Legal Remedy Against Dishonored Cheques

Section 138 and other allied provisions that were added to the Act by an amendment made in 1998 that came into force w.e.f. 1.4.1999 which were further modified by the NI (Amendment and Miscellaneous Provisions) Act 2002 that came into force w.e.f. February 6, 2003, are supposed to work as a criminal remedy of penalty against dishonour of cheques. Prior to this amendment, a recipient of a cheque which was dishonoured had only a civil remedy for realization of his dues. However, with this amendment, dishonour of a cheque for reasons stated in the relevant sections, is treated as a criminal offence.

Section 138 states: Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or part, of any debt or other liability is returned by the bank unpaid either because 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 from that account by an agreement made with the bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term, which may extend to two years with fine, or which may extend to twice the amount of cheque or with both: Provided that nothing contained in this section shall apply unless...

(a)the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

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

(c)the drawer of such cheque fails to make the payment of the said amount of money to the payee or, to the holder in due course of the cheque, as the case may be, within fifteen days of the receipt of the said notice.

Here, “debt or other liability” means a legally enforceable debt or other liability.

Box 3: Is the Joint-account holder who has not signed the cheque liable under Section 138 of Negotiable Instruments Act? R. Priyadharshini vs. LIC Housing Finance Ltd [Crl. O.P. No. 1971 of 2005 and Crl. M. P. No. 912 of 2005] Decided on 16.4.2005 Facts of the Case The respondent/complainant, namely, LIC Housing Finance Limited represented by the Deputy Manager, Coimbatore filed a case against the petitioner and her husband for an offence under Section 138 of the Negotiable Instruments Act. The drawer of the cheques was Mohamed Ansar, the husband of the petitioner. The cheques were dated 31.5.2004 each for a sum of Rs. One lakh for the discharge of the loan raised by Abdul Khader, the late father of Mohamed Ansar. Subsequent to the death of Abdul Khader, the petitioner and her husband undertook to discharge the said loan. The two cheques, bearing the numbers 921164 and 921165 and dated 31.5.2004 drawn by Mohamed Ansar, were issued on ICICI Bank Limited, Trichy Road, Coimbatore – 18. The cheques in question were issued from a joint account operated by the petitioner and her husband Mohammed Ansar in the capacity of either or survivor (E or S). The legality of the inclusion of the petitioner as accused No. 2 in Cr. O. P. No. 1971 of 2005 and M.P. No. 912 of 2005 under Section 138 of the Negotiable Instruments Act and the issue of summons has been challenged. The petitioner contends that being a joint account holder of E or S account does not impute liability for the dishonor of the cheque in question, which was drawn by Mohammed Ansar. Issues of the Case Is the joint account holder who has not signed the cheque liable under Section 138 of Negotiable Instruments Act? Are the joint-account holders vicariously liable for the acts of coaccount holder? Contention of the Parties The maker of a bill of exchange or cheque is called the ‘drawer’. Though the cheques were drawn on a joint account, the petitioner was not the drawer of the cheque as her husband drew the cheques, and the liability did not arise upon the petitioner under Section 138 of the Negotiable Instruments Act. The respondent submitted that since the husband and wife had a joint account, anyone could issue a cheque. In view of this, legally it would be considered a cheque issued by the person who had raised the loan. Therefore, even the joint account holder, who was not a drawer was liable under Section 138 of the Negotiable Instruments Act. Held The Court held that the petitioner was not liable for the cheques drawn by her husband since a drawer of a cheque from a joint account of E or S draws that cheque only for himself/herself and the fact that, there was a joint account along with the petitioner might not make her bound by a mandate under the guise of a tripartite agreement between husband, wife and the bank. The agreement only presupposes that at a given point of time, anyone – the husband or the wife – can independently issue a cheque and draw the amount from their joint account for which the banker had agreed to oblige them. Thus, the petitioner was not liable and the proceedings were liable to be quashed in so far as the petitioner was concerned, but not against the drawer of the cheque namely, the husband. The original criminal petition was allowed and the summon issued to the petitioner by the learned Judicial Magistrate was quashed. Case Notes In a joint account operated by E or S, account holders are permitted to draw a sum that will never suggest one authorizing the other. The account is opened for operational convenience and the transactions have no mutual accountability. A General reading of Section 7 and also the various ingredients of Section 138 of the Negotiable Instruments Act indicate that the mere fact that the account can be operated jointly by both the accused cannot, by any stretch of imagination, invite culpable liability against the co-account holder, who is not the drawer. Section 138 does not allow extraneous presumptions of liability beyond the apparent tenor and material as existing on the dishonored cheque. Source: The Icfai Journal of Banking Law, Vol. IV, No. 1, January 2006.

1.1 Offences by the Companies (Sec 141)

If the person committing an offence under Sec 138 is a company, every person, who at the time when an offence was committed, was in charge of and was responsible to the company for conduct of the business, shall be deemed guilty of the offence and shall be liable to be proceeded against and punished accordingly.

It has been consistently held by the courts that a non-executive director who is not in-charge of or responsible for the conduct of the business cannot be proceeded against under Sec 138. Even then, complainants join all the directors to put extra pressure on the company.

As per the new proviso to section 141, if a person is nominated as a director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under the provisions of this Act.

1.2 Cognisance of Offence

Notwithstanding anything contained in the CPC, no court shall take cognisance of any offence punishable under Section 138, unless a complaint in writing is made by the payee or the holder in due course of the cheque as the case may be. And such a complaint should be made within one month from the date on which the cause of action arises.

1.3. Cause of Action

Upon the return of a cheque not paid due to insufficient funds to the credit of the drawer to honour the cheque, the payee or the holder in due course shall:

• Issue a notice to the drawer of the cheque within 30 days of the receipt of the information regarding the return of the cheque as unpaid, making a demand for the payment of the cheque amount;

• If the drawer fails to pay the amount within 15 days of the receipt of notice, a complaint thereafter should be filed within one month in the relevant court of Metropolitan Magistrate/Judicial Magistrate, as the case may be, having jurisdiction.

• However, with the new proviso to section 142, the court can now take cognizance of a complaint even after the prescribed period (one month), if the complainant had a valid cause and satisfies the court for not filing a complaint within the said period.

1.4. Power of Court to Try Cases Summarily

As per the new section 143, all offences under this Chapter shall be tried by a First Class Judicial Magistrate or a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials. In the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding Rs. 5000/-. In the course of summary trial, if the Magistrate feels that the nature of the case is such that it warrants imprisonment for a term exceeding one year, or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall, after hearing the parties, record an order to that effect and thereafter, recall any witness who may have been examined and proceed to hear or re-hear the case in the manner as provided in the Criminal Procedure Code, 1973. The section also provides for consistent hearing of the case until its conclusion and an endeavour shall be made to conclude the trial within six months from the date of filing of the complaint.

1.5. Service of Summons

As per the new section 144, notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place, where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session.

In case where an acknowledgment purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorised by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served.

1.6. Evidence of on Affidavit

Under the newly introduced section 145, the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions, be read as evidence in any enquiry, trial or other proceedings under the Code of Criminal Procedure, 1973. Further the court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the fact contained therein.

1.7. Bank’s Slip, a Prima Facie Evidence

According to the new section 146, the Court shall, in respect of every proceeding under this Chapter, on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved.

1.8. Offences Compoundable

According to the newly introduced section 147, every offence punishable under this Act is now compoundable.

Introduction of these new clauses is, of course, a welcome step. However, there are still certain important aspects that are left out of the domain of amendment such as territorial jurisdiction, re-presentment of cheque, endorsements like ‘stop payment’, ‘account closed’ etc. The ambiguity regarding stop payment instruction has however been resolved in the recent verdict of the M/s M.M.T.C. Ltd. V. M/s Medchal Chemicals and Pharma (P) Ltd. in which, the Court held that even if the cheque is dishonoured by reason that payment of the cheque had been stopped by the drawer, the complaint under section 138 is maintainable.

Box 4: Francis Mathew Vs State of Kerala (CRL R. P. No 2009 of 2004 17/2/2005/KH) Facts of the Case The petitioner Francis Mathew took Rs.80,000/- from Rasheed to secure him a job in Premier Tyres Ltd. When Francis failed to arrange a job, on demand from (the second respondent) brother of Rasheed, Francis issued a cheque in favour of the second respondent for Rs.80,000/-. When the cheque was presented for payment on the drawee bank, the cheque was dishonored for want of sufficient funds. The second respondent (the payee of the cheque) had complied with all the formalities for a complaint under Section 138 of N. I. Act. Francis Mathew was convicted and sentenced to simple imprisonment for six months by the First Class Judicial Magistrate and ordered to pay a compensation of Rs. 80,000 and, on default, simple imprisonment for another six months under section 138 of N.I. Act. On challenge by the accused, the Additional Sessions Judge confirmed conviction and sentence and dismissed the appeal. The present revision petition is preferred from jail by Francis Mathews. Issues The cheque under dispute was not issued towards discharge of a legally enforceable debt, as the amount obtained for arranging a job is opposed to public policy and hence not a legally enforceable debt. Conviction under Section 138 of N. I. Act for an unenforceable debt is not valid. Held Petitioner could not be permitted to be benefited by retaining the amount which he was not entitled to claim. The amount of cheque could not be disallowed on the ground that it was opposed to public policy as canvassed by the learned counsel for the petitioner. Presumption of debt under Section 139 of N. I. Act was available to the second respondent. Revision was partly allowed with the modification of the sentence to imprisonment for 15 days and a compensation of Rs.80,000, and on default, simple imprisonment for one month. Case Notes This judgment partly differs from the observations made by High Court in J. Daniel vs. State of Kerala and Anr (1 (2006) BC 273): “Execution of the cheque is not sufficient to constitute an offence punishable under Section 138 of N. I. Act. Only a claim arising out of an enforceable debt or other liability will constitute an offence under Section 138.” In the present case, debt had arisen out of a contract opposed to public policy. It appears that the conviction under Section 138 was placed on a different ground, notwithstanding the legal enforceability of the consideration. Source: The Icfai Journal of Banking Law, Vol. V, No. 3, 2007.