoil which keeps a tally of the amount. This spelling was kept up till comparatively late period down to and including the 12th edition of Byles on Bills. It is interesting to note that Dr. Bett is of opinion that cheque or exchequer are all words
2 M.S.Parthasarathy Cheque in law and practice at pp. 1-2 3 Bhashyam and Adiga- The Negotiable Instrument 13rh Ed. p.5
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derived from the game of chess and go back to the Persian word for a King and that the principal piece has given its name to the game itself. In this way he says that Cheques do not seem to have been introduced in England till the seventeenth century; for, it is really then that the business of banking was undertaken by goldsmiths in England, who borrowed the practice from Holland and from the money-dealers of Florence who flourished as early as the thirteenth century. In Holdens History of Negotiable Instruments in English law a cheque dated 14.08.1675 is described at page 210 and is worded 4 :
Mr. Thomas, I desire you to pay unto Mr. Samuell Howard or order upon receipt hereof the sum of nine pounds thirteen shillings and six pence and place it to the account of 14th August, 1675 Yours Servant 9:13:6 EDMOND WARLOPP On the reverse of the instrument is the payees endorsement worded thus: Received in full of this Bill the sum of nine pounds thirteen shillings and six pence. Samuell Howard. It will be noticed that the form of the instrument is very similar to that of a modern cheque, even though the language employed is somewhat different: modern customers do not sign themselves `your servant when writing to their bank managers. One view is that the London goldsmiths were the first bankers in England. They received money from their customers on condition to pay its equivalent when called upon to do so. When a customer wished to make payment to a third party, it was customary to write an order addressed to his banker to pay the sum required and these notes or orders were the earlier forms of cheque currency. The cheque or dream note as it was called and which was used by the customers of the goldsmith banker Before banking in modern sense of the word originated in England the Goldsmiths exercised many of the functions of bankers and some of the oldest existing private banks in England are the direct descendent of these Goldsmiths. They received money on
4 ibid at p. 5
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deposit from their customers subject to the obligation to repay an equivalent sum, when called upon to do so. They paid interests on deposits. They discounted bills of exchange and various types of Treasury Exchequer money orders; they bought and sold bullion; they circulated their own bank notes and they changed the coins of other countries for English coins and so on. From about the middle of the seventeenth century, the depositor would address to his goldsmith a short letter of request authorizing the payment to his creditor of the sum due. They would take this authority to the goldsmiths shop and there receive the sum in specie. Before long, the merchant debtor drew his bill or note in favour of his creditor or order or in favour of him or bearer, and the goldsmith duly honoured it upon presentation. The accounts of those merchants, which nowadays would be called current accounts, were usually known as running cashes, and they became popular. By 1677 there were fifty-eight goldsmiths in London, who kept running cashes, thirty-eight of whom lived in Lombard Street. Furthermore, there is clear evidence that the goldsmiths employed the funds left with them by making loans to others. Thus, they made loans to Cromwell and also to merchants who were the goldsmiths performed the basic functions of modern bankers by accepting sums at interest by making loans and by providing their customers with facilities for making payments to third parties. The word Cheque or check as it was spelt at first did not come into use until the eighteenth century. The modern spelling of the word was adopted about the middle of the nineteenth century. The 1827 edition of Joseph Chittys work on Bills of Exchange used the old spelling check. The following year J.W. Gilbert published his Practical Treatise on Banking. He used the modern spelling Cheque, and he explained that he had adopted that spelling because it was free from ambiguity.
In India: The Cheque was introduced in India by the Bank of Hindustan, the first joint stock bank established in 1770. In 1881, the Negotiable Instruments Act (NI Act) was enacted
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in India, formalizing the usage and characteristics of instruments like the cheque, the bill of exchange and promissory note. The NI Act provided a legal framework for non-cash paper payment instruments in India. In 1938, the Calcutta Clearing Banks' Association, which was the largest bankers' association at that time, adopted clearing house. Until 1 April 2012, cheques in India were valid for a period of six months from the date of their issue, before the Reserve Bank of India issued a notification reducing their validity to three months from the date of issue. In the commonwealth almost all Jurisdictions have codified the law relating to negotiable instruments in a Bills of Exchange Act 1882 in the UK, Bills of Exchange Act. 1908 in New Zealand. The Negotiable Instrument Act 1881 in India and the Bills of Exchange Act 1914 in Mauritius. The Bills of Exchange Act Additionally most commonwealth Jurisdictions have separate cheques Acts providing for additional protections for bankers collecting unendorsed or irregularly endorsed cheques, providing that cheques that are crossed and marked not negotiable or similar are not transferable, and providing for electronic presentation of cheques in inter-bank cheque clearing system.
1.3 DEFINITION OF A CHEQUE As per Section 6 "A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand." After 2002 amendment cheque includes the electronic image of a truncated cheque and a cheque in the electronic form." In terms of Explanation, (a) " 'a cheque in the electronic form' means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system; (b) 'a truncated cheque' means a cheque which is truncated during the course of a clearing cycle, either by the clearing
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house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing."
M.I.C.R.Cheques/Drafts 5
In MICR (Magnetic Ink Character Recognition) cheques: 1. First six number indicate the cheque number 2. Next three numbers indicate city code 3. Next three numbers indicate Bank code 4. Next three numbers indicate Branch code
A. Statutory Definition Section 6 of the Negotiable Instruments Act, 1881 defines the Cheque as under: A cheque is a bill of exchange drawn on a specified Banker and not expressed to be payable otherwise than on demand. Substitution of new section for section 6 by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act 2002: 6
For section 6 of the Negotiable Instruments Act 1881(26 of 1881) (hereinafter referred to as the principal Act), the following section shall be substituted, namely: Sec 6. Cheque- A cheque is 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. It will be thus seen that cheque is a special kind of bill of exchange in the sense that it is drawn in the name of a specified Banker.
B. Dictionary Meaning Venkataramaiyas law lexicon Dictionary defines cheque as under 7 : Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise then on demand.
Mitras legal and commercial Dictionary 8 defines cheque as under:- A cheque is a bill of exchange drawn on a banker, payable on demand A bearer cheque is one expressed to be payable to a particular person or bearer, an order cheque is one which is expressed to be so payable, or which is expressed to be payable to a particular person or body and does not contain words prohibiting transfer or indicating an Intention that it should not be transferable. A cheque which bears across its face an addition of the name of a banker, either with or without the words not negotiable is crossed specially to that banker. 9
Whartons Law Lexicon defines it as 10
Cheque- An order addressed to a banker requesting him to pay to (a) the person therein mentioned, or his order, or (b) the person therein mentioned, or the bearer of the cheque, the sum of money therein mentioned; defined in the Bill of Exchange Act, 1882, Sec. 73 by which such provisions of that Act as are applicable to a bill of exchange payable on demand apply also to a cheque as a bill of exchange drawn on a banker payable on demand.
K. J. Aiyers Judicial Dictionary 11 defines cheque as under:
7 2nd Ed 1978, Vol. 2. 8 2nd Ed 1976 by A.R Biwas. At pp. 130-131. 9 3rd Ed Vol. 2 by Halsbury s laws of England, pp 151-152 10 14th Ed. 3rd Indian Reprint 1996, p. 186 11 8th Ed 1980, p.203.
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A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand (section 6 Negotiable Instruments Act, XXVI of 1881). A bankers cheque is a peculiar sort of instrument, in many respects resembling a bill of exchange, but in some respect entirely different. A cheque does not require acceptance in ordinary course, it is never accepted, and it is never intended for 12 circulation, it is given for immediate payment; it is not entitled to days of grace; and though, strictly, speaking, an order pay to a third person the whole or part of debt, yet in the ordinary understanding of person it is not so considered. It is more like an appropriation of what is treated as ready money in the hands of the banker, and in giving the order to appropriate to a creditor, the person giving the cheque must be considered as the person primarily liable to pay, who orders his debt to be paid at a particular place, and as being much in the position of a maker of a promissory note or the acceptor of a bill of exchange payable at a particular place and not elsewhere who has no right to insist on immediate presentation at that place. [Per Lord Wensleydale]. A cheque is clearly not an assignment of money in the hands of a banker, The banker is bound by the contract with his customer to honour the cheque when he has sufficient assets in his hands; if he does not fulfil his contract he is liable to an action by the drawer, in which heavy damages may be recovered if the drawers credit has been injured. I do not understand the expression attributed to Byles, J. in Keane v. Beard 13 ; but I am quite sure that the learned Judge never meant to lay down that a banker who dishonour a cheque is liable to a suit in equity by the holder.
The New Encyclopaedia Britannica Micropaedia Ready Referencer Ceara Deluc 14 defines it as-
12 15th Ed (1993) Vol. III, pp. 145-146. 13 8 CB (NS), p. 381. 14 15th Ed (1993) Vol. III, pp. 145-146.
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Cheque, also spelled CHEQUE, bill of exchange drawn on a bank and payable on demand; it has become the chief form of money in the domestic commerce of developed countries. As a written order to pay money, it may be transferred from one person to another by endorsement and delivery or in certain cases, by delivery alone Negotiability can be qualified by appropriate words, as with restrictive endorsements, or by the check form itself. Most checks are not paid in currency but by the debiting and crediting of accomplished either by direct presentation, by correspondent banks, in the United States. A cashiers check is issued by a bank against itself and is signed by the cashier or some other bank officer. It has unquestioned acceptability as exchange. A certified check is a depositors check that has been guaranteed by the bank upon which it is drawn and is so stamped. Travellers checks are cashiers checks sold to travellers that require two signatures is placed on the check in the presence of an issuing agent; the purpose of identification and is placed on the check when it is cashed. Purchasers of travellers checks are guaranteed reimbursement by the issuers of the Checks if the checks are lost or stolen. New Standard Encyclopaedia 15 defines it as Check- a written order to a bank to pay money. It is a convenient and safe means of transferring money, and provides a permanent record and receipt for each transaction. Any person or firm having money on deposit in a checking account in a bank may write a check on that bank. In some cases, money may be transferred from one checking account to another without writing a check; the transactions accomplished by computer. To open a checking account, a person deposits a sum of money in a bank. The bank gives him a check-book with blank check forms, and provides him with a means of keeping a record of the checks he writes and the amount of money he still has on deposit. The bank gives him a receipt for each new deposit and sends him a statement (usually monthly) showing a complete record of all transactions. All concealed checks (checks
15 40 Vol.-3 pp. C-234-236
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that have been cashed by the bank) are returned with the statement, providing the depositor with proof that payment was received. The bank usually makes a small service charge on every account, and perhaps also a charge for each check written. Ordinarily, no interest is paid on checking accounts. To make out a check, the depositor writes the date, the name of the payee (the person or firm who is to receive the money), and the amount. He then signs his name. Before cashing the check the payee must endorse it by signing his name on the back. He then either deposits it in a bank or exchanges it for cash by giving the check to a bank, currency exchange, business firm, or individual. The new owner can endorse the check to someone else or can deposit it in a bank. When a check reaches a bank, it is forwarded through a clearing-house back to the bank on which it was drawn. After making sure the depositors signature is genuine, this bank in turn pays the cashing bank through the clearing- house. The biggest danger in accepting a check is that the person writing it may not have enough money (or any money) in the bank to cover it. Forgery is another danger. The best defence against bad checks is to refuse to accept checks from strangers.
Thomsons Dictionary of Banking, 16 defines Cheque as CHEQUE (Formerly written check) The word is derived from the French Eches, Chess. The Chequers placed at the doors of public houses are intended to represent Chessboards and originally denoted that the game of Chess was played in those houses. Similar tables were employed in reckoning money, and hence came the expression to check an account; and the Government office where the public accounts were kept was called the Exchequer. Another explanation is that the word `Cheque arose from the consecutive numbers, which were placed upon the forms to act as a check or means of verification. In the United States the word check is used at the present day. Cheques first came into use about 1780.
16 12th Ed. 1974.
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Sir John Paget, in the Gilbert Lectures, 1916 (No.1), said money on current account is just like any other debt, it is repayable on demand; if a customer comes and asks for his money, he is entitled to have it without the formality of drawing a cheque. In such a case, however, the customer would have to give a receipt. But the regular and ordinary method of withdrawing money from a current account is by means of a cheque. A depositor may withdraw money from his deposit account by signing a form of receipt. Part III of the Bills of Exchange Act, 1882, is devoted to provisions regarding each features of cheques as are not found in connection with a bill
Section 73 defines a cheque Cheque is a bill of exchange drawn on a banker, payable on demand. Except as otherwise provided in this Part, the provisions of this Act applicable to a bill of exchange payable on demand apply to a cheque. Section 3 defines a bill of exchange. These two sections, taken together, show that a cheque is an unconditional order in writing, drawn on a banker, signed by the drawer requiring the banker to pay on demand a sum certain in money to or to the order or a specified person or to bearer. A cheque differs from a bill in several points: it does not require acceptance; it is drawn upon a banker; the banker may be protected if he pays it bearing a forged endorsement; the drawer is the person liable to pay it and the drawer, as a rule, is not discharged by delay in presenting it for payment. The intention of a cheque is that it be paid at an early date. The drawees authority to pay is determined by notice of the drawers death, and the drawer may stop payment of the cheque. Indelible pencils are not desirable articles with which to draw cheques. A cheque written in ordinary pencil should not be paid without personal reference to the drawer, as the banker cannot possibly tell whether or not it has been altered. It is much to be desired that all cheques should be written in ink. Typewritten cheques are too easily altered, and their use should be discouraged as far as possible.
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A cheque written upon a sheet of paper, provided it is in proper form, is sufficient. Cheques of this description should, however, never be drawn except in cases of extreme necessity. A customers cheque must be unambiguous and must be ex facie in such a condition as not to arouse any reasonable suspicion. But it follows from that it is the duty of the customer, should his own business or other requirements prevent him from personally presenting it, to take care to frame and fill up his cheque in such a manner that when it passes out of his (the customers) hands it will not be so left that before presentation, alterations, interpolations, etc., can be readily made upon it without giving reasonable ground for suspicion to the banker that they did not form part of the original body of the cheque when signed. To neglect this duty of carefulness is a negligence cognizable by law. The consequences of such negligence fall alone upon the party guilty of it. A cheque is drawn in England on an English bank in foreign currency, the method usually adopted between the collecting and paying bankers is for the cheque to be presented for payment converted into sterling at the current rate of exchange. If the paying banker is in agreement with the rate of cheque is paid in sterling. If the customer instructs his banker to debit the amount for which the cheque has been drawn to a currency account, the paying banker, having paid sterling, sells the currency at the current rate, thereby reimbursing himself for the amount paid to the collecting banker. If the paying banker is not in agreement with the rate of exchange claimed by the collecting banker, he offers a draft in currency on his foreign correspondent, and this draft is usually taken by the collecting banker in place of the sterling originally claimed, and the currency account of the customer is debited with the amount. If the customer wishes to pay in sterling, the equivalent at the rate agreed upon between the collecting and paying banker is debited to his sterling account, but should the paying banker refuse to pay at the rate demand, he will issue a cheque in currency on his foreign correspondent, debiting the sterling account of his customer at the selling rate for drafts on his foreign correspondent.
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The members of the British Bankers Association agreed in June 1946, to standardize cheque forms. As regards size, the must not exceed 8 inches by 4 inches and must not be less than 6 inches by 3 inches. Prior to this time, the amount was usually inserted in figures on the left-hand side; as from June 1946, the space for the amount in figures has been shown on the right hand side, immediately above the signature of the drawer. The customary form of cheque should be adhered to as much as possible, though legally any form which fulfils the requirements of the Bills of Exchange Act would be sufficient as, for example, where the drawer instead of signing his name at the bottom signs it at the top, I, John Brown, direct you to pay to John Jones the sum, etc. The Bank of England declines to pay cheques unless drawn upon the forms it supplies. Some cheques have a notice upon them that they are payable only if presented within a certain period. Such a condition may possibly exclude the document from being considered a cheque under the Bills of Exchange Act. In Thairlwall v. Great Northern Railway Company 17 where a dividend warrant had a condition at the bottom of it that it will not be honoured after three months from date of issue unless specially indorsed for payment by the secretary. It was argued that the document was not a cheque because of this condition. Mr. Justice Bray said, I have felt a great deal of doubt on this point because of this statement. But, on the whole, I am inclined to think that this document is a cheque, and is within the meaning of Section 73 and 3 of the Bills of Exchange Act, 1882, a cheque and an unconditional order in writing. And I think it is none the less a cheque because of that statement at the bottom of the document. I do not consider that statement makes the order conditional. There are also forms of cheques, or rather document, which make the payment dependent upon a certain receipt being signed. Conditional documents of this kind are not
17 (1910) 2 K.B. 509
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cheques as defined by the Bills of Exchange Act. They may, however, be crossed like a cheque as mentioned in Receipt on Cheque. The form of cheque (or, more correctly, order for payment) in use by some Local Authorities is a peculiar one as, being drawn upon the Treasurer, it does not conform with the requirement of the Bills of Exchange Act that it be drawn upon a banker. It is considered, however, that, although drawn upon an individual, the order is practically drawn upon the bank where the Treasurers account is kept, and the banker paying such order is entitled to the protection which is afforded by Section 60 of the Bills of Exchange Act, 1882, against forged endorsements. If such orders should be held not to come within the Bills of Exchange Act, then the benefit of Section 60 would not apply, and they would also be incapable of being validly crossed. As far as the collecting banker is concerned, it would appear that local authority drafts now fall within Section 4(2)(b) of the Cheques Act, 1957. Cheques paid to credit of a customers account should be carefully examined before being remitted for collection, and if not in order should be returned to the customer, or, if possible, sent out to him to be remedied. Since the passing of the Cheques Act, 1957 (q.v.), endorsement is necessary for various reasons only in the following cases
i) Where cheques are cashed or exchanged across counter; ii) Where cheques have been negotiated; iii) Where cheques payable to joint payees are tendered for the credit of an account to which all are not parties; iv) Where a cheque acts as a combined cheque and receipt form (these cheques will bear a bold letter R on their face); v) In the case of bills of exchange other than cheques, and promissory notes.
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Some of the categories stem from the Clearing Bankers Circular rather than from the Act and it is not certain that in all cases the courts would insist on endorsement Westminster Bank Ltd. v. Zang. 18
With regard to alterations in cheques and fraudulent alterations as mentioned in Alterations. If there is a difference between the amount writing and the figures on a cheque, the cheque may be paid according to the amount in writing, but it is the usual custom, and a prudent course, to return the cheque unpaid marked amounts differ. If the figures have been omitted and the amount only appears in writing, a banker is justified in paying the cheque according to the words, though if the words have been omitted and the amount is given only in figures, the cheque should not be paid. A cheque payable to John Brown only or to John Brown, not transferable, must be paid to none other than John Brown. If the payee himself presents a cheque for payment and declines to indorse it, he has probably a legal right to do so, and the banker paying the cheque will protected under section 1(1) Cheques Act, 1957 (q.v.) if the cheque is otherwise in order. However, the circular dated 23rd September 1957, of the Committee of London Clearing Bankers included as cheques cashed or exchanged across the counter. It is considered that the public interest will best be served by continuing existing practice in regard to cheques cashed or exchanged. The Mocatta Committee set up by the Government to examine the whole question of endorsement attached importance to endorsement of such cheques as possibly affording some evidence of identity of the recipient and some measure of protection for the public. If the balance of a customers account will not allow of the full payment of a cheque, which is presented, the cheque may be dishonoured. A cheque cannot be paid in part. In England, if such a cheque is dishonoured and another cheque is presented subsequently for a smaller amount, which the account will stand, it may be paid. In Scotland, however,
18 (1966) All E.R. 114
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when a cheque is presented for payment and there is not a sufficient balance to meet it, the cheque attaches such funds as there may be in the bankers hands belonging to the drawer, and subsequent cheques, though for a less amount than the balance of the account, will be returned unpaid. A banker does not, as a rule, pay a cheque, which has been cut, or torn, into two or more portions, or torn sufficiently to suggest cancellation. But if a mutilated cheque bears a note upon it signed by a collecting banker, such as accidentally torn, it is customary to pay it. A cheque is sometimes marked or certified by a banker as being good for the amount for which it is drawn. It may be marked by the banker on whom it is drawn for another banker, as a matter of convenience for the purposes of clearing arrangements. Or, occasionally, it may be marked at the request of the drawer, or even at the request of the payee or holder, English bankers do not encourage the marking of cheques as between themselves and the public, it being much the preferable way to pay the cheque, and, if necessary, give a draft in exchange. In America, the certification or acceptance of cheques is very common which may be seen in Certification of Cheque. Marking a cheque by a banker is not equivalent to acceptance. If it was marked at the request of a payee or holder it could not be debited to the drawers account if, in the meantime, the drawer has died or has stopped payment of the cheque, or if a receiving order has been made or notice of the presentation of bankruptcy petition has been received. A person is liable to be charged under the Theft Act, 1968, if he gives a cheque in payment of a purchase when he has no account with the baker on whom the cheque is drawn.
1.4 ESSENTIALS OF A CHEQUE
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Cheque is one of the important negotiable instruments. It is frequently used by the people and business community in the course of their personal and business transactions. The definition of cheque has been given in Section 6 of Negotiable Instrument Act in these words, A cheque is a bill of exchange drawn on a specified banker and is expressed to the payable, otherwise than on demand. The essential requisites of cheque are as: -
A) Must be in Writing The cheque may be written in hand by using ink or ballpoint pen, typed or even it may be printed. But the customer should not use pencil to fill up the cheque form. Even though other columns may be permitted to be written in hand or printed or typed, the signatures should be made by ink pen or ballpoint pen by the maker.
B) Must be Unconditional The order to pay the amount must be unconditional. If there is any condition imposed to pay the amount to the holder of the cheque then it will not be considered as a cheque. A cheque made payable on the happening of a contingent event is void ab-initio.
C) Must be Drawn on a Specified Banker For the validity of a Cheque it must be drawn on a specified banker. If there is not mentioned in the cheque about the banker it would not be a valid cheque. In addition to it, it must contain all the three parties i.e. Drawer, Drawee and Payee.
D) Certain Sum of Money It is one of the essential requirement of the Cheque that it must be payable in money and money only. If is not in term of money then it will be a valid one. The sum mentioned in it must be certain.
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E) Certain Payee The parties of the Cheque must be certain. There are three parties of the cheque i.e. Drawer, Drawer and Payee. In a valid Cheque the name of the must contain in other words they must be certain. It must contain an order, which must be unconditional. If any condition were imposed then it would not be a valid cheque.
F) Date In a valid cheque it must be signed by the drawer with date otherwise it would not be a valid cheque. It must be written in hand by using ink or ball point pen, typed or even it may be printed as it becomes conclusive proof i.e. presumption under Section 118(b) unless contrary is proved. In accordance with Section 5 and 6 of the Indian Negotiable Instruments Act, 1881, cheques are regarded as negotiable.
1.5 A study of the cheque, thus, requires a study of the negotiable instrument:
A number of definitions have been given of the Negotiable Instrument, however, some of them are being discussed below: - J. M. Rosenbery in his Dictionary of Banking and Finance 19 defines Negotiable Instrument as under: - Negotiable Instrument, the Uniform Negotiable Instruments Act states: An instrument, to be negotiable must conform to the following requirements:
(i) It must be in writing and signed by the maker or drawer; (ii) It must contain an unconditional promise or order to pay certain sum in money; (iii) It must be payable on demand; or at a fixed or determinable future time;
19 Ed. 1982, p. 57
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(iv)It must be payable to order or to bearer; and (v) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
On the other hand Wills 20 has defined a negotiable instrument as under: - A negotiable instrument is one the property in which is acquired by anyone who takes it bonafide and for value, notwithstanding any defect of title in the person from whom he took it, from which is follows that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of the instrument. Further, it has been held in Sukanraj Khimraja v. Raja Gopalan, 21 that an important fact about negotiability is that by dishonour of a cheque the negotiability of the cheque is lost. In this way, the first essential feature of a cheque is that it can be transferred. The transfer can either be by way of mere delivery or by an endorsement and delivery. Whenever, the procedure mentioned above is adopted, the ownership of the property in the instrument is transferred and further no other document is required for this purpose. Whereas on the other hand the other documents e.g. shares are not negotiable, as the property in the said shares is not transferred only by means of delivery. The second important characteristic of a cheque is that a holder in the course gets a valid title to it despite of any defect in the transferors title. Such a bona-fide transferee for value gets a complete, independent and indefeasible title to the instrument and such person is known as the holder in due course and he gets a title against the whole world i.e. ad-rem. In case this characteristic is missing then the whole machinery of trade will be upset as nobody will accept a cheque if the transferee was made liable to make fishing enquiries about the titles of the transferor.
20 S.N.Gupta- Dishonour of Cheque, Liability Civil and Criminal, 3rd Ed. p. 5 21 (1989) 1 LW 401.
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The third and the last characteristic of a cheque on account of its being a negotiable instrument is that is has an inherent mechanism built in itself and it has a right of action infused in itself. The holder of a cheque has therefore, a right to sue thereon in his own name and he is not dependent upon another title. According to the negotiable instrument, whenever a bona-fide holder for value without notice- or, in short a holder in due course sues on the instrument, it is for the defendant to prove that the plaintiff is not entitled on the cheque on which the case is being filed. It should be remembered that a cheque, which is negotiable, can be made not negotiable if the negotiation is prohibited. In case a cheque is crossed not negotiable or made payable only to the payee named therein and not to his order or to bearer this cheque is not negotiable. Cheque or a Bill marked pay cash or order does not come within the meaning of the Act and is not a negotiable instrument. Generally speaking, the term Cheque is simply an ordinary slip of paper containing a written order, addressed to the banker by his customer, which is frequently used in connection with transactions of banking business i.e. in other words it is a negotiable instrument. The term `Cheque has been defined in Section 6 of the Negotiable Instruments Act, 1881 although there were certain principles of equity and usages of trade which general convenience and commonsense of justice had established to regulate the dealings of merchants and mariners in all the commercial countries of the civilized world. As it has been stated above, a piece of paper, in the form of cheque, promissory note or bill of exchange which authorise a person or party to get the sum of money mentioned therein, is known as Negotiable Instrument. The main categories of Negotiable Instruments are Promissory Note, Bill of Exchange and Cheques. Not only India but also all the countries of world make use of the negotiable instruments in some of other form in the course of personal as well as business transactions. The result is the law relating to Negotiable Instruments is mainly based on the common customs and
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usage of the business community of the world as a whole. The general outline of this law is, therefore, almost one and the same in all countries. 1.6 PARTIES TO THE CHEQUE The maker of a cheque is called the Drawer, the person thereby directed to pay is called Drawee and the person named in the instruments, to whom or to whose order the money is by the instrument direct to be paid, is called the Payee. 22
The person entitled in his own name to the possession of the cheque and to receive or recover the amount due is called the Holder of the cheque. 23 The person who for consideration becomes the possessor of the cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title is called the Holder in due course. The maker or the holder of the cheque signs his name (endorse) on the back of the cheque for the purpose of negotiable and he is said to be the Endorser. The endorser who signs his name and directs to pay the amount mentioned in the cheque to, or the order of, a specified person, and the person so specified is called the Endorsee of the cheque.
1.7 HOLDER AND HOLDER IN DUE COURSE A. Holder Every instrument initially belongs to the payee and he is entitled to its possession. The payee can transfer it to any person in payment of his own debt. This transfer is known as negotiation. Negotiation takes place in two ways. A bearer instrument passes by simple delivery and the person to whom it is delivered becomes the holder. An order instruments, on the other hand, can be negotiated only by endorsement and delivery and the endorsee becomes the holder. Hence the holder means either the bearer of endorsee of an instrument. Accordingly Section 2 of the English Bills of Exchange Act, 1882, provides that holder means the payee or endorsee of a bill or note who is in possession
22 Section 7 of the Negotiable Instruments Act, 1881 23 Section 8 of the Negotiable Instruments Act, 1881
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of it or the bearer thereof. The definition contained in Section 8 of the Indian Act is to the same effect, although expressed in different words. It says that holder means any person entitled in his own name to the possession of an instrument and to receive and recover the amount. Now, no one can be entitled to the possession of a bill or note unless he becomes either the bearer or endorsee thereof. 24 Section 8 says: The holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. In Section 139 the words used are the holder of a cheque received the cheque. The word Holder has been defined in Section of the 8 of the Negotiable Instruments Act as well as in Section 2 of English Bills of Exchange Act, 1882 as mentioned above. Reading these definitions with section 78 of the Negotiable Instruments Act it means that a person to whom the payment should be made in order to discharge the maker or acceptor from all liabilities under the instrument is the holder of the instrument or he is accredited agent such as Banker, acting as an agent for collection. A person who cannot claim and does not have right to recover the amount due on the instrument, is not the holder. Thus, a person who can sue in his name is a holder. He may be the payee or one who becomes entitled to it as endorsee or becomes the bearer of an instrument payable to the bearer. The most significant words in the section are entitled in his own name. Thus, the term holder does not include a person who, though in possession of the instrument, has no right to recover the amount due thereon from the parties thereto. However, the assignee of such person is entitled to sue in his own name. 25
B. Holder in Due Course Section 9 of the Negotiable Instruments Act, 1881 defines Holder in Due Course which reads as under: -
24 Dr. Avtar Singhs Negotiable Instruments, 3rd Ed. p. 39
25 S.N.Guptas Dishonour of Cheque, 3rd Ed. 1996
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Holder in due course means any person who for consideration became the possessor of the a promissory note, bill of exchange or cheque if payable to bearer, or the payee of endorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. In order that a person can be called a holder in due course, he must show: (a) that he is the holder of the negotiable instrument, (b) he has obtained it for consideration, (c) he has obtained it before the maturity of the negotiable instrument, and (d) that he has obtained the negotiable instrument in good faith. Until contrary is proved the holder of a negotiable instrument is presumed to be a holder in due course. 26
In India it has been seen above the payee can also be a holder in due course but in England the payee of a negotiable instrument cannot be holder in due course as was decided by the house of Lords in Jones v. Waring and Gillow. 27 If a person gets an instrument under a forged endorsement, he cannot be called a holder in due course. Section 9 requires that to be a holder in due course a person must take the negotiable instrument before the amount due thereon became payable. Section 59 of the Negotiable Instruments Act also provides that a person taking a negotiable instrument after its maturity has the rights thereon of a transferor. It means that a person taking an instrument after maturity will not be a holder in due course and will not be capable of having a better title than that of the transferor. Holder in due course must take the negotiable instrument without having sufficient cause to believe that any defect existed in the title of the person from whom he delivers his title. The condition requires that he should act in good faith and with reasonable caution. In the case of Mathew George v. Jacob 28 the Kerala High Court held that complainant need not prove identity of accused: A reading of section 138 would clearly
26 Section 118(g). 27 1926 AC 670; Lewis v. Clay, 14 T.L.R. 149. 28 III (2006) B.C. 21 (Ker): (2006)1 KLT 126.
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indicate that as and when cheque signed in discharge of a legally enforceable debt is dishonoured, the offence under section 138 of the Act comes into existence. Further, as per section 139 of the act, there is a presumption in favour of the holder of the cheque. It is the burden of the complainant to prove that the cheque was signed by the drawer in discharge of a legally enforceable debt. If such burden is proved, the presumption under section 139 of the Act comes into force in favour of the complainant. In such circumstances, the identity of the signatory of a negotiable instrument does not arise. Further, as per section 9 of the Act, a complaint can be filed by a person who is holder in due course of a negotiable instrument like the cheque. That apart, in the decision reported in Venugopalan v. Prakasan, the Kerala High Court had taken the view that when a private complaint is filed before the court, the court is expected to make an enquiry under section 202, Cr.P.C. only with regard to the offence alleged and not with regard to the identity of the accused who committed the offence. In the above circumstances, identity of the signatory of a cheque is not a question to be considered by the Trial Court. In case of Sardar Jasvir Singh v. State of Uttar Pradesh in the Honble Allahabad High Court held that a person in possession of cheque and cheque is payable to bearer would be deemed to be holder in due course of cheque and would have locus to file complaint of dishonour of cheque. 29
Rights of a Holder 30
1. An endorsement in blank may be converted by him into an endorsement in full. 2. He is entitled to cross a cheque either generally or specially with the words Not Negotiable. 3. He can negotiate a cheque to a third person.
4. He can obtain a duplicate of the lost instrument.
1.9 Necessary Ingredients which attract Section 138:
Section 138 of the NI Act, 1881 was mainly enacted by the Legislature to restore back the faith of the mercantile community with respect to the mechanism of the cheques as awhole. This section was mainly enacted to protect the holder of cheque from the dishonest attitude of the drawer of the cheque. But in order to attract liability under Sec 138 certain provisions of the section are to be complied with as specified in case of Anchor Capital of India v. State of Gujarat. These provisions are as follows: The cheque must be issued in favour of a payee for the discharge either in full or in part of a legally enforceable debt. Then the same cheque must be presented for payment within six months from the date of issue of the cheque or the date of validity whichever is earlier and the cheque should be returned back by the banker as unpaid as because the funds available in the account of the drawer are insufficient for the debt to be paid. After receiving such an information from the banker with regards to the insufficiency of funds the payee must sent a notice intimating the same to the drawer within thirty days of receiving such notice, Then it is the duty of the drawer that within fifteen days of receiving such notice from the payee it has a duty of taking any action to make good the loss suffered by the payee. But if under any circumstances the drawer fails to take any action with regards to the dishonour of cheque then the drawer is considered to be responsible for the loss suffered by the payee without even he having an intention to cheat the payee. So under Sec 138 the concept of criminal liability begins from the point where the drawer even after receiving the notice from the payee fails to take any action in order to prevent such loss suffered by the payee. So a detailed analysis of the Section 138 helps us to understand that the section does not make the drawer criminally liable from the very starting point when the cheque is dishonoured. It gives a chance to the honest drawers to prevent any type of harassment at the hands of law by way of taking any
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action to make good the loss suffered by the payee after receiving a notice from the payee intimating him about the dishonour of the cheque. So this means that the cause of action with respect to the dishonour of a cheque necessary to make a person criminally liable arises only after the drawer fails to take any action within fifteen days of receipt of the notice from the payee informing him about the dishonour of the cheque to make good the loss suffered by him. In the case of Raman B v. Shasun Chemicals and Drugs Ltd., (2006) 4 CTC 529: (2006) 2 LW (Cri) 775(Mad). It was held that the cause of action for prosecution under the Section 138 does not arise from mere presentment or dishonour of the cheque. It arises only when the drawer defaults in paying up the cheque amount due within fifteen days of receipt of the notice informing him about the dishonour of the cheque. The legislative mandate is that the Drawer should not be prosecuted immediately with the dishonour of cheque but rather he should be given a chance by the payee to rectify his mistake.
SUM UP:
In India, prior to the enforcement of the present Negotiable Instrument Act, English Acts and Statutes dealing with this subject were in force. The frequent use of negotiable instruments in personal as well as business transaction in India was also not a totally new practice during the British regime. The reason was that since olden days, the use of such instruments like Hundies, was prevalent in India. In Mughal period too, there was same position. When British regime established in India three fold system in this regard was enforced and Muslims were governed by their respective personal law. The Europeans were governed for that purpose by English laws, whenever there was any conflict between personal laws, i.e. Hindu Law or Muslim law with English Bill of Exchange and there was no proof of any specific usage, the English law had to prevail. Thereafter, various English Acts and statutes were enforced in India to deal with the matters relating to negotiable instruments. Those acts and Statues were enforced in India to deal with the
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matters relating to negotiable instruments. Those Acts and statues were English Bill of Exchange Act. The law reliant to promissory notes [Statutes of William III, C, 17 and 3 and 4 Ann(8)] and Governor General in Council Act ( Act V of 1866). In 1866 Law Commission drafted a Bill of regulating the use and transactions through Negotiable instruments. On the basis of it Indian Negotiable Instruments Act, 1881 (Act No. XXVI of 1881) was passed and enforced in the whole territory of India except the state of Jammu and Kashmir. This Act was mainly based on the principles laid down in English Law merchant. The main object of this Act was to do away with the inconsistencies existing prior to its enforcement especially with regard to applicability of law of Negotiation to persons belonging to different communities.
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CHAPTER II: RESEARCH METHODOLOGY:
It is an important part of social legal survey/research that is research methodology for which we have to go through in a following manner. "There is no shortcut to prove, no way to gain knowledge of universal science, except through the scientific method" Karl Pearson'. Methodology is an important part of any research work. Method is the way of doing something. Methodology is science to study of particular subject. Research Methodology is a systematic investigation to gain new knowledge about the phenomena or problem but in its wider sense methodology includes the philosophy and practice of whole research process. It provides standard which the researcher used for integrating data and reaching the conclusion. Thus research methodology is the method which the researcher applies for the said research. The present study well based on doctrinal method. The study will be completed on the study of various law books. For the purpose of data collection the researcher will visit law libraries, refer various law journals like, All India Reporter, All Supreme Court cases, Maharashtra Law Journal, Maharashtra Law Report, Internet Service etc. As mentioned earlier, a scholar of law, interested in legal research, may adopt any of the following courses in doing his research: 1. Doctrinal method 2. Non doctrinal method Doctrinal legal research endeavors to develop theories, and non-doctrinal legal research endeavors to see as to whether the theories, the doctrines, that we have assumed are appropriate to apply in society at a given time, are still valid and relevant. Non- doctrinal legal research helps to test whether the theories assumed (in
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chilot.wordpress.com these broad five options available to a legal scholar can be divided into two broad categories of legal research: (1) doctrinal legal research, and (2) non- doctrinal regal research. Doctrinal legal research is defined as research into legal doctrines through analysis of statutory provisions and cases by the application of power of reasoning. It gives emphasis on analysis of legal rules, principles or doctrines. While non-doctrinal legal research is defined as research into relationship of law with other behavioral sciences. It gives prominence to relationship of law with people, social values and social institutions. It endeavors to highlight the relationship between law and other behavioral sciences and social facts. It involves empirical inquiry into the operation of law. Here inquiry is directed to some manifestation of human behavior as law affects it or as it affects law. The researcher wants to know to what extent certain legal rules work or have worked. Law) work in the way they should. Doctrinal legal research is, therefore, research in law while non-doctrinal legal research is research about law. It involves a systematic exposition, analysis and critical evaluation of legal rules, doctrines or concepts, their conceptual bases, and inter-relationship. To put it in a different way, a doctrinal legal researcher indulges into analysis of black-letter of law. He therefore sticks pretty close to the primary source materials, to the Constitution (where legal system have one), to legislation (statutes, statutory instruments) and to the leading judicial decisions (the precedents). While a non-doctrinal legal researcher is interested in knowing law-in-action through empiricism. As the place and source of data, namely, substantive legal rules, doctrines, or concepts and judicial decisions thereon, required for doctrinal legal research is law library, doctrinal legal research is nicknamed as arm-chair research, or basic or fundamental research. While, non-doctrinal legal research, which gets its data primarily from sources other than law [i.e. society] and focuses on social reality of law rather than on law itself, is also known as empirical research, socio-legal research, sociology of law or non-library research.
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2.1 Title of the study: The title of the study must be precise and unambiguous. That means the title must give full idea of topic at the first instance which is about to discuss. Hence the title of the study is Legal analysis of protection available to holder of cheque under the Negotiable Instruments Act, 1881 with decided case laws.
2.2 Problem of the study: The major problem of the study is that the existing law had proved inadequate with the problem which has arisen in recent years. Those people who are holder of cheque in due course have no knowledge in respect of limitation for presentation of cheque for encashment and they have also no knowledge regarding issue of legal notice with in stipulated period. They have also no knowledge regarding filing of complain in the court of law and its limitation. By keeping in this fact the legislature with the help of negotiable instrument act 1881 has amended penal provisions and provisions for limitation and jurisdiction. By going through this provision a common public can get some knowledge of penal provision under negotiable instrument act 1881 and its limitations. That though there is existing provision in Negotiable Instrument Act for dishonor of cheque, still there deficient in dealing with cheque bouncing cases relating to the post- dated cheques legal liability and limitation for it and not only the punishment provided in the act has found to be inadequate and the procedure for filing the complaint has been found to be cumbersome including conflicting opinions for judiciary. This growing problem of dishonor of cheques in todays century attracted me to the research on the main following two points:
1. Whether the presumption enacted by the N.I. act in favour of the holder of cheques under the various provisions is adequate in order to obtain the full justice in his favour.
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2. Whether the Apex court has provide the full protection of presumption in favour of the holder of cheque from all other angles of the act by its various landmark judgments.
2.3 Rational of study: The intention of the legislature is to see that in the event of amount not being paid on presenting the cheque due to insufficiency of funds or if it exceeds the arrangement made by the bank by an agreement such as obtaining the facility of overdraft etc. the person is liable for prosecution. The safeguard that has been made to present hasty action is that the payee or holder in due course of the cheque shall make demand for the payment of amount covered by the cheque by giving notice, in writing, to the drawer with in thirty days of the receipt of information by him from bank. The rationale behind the study is to know the provisions under Negotiable Instrument Act 1881 and consequences if the limitation provided for presentation of cheque bounce notice and the complaint is not filed within limitation.
2.4 Objective of the Study:
The objectives of project aims at studying the various aspects related to dishonour of cheques and liability arising for the protection of holder of cheques. It begins by defining the concept of dishonour of cheques and then proceeds to the liability arising out of such dishonour and the laws related thereto. The ultimate objective is to understand the liability and the penal provisions for dishonour of cheques and then to understand its application in the protection for the cheque holder. While going through the research topic that means Legal analysis of protection available to holder of cheque under the Negotiable Instruments Act, 1881 with decided case laws following are the objectives of the research.
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1. To find out ways and means for effective implementation of the relevant provisions of law so that the cases relating to dishonour of cheque can be disposed of within the time frame prescribed by law 2. To study the provision for the dishonour of cheques. 3. To study the procedure of complaint as provided under Negotiable Instrument Act 1881. 4. To study the offence and penalties in case of dishonor of cheques. 5. To study the role of Supreme Court in respect of dishonor of postdated cheque under Negotiable Instrument Act. 6. To study Law Relating to Negotiable Instruments with Special reference to the protection of holder of cheques. 2.5 Hypothesis: Hypothesis means an idea formed beforehand which has less value that the generally considered as the principal instrument in research. Its main function is to suggest a new experiment and observation. According to Goods and Hatt Hypothesis is proposition which can be put to test or determine its validity The present study proceed on the following hypothesis they are, the provision under Negotiable Instrument Act 1881 is in corporate with a view to encourage the culture of us for cheques and enhancing the credibility of the instrument. 1. The punishment provide in the act has proved to be inadequate. 2. The procedure prescribed for the courts to deal with such matter has been cumbersome. 3. The disputes under section 138 of the Negotiable Instrument Act are not nearly involving the interests commercial circle/economy of globe. 4. Large population, more litigation and lack of adequate infrastructure are the major factors that hamper our justice system.
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5. The procedure as required u/s 138 of Negotiable Instrument Act 1881 is not followed properly and the complaint becomes absurd.
2.6 Review of Literature: While finalizing to the topic, the researcher has to review the existing literature. In this present research the researcher has gone through the books of eminent authors related to these topics. In addition to this the researcher has also review Law journals, AIR, Supreme Court cases, articles from newspaper reports on Dishonor of cheque. Thus, after reviewing the literature, the researcher has able to understand the exact nature of the problem of dishonor of cheque u/s 138 of Negotiable Instrument Act 1881.
2.7 Research Design: The research design refers to the entire process and carrying out the research study. The idealized research design is concerned with specifying the optimum research procedure that could be followed where there are no practical restrictions. The research design for this study is Doctrinal. The data for this study was collected from the books, commentaries, journals and websites. After defining a research problem or formulating a hypothesis, as the case may be, the researcher has to work out a design for the study. Research design is the conceptual structure within which research is conducted. It is a logical systematic planning of research. The term research design refers to the entire process of planning and carrying out a research study. It is the process of visualization of the entire process of conducting empirical research before its commencement. Research design is a blue print of the proposed research. However, the blue print is tentative as the researcher may not be able to foresee all the contingencies before he starts his investigation. He is allowed to meet these contingencies when he encounters them in his research journey. Research design helps the researcher to identify in advance the kind of data he requires, the means to collect them, the methods to be used for analysis and interpretation
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of the data, and presentation of his findings with more accuracy. Research design, thus, helps him in minimizing the uncertainties, confusion and practical hazards associated with the research problem. It helps in enhancing efficiency and reliability of his findings a) Nature of study : The present study is Doctrinal or Non empirical legal research. The nature of study is doctrinal legal propositions by analyzing the existing statutory provisions, and available secondary sources of data. One of the reasons for doctrinal research is to ascertain a rule for the purpose of shoving a problem. In the present topic Law Relating to Negotiable Instruments with Special reference to cheques. The researcher had made an attempt to analyze the provisions under Negotiable Instruments act 1881 for dishonor of cheque for this purpose the researcher had gone through various secondary sources of data. The research design refers to the entire process and carrying out the research study. The idealized research design is concerned with specifying the optimum research procedure that could be followed where there are no practical restrictions. The research design for this study is Doctrinal. The data for this study was collected from the books, commentaries, journals and websites. b) Type of study The present study is basically explanatory as it explains in details the various aspects of the topic in detail. To explain various aspects and dimensions of the topic, the researcher had segregated the topic in six different chapters; each chapter explains in details the important aspect of the topic. The present study on the topic Legal analysis of protection available to holder of cheque under the Negotiable Instruments Act, 1881 with decided case laws is also analytical in nature as it analyzes different aspects of the topic and after analyzing significant issues and aspects of the topic, the researcher had made various conclusions and have suggested various point to solve the problem.
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2.8 Method of Data Collection. The method of data collection followed under the present study are secondary method of data collection, because the present researcher doctrinal researcher. Therefore the researcher had gone through various secondary sources of data by adopting secondary method of data collection. The researcher had gone through various books in relation to provisions for the protection of holder of cheque, referred to articles, searched on internet for collecting matters in relation to the topic.
Sources of data collection The present dissertation on the topic Legal analysis of protection available to holder of cheque under the Negotiable Instruments Act, 1881 with decided case laws. is doctrinal in nature therefore the sources of data collection is secondary in nature the researcher had gone through various books pertaining to negotiable instrument act, the details of which are given in the bibliography. The researcher had also gone through various cases related with the topic, thereafter the research had done intensive search on the internet for collecting and downloading matter pertaining to the present topic. Analysis and interpretation of data In order to include best matter in the present dissertation, the researcher at the first instance had collected every possible information related to the topic from books, Journals, websites etc, thereafter the researcher and analyzed the complete data and had kept the relevant text with him and had left the unnecessary materials. For better analysis also classified the data and segregated the data in various categories, having done so, the researcher had then interpreted the relevant data. Interpretation is a special aspect of analysis. Interpretation includes the cause and effect relationship interpretation of data is very important aspect as it is the soul of any research.
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2.9 Possible contribution of the study: As the researcher uses the Doctrinal (Non Empirial Method) to complete the research work, will be really helpful for the researcher to collect the data from various available sources and complete the dissertation work. The researcher took every possible efforts to complete the dissertation. The present topic of Legal analysis of protection available to holder of cheque under the Negotiable Instruments Act, 1881 with decided case laws would help in providing solutions to combat with the controversial issues of cheque bounce.
2.10 Limitations of the study: Every research has its own limitation. No research can be conducted completely in all aspects within limited period of time. The present topic Legal analysis of protection available to holder of cheque under the Negotiable Instruments Act, 1881 with decided case laws has lot of dimensions and perspectives It was not possible to cover all the dimensions and prospective taking into consideration within the time limit of the study, so the researcher had mainly emphasized on the provisions for the protection of holder of cheque i.e dishonor of cheque in NI act. The other difficulties faced by the researcher was cost involved in coaching the research some books were of very high prices which the researcher could not afford to buy or have access to it.
2.11 Time Schedule: The researcher is doing doctrinal research and it needs sufficient time to complete the research work within stipulated time as mention in the syllabus.
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CHAPTER III: DISHONOUR OF CHEQUE AND ITS PROCEDURE
3.1 DISHONOUR OF CHEQUE- The legal machinery relating to the dishonour of a cheque comes into motion for the protection of holder of cheque if cheque is dishonoured. The concept of dishonour has first to be considered and for this purpose refer sections 92 and 93of the Negotiable Instruments Act, 1881. Section 92 reads under as Dishonour by non-payment.-A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. 31
The advancement and progress of society and the increase of commerce and various activities of trade, the transaction of money between human beings became complex and the ancient law giver were also forced by the circumstances to evolve new rules and regulations to regulate the transaction of money. The present day economies of the world which are functioning beyond the international boundaries are relying to a very great extent on the mechanism of the Negotiable Instruments such as cheques and bank drafts and also the oriental bill of exchange prevalent in India and known as Hundies. Since business activities have increased, the attempt to commit crimes and indulge in activities for making easy money has also increased. Thus besides civil law, an important development both, in internal and external trade is the growth of crimes and we find that banking transactions and banking business is every day being confronted with criminal actions and this has led to an increase in the number of criminal cases relating to or concerned with the Banking transactions.
Section 138 of the Negotiable Instruments Act, 1881 and its Significance:
31 The Negotiable instrument act 1881
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Section 138 of the Negotiable Instruments Act is a pragmatic legislative step to reach justice to the aggrieved. This section was introduced by the legislature to protect the holder of cheque who were victims of dishonour of cheques. This section basically provides for Dishonour of cheques for insufficiency etc., of funds in the account. As per Sec 138 if under any circumstance the cheque issued by the drawer of the cheque is dishonoured or it bounces back due to lack of funds in the account of the drawer or for the reason that it exceeds the arrangements made by the drawer with the bank then the drawer of cheque is liable for such dishonour. The signifance of Section 138 can be proved from the fact that it not only provides justice to the payee in case of dishonour of cheques but it also gives a chance to the honest drawers to rectify their actions in case of negligent behaviour so as to protect them from the clutches of law and to prevent their harassment at the hands of law. It can be said that Section 138 is a provision which clothes a civil dispute with the garment of criminality.
3.2 CAUSES OF DISHONOUR OF A CHEQUE
There are some reasons of dishonour of cheques, which are being discussed below: A. Refer to Drawer In Thomsons Dictionary of Banking it is stated that the answer put upon a cheque by the drawee banker when dishonouring a cheque in certain circumstances. The most usual circumstance is where the drawer has no available funds for payment or has exceeded any arrangement for accommodation. The use of the phrase is not confined to this case, however, it is the proper answer to put on a cheque which is being returned on account of service of a garnishee order; it is likewise properly used where a cheque is returned on account of the drawer being involved in bankruptcy proceedings. It generally means to convey to the holder that he should refer to the drawer for payment that is the bank has not sufficient funds at drawers disposal to honour the cheque.
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According to A Dictionary of International Banking by Dr. S. Ramalingam the drawee bank uses the words when it returns a cheque because the drawer has insufficient funds in his account to meet it. If a cheque is retuned with an endorsement refer to drawer it cannot be safely interpreted to mean any of the two reasons contemplated under the Act. This question was raised in V.S. Krishnan v. Narayanan 32 , bringing the decision of the Kings Bench in Plunkett v. Barclays Bank Ltd 33 , to the notice of the court it was said The offence under section 138 of the Negotiable Instruments Act will be attracted only if the cheque 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 for from the account by an agreement made with the bank. Sometimes it is also suggested that the reasons, Exceeds Arrangement or Not arranged for may lead to an unwarranted disclosure of the customers account and may amount to a libel. For this reason the term Refer to Drawer should be preferred. In other case Jaya Lakshmi v. Rashida, 34 the Court held that the endorsement refer to drawer is a euphemistic way of informing the payee that the drawer of the cheque has got no amount to his credit to honour the cheque. Similarly in Manohar v. Mahalingam, 35 Justice Padmini Jesudurai has held that the answer Refer to Drawer after adopted by the bankers could mean anything from shortage of funds to death or insolvency of the drawer and could also include insufficiency of funds. It is seen therefore, that the nomenclature of the return by itself would not be decisive of the cause
34 I (1992) BC 259: (Vol. 74) Comp Cas (Mad) 841: 1992(2) Crimes 5: 1993 Bank J 378: (1991) (2) MWN (CN) 202. 35 (1992) LW Cri 367
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of return. Reference may also be made to M.M.Malik v. Prem Kumar Goyal, 36 decided by Punjab and Haryana High court. In this case M.Shreemulu Reddy v. N.C. Ramasamy, 37 in which it was held that whether endorsement Refer to Drawer made out an offence was a question of fact to be established on evidence and to establish that return of the cheque implied insufficiency of funds in the account. There had to be the appreciation of evidence. We can also refer to the case V.S.Krishnan v. Narayanan, 38 where it was held that in banking parlance the reasons Refer to Drawer when cheques are returned unpaid is used generally for returning the cheque for want of funds in the drawers account or because of service of a garnishee order. This again is a matter of evidence. The bank would be able to justify before the Court the reasons for which the cheque was returned. Reference can also be made to a number of other cases such as In A.D. Circle Pvt. Ltd. v. Shri Shanker, 39 before the Delhi High Court held that where the cheque had been returned with the remarks Refer to Drawer complaint was dismissed. However, the High Court held that close scrutiny of record and evidence shows that the cheque was dishonoured for insufficient of funds and the offence was committed. A Division Bench of the Kerala High Court has held that such endorsements as Refer to Drawer, Account Closed and Payment has been stopped etc. have the effect of proving that the cheque has been bounced and if the bouncing was on account of insufficiency of funds, then an offence under Section 138 of the Negotiable Instruments Act has been made out 40 . There are a number of other cases as well to which a reference can be made and which clearly establish that Refer to Drawer means insufficiency of funds. Refer to
36 II (1991) BC 484: 1991 Cri L.J. 2594 37 79 CC (1994) 540: I (1993) BC 8 38 (1990) LW Cri 66: 1991 Cri J. 609
39 II (1992) BC 525: 76 Comp Cas Delhi 764 40 Thomas Verghese v. Jerome, (1992) BC 224(DB): 1992 Cri. LJ 308: 76 Comp Cas (Kerala) 684
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Drawer is only a courteous way normally adopted by Banker to show its inability to honour the cheque for want of funds. If the Petitioner Company had the arrangement or credit in its account with the bank, he can show this fact to the Trial Court, in the absence of which Refer to Drawer means Insufficiency of funds. Refer to Drawer in their ordinary meaning amounted to a statement by the Bank- We are not paying, go back to the drawer and ask him why. 41
Refer to Drawer means cheque has been returned for want of funds. 42
Similarly the Trial Court had dismissed the complaint on the ground that the term Refer to Drawer is vague and does not disclose insufficiency of funds. The High Court held that the Learned Magistrate should have given the Petitioner to lead pre-charge evidence to prove that cheque was returned for paucity of funds. 43 In Dada Silk Mils and others v. Indian Overseas Bank and another 44 , it has been held by the Gujarat High Court that the endorsement refer to drawer, necessarily in banking parlance means that the cheque has been returned for want of funds in the account of the drawer of the cheque.
B. Exceeds arrangement It is generally meant to convey that the drawer has credit limit but the amount exceeds the drawing power. Not arranged means no overdraft facility exceeding the limit already sanctioned or overdraft facility not sanctioned.
C. Effects not cleared According to Thomsons Dictionary of Banking, owing to the exigencies of business, the bankers usually credit articles paid in for collection to a customers account, before
41 M.M.Malik v. Prem Kumar Goyal, II (1991) BC 484: 1991 Cri L.J. 2594 42 Syed Rasool & Sons v. Aildas & Co., 1992 Cri L.J. 4048: 1993(II) Crimes 550: (1993) 78 Comp Cas. 738 43 29 Prof. Veda Vyasa v. Satija Builders & Financiers Ltd., II (1992) BC 146 44 30 (1995) 82 Comp. Cas 35
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clearance thereof. In some cases items are entered in the ledger and statement as Cash; in other cases they are indicated by symbols. If there is an agreement express or implied such as would arise out of a course of business to pay against uncleared effects, a banker would be bound to honour cheques drawn against such effects and he cannot arbitrarily and without notice withdraw such facilities. It is generally meant to convey that the drawer has paid the cheques or bills, which are in course of collection but their proceeds are not available for meeting the cheque. According to A Dictionary of Bank by F.E. Perry, the total of cheques collected for a customer, which is credited to his account on the day he pays them in. The proceeds remain uncleared for three days, or five if a week end intervenes. During this time the bank is presenting the cheques to the paying banks through the clearinghouse. If they are unpaid they should be received back through the post on the morning of the forth (or sixth) day. (Town clearing cheques are cleared more quickly.) Whether or not the customer is allowed to draw against the proceeds of these cheques before they are cleared is a question of fact in each case, but the banker does not have to pay against uncleared effects unless he so wishes. If he does so, however, he may encourage the customer to think that similar concessions may be made on future occasions, and an implied permission may be construed.
D. Full Cover not Received It is generally meant to convey adequate funds to honour the cheque or has not given adequate security to cover the overdraft which might be created by paying the cheque.
E. Not Provided for
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An answer sometimes written by a banker on a cheque, which is being returned unpaid for the reason that the drawer has failed to provide funds to meet it. A better answer in these circumstances is Refer to Drawer.
F. Not Sufficient- When the funds in a customers account are insufficient to meet a cheque, which has been presented to the banker through the clearing or otherwise, the cheque, on being returned unpaid, is sometimes marked with the words not sufficient, or not sufficient funds. The answer Refer to drawer is preferable.
G. Present Again According to Thomsons Dictionary of Banking, these words are sometimes written by a banker upon a cheque, which is returned unpaid because of insufficient funds in the customers account to meet it. It is not, however, by itself a correct answer to give, as it does not afford any explanation why the cheque has been returned. The best answer to write upon a dishonoured cheque is Refer to Drawer. Sometimes the words are joined with another answer, as Refer to Drawer Present again, Not sufficient- Present again. No doubt the words Present again are used with the idea of minimising the risk of injury to the drawers credit by returning the cheque, but it is perhaps questionable whether they are altogether prudent words to use. The banker to whom a cheque is returned with a request Present again advises his customer of the dishonour of the cheque and arranges for it to be represented.
H. Payment Stopped by Drawer One of the reasons on account of which the Banker can refuse to make the payment of a cheque is that the drawer has stopped the payment. The customer has the right to give notice his Bankers to stop payment of a cheque which he has issued. The notice should be in writing and should give accurate particulars of the cheque and should be
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signed by the drawer. According to Thomson Dictionary of Banking, in case a Bank passes a cheque after a Stop Order has been received, he shall be liable for so doing. It is necessary, therefore, to warn each Branch where the cheque may be presented, of the notice, which has been received. A notice should be placed in the Customer Account in the ledger, so that any one referring to the account may at once observed particulars of the Stop Order. A red colour slip may be inserted in the ledger, so that there is no mistake. As for different branches of a bank, in case notice is given to one branch, it shall not be deemed a notice to the other branches as well. The discussion relating to stop payment has assumed importance in view of the amendment to the Negotiable Instruments Law (Amendment) Act, 1988 (66 of 1988) and the Negotiable Instruments (Amendment and Miscellaneous Provisions Bill, 2002(Bill No. 55 of 2002). We have already seen that by the fact that the dishonour of the cheque can result in penal consequences in case the cheque is returned on account of the reasons that it exceeds arrangement made by the drawer with the Bank. Section 138 of the Amended Act deals with such cases. In Abdul Samod v. Satya Narayana Mahavir, 45 a complaint had been filed under Section 138 and the case of the respondent was that he had stopped the payment of the cheque on account of civil litigation pending between the parties. Honble Mr. Justice A.P. Chowdhry analysed Section 138 of the Negotiable Instruments Act and he stated that there were 5 ingredients of the section which must be fulfilled, which are as under: -
1. The cheque is drawn on a bank for the discharge of any legally enforceable debt or other liability; 2. The cheque is returned by the bank unpaid; 3. The cheque is returned unpaid because the amount available in that account is insufficient for making the payment of the cheque;
45 35 PLR 1990(2) 269: II (1990) BC 380
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4. The payee gives a notice to the drawer claiming the amount within 15 days (now 30 days as per Amendment 2002) of the receipt of the information by the bank; and 5. The drawer fails to make payment within 15 days (now 30 days as per Amendment 2002) of the receipt of notice.
In this particular case, the contention of the respondent was that the cheque had been returned on account of stop payment instructions and not on account of insufficiency of funds and thus all the ingredients of the section were not available. According to Section 138 it was only when the cheque had bounced on account of inadequate balance in the account that a complaint was maintainable if the said ground was not available, then the complaint was not maintainable and the Honble High Court held that there was no justification to let the proceedings continue. After the passing of the Banking, the Negotiable Instruments Law (Amendment) Act, 1988 (66 of 1988) and the Negotiable Instruments (Amendment and Miscellaneous Provisions Bill, 2002 (Bill No. 55 of 2002) the people who issue cheques knowingly well that cheque is not going to be honoured on presentation, try to create circumstances in which the banks return the cheque with such endorsements as Stop payment, Refer to Drawer and A/c closed. This is with a view to escape from the criminal liability. The question arises whether the offence under the Act shall be committed in case the cheque issued by a person bounces on account of such reasons. There have been decisions of the various High Courts and the preponderance of the view of the said judicial decisions in that in case a cheque is retuned dishonoured with such remarks and if it can be proved that there was also the insufficiency of funds in the account or that the amount of the cheque issued by drawer of the cheque had exceeded the arrangement made, then irrespective of such action of the drawer, it would constitute an offence under the Amended Act. The necessary condition, however, is that there must be an averment in the petitioner to the effect that the cheque had bounced on account of insufficiency of funds
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and on account of the amount of the cheque having exceeded the arrangement made by the drawer. The Kerala High Court in Calcutta Sanitary Waters v. Jacob 46 has held that in case the payment was countermanded, then it was without an offence. All these judgments have been examined in judgment of the High Court of Judicature of Bombay at Aurangabad in Criminal Application No. 1073 to 1076 of 1992 in Shri Prithvi Raj S/o Amba Lal Patel v. Sh. Bhupendra S/o Shri Jasu Bahi Patel. In these four appeals Honble Mr. Justice M.S. Vaidya in his judgement dated 06.01.94 examined all the important judgements relating to the stop payment instructions and also referred to the Division Bench Judgement of the Bombay High Court. 47
A reference also made to the judgement 48 in which it was held that the offence under the section cannot depend on the endorsement made by the banker while returning the cheque. Irrespective of the endorsement made by the banker, if it is established that in fact the cheque was returned unpaid either because of the account of the money to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank, the offence will be established. The endorsement made by the banker while returning the cheque cannot be the decisive factor. In both the judgments it was contended that what was relevant for the purpose of determining whether or not an offence under Section 138 of the Negotiable Instruments Act was disclosed and whether or not the drawer of the cheque had arranged for payment or had made the payment of the amount covered by the cheque within the period of 15 days prescribed under the said section and not the reason for which the cheques were dishonoured by the Bank. The Bombay High Court held that judgement given by the single in the judgement of Om Parkash Bhojraj Maniyar v. Swati Girish Bhide, 49 in which the case of G.F. Hunasi Katti Math v. State of Karnataka, 50 and the decision in
46 I (1991) BC 512: 1991(1) KLT 269 109
47 Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar, 1993 Cri L.J. 48 Thomas Varghese v. P. Jerome, 1992 Cri L.J. 308 49 1992 Mah. L.J. 302:1992(3) Crimes 306 50 I (1991) BC 438: 1991(1) Crimes 227
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case of Mrs. R. Jayalakshmi v. Mrs. Rashida, 51 provided to honour an interpretation which was narrow and deserved to be set aside. It was a construction of the section where the judges had failed to take into accounts the objects and reasons behind the amendment. The decision of division bench of the Kerala High Court 52 was specific in observing that where the cheque issued by the drawer was dishonoured by the bank and returned to the drawer with the endorsement that Payment stopped by the drawer and in the complaint the complainant had specifically stated that the accused had no amount in his account with the bank for honouring cheque and that mischievously and maliciously issued an instruction to the bankers to stop the payment, the complaint for an offence under section 138 of the Negotiable Instruments Act cannot be quashed on the ground that the amount of money standing to the credit of the account of the drawer was insufficient to honour the cheque or that it exceeds the account arranged to be paid from that account by an agreement made with the bank. This is in fact the correct view of the matter. Since there has been conflicting opinions by the different High Courts and also because the fact that divergent opinions have been given by the different High Court the matter was finally decided by the Honble Supreme Court of India in Bhupendra v. Prithvi Raj. It is worthwhile to refer to report judgement on the subject by the Gujarat High Court namely the judgements in Dada Silk Mills and others, 53 (Supra) where the Gujarat High Court has held that in the light of Specific Scheme of Section 138 of the Negotiable Instruments ACT, 1881 the return of the cheque by the banker with any of the endorsements, Refer to Drawer, Insufficiency of funds, Funds not arranged or Account closed ultimately connotes dishonour of the cheque on account of fault on the part of the person who has issued the cheque in not providing sufficient funds or in not arranging for the funds or in closing the Account. We should keep in mind the fact that in the scheme of the Act the legislature has provided an opportunity to the drawer to explain the endorsement made by the banker, and it is always open to the drawer of the cheque to
51 I (1992) BC 259: 1991(1) Crimes 5. 52 Thomas Varghese v. Jerome, 1992 Cri L.J. 308 111 53 (1995) 82 Comp Cas. 35 Guj.
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explain and establish that dishonouring of the cheque was not referable to insufficiency of funds or his not making provision of necessary funds. The object of the legislature while introducing Chapter XVII in the Act cannot be allowed to be frustrated. I. Account closed- It is an offence under section 138 of the Act Closure of account would be an eventuality after the entire amount in the account is withdrawn It means that there was no amount in the credit of that account on the relevant date when the cheque was presented for honouring the same. An account that has been deactivated at the request of the account holder or by the action of the provider in which no additional adjustments may be made. It represents the final, detailed statement of account activities between the two parties. In Om Parkash Maniyar v. Swati Girish Bhide 54 held that the endorsement Account Closed cannot afford a ground for taking penal action under the Act. Except the two ground i.e. the insufficiency of the funds or, because the cheque exceeds the amount arranged to be paid there is no third eventuality contemplated under the Act. The maxim Expresum Facit Sessari Licitum means that express mention of one thing implies the exclusion of the other. Honble Mr. Justice K.T. Thomas of Kerala High Court observed in Japahari v. Priya, 55 held that the contention for attracting penal liability for the offence under Section 138 of the Act the account must have been alive at the time of presentation of the cheque is unsound. If the contention gains acceptance it could open a safe escape route for those who fraudulently issue cheques and close the account immediately thereafter to deprive the payees of the cheque proceeds. It would thus defeat the very object of innovation made through Act No. 66 of 1988 by which Section 138 and its allied provisions were inserted in the Act. Closing the account is one the modes by which a drawer can render his account inadequate to honour the cheque issued by him. I am of the
view that the drawer of the cheque who closes his account with the bank before the cheque reaches the bank for presentation, is actually causing insufficiency of money standing to the credit of that account.
3.3 CONSEQUENCES OF DISHONOUR - There are two points relating to the consequences of the dishonour of the cheques. The first is that by dishonour of the cheque the negotiability of a cheque is lost. In Sukanraja Khimraja, a firm of Merchants, Bombay v. N. Rajagopalan, 56 and the facts were that after the dishonouring of a cheque, the payee (M) endorsed it to (R) for valuable consideration. (R) Demanded payment of the amount as per the cheque from defendants,( namely the firm which issued the cheque and its partners), and they having neglected to pay, the suit was filed. The Trial Court decreed the suit and it was affirmed on appeal. In the Letter Patent Appeal it was contended for the appellants- defendants 1 and 2 ,that the crucial point involved was, whether the alleged cheque was negotiable after being dishonoured, and whether the endorsee (M) who filed the suit could be a holder in due course as defined in Section 9 of the Negotiable Instruments Act. It was held that the plaintiff as the brother of (M), was fully aware that the cheque had been dishonoured, and the endorsement in his favour was only after the Bank returned it. Therefore, Ex. A-1 had lost its negotiability. Hence, he cannot be a holder in due course. This essential characteristics having not been comprehended and more so, when the cheque had never been thereafter presented to the Bank for encashment, the suit as laid, could not have been decreed at all. The second aspect is relating to the question of limitation. In the case it was held that in the event of a postdated cheque given on the date of loan in repayment of debt, being dishonoured, there is no payment at all either on the part of the debt or the whole of it with the result that the debt in question continues to exist and hence, limitation could not
56 1989 1 LW 401
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be counted from the date when the cheque was dishonoured but from the date of the loan. 57
The Supreme Court 58 and Bombay High Court 59 have observed as follows:- The object of Section 138 to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. Despite civil remedy, Section 138 intended to prevent dishonesty on the part of the drawer of 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. Section 138 draws presumption that one commits the offence if the issues the cheque dishonestly. Once such a cheque against insufficient funds has been drawn and issued to the payee and the payee has presented the cheque and cheque is returned to the payee with such an endorsement, it amounts to dishonour of cheque and it comes within the meaning of Section 138. If, after the cheque is issued to the payee or to the holder in due course presents the cheque to the bank for payment and when it is returned on instructions, Section 138 does not attract.
3.4 INGREDIENTS OF LIABILITY UNDER SECTION 138 OF NEGOTIABLE INSTRUMENTS ACT, 1881 The ingredients of liability under the section have been stated in terms of the following points: A) The cheque is drawn on a bank for the discharge of any legally enforceable debt or other liability. B) The cheque is returned by the bank unpaid.
57 Arjuna Lal Dhanji Rathod v. Dayaram Premji Padhiar, AIR 1971 Pat. 278 58 Electronics Trade & Technology Development Corpn Ltd. v. Indian Technologists & Engineers Electronics Pvt. Ltd. 59 Mayri Pulse Mills v. Union of India, (1996) 86 Comp Cas 121 Bom.
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C) The cheque is returned unpaid because the amount available in the drawers account is insufficient for paying the cheque. D) The payee has given a notice to the drawer claiming the amount within 15 days of the receipt of the information by the bank. E) The drawer has failed to pay within 15 days from the date of receipt of notice. 3.5 CONSTITUTIONAL VALIDITY OF SECTION 138 OF N.I.ACT, 1881 The validity of section of 138 of the Negotiable Instruments was challenged before the Maharashtra High Court 60 contending therein that the provisions of this section are violative of Article of 14 of the Constitution of India. The Court examined the matter in detail taking into consideration the facts of the case and various articles of the Indian Constitution and observed that the importance of banking section in the developing economy could not be under-rated. It is not necessary for the purpose of this case to peep into the history of the development of law, whether it is the Bills of Exchange Act of England of the year 1882, the Cheque Act, 1957, and various other statutory exercises. It is the larger public interest that commercial transaction maintain the speed and tempo and that a swift sale or a prompt purpose, is not unduly impeded by suspicions always hovering round that part of promise to be performed in future. The issue of a cheque carries with it assumptions which could regulate the normal functioning of an honest citizen. At a period of time when multitudinous persons and institutions press into services, devices and facilities available under the Negotiable Instruments Act, it may be necessary to ensure that those who issue such vital documents, do not adopt a casual or careless attitude which could block the free flow of trade. It is in the light of the experience, which the State had, that the enactment has been attempted. Court is unable to detect any legal infirmity or constitutional incompetence. The attempt has not been made out as to show how Article 20 of the Constitution can be attracted to such a situation. The statute, therefore, cannot be struck down, merely
60 Narayanadas Bhagwandas Partani v. Union of India, 1993 Mah LJ 1229
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because the petitioners desire to see its collapse. Entry Nos 45 and 46 respectively, refer to banking. Bills of Exchange, Promissory Notes and other instruments. The impugned provisions, would come well within the larger ambit of the entries. It is connected with negotiable instrument, which clearly come with the aforesaid entries dealing with legislative power. Court is unable to see any provision in arbitrariness or infraction of Article 14 of the Constitution. Those who deal in negotiable instruments are not to resort to sharp practices. A time consuming civil litigation may not give immediate or adequate remedy to the victims of an illegal act or a dishonest move. The Parliament could then make a provision with sufficient teeth, as to strongly deal with the ruffians in the trading area, or the unscrupulous elements who play foul with negotiable instrument. Following this, the Bombay High Court held subsequently in Mayri Pulse Mills v. Union of India 61 and Tarun Kumar Bose v. Union of India as follows :- We have no hesitation in holding that Parliament had power and competence to enact Chapter XVI under Entries 45 and 46 of List I in the 7th Schedule of the Constitution. The court also observed that the mere fact that the new sections impose absolute liability dispensing with the doctrine of mens rea does not render the provisions invalid. The provision in Section 140 that it would not be a defence to show that the drawer had no reason to believe when he issued the cheque that it would be dishonoured was held to be valid. The raising of the presumption that the drawer of the cheque is guilty till he proves the contrary is also not arbitrary because the presumption arises only after the basic requirements for the presumption to arise are proved. Burden of Proof & Criminal Liability under Sec 138: In cases of criminal liability under dishonour of cheques the burden of proof lies on the accused who has to prove with the help of the required evidence that the cheque
61 56 ibid
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issued were not for the discharge of the existing debt or liability incurred by the drawer during the due course of time . No burden of proof lies on the complainant to prove with the help of evidence that the said cheque was issued with respect to the discharge of any existing debt or liability incurred by the accused. In complaints under Section 138the Courts have to presume that the cheque or cheques issued were merely for discharging the liability of the drawer and such a presumption made by the Court is rebuttable. The drawer is considered to be criminally liable for dishonour of cheques when he fails to make payment of the amount which is due to the payee within fifteen days of receipt of notice from the payee intimating him regarding the dishonour of cheque and demanding payment of the said amount. In such a case it is considered that as the chance given to the drawer to pay up the amount due after the receipt of the notice was misused by the drawer and so this makes the Courts presume that even if there was no dishonest intention on part of the drawer then also he is considered to be criminally liable for the dishonour of the cheque. Under such circumstances the drawer may subjected to imprisonment for a term of two years or with fine which may exceed twice the amount of the cheque or with both. But assumption of criminal liability varies from case to case. The option either to prosecute the accused or to lay a suit for recovery lies with the payee or the complainant. The payee is even entitled to pursue both the civil as well as the criminal remedies together. The initiation of criminal proceedings does not bar the payee from initiating the civil proceedings against the accused for recovery of the amount due. In Act. G.N. Raju v. B.S. Jaiprakash & Anr., 2006 Cr LJ 820 (Kant) it was held that if the complainant was successful in getting the fruits of the decree in civil court, it would be helpful only as a mitigating circumstance while imposing sentence under Section 138 of NI Act. But such a criminal liability will not be attached on the drawer if the cheque issued was not with respect to the discharge of the legally enforceable debt on the part of the drawer, if the cheque issued was a gift without any consideration, if the cheque was returned by due to some technical problems like signature being not clear, or date not
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mentioned properly, if the complaint made is not within the time limit prescribed by Section 138 and 142 etc.
NATURE OF OFFENCE UNDER SECTION 138 OF N.I. ACT, 1881 The offence is not the drawing of the cheque. The offence takes places when a cheque is returned unpaid on the twin grounds as contained in Section 138 of the Negotiable Instruments Act, 1881. Thus, there is a retrospective operation. The Madras High Court has held that laws made justly and for the benefit of individuals and for the community as a whole may relate to time antecedent to their commencement. The conclusion would be that such prosecution is not hit by Article 20 (1) of the Constitution which provides that no person shall be convicted of any offence except for violation of the law in force at the time of the commission of act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. 62
The amendment had been introduced to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties in case of bouncing of cheques due to insufficiency of funds in the accounts or for the reason that it exceeds the arrangements made by the drawer, with adequate safeguards to prevent harassment of honest drawers. The offence under Section 138 of the Act is a non-cognizable offence by virtue of Section 142 of the Act on account of the non obstante clause as comprised in Section 142 of the Act, the Magistrate receiving the complaint has to proceed straightway to take cognizance of the offence of a complaint being made to him in writing and that he cannot sent the same for investigation to the police. 63 It was held by the Court that in a complaint case alleging commission of a non cognisable offence made in writing to a Magistrate or received in his Court, under Section 192 of the Code, it is incumbent upon him to
immediately take cognizance and proceed to examine upon oath the complainant and his witnesses, if any, and a Magistrate cannot straightaway such a procedure is not warranted by law. In the present case, therefore, it has to be held that the concerned Magistrate erred in sending the copy of the complaint to the SHO for further investigation or enquiry and in not straightaway taking cognizance of the complaint and his witnesses.
3.6 PROCEDURE FOR DISHONOUR OF CHEQUES I. DISHONOUR OF CHEQUE A promissory note, bill of exchange or cheque is said to be dishonoured by non- payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. As against section 91, section 92 applies to all the three types of instruments, namely, promissory notes, bills of exchange and cheques. When the maker of a note, or an acceptor of a bill of exchange, or a drawee in case of need, or an acceptor of a bill (supra) protest or a banker to whom a cheque is drawn fails and neglects to pay the amount against the instrument according to the apparent tenor thereof when presented to him on the due date, the dishonour is complete. 64
II. OBJECT OF NOTICE OF DISHONOUR The object of notice of dishonour to endorser is not to demand payment but clearly to indicate to the party notified that the contract arising on the negotiable instrument has been broken by the principal debtor and that the former being a surety, will now be liable for the payment. This is the principle embodied in section 93 of the Negotiable Instruments Act. 65 The object of giving notice of dishonour is not to demand payment for the party giving notice but to warn the party of his liability and in the case of drawer, to enable him to protect him as against the drawee or acceptor who was dishonoured the
64 1 Kanneganti Venkatasubbayya v. PR Rao Tobacco Co. AIR 1972 AP 72.
65 2 Kanhaya Lal v. Ram Kumar, AIR 1956 Raj 129: 1958 Raj LW 317: (1956) 6 Raj 612 (DB).
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draft. Generally, where the drawer has no funds belonging to himself in the drawees hands neither the presentment of cheque for payment nor notice of dishonour is necessary to charge the drawer. III. NECESSITY FOR NOTICE In Halsburys laws of England, it has been stated that as in the case of dishonour by non-acceptance, so also in that of dishonour by non-payment, notice of dishonour must be given to the drawer and each endorser; otherwise the drawer of any to endorser to whom such notice it not given is discharged. But where a bill has been dishonoured by non-acceptance, and due notice of dishonour has been given it is unnecessary to give notice of a subsequent dishonour by non-payment unless the bill has in the meantime been accepted. The rules for giving due notice of dishonour are the same whether the dishonour has been by non-acceptance or non-payment. 66
The rules relating to the notice of dishonour to be given can be summarized as follows:- (A) Notice must be given by or on behalf of the holder, or by on behalf, of an endorser who, at the time of giving the notice, is himself liable on the bill. Thus the holder, on dishonour, may give notice of it to any previous endorser or endorsers who, in their turn may serve notice to those, whom they would like to hold responsible. Notice may be given by the agent either in his own name, or in the name of any party entitled to give notice.
(B) Where the notice is given by or on behalf of the holder, it ensures for the benefit of all subsequent holders and all prior endorsers, who have a right of recourse against all parties to whom it is given. Thus A, B, C, D and E are endorsers. F is the holder; if F give a notice to A of the dishonour, it ensures for the benefit of B,C,D and E as they have themselves a right of recourse against A.
66 3 Halsburys Laws of England, 4th Edn. Vol. 4(1), Para 422.
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(C) When notice is given by or on behalf of the endorser, it ensures for the benefit of the holder and all endorsers subsequent to the party to whom notice is given. Notice may be given to the party himself or his agent in that behalf. If the drawer of endorser is dead, and the party giving notice knows it, it must be given to his legal representative if he could be reasonably found. If the drawer or endorser is a bankrupt, notice may be given to him or his official assignee. If there are two or drawers or endorsers who are not partners notice must be given to each of them, unless one of them has authority to receive such notice for the others.
IV PARTICULARS TO BE STATED IN NOTICE The plaintiff is a suit based on a negotiable instrument where he is the endorsee must state clearly in his plaint that a notice of dishonour was sent to the endorser and must give the particulars thereof or where he considers that he is exempt from giving this notice, he should allege the facts which exempt him from giving such notice. The notice may be oral or written but it is necessary that it must have been given within a reasonable time. The notice must also clearly estimate that payment was demanded from the drawee but refused and that the holder holds the person notified liable on the instruments. The importance of this requirement lies in the consideration that the giving of a notice of dishonour is a part of plaintiffs cause of action and is a condition precedent for making the endorsee liable and in the absence of such a notice, his liability to the endorsee must stand extinguished. 67 Where the endorsee of a pronote seeks to make the endorser liable, the fact of presentment and issue of notice of dishonour should be made clear in the plaint itself, as notice of dishonour has been held to be a material part of the cause of action where there is no such allegation in the plaint, nor is there any proof of the same, the
67 4 Kanhaya Lal v. Ram Kumar, AIR 1956 Raj 129: 1958 Raj LW 317: (1956)6 Raj 612. 131
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endorsee of a simple on demand pronote will not be entitled to a decree against an endorser. 68
Section 94 of the Negotiable Instruments Act speaks of the modes in which notice has to be given and notice by post is a perfectly legal method by which notice can be given. 69 Proviso (b) to section 138 of the Act insists that the said notice should be in writing; and the liability under section 138 of the act would arise only if the accused defaulted payment within 15 days of the receipt of notice. This has got special significance; only if the person accused of the offence knows as to the dishonour can he pay the amount within the stipulated time.
V PROCEDURE OF NOTICE Section 138 of the Amended Act is the section which may be terms as the king pin and provides both for punishment of imprisonment and fine both alternatively with imprisonment or fine as the case may be, yet, the working of the section is governed by the three provisos to the Section which may be termed as the regulating and controlling factors. In case any of the basic requirement is not fulfilled and in case any particular case is hit by non-compliance to the condition specified therein, a person cannot be prosecuted under Section 138 of the Act. These provisos have been in brief as under: Clause (b) of the proviso of Section 138 states that the payee or the holder in due course of the cheque makes a demand by giving a notice within 15 days of the receipt of information by him regarding the dishonour of the cheque. Now the period of 15 days has been increased to that of 30 days by the Amendment Bill No. 55 of 2002. In this way this proviso stipulates
a) The payee is the holder in due course. b) A demand in made by giving a notice by the payee to the drawer.
68 5 Kothan V. K. v. Kannan, AIR 1951 Mad 632 (1949)2. 69 8 Ravi v. Kuttappan, (2007) 3KLT31: IV (2007) BC 162 (Ker).
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c) The notice is given within a period of 15 days (now 30 days as per new provisions) from the date of receipt of the information about dishonour. The provision of a notice in the proviso (b) to Section 138 of the Act has been enacted so as to give an opportunity to the person who has drawn the cheque to make the payment. In case there is no mala fide on his part. What is contemplated by the section is a notice in writing.
A. Written Form - The Clause (b) of proviso to Section 138 of the Negotiable Instruments Act, 1881 contemplates notice in writing. It does not say that is should be sent by Registered Post or that is should be served by post. The Section 27 of the General Clauses Act cannot be transposed into Section 138 of the Negotiable Instruments Act, where the service by post is not contemplated and what is contemplated is notice in writing. 70
B. Proper Address
Where the notice, which was sent to the accused, returned with endorsement not found and the complainant immediately went to the business place of the accused to deliver notice, which was refused, it was held that notice sent at proper address amounts to constructive notice. This is a notice which was sent by the complainant by the Registered Post for the purpose of Section 138 of the Negotiable Instruments Act and which was returned with the endorsement unclaimed. This shall be sufficient service for the purpose of the Act and shall amount to a culpable default or deliberate evasion of the accused. This would constitute receipt of notice. 71
70 9 V.P.Ravathi v. Asha Bagree, 1 (1992) BC 467: (1992) 1 Crimes 743: 1992 Vol. 75 Comp. Cas. 372 71 Prasanna v. R. Vijay Lakshmi, 1 (1992) BC 671: 11(1993) Crimes 679
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a) The Delhi High Court has held that the receipt of notice by even a partner habitually working for the business of the Firm operates as a notice to the firm. 72
b) In case a notice is issued to a firm then there is no question of issuing a notice to all the partners. 73 In the case the notice is refused, the cause of action is the date of refusal and file the complaint within 15 days of the refusal of the notice. 74
c) The Calcutta High Court has held that in case of offence by the Company, no separate notice under clause (b) of proviso to section 138 is required to the Director of the Company. 75
C. Obligations under Section 138 of Negotiable Instruments Act, 1881
To constitute an offence under Section 138 of the Negotiable Instruments Act, 1881, the Complainant is obliged to prove its ingredients which include the receipt of notice by accused under clause (b). It is to be kept in mind that it not the giving of notice which makes the offence, but is the receipt of the notice by the drawer which gives cause of action to complainant to file the complaint within the statutory period. 76
It is settled law that without taking peremptory action in exercise of his right under clause (b) of Section 138 of the Negotiable Instruments Act, 1881, the payee cannot go on presenting the cheque so as to enable him to exercise his right at any point of time during the validity of the cheque. But once he gives a notice under clause (b) of the proviso to Section 138 of the Act, he forfeits the right of presenting the cheque all over again, for, in the case of failure of drawer to pay the money within the stipulated time, the
72 Renu Vohra v. Shreyans Papers Mills Ltd., II (1993) CCR 1471 73 Oswal Ispat Udyog v. Salem Steel Suppliers, 78(1993) Comp. Cas. 512 74 Ghanshyam M.Swamy v. M/s. Classic Steel Products, (1992) 75 Comp. Cas. 695: 1 (1992) BC 240. 75 Dalip Kumar Jaiswal v. Debapriya Bannerjee, 1 (1992) BC 403 (DB): 1992(1) Crimes Cal. 1233: (1992)73 Comp. Cas 434: 1992 Bank J. 417 76 Dalmia Cement ( Bharat) Ltd. v. Galaxy Traders and Agencies Ltd. and others, (2001) 5 Comp.LJ 26 (SC)
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drawer would be liable for the offence and the cause of action for filing the complaint will arise with the period of one month for filing the complaint being required to be reckoned from the day immediately following the day on which the period of fifteen days from the date of the notice by the drawer expires. 77
Statutory notice of demand must be a written notice and not an oral notice. When the complainant brought fact of dishonour of Cheque to notice of accused orally but on request by accused, complainant allowed three months time. On second presentation, cheque was again dishonoured. Statutory Notice after second dishonour by complainant was well within validity period then complaint filed after second dishonour within validity period was proper. 78
D. Whether Service of Notice could be Constructive It has been held that sub- Section (c) of Section 138 does not at all contemplate any constructive notice 79 . If constructive notice has been contemplated under the said sub- Section by the Legislature, sufficient phraseology would have been utilised for such a purpose. The language used therein, namely, receipt of the said notice, unambiguously points out actual receipt of the notice. In the case on hand notice issued has not been actually served but it has been returned with a postal endorsement as not found. Such being the case, it cannot at all be stated that the provisions of sub-Section (c) of the said Section had been duly complied with and the non-compliance of the said provision is sufficient enough for the prosecution to be thrown back, stock and barrel. The provisions of sub-Section (c) of the said Section contemplates constructive notice, even then it cannot be stated that in the case on hand, there is a plausibility to
77 Sadanandan Bhadran v. Madhavan Sunil Kumar (1998) 4 Comp. LJ 228(SC): (1998) 94 Comp. Cas 812 (SC) : AIR 1998 SC 3043.
78 H.N.Haria v. A.J. Mavla (2002) 1 Comp. LJ 143 ( Karn) 79 R.M. Sundaram v. C.M. Ramraj, 283 Mad.
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come to the conclusion of the existence of such a constructive notice. It is not as if the notice has been returned as refused to receive and in such an eventuality, one can attribute knowledge on the part of the person responsible for the refusal of such a notice. In the case of a postal acknowledgement as not found, which is exactly the situation in the case on hand, it cannot be stated that there could have been any sort of wilful evasion of such a notice, in as much as issuance of such a notice could not be put to the knowledge of the person to whom it was intended. Therefore it is held that it cannot be stated that the complaint had complied with the provisions of sub Section (c) of Section 138 of the Act and consequently, he has to face the music of dismal failure of his complaint being thrown out. If refusal and even failure to claim in circumstances as here will be tantamount to service of notice. The appellant was not case at all that it had not been proper addressed to him that, therefore, it was returned. The evidence in this case showed that it was properly addressed to him, that he refused/failed to claim and that there was, therefore, proper service of notice upon him, whose grievance in this behalf was unfounded. 80 If a notice is not given within the stipulated period as mentioned in clause (b) of the proviso attached to Section 138 of the Act, the said section would not apply. As the provision in terms states that nothing contained in this section shall apply unless clause, a, b or c are complied. 81
i) Service of Notice Madras High Court held that where the notice was returned by the post office with the remark that the addressee was not found, it was held to be not a notice for the purposes of a complaint. The court noted the language used in Section 138 (c) receipt of the said notice and said that this unambiguously pointed to the actual notice to the other
80 Kunjan Panicker v. Christudas, 1997(4) Crimes 477 at pp. 479,480 81 Jitinder Kumar Chopra v. Harish Kumar, II (1997) CCR 626 at p. 627
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party. The return of the notice must show at least wilful evasion. 82 The court followed its own earlier decision to the effect that Section 138 (c) did not contemplate constructive notice. Hence, a written demand notice returned with the postal endorsement not found could not be said to have complied with the requirements of the Act 83 . The court said that if constructive notice had been contemplated, the legislature would have used apt phraseology for the purpose. The matters would have been different if the notice had been returned under refusal because in that case presumption of notice would be there. The Allahabad High Court has held that the omission to mention the date of service in the complaint did not affect the maintainability of the complaint. Madras High Court held that wherein the allegations in the complaint were that the notice was deliberately avoided, complaint was not quashed. In another case it was held that the deliberate avoidance of notice amount to constructive notice and refusal notice is also constructive service. Then Kerala High Court has held that the miscarriage of notice in post does not affect the validity of notice. 84
Bombay High Court has held that the Provisions requiring notice to be given are generally construed liberally. In the context in which notice to the drawer is contemplated in clause (b) of the proviso of Section 138, a liberal interpretation is needed in favour of the person who is under the statutory obligation of giving notice since he is the loser in the transaction and it is for safeguarding his interest that the new provisions have been made. The giving of notice and receipt of notice are two different things but even so the court held that in the present context if the payee has despatched notice to the correct address of the drawer reasonably ahead of the expiry of 15 days, it would be sufficient to show that the notice has been received by the opposite party. 85
Kerala High Court has held that the questions whether the notice was despatched in time, whether the drawer evaded service can be decided at the trial. 86
On the other hand the Bombay High Court has held return of acknowledgement receipt is a good evidence of constructive notice. The date of service can also be examined at the trial even if not mentioned in the complaint.
ii) Mode of communication Section 94 of the Negotiable Instruments Act provides that the notice of dishonour may be given to a duly authorised agent of the person to whom it is required to be given, or, where he has died, to his legal representative, or where he has been declared an insolvent, his assignee; may be oral or written; may, if written, be sent by post; and may be in any form; but it must inform the party to whom it given either in express terms or by reasonable intendment, that the instrument has been dishonoured, and in what way, and that he will be liable thereon; and it must be given within a reasonable time after dishonour, at the place of business or ( in case such party has no place of business) at the residence of the party for whom it is intended. If the notice is duly directed and sent by post and miscarried, such miscarriage does not render the notice invalid. Madras High Court has upheld its earlier view 87 that it is not necessary that the notice of dishonour (notice in writing) which is required under Section 138(b) should be sent by registered post. It may be sent by an ordinary letter or even by a telegram. The same High Court held that notice within stipulated time requiring payment of cheques as well as other dues is valid.
VI CAUSE OF ACTION
86 Syed Hamid Bafaky v. Moideen, (1996) 85 Comp. Cas 267 Ker. 87 V.P.Revathi v. Asha Bagree, (1992) 75 Comp. Cas. 372 Mad 1991) LW (Cri) 468
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Allahabad High Court held that the cause of action under the proviso (b) and (c) of Section 138 of the Negotiable Instruments Act, filing complaint cannot be said to arise merely on the cheque being dishonoured but will arise only after the giving of notice of demand of a the amount of the cheque by payee or holder in due course of the cheque to the drawer of the cheque and coupled with the failure of the drawer of the cheque to pay the amount within 15 days of the date of service or receipt of the notice on or by him. Whereas the Madras High Court held that the mere presentation and dishonour do not create the cause of action. It is the notice, which gives the cause. There is no restriction on the number of times for presenting the cheque for payment. Accordingly, any one of those presentments, within the time limit of six months, may be chosen for given notice and launching prosecution. 88 In this case it followed its earlier decision 89 . In another case it held that the date of the issue of the cheque could be enquired at the trial 90 . A cheque can be presented by the payee or its holder in due course on different occasions but within the prescribed period of six months or the period of validity of the cheque whichever is earlier, further a clear stipulation that upon the dishonouring of the cheque for the first time, the payee has not taken any action as postulated in terms of provision (b) and (c) of provision to Section 138 of the Act. 91
Failure to file prosecution on the dishonour of a cheque on the first occasion is not a bar for initiation of a prosecution subsequently, and successive dishonour of cheque on different occasions, of course, presented within its period of validity, will have to be construed as constituting separate cause of action for the initiation of a prosecution. According to Sections 138 and 142(b) cause of action to file complaint arises on the expiry of notice demanding payment and not earlier. VII PROCEDURE FOR FILING OF COMPLAINT
88 K.Annakldi Ammal v. K. Ethiraj, (1994) 80 Comp. Cas. 870 Mad. 89 K.V. Iyer v. Chitra & Co. (1990) 2 MWN ( Cri) 47 90 L.Sashikala v. Integrated Finance Co. Ltd. (1994) 80 Comp. Cas, 875 Mad. 91 Harshivinder Singh v. M/s Bhagat Trading Co. (1998 Cri LJ 345 at 350,351
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The Act does not define complaint anywhere in the act itself but only states that after dishonouring of a cheque a notice within 15 days of information received from the banker complaint be instituted before the Magistrate 1st Class having jurisdiction to try the case. However, the term complaint has been defined in Section 2(d) of Code of Criminal Procedure, 1973 as under: Complaint, means any allegation made orally or in writing to a Magistrate with a view to his taking action under this Code, that some person, whether known of unknown, has committed an offence, but does not include a police report. A report made by a police officer in a case which discloses, after investigation, the commission of a non-cognizable offence shall be deemed to be a complaint; and the police officer by whom such report is made shall be deemed to be the complainant. It is crystal clear that the complaint filed before the Magistrate should sets out the allegation, which prima facie constitute an offence under the Act stated therein, and also there is a prayed therein to take cognizance of the said offence and to compel the accused by legal process to stand his trial under the law. For the refraction or violation of the provisions of Section 138 of the Negotiable Instruments Act, the Court is empowered to take cognizance of such offence only if the complaint is preferred by the payee or the holder in due course of the cheque. In case of Company or Firm it will be filed by its representative.
A. Private Complaint Clause (a) of Section 142 contemplates of filing of a private complaint only. This section does not give any indication to refer such a private complaint filed by the payee or the holder in due course to the police for investigation under Section 156(3) of the Code of Criminal Procedure by the magistrate before whom such a complaint is filed. 92
92 K.Mahadevan v. Y.Venkatesh ,(1992) 3 ALT 634
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Andhra Pradesh High Court held that the cognizance of a complaint by a magistrate on police complaint not to be valid. 93 In another case the same High Court has held that the Magistrate has no power to refer to the matter to the police. 94
B. Reference to Police Karnataka High Court held that there is much force in the contention that for an offence punishable under Section 138 of the Act, the procedure as contemplated under Section 142 of the Act is an answer and making reference to police under Section 156(3) Cr. P.C. is not warranted. This contention supported by its earlier decision. 95
VII. LIMITATION FOR FILING COMPLAINT The object which such provisions seeks to sub-serve is clearly in consonance with the concept of fairness of trial as enshrined in Article 21 of the Constitution of India. It is, therefore, of the utmost importance that every prosecution must abide by the letter of law or take the risk of the prosecution falling on the ground of limitation. Clause (c) of Section 138 of the Negotiable Instruments Act, 1881 provides that the cause of action arises on the failure of the drawer 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 given under Clause (b) thereof, and not before that. No such complaint can, therefore, legally be filed before the aforesaid period. That being so, the material and relevant date for accrual of cause of action for such-like complaint is the date of receipt of the notice by the drawer. Knowledge of the sender about the date of receipt of the notice by the drawer is, therefore, very much material as regards accrual of the cause of action for making such-like complaint. In cases where notice is sent by registered post A/D, the knowledge of the sender (complainant) about the date of receipt of such notice would invariably be dependent
93 Y.Venkateshwar Rao v. Mahee Handlooms P. Ltd.(1994) 79 Comp. Cas. 206 AP 94 Jagarlamudi Durga Prasad v. State of A.P., (1993) 76 Comp. Cas 339 AP 95 H.Mohan v. State of Karnataka, 1991(2) Crimes 93 (Kar).
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upon other agencies, namely, the Postal Department which is obliged to return back the A/D card to the sender of the registered notice. More often than not A/D card is hardly returned back to the sender in time or never reaches back the sender, necessitating correspondence with the Postal Department as to the delivery/service of the registered notice or the date of delivery/service of such notice, which may often involve a time consuming process. In such cases, such like complaint is likely to fail for no fault of the complaint, but for the failure/latches on the part of the Postal Department. The knowledge of the sender of the notice about the date of receipt of the same being an essential requirement of fair play and natural justice, the expression within 15 days of the receipt of the said notice, used in the aforesaid provision, should clearly mean the date when the sender acquires the knowledge about the date of the receipt of the notice given by him under Clause (b) of the relevant provision. If a person is given a right to resort to a remedy within a prescribed time, limitation should not be computed from a date earlier than that on which the party aggrieved actually knew about the date of accrual of cause of action for making a complaint before the competent court for seeking redress thereof, or else, it might be an absurd and unreasonable application of law. On a fair and reasonable construction, cause of action for such complaint, so far as the complainant is concerned, would thus accrue on the failure of the drawer to make payment within 15 days from the date of knowledge of the complainant about the receipt of the notice by the former (Drawer). 96
From a plain reading of section 142 (b) of the Act, it is manifest that a competent court can take cognizance of a written complaint of an offence under section 138 if it is made within one month of the date on which the cause of action arises under clause (c) of the proviso to section 138. The term one month would be the calendar month and as per section 3(35) of the General Clauses Act, 1897, the number of days in a month be reckoned according to the British Calendar, under which some months have 31 days and others have 30m days while one month has 28 or in a leap year 29 days.There was a
96 Santa Priya Engineers Pvt. Ltd. and others. v. Uday Sanker Dass and others. (1996) 296 (Cal)
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controversy as to whether the period of one month should be reckoned from the day after the period of 15 days or excluding that day. Examining the matter in the light of section 12 (1) and (2) of Limitation Act, 1963 and section 9 of the General Clauses Act, 1897, the Apex Court laid down that ordinarily in computing the time, the rule observed is to exclude the first day and to include the last. Thus the period of one month as contemplated in section 142 (b) for filing complaint shall be reckoned from the day immediately following the day on which the period of 15 days from the date of the receipt of notice by the drawer expires but excluding that very day. In this case the period of 15 days expired on 14 October 1995, and cause of action arose on 15th October, 1995. It was held that after excluding 15th October 1995 the period of one month will extend upto 15th November 1995 therefore, complaint filed on 15th November 1995 is within limitation; refer : M/s Saketh India Ltd. & Others Vs. M/s India Securities Ltd., A.I.R. 1999 SC 1090. Earlier in Sections 138 to 142 there was no provision for condonation of delay in making complaint. By Amending Act of 2002 a proviso has been added to sub-clause (b) of Section 142 which provides that the Court may take cognizance of complaint after the prescribed period if it is satisfied that the complainant had sufficient cause for not making complaint within prescribed period. The Amendment Act of 2002 has come into force from 6.2.2003. Apart from the period of limitation prescribed in section 142 (b) of the Act, two other timeframes are also required to be noticed which a complainant is expected to observe in order to have a cause of action for filing a complaint under Section 138 of the Act. Firstly, as required by proviso (a) to Section 138, the cheque must be presented to the drawee Bank within a period of six months from the date on which it is shown to have been issued or within the period of its validity, whichever is earlier. The non-presentation of the cheque to the drawee bank within the specified period would absolve the person issuing the cheque of his criminal liability under section 138 of the Act; refer: Shri Ishar (supra). In case of a post-dated cheque the period of six months shall commence from the date written on the cheque. Secondly, after dishonour of the
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cheque the complainant should make a demand for the payment of money by giving a notice to the drawer of the cheque within 30 days (prior to Amendment of 2002 15 days) of the receipt of information by him from the bank regarding the return of the cheque as unpaid. So 30 days are to be counted from the receipt of information regarding the return of the cheque as unpaid. In M/s Munoth Investments Ltd. Vs. Puttokola Proprietors Ltd., A.I.R 2001 SC 752, the cheque was returned by the bank on 13th and information was given to the complainant only on 17th because 14th, 15th and 16th were Pongal holidays, the Apex Court held that the period of 15 days is to be counted from 17th and not from 13th.
A. When the period of limitation expires on holiday It has been held by the Madras High Court that the complaint to be filed within 45 days from the date of service of notice of dishonour on the drawer and where the period of 45 days expired on a holiday, presentation of complaint on next working day as the same is not barred by time. 97
B. Successive dishonour It has been held by the Andhra High Court that the complainant can file a complaint for offences under Section 138 read with 142 of the Negotiable Instruments Act after the dishonouring of the cheque for the first time or he may choose to present the cheque at the request of the drawer with the said period of six months from the date of the cheque any number of times but the action to be taken by filing complaint is only once and the period of limitation has to be counted from the date of last dishonouring of the cheque. That means the limitation period cannot be taken into consideration from the first date of dishonouring and the last date of dishonouring alone has to be taken into consideration. 98
97 M.Y.Maharishi v. M/s Tagore Financiers, (1992) Mad. 306
98 M/s Syed Rasool and Sons and Others v. (M/s) Alida and Co. and others (1996) 14 (A.P.)
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C. Fresh Representation Does Not Increase Limitation It has been held by the Punjab and Haryana High Court that once a cause of action had arisen, the limitation will begin to run and it could not stopped by presenting the cheque again so as to have a fresh cause of action and fresh limitation. The criminal prosecution (under Section 138 of the Negotiable Instruments Act) had to be launched within one month of the expiry of fifteen days period from the receipt of notice by the drawer as provide by Section 142(b) of the Act. Section 138 of the Amended Act is the section which may be terms as the king pin and provides both for punishment of imprisonment and fine both alternatively with imprisonment or fine as the case may be, yet, the working of the section is governed by the three provisos to the Section which may be termed as the regulating and controlling factors. In case any of the basic requirement is not fulfilled and in case any particular case is hit by non-compliance to the condition specified therein, a person cannot be prosecuted under Section 138 of the Act. Clause (b) of the proviso of Section 138 states that the payee or the holder in due course of the cheque makes a demand by giving a notice within 15 days of the receipt of information by him regarding the dishonour of the cheque. Now the period of 15 days has been increased to that of 30 days by the Amendment Bill No. 55 of 2002. SUCCESSIVE PRESENTATION ONE CAUSE OF ACTION: A cheque can be successively presented before the bank but the question arises whether every presentation and consequent dishonour of the cheque gives rise to a fresh cause of action. Dealing with this issue the Apex Court in Sadanandan Bhadran Vs. Madhavan Sunil Kumar, (1998) 6 SCC 514, laid down that of course, in the course of business transactions it is not uncommon for the cheque being returned due to insufficiency of funds or such similar reasons and being presented again by the payee after sometime, on his own volition or at the request of the drawer in expectation that it would be encashed. The primary interest of the payee is to get his money and not prosecution of the drawer, recourse to which, normally, is taken out of compulsion and
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not choice. On each presentation of the cheque and its dishonour, a fresh right-and not cause of action accrues in his favour. He may, therefore, without taking pre-emptory action in exercise of his right under clause (b) of section 138, go on presenting the cheque so as to enable him to exercise his right at any point of time during the validity of the cheque. But once he gives a notice under clause (b) of section 138, he forfeits such right, for in case of failure of the drawer to pay the money within the stipulated time, the cause of action for filing the complaint will arise.
SUM UP: The people who issue cheques knowingly well that cheque is not going to be honoured on presentation, try to create circumstances in which the banks return the cheque with such endorsements as Stop payment, Refer to Drawer and A/c closed. This is with a view to escape from the criminal liability. Account Closed cannot afford a ground for taking penal action under the Act. Except the two ground i.e. the insufficiency of the funds or exceed arrangement because the cheque exceeds the amount arranged to be paid there is no third eventuality contemplated under the Act. Further, the main object of Section 138 was to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. Despite civil remedy, the present day economies of the world which are functioning beyond the international boundaries are relying to a very great extent on the mechanism of the Negotiable Instruments such as cheques and bank drafts and also the oriental bill of exchange as the business activities have increased, the attempt to commit crimes and indulge in activities for making easy money has also increased. Thus besides civil law, an important development both, in internal and external trade is the growth of crimes and find that banking transactions and banking business is every day being confronted with criminal actions and this has led to an increase in the number of criminal cases relating to or concerned with the Banking transactions. Whenever a cheque is dishonoured, the legal machinery relating to the dishonour of a cheque comes
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into motion. It is in the larger public interest that commercial transaction maintains the speed and tempo and that a swift sale or a prompt purpose, is not unduly impeded by suspicions always hovering round that part of promise to be performed in future. The issue of a cheque carries with it assumptions which could regulate the normal functioning of an honest citizen. 67 Belgaun Bank Ltd. v. Bando Raghunath AIR 1945 Bom. Notice may be given to the party himself or his agent in that behalf. If the drawer or endorser is dead, and the party giving notice knows it, it must be given to his legal representative if he could be reasonably found. If the drawer or endorser is a bankrupt, notice may be given to him or his official assignee. If there are two or more drawers or endorsers who are not partners, notice must be given to each of them, unless one of them has authority to receive such notice for the others. It is necessary that it must have been given within a reasonable time. The notice must also clearly estimate that payment was demanded from the drawee but refused and that the holder holds the person notified liable on the instruments. For filing complaint cannot be said to arise merely on the cheque being dishonoured but will arise only after the giving of notice of demand of a the amount of the cheque by payee or holder in due course of the cheque to the drawer of the cheque and coupled with the failure of the drawer of the cheque to pay the amount within 15 days of the date of service or receipt of the notice.
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CHAPTER V: JURISDICTION OF COURTS AND INITIATION OF TRIAL
4.1 JURISDICTION The jurisdiction of the Area is concerned, the complainant can choose any one of those courts having jurisdiction over any of the local areas within the territorial limits of which any one of the following acts took place: i) Drawing of the cheque. ii) Presentation of the cheque iii) Returning of the cheque by drawee bank iv)Giving of notice in writing to the drawer of the cheque demanding payment of cheque and failure of the drawer to make payments within 15 days of receipt of notice. 99
Jurisdiction u/s 138 of N.I. Act, 1881 A. Cause of Action: Where a cheque was issued for business purchased at one place and the recipient of the cheque also deposited the cheque into his account at that very place, but, after dishonour, he issued notice of dishonour from his place of business in some other town, it was held that a complaint filed at that place was competent. The cause of action partly
99 K.Bhaskarn v. Shanta Karan Vidyan Balan AIR 1999-7 SC-570
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arose there because to discharge his liability the drawer would have to make arrangement for payment at the recipient place. Thus the places where the payment was to be made and where the cheque was delivered are also relevant. Where a cheque was given at Delhi but was deposited by the payee at some other place, there was no jurisdiction at that place. It is the duty of the debtor to seek his creditor and, therefore, the court at the place of the payee had jurisdiction. Cause of action may arise at the place where the cheque was issued or delivered or where the money was expressly or impliedly payable. Where there was averment in the compliant of an agreement to return the money at the residence of the complainant, it was held that the cause of action arose there.
B. Where Refusal Takes Place Section 177 of The Code of Criminal Procedure states that every offence shall ordinarily be enquired into and tried by Court within whose local jurisdiction it was committed and Section 179 of the said Code states that when an act is an offence by reason of anything which has been done, and of a consequence which has ensured, the offence may be enquired into or tried by the Court within whose local jurisdiction such thing has been done or such a consequence has ensued. So far as the complaint lodged by the respondent No. 2 against the petitioners for an alleged offence under Section 138 of the Negotiable Instruments Act, 1881 is concerned, from the complaint, it is evident that the cheques that were issued by the petitioner No 1 under the signature of the petitioner No. 2 in the name of the respondent No. 2, were drawn on the Vijaya Bank at Shakespeare Sarani in Calcutta, although sent to Bombay, and the cheques were produced at Vijaya Bank at Shakespeare Sarani in Calcutta for encashment where those were dishonoured. Accordingly, if any offence was committed by the petitioners at all, it was committed in Calcutta as per the provisions of Section 179 read with Section 177 of the Code of Criminal Procedure and such an offence is to be tried by the Court within whose local jurisdiction such offence was committed namely, by a competent Criminal Court in
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Calcutta. The ratio of the decisions in AIR 1954 SC 429: AIR 1960 Cal 513: AIR 1963 Pat. 398 and AIR 1974 P & H 2, therefore, apply with full force so far as the contention of Mr. Mukherjee regarding the lack jurisdiction of the Metropolitan Magistrates Court in Bombay to entertain the disputed complaint against the petitioners is concerned, as from the facts of the present case, it becomes quite clear, that if there be any cause of action for starting a criminal proceeding against the writ petitioners for their alleged offence at all, such cause of action has arisen wholly in Calcutta when the alleged offence has been committed and not in Bombay as no part of such cause of action has arisen there. 100
Once the cheque is dishonoured and the payee serves the notice he is entitled to enforce his rights under Section 138 of the Negotiable Instruments Act at the place of his business. The Courts at Khanna have the jurisdiction to try the criminal charges against the petitioner. No case is thus, made out for quashing of the complaint and consequent proceedings. 101
The complaint can be filed in a Court within the jurisdiction of which the cheque has been drawn or the place where the cheque is presented for collection and received an endorsement about the dishonour of the cheque or the place where the cheque is dishonoured. In this case the cheques drawn on State Bank of India, Kurnool Branch of Hyderabad for collection where a part of the cause of action arose. Therefore, the Court at Hyderabad has got jurisdiction to try the case. Under those circumstances, the learned Magistrate is perfectly right in dismissing the petition filed by the accused which does not call for interference. 102
C. In Case of Non Payment
100 Indmark Finance and Investment Co. (Pvt) Ltd. v. The Learned Metropolitan Magistrate 28th Court, 1992(1) Crimes 993 at p. 997 101 T.K.Khungar v. Sanjay Ghai, 1994(3) Crimes 802 102 M/s Goutham T.V. Centre v. M/s Apex Agencies, 1993(1) Crimes 723: 1993 Cri. LJ 1004.
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Since Section 142(b) of the Acts speaks of cause of action. What does cause of action mean? A court gets jurisdiction over the matter if the cause of action arises within the local limits of its jurisdiction. Cause of action means: the whole bundle of material facts which it is necessary for the plaintiff to prove in order to entitle him to succeed in the suit to ascertain whether the bundle of facts give rise to the cause of action and to determine whether one or more of those facts had occurred within the territorial jurisdiction of the Court the entire plaint has to be taken into consideration. In the decision in the State of Madras v. C.P. Agencies, 103 the Supreme Court quoted with approval the following observations in Ms. Chand Kaur v. Partap Singh, 104
Now the cause of action has no relation whatever to the defence which may set up by the defendant, nor does it depend upon the character of the relief prayed for by the plaintiff. It refers entirely to the grounds set forth in the plaint as the cause of action, or, in other words, to the media upon which the plaintiff asks the Court to arrive at a conclusion to his favour. The question whether the Court within whose jurisdiction cheque is delivered can entertain the suit arose for consideration in the decision of Lachhman Dass v. Chuhra Mal. 105 It was held that in a suit for recovery of loan, the cause of action does not constitute merely the giving of loan but it consists for of a bundle of facts including the agreement relating to the loan, the place where the plaintiff delivered to the defendant the cheque for the amount of loan and the place where the loan was to be paid back. It was observed that if no cash was advanced by plaintiff to the defendant but it was the cheque that constituted the loan, then the place where the defendant got the cheque from the plaintiff gives rise to a part of the cause of action and the plaintiff has a right to institute the suit in the Civil Courts within whose territorial jurisdiction the cheque was delivered to the defendant.
103 AIR 1960 SC 1309. 104 15 Indian Appeals, 156. 105 AIR 1952 Pepsu 5.
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The complaint can be laid at the place wherein the cheque was dishonoured and also at the place where the cheque was issued, which means that the complaints laid in these cases before the Judicial First Class Magistrate-II Kannur has jurisdiction to try the offence. 106
As per Section 179 of Cr. P.C. the place where the cheque was given or handed over will have jurisdiction and the courts of that place will have jurisdiction to try the offence. Likewise for purpose of Section 178(b) payment of cheque may be one part of an offence and dishonour of the cheque may be another part and, therefore, both places, i.e. place where the cheque was handed over and the place where it was dishonoured will have jurisdiction. 107
D. The Court to Try Offence The offence falling under Section 138 of the Act will not be the only solitary act of dishonour by the Bank on which the cheque is drawn. Even giving of the cheque by the accused when he has not made arrangements for honouring of the cheque itself will be a part of the facts constituting the offence. Section 178(b), Cr. P.C. lays down that when an offence is committed partly in one local area and partly in another area, it may be enquired into and tried by a Court having jurisdiction over any of such local areas. Under Section 179, Cr. P.C. when an act is an offence by reason of anything which has been done and of a consequence which has ensued, the offence may be inquired into or tried by a Court within whose local jurisdiction such thing has been done or such consequence has ensued. Giving the cheque by the accused to the complainant and giving the cheque for collection by the complainant to its Banker at Bangalore will also be the facts constituting the offence. Therefore, in view of the provisions of Sections 178(b) and 179 Cr. P.C. the complaint can be filed in a court within the jurisdiction of which the cheque
106 Mohmmed Kunhi v. Abdul Kagged, 1996(3) Crimes 406: 1 (1996) BC 271 Ker. 107 CanBank Financial Services Ltd. v. Gitajli Motors Pvt. 1996 (1) BC 221: 1995 Cri. LJ 1222: 1995 (1) Crimes 342 : 1995(1) Civil LJ 902.
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has been issued or the place where the cheque is presented for collection or the place where the cheque is not honoured. In view of this position of law, the learned Magistrate was wrong in coming to the conclusion that he has no jurisdiction to entertain the complaint. He has the jurisdiction to entertain the complaint in view of the fact that the cheque was issued by the accused at Bangalore and the cheque was given for collection by the complainant to its Banker at Bangalore. These are the facts which took place within the jurisdiction of the Court. 108
It is well settled now that the Court has jurisdiction over the area where the cheque was issued or delivered or where the drawer of the cheque fails to make payment of the money or where the cheque was presented for encashment or the area where the payment was to be made. Therefore, the appellant had cause of action to file the complaint before the lower Court where the cheque was presented for encashment and the lower court had jurisdiction to take cognizance of the offence. Therefore, the finding of the lower court that it had no jurisdiction to take cognizance of the offence is absolutely unsustainable. 109
The non payment of cheque amount at Madras, despite the written demand from the Registered Office at Madras, would make the offence complete. This is made clear even from the observation made by the High Court of Kerala in P.K. Muraleedharan case, 110
that the cause of action arises at the place, where the cheque was issued or delivered or the place where the money was expressly or impliedly payable. In the instant case, the complainant, the Registered office at Madras demands money from Madras, asking the drawer to pay the money to Madras office. Therefore, the place where the money is payable also will have the jurisdiction. 111
E. Where Cheque Dishonoured- Under Section 138 of Negotiable Instruments Act, 1881 and Sections 177 & 179 Cr. P.C.
108 M/s. Pohathi Agencies v. The State of Karnataka, 1991 Cr. LJ 2530 at p. 2531 Kar. 109 Varghese v. C.K. Ramani, 1998 Cri. LJ 2755 at p. 2757. 110 1993(1) Crimes 46. 111 Narang Industries Ltd. v. Ashok Leyland Finance Ltd., I (1998) BC 532 at p. 542.
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A reference may also be made to the decision in Re Jivandas v. Savchand, 112 which deals with the question of jurisdiction in a case filed for the offence under Section 406 of the Indian Penal Code. It was held by the Full Bench of the Bombay High Court as follows: What Section 179 provides is that when a person is accused of the commission of any offence by reason of two things, by reason first, of anything which has been done, and secondly, of any consequence which has ensued, then the jurisdiction is conferred on the Court where the act has done or the consequence has ensued. The offence, therefore, must be charged by reason of the two things, the act done and the consequence which ensued and the consequence, therefore, forms the necessary part of the offence. 113
Where cheque was presented for collection that Court had also the jurisdiction to try the complaint. In the present case, the cheque was presented at Chandigarh and respondent was also informed through Bank regarding bouncing of the cheque. Therefore, the Courts at Chandigarh had the jurisdiction to entertain the criminal complaint. 114
F. Where Even Part Cause of Action Arises Coming to the question of jurisdiction, it is to be considered that the issuance of the cheques and their dishonouring are only a part of cause of action, the offence was complete only when the petitioners failed to discharge their liability to the respondent- firm. For discharging a debt, it is the debtor who has to find out his creditor and since in the present case the respondent, who is the creditor, has its office at Panchkula, the Court at Ambala had the territorial jurisdiction to try the offence complained of. 115
In the present case the cheques were issued at Moga and these were presented by the respondent for collection of payment to State of Patiala at Moga. The cheques were
112 AIR 1930 Bom. 490(FB). 113 M/s. Goutham T.V. Centre v. M/s. Apex Agenceis, 1993 Cr. LJ 1004 at pp. 1005-1007 AP. 114 M/s. Meltro Enterprises v. Ramesh Chander Jain, 1997 (3) Crimes 360 at p. 361. 115 M/s. Ess Bee Food Spectalities v. Kapoor Brothers, 1992 Cri. LJ 739 at pp.741, 742 P & H.
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dishonoured by the State Bank of Indian Jalanadhar but intimation of dishonour was received at Moga. Notices were sent by the respondent to make payment at Moga. Moga Court had, therefore, jurisdiction to try the case. Similar view was taken in the case of M/s Probathi Agencies v. State of Karnataka. 116 The Court at Moga, thus, had jurisdiction to entertain the complaints. No. case is made out for quashing the complaints and consequent proceedings. 117
G. When Complainant Died Bombay High Court had occasion to hold that the trying Magistrate has discretion in proper cases to allow the complaint to continue by a proper and fit complainant. The court held that, In a case of non-cognizable offence instituted upon a complaint, the axiom of actio personalis moritur cum persona, in civil law confined to torts, does not apply, and the trying Magistrate has discretion in proper cases to allow the complainant to continue by a proper and fit complaint, if the latter is willing. 118
The above view has been adopted in Subbamma v. Kannappachari, 119 where the Mysore High Court held that the death of the complainant in a case of non-cognizable offence does not abate the prosecution and it is within the discretion of the trying Magistrate in a proper case to allow the complaint to continue by a proper and fit complaint if the later is wiling but some other High Courts have taken a contrary stand. As to the question whether the complainants death ends the proceedings in a summons case, the Law Commission in its 41st report observed : A question has arisen whether the complainants death ends the proceedings in a summons case; and we find that different views have been expressed on this question. As a matter of policy we think the answer should depend on the nature of the case and the
116 1991(2) Recent Criminal Reports 685. 117 Tarsem Lal Hans v. Prem Nath Palta, 1995 Cri. LJ 2408. 118 Mahomed Azam v. Emperor, AIR 1926 178. 119 AIR 1969 Mys. 221.
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stage of the proceedings at which death occurs. It is impracticable to detail the various situations that may arise and the considerationsthat may to be weighted. We think, in the circumstances, that the decision should be left to the judicial discretion of the Court, and, the legal provisions need only be that death and absence stand on the same footing. We trust this will in practice work satisfactorily. As sub-section (2) of section 256 of Code of Criminal Procedure is intended to achieve this objective it cannot be held that the Magistrate has no option but to acquit the accused when the complainant is dead. In other words, in appropriate cases the Magistrate can grant permission to the son of the deceased complaint to proceed with the complaint. 120
H. Compoundable Offence Though before introducing The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 remedies regarding compounding of an offence committed under Section 138 were available under various sections of Code of Criminal Procedure viz. in Section 239,319, 320 but now by inserting Section 147 the offence has been made compoundable. Section 147 of the Negotiable Instruments Act, 1881 reads as: Notwithstanding anything contained in the Code of Criminal Procedure, 1973(2 of 1974), every offence punishable under this Act shall be compoundable
Territorial jurisdiction: The issue relating to the jurisdiction of Court in respect of cases arising u/s 138 of the Act was considered in detail by the Apex Court in K. Bhaskaran v. Sankaran Vaidhyan Balan and another, AI R 1999 SC 3762. After referring to Sections 177, 178 (d) and 179 of the Code of Criminal Procedure,1973 the Apex Court ordained that
120 T.N. Jayarajan v. Jayarajan, 1992(3) Crimes 866 at. 667.
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offence u/s 138 of the Act can be completed only with the con-catenation of the following Acts ; (1) Drawing of the cheque, (2) Presentation of the cheque to the bank, (3) Returning the cheque unpaid by the drawee bank, (4) Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount, (5) Failure of the drawer to make payment within 15 days of the receipt of the notice. It was further observed that if the five different Acts were done in five different localities any one of the Courts exercising jurisdiction in one of the five local areas can become the place of trial for the offence under Section 138 of the Act. In other words, the complainant can choose any one of those Courts having jurisdiction over any one of the local areas within the territorial limits of which any of those five acts was done.
4.2 APPEARANCE OF COMPLAINANT When a complaint raises all pleas regarding ingredients of the offence under Section 138 of the Negotiable Instruments Act, then at the time of taking cognizance, the Magistrate cannot be expected to go into the niceties of the case which would be set up by the accused and for which complainants personal presence should be needed. 121 The complaint was by a Government company through its manager. The manager was exempted from attendance. The counsel of the company did not appear on the listed date. The dismissal of the complaint for such nonappearance was held to be not justified. There was nothing to show lack of diligence to prosecute the complaint. 122
121 Pearey Lal Rajindra Kumar Pvt. Ltd. v. State of Rajasthan, (1994 3 Crimes.308. 122 Steel Authority of India Ltd. v. Vishwakarma Agro and Allied Industries, (1996) 86 Comp. Cas. 929 P & H.
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4.3 PROPER EVIDENCE When the accused challenged the prosecution for the offence under Section 138 of the Act on the ground that goods supplied by the complainant were defective and having been rejected there could be no liability to pay, it was held that without proper evidence at the stage of the accused being summoned, it could not be said that the accused company did not have the liability for which cheque was issued. 123
Where a complaint was filed on the basis of the three cheques in a year, the court demanded the complainant to make up his mind as to the cheque on which the prosecution was to continue. 124
4.4 DATE OF CHEQUE The Supreme Court has held that there is a presumption that cheque is drawn on the date it bears and it is to be presented within six months of the date of the cheque though beyond six months of the date of delivery. Offence is committed within six months from the date it bears irrespective of when the cheque was written or delivered. 125
4.5 DEFENCES TO PROCEEDINGS UNDER SECTION 138 (i) That the drawer had believed that the cheque may not be dishonoured on presentation. 126
(ii) A banker cannot take advantage of his own fault. 127
(iii) Insufficiency of funds. (iv)Exceeding arrangement with Bank.
4.6 STAY PROCEEDINGS (SECTION 138)
123 Dilip Kumar Jaiswal v. D. Banerjee, (1992) 1 Crimes 1233. 124 Printo Stick v. H.C. Oswal , (1996) 86 Comp. Vas. 942 Mad. 125 Manoj K. Seth v. Fernandez, (1994) 1 BC 1 SC. 126 Holland v. Manchester & Liverpool District Banking Co.(1909) 25 TLR 386. 127 Brahma v. Chartered Bank, AIR 1956 Cal.399.
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Where after the issue of notice to the drawer of the dishonour of his cheque he filed a civil suit denying his liability to pay and, therefore, contending that Section 138 was not attracted and obtained an interlocutory injunction retraining the payee of the cheque from proceeding under Section 138. The grant of the injunction was held to be illegal. 128
Whereas The Supreme Court held that where a civil suit was pending at the time when criminal proceedings were launched for the dishonour of a cheque and the High Court stayed the civil proceedings under the apprehension that the defendants defences in the criminal case would become disclosed in advance, the approach of the High Court was not correct. The court noted that the defence in the criminal case had already been filed and therefore, nothing remained which deserved protection from disclosure. 129
Civil and criminal proceedings are simultaneously possible. Hence, a complaint is not liable to be stayed pending the disposal of a civil suit. 130 The court said that a civil suit cannot debar a criminal prosecution. The successful end of a civil suit cannot by itself amount to abuse of the process of the court.
4.7 PRESUMPTION IN FAVOUR OF HOLDER - The special rules of evidence contain certain presumptions concerning negotiable instruments and the estoppels arising from them. The presumptions are stated in Section 1. They are presumptions of law. The court is bound to raise such presumptions. The presumptions being rebuttable, the party against whom a presumption is drawn can lead evidence to the contrary to overthrow the presumption. There is, for exampled the presumption that all instruments have been issued or transferred for consideration. It relieves the plaintiff of the initial burden of proving that he became a holder for consideration. The opposite party may show that there was no consideration, in which case the plaintiff will have to prove consideration, the presumption in his favour having been rebutted. Section 118 is as follows
128 Aristo Printers P. Ltd. v. Purbanchal Erade Centre, AIR 1992 Guau 81. 129 State of Rajasthan v. Kalyan Sundaram Cement Industries Ltd. (1996) 3 SCC 87 : (1996) 86 Comp.Cas. 433. 130 Sanjiv Kumar v. Surendra Steel Rolling Mills, (1996) Comp. Cas. 418 P & H.
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118. Presumptions as to negotiable- Until the contrary is proved the following presumptions shall be made : (A) of consideration: that every negotiable instrument was made or drawn for consideration, and that every such instrument which it has been accepted, endorsed, negotiated or transferred, was accepted, endorsed, negotiated or transferred for consideration; (B) As to date: that every negotiable instrument bearing a date was made or drawn on such date; (C) As to time of acceptance: that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; (D) As to time of transfer: that every transfer of negotiable instrument was made before its maturity; (E) As to order of endorsement: that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon; (F) As to stamp: that a lost promissory note, bill of exchange or cheque was duly stamped; (G) That holder is a holder in due course: that the holder of a negotiable instrument is a holder in due course: Provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody, thereof, by means of an offer or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him. Section 139 of the Act says it shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque, of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability. In this way Sections 118 and 139 collectively provide:
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(i) Special rules of Evidence; (ii) Presumption and their applicability; (iii) Holder; (iv)Essential ingredients (v) Liability; (vi)Debt; (vii) Shall presume
(i) Special Rules of Evidence Section 139 is what may be termed as Special Rules of Evidence and to confirm the presumption already provided by sections 118(a) and 118(g) of Chapter XII of the Negotiable Instruments Act. It means that the cheque is for discharge of an existing debt and not for creation of a new debt. The phrase shall presume is explained under Section 4 of the Indian Evidence Act, 1872. 166 It says that whenever it is directed by this Act that the Court shall presume a fact, it shall regard such fact as proved unless and until it is disapproved. Thus in this case onus will be on the drawer to prove: a) that cheque was not received by the holder for discharge of a debt or other liabilities; b) that the person in possession of cheque is not the holder; c) that cheque represented for payment of any gratuitous act like donation, gift, etc. (ii) Presumptions and their applicability According to the section the presumption can be rebutted also and thus if A give a loan to B by means of a cheque, if the cheque is dishonoured and B wants to prove under Section 138 of the amended Act then A can prove that it was a transaction creating a new debt. Moreover, the presumption under Section 139 is applicable only for the cheques referred to under Section 138 and not in any other case i.e. cheques issued for the discharge of a lawful debt or liability. In suits on negotiable instruments, though the
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plaintiff is not in general required to prove that he gave value for the instrument and the want of consideration is to be proved by the defendant, yet the burden may shift in case of fraud and undue influence etc. and the plaintiff may be required to prove his case. 131
It should be kept in mind that the rules stated in Section 118(a) of the Negotiable Instruments Act as to shifting of onus of proof when fraud of legality is proved must be taken with the provisions of Section 53 of the Act. In certain cases the plaintiff is to prove that consideration was free from taint. (iii) Holder Every instrument initially belongs to the payee and he is entitled to its possession. The payee can transfer it to any person in payment of his own debt. This transfer is known as negotiation. Negotiation takes place in two ways. A bearer instrument passes by simple delivery and the person to whom it is delivered becomes the holder. An order instruments, on the other hand, can be negotiated only by endorsement and delivery and the endorsee becomes the holder. Hence the holder means either the bearer of endorsee of an instrument. Accordingly Section 2 of the English Bills of Exchange Act, 1882, provides that holder means the payee or endorsee of a bill or note who is in possession of it or the bearer thereof. The definition contained in Section 8 of the Indian Act is to the same effect, although expressed in different words. It says that holder means any person entitled in his own name to the possession of an instrument and to receive and recover the amount. Now, no one can be entitled to the possession of a bill or note unless he becomes either the bearer or endorsee thereof. 132 Section 8 says : The holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.
131 40 Shanmugha Rajeswara v. Chidambaram, ILR (1938) Mad 646( PC) : AIR 1938 PC 123. 132 Avtar Singhs Negotiable Instruments at p. 39.
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In Section 139 the words used are the holder of a cheque received the cheque. The word Holder has been defined in Section 8 of the Negotiable Instruments Act as well as in Section 2 of English Bills of Exchange Act, 1882 as mentioned above. Reading these definitions with section 78 of the Negotiable Instruments Act it means that a person to whom the payment should be made in order to discharge the maker or acceptor from all liabilities under the instrument is the holder of the instrument or he is accredited agent such as Banker, acting as an agent for collection. A person cannot claim and does not have right to recover the amount due on the instrument, is not the holder. Thus, a person who can sue in his name is a holder. He may be the payee or one who becomes entitled to it as endorsee or becomes the bearer of an instrument payable to the bearer. The most significant words in the section are entitled in his own name. Thus, the term holder does not include a person who, though in possession of the instrument, has no right to recover the amount due thereon from the parties thereto. However, the assignee of such person is entitled to sue in his own name. 133
(iv) Essential ingredients The following may be stated to be the essential ingredients for bringing the offence under Section 138 of the Act :- a) the cheque should have been issued for the discharge in whole or part of any debt or liability. b) debt or liability means legally enforceable debt or other liability. So far as the word debt is concerned in accordance with section 2(b) of the Presidency Towns Insolvency Act, 1909 it includes a judgement debt. According to a Dictionary of Banking by F.E. Perry, debt means something owned to another, a liability, an obligation. A chose in action which is capable of being assigned by the creditor to some other person. The assignment must be in writing and must apply to the whole of the debt. According to the same Dictionary debtor means one who owes money, or is under some obligation to another, the debit side of an account. For the
133 S.N.Guptas Dishonur of Cheques, 3rd Ed.1995.
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purposes of the Consumer Credit Act, 1974 debtor means the individual receiving credit under a Consumer Credit Agreement or the person to whom his rights and duties under the agreement have passed by assignment or operation of law, and in relation to a prospective consumer credit agreement includes the prospective debtor. According to the section the cheque must have been issued in discharge of whole or part of debt or liability. Thus, a cheque given as gift will be out of the frame work of this chapter. According to New Webster Dictionary debt means which one person is bound to pay to or perform for another. It means an obligation and the state of owing something to another, as to be in debt. It must be an existing debt and not a contingent debt. It must a debt accrued and not a debt in future 134 . The Supreme Court made the following observation: 135
The question whether a contingent debt is a debt as understood in law has often come up for consideration before English Courts in connection with garnishee proceedings taken by the judgement creditors to attach it as a debt. The decision has invariably been that they are not debts accruing and could not be attached. The point for decision 136 was whether an amount payable by a trustee to the beneficiary in futuro could be attached by a judgement-creditor as a debt owing or accruing, and it was answered in negative. Discussing the distinction between an existing debt, and a contingent debt, Lord Lindley observed: I should say apart from any authority, that a debt legal or equitable can be attached whether it be a debt owing or accruing; but it must be debt, and a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in praesenti, solvendum in futuro. An accruing debt, therefore is a debt, not yet actually payable but a debt which is represented by an existing obligation The result seems to me to be this: you may attach all debts, whether equitable or legal; but only debts can be attached ; and money which may or may not become payable from a trustee to his cestuigue trust are not debts.
134 S.N.Guptas Dishonour of Cheque 3rd ed. at p.164- 165. 135 Shanti Prasad Jain v. Director of Enforcement Foreign Regulation Act, BLC Vol. 2 p. 347: AIR 1962 SC 1964: 1962(2) SCR 297. 136 Webb v. Stenton, (1883) 11 QBD 518.
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Thus, the cheque must have been issued in connection with the discharge of a debt. The word liability is defined in the Explanation to section 46 of the Presidency Towns Insolvency Act, 1909. Liability means the state of being liable. It means something for which a man is liable and includes pecuniary liability or limited liability. Payment for taxes, house rents may amount to enforceable liability. If the cheque is issued and the cheque is dishonoured for insufficiency of funds, unless the contrary is proved, it can be presumed that the cheque has been issued to discharge liability.
(v) Liability - As regards liability, The Law Lexicon by P.Ramanath Aiyar states: LiabiliIty: A broad term; it may be employed as meaning the state of being liable, that for which one is responsible or liable; obligation is general; that condition of affairs which given rise to an obligation to do a particular thing to be enforced by action; responsibility; legal responsibility. In other words, the condition of one who is subject to a charge or duty which may be judicially enforced. Liability of managing director/directors: There was some controversy regarding the liability of Managing Director/Signatory of cheque regarding the cheque issued on behalf of the company. Considering the issue a larger Bench of the Apex Court in S.M.S. Pharmaceuticals v. Neetal Bhalla and another, (2005) 8 SCC 89 has held that following principles should be followed while dealing with such matter: Firstly, it is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company. Without this averment being made in a complaint, the requirements of Section 141 cannot be said to be satisfied. Secondly, merely being a Director of a company is not sufficient to make the person liable under Section 141 of the Act. A Director in a company cannot be said to be in charge of and responsible to the company for the conduct of its business. The
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requirement of Section 141 is that the person sought to be made liable should be in- charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases. Thirdly, Managing Director/Joint Managing Director by virtue of the office they hold are persons in charge of and responsible for the conduct of business of the company. Therefore, they become liable u/s 141 of the Act on behalf of the Company. Lastly, the signatory of a cheque which is dishonoured, is clearly responsible for the incriminating act and will be covered under sub-section (2) of Section 141. The aforesaid legal propositions make the position very clear on the issue relating to liability of Managing Director, Director and Signatory of the cheque.
(vi)Debt or Liability These terms should be interpreted within the limited meaning so as to include a legally enforceable debt or liability. Different Acts have given different definitions of these terms. Different meanings have been give under the Income Tax Act, 1961, various Debt Relief Act, Wealth Tax Act, 1957, Indian Contract Act, 1872 and so on. Similarly there may be various type of liabilities which may arise in different ways and they may be real or contingent and may be legally enforceable debt or not. However, we are concerned only with a legally enforceable debt or liability. There are various debt which are not legally enforceable by law the detail of which is given below: a) A debt barred by limitation is not legally enforceable and not a debt for the purposes of this Act. b) A debt due on a wagering contract is not a lawful consideration. c) Similarly a gratuitous payment is also not covered under Section 138 of the Negotiable Instruments Act, 1881.
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Whereas Explanation to Section 138 states that for the purposes of that section debt or other liability means a legally enforceable debt or other liability. Section 139 provides for the discharge in whole or in part, or any debt or other liability. The purpose of Section 139 seems to confirm the presumptions already provided under Section 118(a) and 118(b) of the Chapter XIII of the Act. In fact Article 40 of Schedule 1 of the Limitation Act dealt with the computation of Limitation of limitation period for filing any suit for an amount of cheque dishonoured. A cheque so returned prima facie, suggests that cheque is issued as a payment toward existing debt. Legally enforceable debt or liability: The penal liability u/s 138 of the Act arises only when the cheque which has been dishonoured was for the discharge, in whole or in part, of any debt or liability. Explanation appended to Section 138 says that expression debt or other liability means legally enforceable debt or other liability. There has been some controversy regarding this expression and it has been held by Andhra Pradesh High Court in the case of Giridhari Lal Rathi v. P.T.V. Ramanujachari, 1997 (2) Crimes that a complaint in respect of a cheque, which was issued for time barred debt is not maintainable. This issue was also addressed by the Apex Court in A.V. Murthy v. B.S. Nagabasavanna, AIR 2002 SC 985. Though the Apex Court refrained itself from expressing any final opinion on this point yet it was pointed out that under sub-sec. (3) of S. 25 of the Indian Contract Act, 1872, a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specifically authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits, is a valid contract. This observation has kept the doors open for a more constructive and purposive interpretation of expression debt or other liability as used in Section 138 of the Act. (vii) Shall presume The phrase shall presume is explained under Section 4 of Indian Evidence Act, 1872 . Section 4 reads :
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Whenever it is provided by this Act the Court may presume in fact, it may either regard such fact as proved, unless and until is disproved, or may call for proof of it: Shall presume: When it is directed by this Act that the court shall presume a fact, it shall regard such fact as proved unless and until it disproved: Thus, in this case onus will be on the drawer to prove: 1. a). that cheque was not received by the holder for discharge of a debt or other liabilities; 2. b). that the person in possession of cheque is not the holder; 3. c). that cheque represented for payment of any gratuitous act like donation, gift etc.
This presumption is available only in cases of cheques as per the scheme of Chapter XVII and not against other negotiable instruments. It shall be for the defendant to allege and prove want of consideration. 137
Where a cheque was issued for business purchased at one place and the recipient of the cheque also deposited the cheque into his account at that very place, but, after dishonour, he issued notice of dishonour from his place of business in some other town, the cause of action partly arose there because to discharge his liability the drawer would have to make arrangement for payment at the recipient place. Thus the places where the payment was to be made and where the cheque was delivered are also relevant. Cause of action may arise at the place where the cheque was issued or delivered or where the money was expressly or impliedly payable.
4.8 Liability on Dishonour of Cheque a. Necessary Ingredients for Liability b. Civil Liability c. Criminal Liability
137 Suanmugha Rajeshwara v. Chidambharam, ILR (1938) Mad 646 PC : AIR 1938 PC 123.
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a. Necessary Ingredients for Liability In Anchor Capital of India vs. State of Gujarat1, relates to the ingredients that are necessary to constitute an offence under section 138. The necessary ingredients are as follows:- a. the cheque must have been issued in favour of the payee; b. the cheque so issued must have been issued in discharge, either in whole or in part, of a legally enforceable debt or liability; c. the cheque should have been presented for encashment within six months of the date it bears or within its specific validity period which is earlier; d. the cheque should have been returned by the bank unpaid, because the amount of money standing to the credit of the account is insufficient or it exceeds the amount arranged; e. that the payee should have given a notice of dishonour to the drawer within 15 days of the receipt of information by him from the bank regarding dishonour of the cheque demanding payment of the cheque amount; f. that the drawer should have failed to make payment within 15 days of the receipt of notice. g. Under section 142 of the Act, the Magistrate is empowered to take the cognizance of any offence under section 138 only on a complaint in writing made by the payees or the holder in due course of the cheque provided that such complaint is made within one month from the date on which a cause of action has arisen under clause (c) of the proviso to section 138. b. Civil liability Civil Liability is also arises when the cheque is presented for the payment to the bank gets dishonoured. Section 138 also provides for civil liability which provides for fine twice the amount of dishonoured cheque. c. Criminal Liability
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A criminal liability is provided under section 138 of the Act, which provides imprisonment for two years or with fine which may extend to twice the amount of the cheque, or with both. In case of dishonour of cheque the drawer of it may be prosecuted under sections 417 and 420 of the Indian Penal Code, 1960 (IPC). However, it all depends on the circumstances of each case. Every dishonour of a cheque is not cheating. In A Veerbhadra Rao vs. Government of A.P., it has been held by the Andhra Pradesh High Court that where the accused issues a post-dated cheque with knowledge that the funds in his account are insufficient and such cheque would be dishonoured; he commits offence of cheating under section 420 of IPC. The punishment in the form of two years imprisonment has been provided in case of dishonour of cheque.The imprisonment generally given only for criminal activity and dishonour of cheque considering criminal Act punishment for two years imprisonment provision has been made. Consequently, criminal liability has been imposed when the cheque gets dishonoured. Exceptions to Criminal Liability a. Cheque issued in Discharge of Liability: It is must that the cheque which is given should be in discharge, in whole or in part of any debt or other liability of the drawer towards the payee. In K. Kumar vs. Bapsons Foot Wear, a complaint was filed for the dishonour of a cheque, it was alleged that in the course of business the accused issued a cheque. A petition was filed to quash the complaint. The court allowed the petition holding that the essential requirement for an offence under section 138 of the Act that the cheque must be drawn for discharge in whole or in part of any debt or other liability has not been fulfilled as according to the allegation in the complaint the cheque was issued in the course of their business by the accused. 1. Cheque must not be given as a gift: In B. Mohan Krishna vs. Union of India, the court held that if a cheque was not issued for the purpose of discharge of any debt or
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other liability, the maker of the cheque is not liable for prosecution. If the cheque is given by way of gift or present and if it is dishonoured by the bank, the maker of the cheque is not liable for prosecution. Unless the two conditions set out in section 138 were satisfied, no criminal liability can be fastened. ii. Defence that may be taken If the matter is examined critically, then the following may be a set of defence that may be taken are as follows:- 1. Absence of a legally enforceable debt or liability. 2. Cheque was not returned for the reasons constituting an offence. 3. Complaint is not as per time period provided in sections 138 and 142, i.e., the plea of limitation. 4. Absence of legal notice of 15 days. 5. Lack of Jurisdiction. 6. No return of cheque to the payee.
4.9 DOES CRIMINAL LIABILITY HAS SOLVED THE PROBLEM? The criminal liability under section 138 of the Act has not solved the problem of cheque bouncing and did not develop faith in this credit instrument among the people who widely use it Our judiciary has played a crucial role by imposing strict liability when the cheque is dishonoured but it did not work effectively and still the cheques are getting dishonoured. It is evident from the fact that courts are overburdened due to the complaints of dishonour of cheques inspite of law in this regard.
THE ACT A FAILURE It is sadly submitted that the Act is a failure; numerous factors have all contributed to this failure. The structural flaws intrinsic in the Act caused its failure, more than anything else, but the larger reason of failure is socio-cultural. For the activity the Act was enacted to remove is still rampant. In other words, people still choose to gather cash in the
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discharge of obligations owed them in preference to cheque. It is general place to get that people still hold large amount of cash in settlement of financial obligations and in consummation of commercial activities. The foremost reason for the preference for cash is a lack of confidence in the use of cheques. This lack of confidence primarily due to the continuing prevalence of dishonoured cheques.
i. Socio Cultural Impediment The failure of the Act has more sociological and cultural bases than structural defects inbuilt in the Act. Indian does have extremely small regard for the imperatives of discharging his financial obligations. They think nothing erroneous in issuing a cheque for the reason of discharging his financial obligations that he knows will be dishonored on presentation for insufficiency of funds in his bank account. This is a constituent of the encompassing widespread corruption that damages the foundation of Indian society. They dont file a complaint being issued a dishonour cheque in the court, but would rather find other means of getting back debts owed them by the drawers of the cheque. There is a dearth of reported cases of the offense created in the Act and by implication, of prosecution of cases under the Act. There is the urgent need to amend the Act. ii. Adequacy of the Penalty The punishment provided by the Act has become dreadfully low and reflects very little significance about limiting the criminal behavior to which the Act is committed. Only two years imprisonment has been provided which seems to be very less in view of the wrong. iii. Cognizance of offences The procedure provided under section 142 of the Act is not friendly and viable because it provides that the court will take cognizance of offence or complaint only in writing. Its merely cumbersome formality. The court should take the cognizance of
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offences or complaint in oral also as provided under section 200 Criminal Procedure Code, 1973. iv. Short period Limitation The limitation provided for filing written complaint in the court is one month of the date on which the cause of action arises under clause (c) of the proviso to section 138. The time period within which complaint should be filed is very less, it should be extended maximum 6 months because people are not aware of any such short period of limitation in the Act itself. It takes away their right and left those with no remedy in spite of they have committed no wrong.
SUM-UP:
The jurisdiction of the Area is concerned, the complainant can choose any one of those courts having jurisdiction over any of the local areas within the territorial limits of which any one of the following acts took place : (i) Drawing of the cheque (ii) Presentation of the cheque; (iii) Returning of the cheque by drawee bank; (iv) Giving of notice in writing to the drawer of the cheque demanding payment of cheque and failure of the drawer to make payments within 15 days of receipt of notice. We are fully alive to the imperatives of a sound Cheque system and in our anxiety to scares away the offenders, we are providing more stringent So far as jurisdiction of the Area is concerned, the complainant can choose any one of those courts having jurisdiction over any of the local areas within the territorial limits of which any one of the following acts took place : (i) Drawing of the cheque (ii) Presentation of the cheque; (iii) Returning of the cheque by drawee bank; (iv) Giving of notice in writing to the drawer of the cheque deterrents as spelled out in the Negotiable Instruments Act (Amendment) 2002 interalia provides 2 years imprisonment and issue of notice from 15 days to 30 days and day to day hearing in the case and absent only giving the sound reasons.
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The Code of Criminal Procedure states that every offence shall ordinarily be enquired into and tried by Court within whose local jurisdiction it was committed. The complaint can be filed in a Court within the jurisdiction of which the cheque has been drawn or the place where the cheque is presented for collection and received an endorsement about the dishonour of the cheque or the place where the cheque is dishonoured. It is well settled now that the Court has jurisdiction over the area where the cheque was issued or delivered or where the drawer of the cheque fails to make payment of the money or where the cheque was presented for encashment or the area where the payment was to be made. Therefore, the appellant had cause of action to file the complaint before the lower Court where the cheque was presented for encashment and the lower court had jurisdiction to take cognizance of the offence. Therefore, the finding of the lower court that it had no jurisdiction to take cognizance of the offence is absolutely unsustainable. After the issue of notice to the drawer of the dishonour of his cheque he filed a civil suit denying his liability to pay and, therefore, contending that Section 138 was not attracted and obtained an interlocutory injunction retraining the payee of the cheque from proceeding under Section 138. The grant of the injunction was held to be illegal. Civil and criminal proceedings are simultaneously possible. In suits on negotiable instruments, though the plaintiff is not in general required to prove that he gave value for the instrument into his account at that very place but after dishonour, he issued notice of dishonour from his place of business in some other town, the cause of action partly arose there because to discharge his liability the drawer would have to make arrangement for payment at the rec t and the want of consideration is to be proved by the defendant, yet the burden may shift in case of fraud and undue influence etc. and the plaintiff may be required to prove his case. Cause of action may arise at the place where the cheque was issued or delivered or where the money was expressly or impliedly payable.
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CHAPTER V: JUDICIAL PRONOUNCEMENT
The law in this particular branch has developed rapidly by way of pronouncements of the Superior Courts. This chapter attempts to explore and examine the position of law in respect of some important issues which have been raised from time to time regarding applicability of these provisions.
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The analysis of the section will show that in each case when the cheque is dishonoured, one has to find out as to what the intention of the drawer was at the time when the cheque was issued and whether the drawer knew that the cheque was bound to be dishonoured. Moreover, we have to see as to whether the cheque was issued to meet an antecedent debt or a liability or whether it was only for a future transaction. Thus it has to be seen and determined whether it was a civil or a criminal liability and whether it amounted to cheating or could lead only to a civil liability. A reference to case law can be of help to determine whether the accused had a guilty intention.
CASE LAWS:
Presumption u/s 139 N.I. Act, nature of and standard of requisite proof for rebuttal thereof. Explained Hiten P. Dalal v. Bratindranath Banerjee Reported in (2001) 6 SCC 16 Because both Sections 138 and 139 require that the court shall presume the liability of the drawer of the cheques for the amounts for which the cheques are drawn, as noted in State of Madras v. A. Vaidyanath Iyer, AIR 1958 SC 61 it is obligatory on the court to raise this presumption in every case where the factual basis for the raising of the presumption had been established. It introduces an exception to the general rule as to the burden of proof in criminal cases and shifts the onus on to the accused. (Ibid. at p. 65, para 14.) Such a presumption of fact which describes provisions by which the court may presume a certain state of affairs. Presumptions are rules of evidence and do not conflict with the presumption of innocence, because by the latter, all that is meant is that the prosecution is obliged to prove the case against the accused beyond reasonable doubt. The obligation on the prosecution may be discharged with the help of presumptions of law or fact unless the accused adduces evidences showing the reasonable possibility of the non-existence of the presumed fact. In other words, provided the facts required to
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form the basis of a presumption of law exist, no discretion is left with the court but to draw the statutory conclusion, but this does not preclude the person against whom the presumption is draw from rebutting it and proving the contrary. A fact is said to be proved when, after considering the matters before it, the court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists (Section 3 Evidence Act). Therefore, the rebuttal does not have to be conclusively established but such evidence must be adduced before the court in support of the defence that the court must either believe the defence to exist or consider its existence to be reasonably probable, the standard of reasonability being that of the prudent man. Judicial statements have differed as to the quantum of rebutting evidence required. In Kundan Lal Rallaram v. Custodian, Evacuee Property, AIR 1961 SC 1316 the Court held that the presumption of law under Section 118 of the negotiable Instruments Act could be rebutted, in certain circumstances by a presumption of fact raised under Section 114 of the Evidence Act. The decision must be limited to the facts of that case. The more authoritative view has been laid down in the subsequent decision of the Constitution bench in Dhanvantrai Balwantrai Desai v, State of Maharashtra, AIR 1964 SC 575 where this Court reiterated the principle enunciated in State of Madras v. Vaidyanatha Iyer (Supra) and clarified that the distinction between the two kinds of presumption lay not only in the mandate to the court, but also in the nature of evidence required to rebut the two. In the case of a discretionary presumption the presumption if drawn may be rebutted by an explanation which might reasonably be true and which is consistent with the innocence of the accused. On the other hand in the case of a mandatory presumptionthe burden resting on the accused person in such a case would not be as light as it is where a presumption is raised under Section 114n of the Evidence Act and cannot be held to be discharged merely by reason of the fact that the explanation offered by the accused is reasonable and probable. It must further be shown that the explanation is a true one. The words unless the contrary is proved which occur in this
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provision make it clear that the presumption has to be rebutted by proof and not by a bare explanation which is merely plausible. A fact is said to be proved when its existence is directly established or when upon the material before it the court finds its existence to be so probable that a reasonable man would act on the supposition that it exists. Unless, therefore, the explanation is supported by proof, the presumption created by the provision cannot be said to be rebutted. BURDEN OF PROOF: Under Section 118 of the Act, unless the contrary is proved, it is to be presumed that the negotiable instruments including a cheque had been made or drawn for consideration. Under Section 139 the Court has to presume, unless the contrary is proved, that the holder of the cheque received the cheque for discharge in whole or in part of a debt or liability. Thus in complaints under Section 138, the Court has to presume that the cheque had been issued for a debt or liability. This presumption is rebuttable. However, the burden of proving that a cheque had not been issued for a debt or liability is on the accused. Refer : Hiten P. Dalal v. Brajendranath Banerjee (2001) 6 SCC 16. In K.N. Veena v. Muniyappan & Another, A.I.R. 2001 SC 2895, the accused led no evidence except some formal evidence, it was held that the accused had to prove in the trial, by leading cogent evidence, that there was not debt or liability. The accused not having led any evidence could not be said to have discharged the burden cast on him.
Notice required to be given u/s 138 for demand Notice need not necessarily be by registered post Law explained. Janak Gandhi v. State of M.P. Reported in 2005 (I) MPWN 99 Counsel for the petitioner submits that in absence of notice by registered post the proceedings under section 138 of the Negotiable Instruments Act cannot continue against him. For this purpose counsel for the petitioner relied upon a decision of Bombay High in the case of Baroda Ferro Alloys and Industries Ltd. & others v. Span Overseas Pvt. Ltd.
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& another (2000 DCR 331). In that case Bombay High Court has held that service of notice by Fax is not sufficient to constitute demand under section 138 of the Negotiable Instruments Act and the demand must be in writing and by registered post. However, while deciding the aforesaid case Bombay High Court has not considered the effect of Section 94 of the Negotiable Instruments Act. Section 138 of the Negotiable Instruments Act nowhere provides the mode of service. Mode of service is provided in Section 94 of the Act. Section 94 of the Act provides that notice of dishonour may be given to a duly authorized agent of the person to whom it is required to be given, or, where he has died, to his legal representative, or, where he has been declared an insolvent, to his assignee, may be oral or written; may, if written, be sent by post, and may be in any form; but it must inform the party to whom it is given, either in express terms or by reasonable intendment that the instrument has been dishonoured, and in what way, and that he will be held liable thereon; and it must be given within a reasonable time after dishonour. Thus, as per this section it is not required that the notice must be given by registered post. The Bombay High Court has not considered impact of Section 94 of the Act, the said judgment is per incuriam and does not help the present petitioner.
Notice u/s 138, object of Form of the notice Law explained. Central Bank of India v. Saxons Farms Reported in 2000 (1) MPLJ 149 (SC) Notice of demand by counsel for payee to drawer of cheque. Nature of demand. though no form of notice is prescribed in clause (b) of proviso to section 138 of the Negotiable Instruments Act, the requirement is that notice shall be given in writing within fifteen days of receipt of information from the bank regarding return of cheque as unpaid and in the notice a demand for payment of an amount of the cheque has to be made. The object of notice is to give a chance to the drawer of the cheque to rectify his omission and also to protect an honest drawer. Service of notice of demand in clause (b) of the proviso to section 138 is a condition precedent for filing a complaint under section 138 of the Act.
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Where the appellant through his counsel gave notice containing the following words Kindly arrange to make the payment to avoid the unpleasant action of my client it was clear demand as required under clause (b) of the proviso to section 138, Negotiable Instruments Act.
Presumption under Section 139 of the N.I. Act, Explained. Maruti Udyog Ltd. v. Narender and others Reported in (1999) 1 SCC 113 Presumption must be drawn that holder of the cheque received the cheque of the nature referred to in S. 138 unless the contrary is proved. In view of the express provisions of Section 139 of the Negotiable Instruments Act, 1881, a presumption must be drawn that the holder of the cheque received the cheque, of the nature referred to in Section 138, for the discharge of any debit or other liability unless the contrary is proved. Therefore, the High Court was not justified in entertaining and accepting the plea of the accused respondent at the initial stage of the proceedings and quashing the complaints filed by the appellant. We, therefore, allow these appeals, set aside the impugned orders of the High Court and direct the trial court to proceed with the complaints in accordance with law.
Cheque returned by the bank unpaid on the ground that the account is closed Whether if amount dishonour on account of insufficiency of funds. Held, Yes. NEPC Micon Ltd. v. Magma Leasing Ltd. Reported in 2000 (1) MPHT 310 (SC) The question is, in a case where cheque is returned by the bank unpaid on the ground that the account is closed, would it mean that cheque is returned as unpaid on the ground that the amount of money standing to the credit of the account is insufficient to honour the cheque. In our view, the answer would obviously be in the affirmative because cheque is dishonoured as the amount of money standing to the credit of that account was nil at the relevant time apart from it vein closed. Closure of the account would be
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an eventuality after the entire amount in the account is withdrawn. It means that there was no amount in the credit of that account on the relevant date when the cheque was presented for honouring the same, the expression the amount of money standing to the credit of that account is insufficient to honour the cheque is a genus of which the expression that account being closed is specie. After issuing the cheque drawn on an account maintained a person, if he closes that account apart from the fact that it may amount to another offence, it would certainly be an offence under Section 138 as there was insufficient or no fund to honour the cheque in that account
Whether pendency of civil suit operates as bar to proceed with criminal case? Held, No. State of Rajasthan v. M/s Kalyan Sundaram Cement Industries Ltd. Reported In 1996 (2) MPWN Note 61 (SC) It is settled law that pendaency of the criminal matters would not be an impediment to proceed with the civil suits. The criminal Court would deal with offence punishable under the Act. On the other hand, the Courts rarely stay the criminal cases and only when the compelling circumstances require the exercise of power. We have never come across stay of any civil suits by the Courts so far. The High Court of Rajasthan is only an exception to pass such orders. The High Court proceeded on wrong premise that the accused would be expected to disclose their defence in the criminal case by asking them to proceed with the trial of the suit. It is not a correct principle of law. Even otherwise it no longer subsists, since many of them have filed their defences in the civil suit. On principle of law, we hold that the approach adopted by the High Court is not correct. But since the defence has already been filed nothing survives in this matter. The appeal is accordingly allowed. The order of the High Court is set aside. No costs.
Out-of-court Settlement Compounding
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R. Raju vs. K. Sivaswamy, MANU/SC/1449/2011), Compounding refers to a compromise between the victim and the accused whereby the two agree to close the judicial process. Proceedings relating to cheque bouncing are compoundable. In other words, at any stage the drawer of the cheque and the holder of cheque can arrive at a compromise and apply to a court to close the proceedings. In this case under Section 138 ,the Magistrate convicted the accused and sentenced him to undergo one year simple imprisonment and to pay a fine of Rs. 5000/-, in default, to undergo simple imprisonment for three months. The Sessions Court confirmed the sentence. The accused filed an appeal in High Court. During the pendency of the appeal, the parties entered into an agreement. The complainant applied to the High Court stating that he had received full money and wanted the offence to be compounded. The High Court did not grant the application for compounding. However, the Supreme Court overruled the order of the High Court and allowed compounding. However, the Supreme Court felt that the time of the judicial process had been wasted and therefore awarded exemplary costs. The following extract from the judgment sums it up. In conclusion, it can be said that if one is caught in a case involving bouncing of cheque the option of a compromise is always open even when the Magistrate has convicted and the Sessions Court has confirmed the sentence.
B.Sarvothama vs S.M.Haneef on 17 July, 2013 This Criminal Revision Petition is filed under Section 397 read with Section 401 Code of Criminal Procedure, 1973 , praying to set aside the judgment and order dated 11.11.2008 in C.C.No.176 of 2006 passed by the Additional Civil Judge (Jr.Dn.) and Judicial Magistrate First Class, Karkala and further set aside the judgment and order dated 13.10.2009 in Criminal Appeal No.229 of 2008 passed by the Fast Track Court, Udupi District, Udupi. This petition, having been heard and reserved on 20.06.2013 and coming on for Pronouncement of Orders this day, the Court delivered the following:- ORDER
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The petitioner was the accused before the trial court. The complainant had alleged the commission of an offence punishable under Section 138 of the Negotiable Instruments Act, 1881(Hereinafter referred to as the NI Act, for brevity.) 2. It was alleged that the petitioner had purchased a bus from the complainant. The petitioner was in arrears in the payment of the price, in a sum of Rs.28,000/-. It is stated that in discharge of the said liability, the petitioner had issued a cheque drawn on " self or bearer ". The complainant having presented the cheque for payment to the banker of the petitioner, the same is said to have been dishonoured for want of sufficient funds. A memo was issued by the bank to that effect. The complainant had issued a legal notice demanding the payment of the amount covered under the cheque, claiming to be a holder in due course, as contemplated under Section 9 of the NI Act. On the failure of the petitioner to meet the demand, the complaint was filed. The trial court took cognizance of the offence punishable under Section 138 of the NI Act, and after recording the sworn statement of the complainant, had issued summons to the petitioner , who appeared before the court and pleaded not guilty and claimed to be tried. The complainant had tendered evidence as PW - 1 and examined four other witnesses on his behalf. The statement of the accused under Section 313Cr.P.C, was recorded, he tendered evidence as DW- 1 , in support of his defence. The court framed the following points for consideration : "1. Whether the complainant proves beyond all reasonable doubt that the accused had issued him a bearer cheque bearing No.0434454 to discharge his debt or liability for Rs.28,000/- dated 5.11.2005 drawn on Vijaya Bank, Mandarti Branch? 2. Whether the complainant proves beyond all reasonable doubt that the complainant has presented the said cheque for encashment before Vijaya Bank, Karkala Branch and the said cheque has been dishonoured due to insufficient funds in the account of the accused? 3. Whether the complainant proves beyond all reasonable doubt that after having the intimation and receiving endorsement of the dishonour of the cheque, complainant got issued legal notice to the accused as required under Section 138 of the NI Act?
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4. Whether the complainant proves beyond all reasonable doubt that after receipt of the notice, accused ahs failed to pay the cheque amount within 15 days from the date of receipt of the said notice ?" All the points were answered in the affirmative and the petitioner was convicted and sentenced to undergo simple imprisonment for a period of six months and to pay a fine of Rs.30,000/-. Out of the fine amount, Rs.28,000/- was to be paid as compensation to the complainant in terms of Section 357(1)(b) of the Code of Criminal Procedure, 1973 (Hereinafter referred to as the 'Cr.PC', for brevity) . This was challenged in appeal. The appellate court however, dismissed the appeal and affirmed the judgment of the trial court, but modified the punishment imposed, the sentence of imprisonment was eschewed. It is the affirmation of the conviction that is under challenge in the present petition. 3. The learned counsel for the petitioner would contend that the cheque in question was drawn on self, and the dishonour of the same would not attract Section 138 of the NI Act, as held by a learned single judge of this court in the case of V. Rama Shetty v. N. Sasidaran Nayar, 2008 Cri. L. J. 4297. The learned counsel would contend that the courts below had committed an error in concluding that though the cheque in question was a self cheque, it was issued in discharge of the liability aforesaid and that the complainant was a "holder in due course" and the dishonour of the cheque in the hands of the complainant, attracted Section 138 of the Act. The learned counsel would insist that this court having opined as above, the courts below were bound by the same and could not have placed reliance on decisions of other High Courts in taking a different view. 4. The learned counsel for the respondent has remained absent. 5. The point for consideration by this bench is, whether the petition ought to be allowed on the short ground that the decision in Rama Shetty's case, supra, was to be followed by the courts below and therefore, warrants interference by this court. Or whether it could be said that there were distinguishing features in the present case on hand that justifies the decisions of the courts below. In this regard, the findings of fact, on the basis of the evidence of the complainant in support of his case, is relevant. The trial court has found
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that though the cheque is drawn as a self cheque, the words " or bearer", have not been scored off and hence the complainant, who had financial transactions with the petitioner would answer to the definition of a holder in due course, as contemplated under Section 9 of the NI Act, and has relied on a decision in the case of Mahesh Goyal v. S.K. Sharma, 1997 Cri. L. J. 2868, in this regard. Secondly, from the evidence of the witnesses, PW-1, PW- 3, 4 and 5, the trial court has found that the cheque was issued in discharge of the liability to pay the balance outstanding, of the price, towards the purchase of the bus, by the petitioner from the complainant. Thirdly, the trial court has found that the complainant had complied with all the requirements of Section 138 of the NI Act and had proved the allegations in the complaint. Incidentally, the decision of this court in Rama Shetty's case, is not shown to have been brought to the attention of either the trial court or the appellate court. In Rama Shetty's case, from the facts stated in the report of the decision, it appears that the cheque in question was a self cheque. It is not stated whether the words "or bearer", normally found on a cheque leaf, were intact or were scored off. The opinion expressed therein is with reference to the tenor of Section 138 of the NI Act, more particularly the following: 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." It is then held that the said cheque being a self cheque and not drawn in favour of another person, Section 138 of the NI Act would not be attracted for the dishonour of a self cheque. But in Amolak Textiles vs. Uphar Fashions, ILR 2009 Kar. 628, the very learned judge who had rendered the decision in Rama Shetty, supra, has found that in the case of a self cheque, the drawer having signed on the obverse of the cheque and having endorsed it in favour of the complainant, would make him a holder in due course and that he could bring an action on the same. In the instant case on hand, the cheque in question was drawn on self or bearer. It is seen that several High courts have taken a view that a bearer cheque, if dishonoured, would
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attract the rigour of Section 138 of the Act. The Allahabad High Court in Farhat Hussain Siddiqui vs. State of Uttar Pradesh, 2010 Cri. LJ 1213, has held that a bearer cheque issued in discharge of debt or other legal liability would enable the person in possession of the same to claim as a holder in due course, as defined under Section 9 of the NI Act, even though the cheque is payable to bearer. The Andhra Pradesh High Court in M/s Intech Net Limited vs. State, 2007 Cr.LJ 216, has held that once the issuance of a cheque is admitted and if the words " or bearer" are not scored off, the person in possession would be a holder in due course and would be entitled to invoke Section 138 NI Act, in case of dishonour of the same. The Punjab and Haryana High Court has in Mahesh Goyal vs. S.K.Sharma, (1997 Cri LJ 2868) (P &H), held as under: - "8. The expression "holder in due course" is clear and unambiguous. The words are plain and meaning clear. A holder in due course is a person who is possessor of an instrument even when it is payable to bearer. He must be in possession on it. If the bill is payable to holder then he has to be a payee or indorsee of the same. 9. In the present case in hand perusal of the cheque indicates that it was addressed as payable to "self" and that the word bearer has not been deleted. It is not even scored off. There were certain transactions alleged and the money was claimed to be due. The respondent was in possession of the same and presented it before the bank, but it was dishonoured. He was obviously holder in due course. When other conditions were satisfied, there was no question of holding that merely because the cheque was addressed to self, Section 138 in the facts would not be attracted. Once the cheque had been given for valid consideration, the respondent must be taken to be holder in due course." The Kerala High Court in Michael Kuruvilla vs. Joseph J Kondody, (1998(2) Andh.LD (Cri)957)(Ker), after following the judgment of the said Court in A.K.Hameed vs. Appakutty,AIR 1969 Ker.189 and after considering the definition of 'Holder in due course' under Section 9 of the Act held that though the cheque does not contain the name of the payee and the printed words "or bearer" are struck off and also it is written pay to
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cash, is a legal and a valid negotiable instrument. It has to be implied that the direction is to pay to the bearer and there is nothing on record to show that the appellant cannot be treated as holder in due course as contemplated under Section 9 of the Act. Having observed so, the learned Judge set aside the judgment of the trial court in finding the accused not guilty of the offence under Section 138 of the Act and held that the accused was guilty of the offence and accordingly convicted him for the said offence. The Madras High Court in Prabhakaran vs. Natesan, 1998(4) Crimes 554)(Mad), held that once the complainant becomes the bearer and he presented the cheque for encashment, virtually the complainant becomes the holder in due course and as such, it could very well be said that he is competent to file a complaint on the non-payment of the cheque amount after dishonour of the cheque. In the instant case, it is shown that there were financial transactions between the parties preceding the issuance of the cheque in question. In order to address the issue, whether the complainant could claim that the cheque being a bearer cheque would attract the rigour of Section 138 of the NI Act, we may usefully refer to the definition of the phrase " Holder in due course" as expressed under Section 9 of the NI Act. It reads as follows :"9. "Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if [payable to order], before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title." The holder of a cheque becomes a holder in due course, only when he has become the possessor thereof for consideration without knowing that any defect existed in the title of the person from whom he derived title. There is, of course, a presumption in favour of the holder in due course that the instrument was drawn for consideration, unless the contrary is proved. It is usually almost impossible to prove that a holder is not a holder in due course by direct evidence and the question has to be decided on probabilities, the mutual position of the parties and other
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circumstances connected with the case. (See: Raza Ali v. Rahat Hussain, AIR 1933 All 754.) In so far as the presentation of a bearer cheque to the banker for encashment is concerned - the banks ordinarily require the person, presenting a bearer cheque for payment, to endorse it though it is not a legal requirement. And the bank is bound to make payment to the bearer. The view, that once a bill of exchange is issued as payable to bearer, it remains always a bearer, held the field, until the ruling in Forbes Campbell & Co. v. the Official Assignee of Bombay (1925)27 Bom.LR 34, which completely upset the ordinary banking practice in India. It was held therein that, where a hundi was drawn in favour of a payee or bearer and was endorsed by the payee to a third person, it ceased to be a bearer hundi and was payable to the third person or his order. It was only with the passage of the Negotiable Instruments (Amendment) Act, 1934, that the principle " once a bearer, always a bearer" has been finally recognized so far as cheques are concerned and the difference between the English and the Indian law on this point has been done away with. The amendment introduced as sub- section (2) to Section 85 of the NI Act reads thus: "Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon and not withstanding that any such endorsement purports to restrict or exclude further negotiation. The amendment however, does not change the legal position, as held in Forbes (supra), in so far as hundis are concerned. (See: Tannan's Banking Law & Practice in India, 22nd Edition, Volume 1, page 496, para 26 & page 497 para 27) Therefore, in the present case on hand, it was established that the complainant had received a bearer cheque for consideration and in discharge of a legal liability and was a holder in due course, of the same. The dishonour of the cheque was for the reason that the account of the petitioner did not carry sufficient funds- the bank had also issued a memo in this regard to the complainant, which is produced and marked as a document at the trial. The burden was heavy on the petitioner to establish that the cheque
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was not issued in discharge of a legal liability. The petitioner has failed to do so. The plea that the cheque being a self cheque would not attract Section 138 of the NI Act, is not tenable. Hence the petition is dismissed.
Limitation for complaint on cheque dishonour clarified day of event to be excluded
Econ antri ltd v. Rom industries ltd.
2013 (10) scale 555. Due to an apparent conflict of opinion, the Supreme Court in econ antri ltd v. Rom industries ltd.reconsidered the principle of limitation explained in saketh india ltd. And ors. V. India securities ltd(saketh). This issue came before the supreme court in light of the difference of opinion with respect to the commencement of the period of limitation under section 142 (b) of the ni act and the calculation of one month period prescribed therein. The issue was whether, in a case where a period is fixed within which a person must act, the day on which the cause of action arises (i.e., receipt of notice under section 138 (b) of the ni act intimating the drawer of the fact of dishonour of the cheque) should also be counted while computing the limit of 30 days. After considering saketh and sil import, usa v. Exim aides silk exporters which had conflicting methods of computation, the supreme court held that for the purposes of calculating the period of one month, the period had to be reckoned by excluding the date on which the cause of action arose. Relying on precedents under the ni act, the general clauses act, 1897 and halsburys laws of england, the supreme court concluded that where a particular time was to be computed from the happening of a certain event, the day of the event was to be excluded. Companies should be aware of when their right to initiate action against a party commences or lapses under indian law and this judgment provides clarity on the principles to be followed in computing the period of limitation.
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Power of attorney holders competence to file complaint upheld G. Kamalakar v. M/s Surana Securities Ltd. & Anr. 2013 SC (Kamalakars case). Conflicting judgments on the legality of a power of attorney holder (Attorney holder) to initiate action on behalf of the principal under Section 138 of the NI Act was settled by a three-judge bench of the Supreme Court in A.C. Narayan v. State of Maharashtra & Anr. (Narayans case) and G. Kamalakar v. M/s Surana Securities Ltd. & Anr. (Kamalakars case). In this judgment the Supreme Court held that subject to certain essential pre-conditions, an Attorney holder had the power and authority to file a complaint under Section 138 of the NI Act. In two different cases the maintainability of an Attorney holder initiating a complaint under Section 138 of the NI Act came up for consideration before the Supreme Court. In Narayans case the drawee of the cheque had authorized the Attorney holder to initiate proceedings under Section 138 of the NI Act and this was upheld by the Bombay High Court. However, in Kamalakars case, the drawer of the cheque challenged the order of the Andhra Pradesh High Court upholding the maintainability of a complaint initiated by an Attorney holder. The Supreme Court had to examine whether a complaint was maintainable when initiated by an Attorney holder and whether an Attorney holder could depose on behalf of the drawee / complainant. The Supreme Court held that an Attorney holder could initiate a complaint on behalf of a principal and also depose on behalf of the principal provided he had personal knowledge of the complaint. For the prosecution of an offence under Section 138 of the NI Act, the principal would not have to be present in person and the Attorney holder could testify on his behalf. Further, the principal should specifically empower the Attorney holder where the power is to be sub-delegated for initiating action under Section 138 of the NI Act. This ruling will be of immense assistance to both companies and individuals who require action to be taken through an Attorney holder to help manage their affairs.
CRIMINAL APPELLATE JURISDICTION
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CRIMINAL APPEAL NO. 1651 OF 2013 [Arising out of S.L.P.(Crl.)No.6191 of 2011] Somnath Sarkar Appellant V. Utpal Basu Mallick & Anr. ..Respondents New Delhi October 07, 2013
1. Leave granted. The Appellant before us makes what is essentially a mercy plea to reduce the sum of Rs.80,000/- imposed on him by way of compensation in lieu of the six months sentence of incarceration imposed by the Metropolitan Magistrate, Calcutta. The Appellant has admittedly issued a cheque in favour of the Respondent No.1-complainant for a sum of Rs.69,500/-, which cheque on presentation was dishonourned with the endorsement insufficient funds. After due compliance with the statutory provisions contained in the Negotiable Instruments Act, 1881 (for short, N.I. Act) prosecution was commenced and the aforementioned punishment under Section 138 thereof came to be passed. The payment of compensation amounting to Rs.80,000/- has admittedly been received by the complainant. The Appellant preferred an appeal to the Additional District & Sessions Judge, Calcutta who by judgment dated 5.7.2004 dismissed the appeal and ordered the Appellant to surrender within 15 days. In these circumstances, Criminal Revision Record No.2447 of 2004 was filed in the High Court of Calcutta which was pleased to substitute the six months sentence by an additional payment of Rs.69,500/-. C.R.R. No.2447 of 2004 was heard and decided along with C.R.R. No.2865 of 2004 also filed by the Appellant. Accordingly, as against the cheque amount of Rs.69,500/- the Appellant is liable to the extent of Rs.1,49,500/-. Faced with the prospects of jail the Appellant had earlier agreed to payment of the additional sum of Rs.80,000/- and for these reasons his plea for reduction thereto was turned down by the High Court in the impugned order. The Appellant was directed to pay a sum of Rs.19,500/- by May 31, 2011 and the balance of Rs.50,000/- in five equal instalments thereafter. Unfortunately, despite repeated readings of the Orders and related documents, the total liability of the Appellant is not clear as also the payments made till date.
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2. Although the learned counsel for the complainant has appeared before us and has endeavoured to persuade us to uphold the impugned order, we find it unnecessary to hear him since the complainant has indubitably already received the sum of the dishonourned cheque alongwith the compensation thereon aggregating Rupees Eighty Thousand. 3. It seems to us that since the Appellant has already faced prosecution in the Magistracy in which he presented virtually no defence, and has thereafter filed an appeal before the Sessions Court, and subsequently two Revisions before the High Court, the ends of justice will be met, were he be directed to pay a sum of Rs.20,000/- only, in default, of which he would be liable to undergo the punishment of simple imprisonment for a term of six months as imposed by the aforementioned Magistrate. The said payment should be made within eight weeks. 4. As already expressed, the language employed by the High Court in the impugned order raises a doubt as to the total liability of the Appellant. A perusal of the sentence passed by the Trial Court as well as the Sessions Judge while dismissing the Appeal also does not completely clarify the position. The cheque amount is Rs.69,500/- and in this regard a sum of Rs.80,000/- has been directed towards compensation which, by virtue of Section 357(3), Code of Criminal Procedure (Cr.P.C.) would be receivable by the ainant. It appears that this sum of Rs.80,000/- has been received by the complainant. The use of the word, additional sum in the impugned order has led to considerable confusion. To put the matter finally at rest, we hold that the total compensation payable under Section 138 of the N.I. Act read with Section 357(3), Cr.P.C. is Rs.80,000/-. i.e., the cheque amount of Rs.69,500/- together with Rs.10,500/- which may be seen as constituting interest on the dishonoured cheque. In the arguments addressed before us there appears to be no controversy that this sum has been duly paid to the Respondent-complainant. A reading of the impugned order appears to indicate that the payment of further sum of Rs.69,500/-, in the instalments indicated in that order would be over and above the said sum of Rs.80,000/-. This would violate Section 138 of the N.I. Act inasmuch as it would exceed
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the double of the cheque amount. This leads us to conclude that the intention of the High Court was that upon deposit/payment of the further sum of Rs.69,500/- (in addition to the earlier sum of Rs.80,000/-), the sentence of imprisonment for six months would stand withdrawn. Learned counsel for the Appellant has fervently submitted that the Appellant is a man of limited financial means and this position has not been controverted. Palpably, the convict has filed appeals all the way to the Apex Court which would have entailed further expenses of no mean measure. We think that with the receipt of Rs.80,000/-, the complainant has received compensation for the dishonoured cheque as per the adjudication of the Trial Court. In these circumstances, any further payment would be in the nature of fine. Accordingly, we clarify that the Appellant must pay a sum of Rs.80,000/- receivable by the complainant within four weeks from today, if not already paid. The Appellant is also sentenced to payment of a fine of Rs.20,000/-, payable within eight weeks from today, and on the failure to make this payment, would be liable for imprisonment for six months. The Appeal is allowed in these terms.
JUDICIAL TRENDS IN RESPECT OF NEGOTIABLE INSTRUMENTS The Constitution has given the immense powers to the judiciary for the protection of the Constitutional rights of citizens. There is no reason why the courts should not adopt activist approach similar to Courts in America to set right the things and in order to bring social changes. It is adopting right approach keeping in view the intention of the legislature expressed through the Banking Public Financial Institutions and Negotiable Instruments Laws ( Amendment) Act, 1888 ( 66 of 1988 ) and The Negotiable Instruments (Amendment and Miscellaneous Provisions Bill, 2002 ( Bill No. 55 of 2002) in order to meet the challenges of present day economy and ensuring the credibility and acceptability of cheques to teach the lesson to the offenders who make the mockery of the sections relating to the dishonour of cheques in order to create loopholes and back doors from where a through exist can be made.
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It is the larger public interest that commercial transaction maintain the speed and tempo and that a swift sale or a prompt purpose, is not unduly impeded by suspicions always hovering round that part of promise to be performed in future. The issue of a cheque carries with it assumptions which could regulate the normal functioning of an honest citizen. At a period of time when multitudinous persons and institutions press into services, devices and facilities available under the Negotiable Instruments Act, it may be necessary to ensure that those who issue such vital documents, do not adopt a casual or careless attitude which could block the free flow of trade. It is in the light of the experience which the State had, that the enactment has been attempted. Court is unable to detect any legal infirmity or constitutional incompetence. The courts have taken keen interest to prevent the fraud relating to the dishonour of cheques as the Section 138 of the Negotiable Instruments was enacted to ensure the preservation of that concept being the life blood of commerce and economy. In order to provide adequate remedy to the victims of an illegal act or a dishonest move, the Parliament could then make a provision with sufficient teeth, as to strongly deal with the ruffians in the trading area, or the unscrupulous elements who play foul with negotiable instrument. Global exposure has led to an awakening in Indian on all points leaving no segments of business or society untouched. India is a signatory of WTO and therefore the international global banking games rules must also apply to us and to have good credentials in the international market of open economy we must have a sound, stable and creditable banking system of which cheques and bill of exchange are important components. The Supreme Court in BALCO & Contract Labor amply reveals that our judiciary is much alive to the economic reforms. The Apex Court has time and again forwarded the erring and defaulting drawers of fake cheques still many of us are not forearmed and the malaise of dishonouring of cheques still persists. The Supreme Court whenever it gets an opportunity to dole the hole in this branch of law, it does so unhesitatingly.
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Thus, the legal machinery is to be geared in a new direction to prove a memo cure to the dishonour of cheques as the battle is not to be fought on the legal field alone. A change is also need in the moral and psychological approach to the subject to establish a convention and it should be condemned unless warranted by serious consideration to prevent some positive wrong. A change in the mental, moral and psychological attitude of all having bank accounts and issuing cheques is also need to makes them realize that a changes is a precious document and value lies in the its being honoured and not in its being retuned for want of funds. As the intention of the Parliament was only to bring home offenders so save the innocent individuals from harassment and loss except to such persons who wanted to defraud the creditor by providing penalty in case of dishonour of the cheque as the cheques are a backbone of the monetary system not only in the national but in the international economy as a whole and specially keeping in view the fact the instance of dishonour of cheques in India is greater in comparison to the other countries.
SUM UP:
In the wake of the increasing fraudulent and dishonest acts with respect to issue of negotiable instruments, it is only imperative and inevitable that a liberal construction be accorded to the provisions of a statute which seeks to protect the society against the wrongs suffered by it. Giving effect to the intention of the Act and the provisions therein, the wrongdoers should not be allowed to escape the consequences by reason of adopting a strict interpretation to such provisions under the garb that it is a penal provision. Thus, this step of the apex court, combined with its previous decisions, go a long way to fulfil the objectives of the Act and is a constructive measure to prevent the misuse of the provisions of law which are enacted for the protection of the society rather than to encourage the illegal acts and misdeeds of the offenders of the society. It is also appreciable that the Supreme Court has taken into consideration the genuine cases and
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suggested to follow the principle of the Laxmi Dyechem on a case-to-case basis as it is also necessary to properly judge the intention of the accused to avoid wrongful conviction. Hopefully our legislature in near future shall incorporate the principles laid down by the judiciary into the statute by way of a much needed amendment to Section 138 of the Act to avoid any ambiguity as well as consider the inclusion of electronic operation of the bank accounts within the ambit of Section 138 of the Act.
CHAPTER VI: MAJOR FINDINGS, CONCLUSIONS AND SUGGESTIONS
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6.1 FINDINGS While doing the research researcher found numerous cases pending in the country are relatable to NI Act cases. This is a cause for huge concern. This is an indicator of the state of affairs of pending NI Act cases. Let us now look for the possible causes for delay in Section 138 cases which can be avoided or improved for better results. It is very disappointing to note that cheque bouncing cases are taking at least three to five years just like a civil suit for recovery of money. This delay defeats the very purpose of the NI Act. 1. One of the main reasons for delay is attributable to less number of judicial magistrates in comparison to the increasing number of 138 cases. 2. .Banks have been offering loans more liberally and collect postdated cheques in advance and in many of the cases the judgment of the financial capacity is wrong or in their endeavor is to reach targets for loans disbursal. 3. .In many of the courts, magistrates are caught in dilemma about as to whether CRPC (Code of Criminal Procedure) is to be followed or special provisions of NI act to are to be followed 4. Discretion has been given to the courts and every magistrate has to exercise such power judiciously. 5. .It is noticed that some of the courts still follow the old system of for serving of summons which takes at least six months while the upper time limit of six months is specified for disposal. E-mails / fax / fast courier are not used for serving of summons and in many cases, the accused manages with the post department and returns the summon resulting in serving of summons second time. 6. Adjournments are granted liberally and no efforts are made to complete evidence and cross examination on the same day. Newly inserted provisions of the Act would be rendered nugatory, if complaints filed under Section 138 of the Act are not disposed of expeditiously. The judicial system itself
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is portrayed in poor light, when Section138 cases take three to five years before final judgment is passed.
6.2 CONCLUSION:
The situation is quite alarming and the judges are finding it very difficult to dispose of these cases with promptitude, particularly, within the time frame of six months as expected by Section 143 of the Act. In earlier days, the use of cheques as a medium of transfer of money was not in vogue.But, with the globalization and spurt in commercial activities, the dependence of business community and other agencies dealing with them on Negotiable Instruments, particularly cheques, has increased manifold. For proper and smooth flow of commercial transactions it is but necessary that parties conduct themselves in an honest and upright manner. However, it was felt that in many cases cheques were issued as a devise to delay or stall to payment of money or to defraud the creditor, which had the effect of eroding the sanctity and credibility of the cheque system. In Goaplast (P) Ltd. Vs. Chico Ursula D'Souza and another, (2004) 2 SCC 235 the Apex Court commenting on the situation observed that: ..Dishonour of a cheque by the bank causes incalculable loss, injury and inconvenience to the payee and the entire credibility of the business transactions within and outside the country suffers a serious setback.The remedy available in a civil court is a long-drawn matter and an unscrupulous drawer normally takes various pleas to feat the genuine claim of the payee. For the protection of holder of cheque and to ensure acceptability of cheques in settlement of liabilities, the Parliament in its wisdom, passed Banking and Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988. By this amendment Chapter XVII comprising of Sections 138 to 142 was inserted in the N.I. Act,
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1881. Section 138 made the drawer of cheque liable under penal law if a cheque was dishonoured due to insufficiency of funds and if he failed to pay despite notice. This law, though helped the business community to some extent, did not prove very effective because of the procedural delays in disposal of cases. Therefore, N.I. Act was further amended in the year 2002 by inserting Sections 143 to 147 in it, which inter alia provide for time bound disposal of such cases in a summary manner. The quantum of punishment was also enhanced and certain other loopholes were also plugged in by amending Sections 138 & 142. These amended provisions of law are yet to have the desired effect on the malaise of dishonour of cheques, the reason being that these provisions have not been effectively implemented by the Courts. The researcher, realizing the great influx of cases under the Act throughout the country, has already undertaken the task of holding work on the subject. The researcher attempts to address the entire problem and has two precise objectives Firstly, to enrich the knowledge base of the judicial officers with respect to various dimensions of law in this particular branch of law like Lokadalats can decide cheque bouncing (Recently, the Bombay High Court held that Lokadalats constituted under Legal Services Authority Act, 1985 can decide the issue of cheque bouncing cases, and their verdict is final in such matters). And secondly, to find out ways and means for effective implementation of the relevant provisions of law so that the cases relating to dishonour of cheque for the protection of holder of cheque can be disposed of within the time frame prescribed by law so as to ensure effective and expeditious justice. The researcher has prepared this Reading Material, in which we have tried to put all the necessary material which can be helpful in dealing with various problems which the judicial officers come across during discharge of their duties while dealing with cases relating to offences u/s 138 N.I. Act.
Views of the Supreme Court
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Honble Supreme Court has narrated four key Judgments where the drawer was held liable for Stop payment of cheques. However there is only one judgment which deals with the laid preposition. In M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s. Indian Technologists & Engineers (Electronics) Pvt. Ltd. and another, a cheque was presented by the complainant on 28-1-1990, through their bankers M/s. Hyderabad Bank for realisation, with the promise by the accused, that the same will be honoured when presented. However, the said cheque was dishonoured with the banker's endorsement dated 29-11-1990 which stated (i) refer to drawer, (ii) instructions for stopping payment and (iii) stamped exceeds arrangements." Appellant filed complaints under Section 138 of the Negotiable Instruments Act, 1881 for dishonour of cheque for insufficiency of funds in the accounts of the accused. It was held by the Honble Supreme Court that: It would thus be clear that when a cheque is drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person out of the amount for the discharge of the debt in whole or in part or other liability is returned by the bank with the endorsement like (1) in this case, "I refer to the drawer" (2) "instructions for stoppage of payment" and (3) "stamp exceeds arrangement", it amounts to dishonour within the meaning of Section 138 of the Act. On issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied".
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The position of Law in this regard has changed dramatically from the 1990s till date, due to the amendment that has been brought into the section. A close look on the judgments of various High Courts shows that the Courts relied on the presumption that the offence referred to in Section 138 can be made out only on bouncing of a cheque on the ground of inadequate balance in the account concerned. Where the cheque is returned unpaid on other grounds, the same has not been made an offence or where the payment was countermanded then it was without an offence. Courts during that time seemed to be more in favour of the drawer. However, after the recent judgments of the Supreme Court, the burden has now shifted to the drawer and a presumption has to be drawn in favour of the holder of the cheque. As explained earlier, a plain reading of section 138 of the Negotiable Instruments Act makes it clear that the words "either because of the amount standing to the credit of that account is sufficient or that it exceeds the amount ..." have been specifically used. It would, therefore, mean that only two contingencies are contemplated and as such, the words "... either .... or" have been used. It is, therefore, clear that the cheque should be dishonoured either for the insufficiency of the amount or, because it exceeds the amount arranged to be paid from that account. No third contingency or eventuality has been contemplated and the specific clear wording of section 138 eliminates any third contingency other than what is mentioned in the section itself. It need not be stated that a cheque can be dishonoured for so many reasons and there may be so many eventualities in which the payee is denied payment by the bank. For example, mentioning the date incorrectly or some corrections not initialled or the difference in between the amount mentioned in figures and words are certain other contingencies in which the cheque will be certainly dishonoured and would be returned as unpaid. It is not in respect of any of these contingencies that the dishonour of a cheque has been made penal under section 138 of the said Act. Section 138 of the Negotiable Instruments Act is a penal provision wherein if a person draws a cheque 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
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whole or in part of any debt or other liability, is returned by the bank unpaid, on the ground 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. However with regard to "Payment stopped by the drawer" this section does not mention anything specifically. Whatever may be ground or reason on the basis of which the cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or "signature differ" or any other ground, an offence under the section is made out and the drawee has full right to initiate proceedings u/s 482 CrPC. It is also important that the time restriction given in Section 138 (c) also get attracted in case of stop payment when a notice as required by the provision is sent to the drawer. It is seen that there are manifold reasons for the dishonor of cheques by banks but there is statutory mandate upon the payee under Section 13 (b) of Negotiable Instruments Act for giving a notice demanding the payment of the amount of said cheque, within 15 days from the date of the information as to bouncing of the said cheque from the drawer of the cheque and upon failure to make payment of the amount by the drawer within 15 days, offence under section 138 is deemed to have been committed. Moreover the decision of the Supreme Court in Electronics Trade & Technology Development Corporation Ltd is explicit and has decided all sorts of controversies in relation to bouncing of the cheque due to payment stopped by the drawer. It has expressly held that if on issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied. It can be concluded that whatever may be the ground or reason on the basis of which the cheque is dishonoured by a bank, whether it may "stopped payment by drawer" or "signature differ" or any other ground the offence under the section is made out and the holder of cheque has full right to initiate proceedings and while deciding the case the
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Court should see that whether payment has been made by the drawer within 15 days of notice issued by the drawee after the dishonour of cheque.
6.3 SUGGESTION Some of the following suggestions are: 1. Fast track courts should be created to deal exclusively 138 cases. 2. Number of posts of magistrates should be increased. 3. The Courts have to be strict in not allowing adjournments to the accused 4. Trial of cases once commenced must be daily till judgment is passed. 5. Endeavour should be made to dispose of cases within a maximum period of six months from the date of complaint or at worst should not stretch beyond one year. 6. High courts should monitor the pending cases. 7. Appeals should not be allowed unless the accused gives valid reasons or brings out deficiencies in judgment of lower court. 8. Amendments should be made to empower courts to direct accused for deposit of full amount of the cheque before the trial starts as it will compel accused to settle for compounding at the earliest. 9. Penalties should be levied for delaying compounding of offence as directed by Supreme Court. 10. The punishment should be enlarged to a minimum term of imprisonment for three years, without an option of fine (for individuals), principally when it joined with the punishment for the offence under IPC. 11. Lok Adalats should be given the jurisdiction to decide the issue of dishonour of cheque and in this regard its decision should be made final. 12. The period of fifteen days for reporting the cheque bouncing by the payee to the drawer should be increased because this is very short span of time and numerous occasions it is felt inadequate. There should be maximum 6 months time should be given to report the cheque bouncing to the drawer.
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Keeping in view this, courts must adopt suitable and effective procedure to ensure expeditious disposal of 138 cases to achieve the objective of the Act. The objective of the part VII Act is to solidify the importance of cheque as a way to inspire the development of banking, commerce, and the economy and the need to protect the continuing reliability coupled with the use of cheque as a main constituent of banking and as a medium of exchange in commerce and other economic endeavors. We also have established that the micro objective of the Act is the annihilation of the use of dishonour cheques to pay debts and settle sundry financial obligations. The Amendments should be made to remove various structural and functional defects that together with socio-cultural factors, have impeded the achievement of the Act's purpose. The public must see that the writing of dishonour cheques is a significant corrupt practice and that must be stopped. The public also should be counseled that cheques should be issued only when there are enough funds in the bank to honour the cheques drawn, which would ensure that paying banks would honor the cheques. The Reserve Bank of India, in conjunction with the banks, should increase awareness campaigns about the different strengths in using cheques to make payments and to discharge other financial obligations and thereby persuade people to use cheques in discharging monetary obligations. They should also educate the public about the peril of dishonour cheques. The offence must be considered committed immediately after issuance and not at any time before the expiration of six months afterwards. LokAdalats will reduce the burden in the higher courts. Also the government may focus on improving the infrastructure facilities and efficacy of the courts to facilitate expeditious disposal of 138 cases.