Dpc Project Final.docx

INTRODUCTION Negotiable Instruments have been used in commercial world for a long period of time as one of the convenient modes for transferring money. Development in Banking sector and with the opening of new branches, cheque become one of the favourite Negotiable Instruments. 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 electronic form.1 However, by the fall of moral standards, even these Negotiable Instruments like cheques issued, started losing their credibility by not being honoured on presentment. It was found that an action in the civil court for collection of the proceeds of negotiable instrument like a cheque tarried, thus defeating the very purpose of recognizing a negotiable instrument as a speedy vehicle of commerce.2 Consequently, the Section 4 of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, inserted Chapter XVII in the Negotiable Instruments Act, 1881 (hereinafter the NI Act). This was done by making the drawer liable for penalties in case of bouncing of the cheque due to insufficiency of funds with adequate safeguards to prevent harassment of the honest drawer. Prior to the year 1988, the act of dishonour of cheque was treated as an offence under Indian Penal Code. Other remedy was to file a suit for recovery which was civil in nature and was dilatory. To ensure promptitude in remedy against defaulters and to ensure credibility of the holders of the negotiable instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881. A negotiable instrument is one, therefore, which when transferred by delivery or by endorsement and delivery, passes to the transferee a good title to payment according to its tenor and irrespective of the title of the transferor, provided he is bona fide holder for value without notice of any defect attaching to the instrument or in the title of the transferor; in other words, the principle nemo dat quod non habit does not apply, It is the element of negotiability that make a contract founded upon paper thus adopted for circulation different in many particulars from other contracts known to law.3 The offence under section 138 is not a natural crime like hurt or murder. It is an offence created by a legal fiction in the statute. It is a civil liability transformed into a criminal liability, under restricted conditions.

1

Section 6 of the Negotiable Instruments Act, 1881 Rangacari(N.) v Bharat Sanchar Nagam Limited (2007) 3 Supreme 626. 3 Canbank Financial Services Ltd. v/s Gitanjali Motors and Ors 1995 Cri.L.J. 1272 2

Section 138 of Negotiable Instruments Act, 1881 “Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless— a) The cheque has been presented to the bank within a period of three months from the date b)

c)

on which it is drawn or within the period of its validity, whichever is earlier; 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 The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability” The title of the Chapter XVII makes it clear that dishonour of every cheque will not bring the case within the purview of Section 138 and a person can be held liable only if the cheque has been issued in discharge of, in whole or in part, of any legally enforceable debt or liability. This section draws presumption that one commits the offence if he issues the cheque dishonestly. It aims of not only protecting the interests of the genuine drawers of the cheques with a view to give them a final opportunity to make payments in respect of dishonoured cheques, but also imposing punishments on the guilty.4

4

Dr N Maheshwara Swamy. Criminal Liability of the Drawer of a Dishonoured Cheque u/s 138. CrLJ. 1994

Ingredients of the Offence u/s 138 To constitute an offence under Section 138 of the Negotiable Instruments Act the following ingredients are required to be fulfilled: 1) Cheque should have been issued for the discharge, in whole or in part, of any debt or liability. 2) The cheque should have been presented within the period of three months or within the period of its validity, whichever is earlier. 3) The payee or the holder in due course should have issued a notice in writing to the drawer within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid. 4) After the receipt of the said notice by the payee or the holder in due course, the drawer should have failed to pay the cheque amount within fifteen days of the receipt of the said notice. 5) On non-payment by the drawer, the complaint should have been filed within one month from the date of expiry of the grace time of fifteen days, before a Metropolitan Magistrate or not below the rank of a Judicial Magistrate of the first class.

Issuance of Cheque for Discharge of any Debt or Other Liability: It is essential that the dishonoured cheque should have been issued in discharge, wholly or partly, of any debt or other liability of the drawer to the payee. The expression ‘debt or other liability’ means a legally enforceable debt or other liability. If a cheque is given by way of gift or present and it is dishonoured by the bank, the maker of the cheque is not liable for prosecution.5 In Maruti Udyog Ltd Vs Narender6, the Supreme Court held that by virtue of Section 139 of the Negotiable Instruments Act, the court has to presume that the holder of the cheque received the cheque for discharge of a debt or liability until the contrary is proved.

Presentation of Cheque: Legally a cheque can be presented for payment repeatedly any number of times within three months from the date of drawing of the cheque or within the period of its validity which is earlier. In K C Nadar Vs Chenabal M R Simon7 the question was raised for the first time before the court whether a cheque may be presented on any number of times during the period of its validity. This was the case which propounded the basic theory that a cheque can be presented any number of times during the period if its validity. Further, the Supreme Court held in Sadanandan Bhadran Vs Madhvan Sunil Kumar8 that section 138 of the Act does not put any embargo upon the payee to successively present a dishonest cheque during the period of its validity and a fresh right arises with every presentation but cause of action arises only once when the notice is served.

5

Mohan Krishna (B) Vs Union of India. CrLJ 1996; 636(AP).

6

(1999) CrLJ 266 (SC).

7

8

1994 CrLJ 3515 (Ker).

1998 CrLJ 4066 (SC).

Reasons for Dishonour of Cheque a) Stop Payment:In Electronics Trade and technology development Corporation India Vs Indian Technologies and Engineers (Electronics) Pvt. Ltd.9, the Supreme court of India observed that if, before presentation of a cheque, notice is issued by the drawer to the payee or holder in due course not to present the cheque for payment, and it is still presented and, on the drawer’s instructions, dishonoured, Section 138 is not attracted. But in another case Modi cements Ltd. Vs Kuchil Kumar Nandi10, the Supreme Court disapproved its own observations in earlier case and held that even if a cheque is dishonoured because of “Stop Payment” instruction to the bank, section 138 would get attracted. It was further affirmed in M/s M. M. T. C. Ltd. Vs M/s Medchl Chemicals and Pharma (P) Ltd.11

b) Bank Account Closed:The dishonour of cheque on the ground that the account has been closed by the drawer of the cheque constitutes an offence under section 138. “Account Closed” would mean that “though the account was in operation when the cheque was issued, subsequently the account is closed.12 It shows that the drawer has no intention to make payment. Closing of account is one of the modes by which a drawer can render his account inadequate to honour the cheque issued by him, therefore, the closing of the account would not enable the accused to wriggle out of his liability under section 138 of the Act.13 In N. A. Issac Vs Jeeman P. Abraham & Anr14, it was held that cheque issued when account has already been closed, provision of Section 138 will apply.

c) Refer to the Drawer:“Refer to drawer” in the ordinary meaning amount to a statement of a bank, “we are not paying, go back to the drawer and ask why”, or else “go back to the drawer and ask him to pay”. The remarks “refer to drawer” necessarily means, as per banking custom, that the cheque has been returned for want of funds in the account of the drawer of the cheque. It is a courteous way normally adopted by a bank to show its inability to honour the cheque for want of funds.15 In M/s Electronic Trade & Technology Development Corporation Ltd. Vs M/s Indian Technologist and Engineer (Electronic) Pvt. Ltd.16 it was held that if cheque is returned with endorsement ‘Refer to drawer’ or Instructions for stoppage of payment or exceeds arrangement, it amounts to dishonour of cheque.

9

AIR 1996 SC 2339 (SC).

10

AIR 1998 SC 1057. AIR 2002 SC 182. 12 Veerajhavan (J) Vs Lalith Kumar 1995 CrLJ 1882. 11

13 14

1999 CrLJ. 2883. Civil Court Cases. 2005; (1):690(SC).

15

Voltas Ltd Vs Hiralal Agarwalla (1991) 71 Comp as 273 (Cal).

16

AIR 1996 SC 2339.

d) Post Paid Cheques:A “post dated” cheque is a bill of exchange when it is written or drawn, it becomes a ‘cheque’ when it is payable on demand.17 A post-dated cheque cannot be presented before the bank and as such question of its return does not arise. It is only when the post dated cheque becomes a cheque with effect from the date shown on the face of the said cheque, Section 138 comes into play.

Jurisdiction: Hon'ble Apex Court in case of K. Bhaskaran vs. Shankara18, had given jurisdiction to initiate the prosecution at any of the following places. 1. Where cheque is drawn. 2. Where payment had to be made. 3. Where cheque is presented for payment. 4. Where cheque is dishonoured. 5. Where notice is served upto drawer. However, in its recent decision in Dashrath Rupsingh Rathod v. State of Maharashtra & Anr.19, the Supreme court held that in cases of dishonour of cheque, only those courts within whose territorial limits the drawee bank is situated would have the jurisdiction to try the case. Subsequently, many people had raised difficulties about this judgment. This is so because the payee of the cheque had to file the case at the place where the drawer of the cheque has a bank account. However, now the legal position has completely changed with above new Ordinance, i.e., the Negotiable Instruments (Amendment) Ordinance, 2015, which has been promulgated by the President on 15 June 2015, and which has immediately come into force with effect from 15 June 2015. The above Supreme Court judgment is now of no consequence since this Ordinance supersedes it, clarifying jurisdiction related issues for filing cases of offence committed under Sec 138.The main amendment included in this is the stipulation that the offence of rejection/return of cheque u/s 138 of NI Act will be enquired into and tried only by a Court within whose local jurisdiction the bank branch of the payee, where the payee presents the cheque for payment is situated.

Punishment: Bouncing of a cheque invites criminal prosecution under section 138 of the Negotiable Instruments Act, 1881. Punishment for the offence under Section 138 of NI Act is imprisonment up to two years or fine which may extend to twice the cheque amount or both. The offence is bailable, compoundable and non-cognizable.

17

Ashok Yashwant Badava Vs Surendra Madhar Rao Nighojabar AIR. 2001 SC 1315.

18

AIR 1999, SC 3762

19

(2014)9 SCC 129.

Notice of Dishonour: Section 138(b) of the Negotiable Instruments Act, 1881 provides for the Notice of Dishonour. It states that the payee or 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 cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid. Thus, the said provision states that if the holder of the cheque receives information from the Bank that the cheque has been dishonoured, he should within 30 days makes a demand to the drawer for payment.

Who sends the notice of dishonour of cheque?

Upon dishonour, the holder of cheque or some party thereto who remains liable thereon, must give notice that the instrument has been so dishonoured to all other parties whom the holders seeks to make severally liable and to some one of several parties whom he seeks to make jointly liable thereon.

To whom is the notice of dishonor given? The notice may be given:  to a duly authorized agent of the person to whom it is required to be given  where he is dead to the legal representative  where he has been declared insolvent- to his assignee

What are the various modes to send notice of Dishonour of Cheque? The notice of Dishonour can be sent by registered post. In the case of SIL Import, USA v. Exim Aides Silk Exporters20, the delivery of notice through Fax was acknowledged. It was observed that the date of delivery of fax message cannot be ignored for the purposes of computing the period of limitation and accrual of the cause of action.

What is the object of sending notice? Central Bank of India v. Saxons Farms21, the Supreme Court held that the object of the notice is to give a chance to the drawer of cheque to rectify his omission and also to protect an honest drawer. The service of notice of demand in clause (B) of Section 138 is a condition precedent for filing a complaint u/Section 138 of NI Act.

When is issue of notice u/Section 138 of NI Act deemed as complete? In a recent case of 2015 in M/S. Jayalakshmi Textiles vs S.K. Kolandasamy[5], the Madras High Court was confronted with a similar issue and observed that when the notice is sent by registered post by correctly addressing the drawer of the cheque, the mandatory requirement of issue of notice in terms of clause (b) of proviso to Section 138 of the Act stands complied with. It is needless to emphasize that the complaint must contain basic facts regarding the mode and manner of the issuance of notice to the drawer of the cheque.

Presumption, as under section 139, with regard to the offence under section 138: Section 139 of the Act lays down the principles of presumption with regard to guilt of a person accused of dishonour of cheque under section 138 of the NI Act, 1881. It says that the Presumption as to the reason for the bouncing or return of a cheque shall always be considered to be insufficiency of funds in the bank unless the drawer of such cheque can prove otherwise. The Himachal Pradesh High Court in Nexus Health and Beauty Care Private Limited and Another v. M/s. National Electrical Office, through its Proprietor, Solan22, observed that, 20

(1999) 4 SCC 567 (1999) 8 SCC 221 22 2013ALLMR(Cri)233 21

“‘It is held that the presumption under Section 139 is attracted in such a case also. The authority shows that even when the cheque is dishonoured by reason of stop-payment instructions by virtue of Section 139 the Court has to presume that the cheque was received by the holder for the discharge, in whole or in part, of any debt or liability. Of course this is a rebuttable presumption. The accused can thus show that the “stop-payment” instructions were not issued because of insufficiency or paucity of funds. If the accused shows that in his account there were sufficient funds to clear the amount of the cheque at the time of presentation of the cheque for encashment at the drawer bank and that the stop-payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under section 138 would not be made out. The important thing is that the burden of so proving would be on the accused.”

Drafting a Legal Notice:  After having established that the above stated factors or conditions are present in the relevant case, the ingredients must be incorporated within the facts so as to constitute an offence under section 138 of the Negotiable instruments Act, 1881. Incorporation of the law within the facts so as to constitute a certain offence is the art of drafting. So while drafting a legal notice for bouncing of a cheque every ingredient of the offence as laid out in section 138 must be imbibed within the facts being alleged in that notice. It is very important to include all the facts in brief that shall form the crucial part of the complaint.  Therefore, the sender of the notice must, by means of the following steps, incorporate the above mentioned ingredients into the facts of the case. Hence, the sender must: Mention the route through which it is being delivered at the top of the legal notice such as Registered post, under Postal Certificate or Speed Post although such communication i.e. a legal notice can also be sent through post, courier, fax, e-mails.  Address the notice to all parties of the transaction.  Traditionally, date of dispatch of the notice is the same as that of drafting it and it therefore should be mentioned in the legal notice as it is of utmost importance in order to address the question of limitation.  Discuss in brief, the agreement between the parties out of which obligations of the parties to transact arose.  Discuss the terms and conditions of agreement in brief with regard to such transaction between the parties.  Mention the date on which the cheque was drawn, the bank on which it was drawn, the cheque number and in whose favour it was drawn in the legal notice along with the date on which the cheque was deposited and the date on which it was returned. An example of a tabular form of information with regard to the relevant cheque drawn is given below.  Attach with the mail a copy of the returned cheque along with a copy of the memo containing the reasons for the return of the cheque as sent by the bank.  Also mention that failure to comply with the relevant notice would lead to the initiation of criminal proceedings against the Drawer, which may result in his/her imprisonment under the relevant provisions of the Indian Penal Code, 1860 and the Negotiable Instruments Act, 1881.  In conclusion, call upon the Drawer of the cheque to pay the amount due within 15 days of the receipt of the legal notice failing which the sender/payee shall be

constrained to take such necessary action as advised against the Drawer in the competent courts of law, at the risk, cost and consequences of the drawer.  It also should be mentioned that the cost for litigation is without prejudice to the amount so due to the payee which the payee has the right to claim at a certain percentage as interest.  Mention the name and details of the sender and if the sender is not same as the payee then the details of the payee, on whose behalf this notice is being sent. The nuances of drafting can involve clever and meticulous use of words which may appear as common but hide within themselves another possible meaning to give the statement a whole new colour. Therefore, the instructions with regard to the drafting technique legal notice can be endless, but the technical requirements as mentioned above remain same in almost all cases of dishonour of cheque under section 138 of the Negotiable Instruments Act, 1881.