Section 138 NI Act Dishonour Of Cheque With Case Laws
138 NI Act: Cheque Dishonour Explained with Case Laws
Dishonor of Cheque
A cheque, like other negotiable instruments, carries with it a solemn promise that the instrument will be honored for payment. It is one of the most widely used instruments in business transactions in India and abroad.
A great hardship is caused if cheques start getting regularly dishonored and it will affect the credibility of genuine holders and drawers of cheque and damage business dealings.
To discourage such dishonors, the Banking, Public FInancial Institutions and Negotiable Instrument Laws (Amendment) Act 1988 (w.e.f from 1st April 1989) brought in Chapter XVII of the act. The chapter is titled “Of penalties in case of dishonor of certain cheques for insufficiency of funds in the accounts” which consists of Section 138-142 which deal with dishonor of cheques. This chapter has been amended in 2002 and 2015 too to keep up with business practices.
Object :-
The object of Section 318 is to ensure that the obligations undertaken by using cheques as a mode of payment are honored. It was brought in to punish unscrupulous drawers of cheques who draw cheques but have no intention of discharging them.
Putting in civil as well as criminal liability discourages such people and increases the credibility of cheques.
Safeguards for Drawers :-
This act not just punishes dishonest drawers, but also provides safeguards to protect the drawers of such instruments where dishonor may take place for reasons other than thode arising out of dishonest intentions. Eg :- ambiguity in cheque, honest mistake, etc.
Also, the prosecution under Section 138 is subject to certain conditions, only after fulfilling those conditions a cause of action arises. Conditions such as chance of amendment, opportunity for the drawer to honor the cheque, etc., are provided as safeguards before a suit can be filed, increasing the credibility of drawers too.
Interpretation of Section 138 :-
Even though dishonor of an instrument gives rise to a civil liability, Section 138 imposes a criminal liability on it with the punishment of fine and prison term. Usually a penal provision is interpreted strictly. But due to the fact that the object of these sections was to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques, these penal provisions are interpreted liberally so as to not defeat these objects.
When Does Cause of Action Arise Under Section 138 :-
The cheque must be drawn on an account maintained by the banker, i.e. the drawer should have an account in the bank .
Payment of money through cheque must be made for discharge of any debt or liability.
On reading the explanation to Section 138, we see that the ‘debt or other liability’ means a legally enforceable debt or liability.
Also on reading Section 139, we see that it provides for a presumption in favor of the holder and it is the drawer who will have to prove that such cheque was not issued in discharge of any debt or liability. It is an exception to the general rule of proof and is a reverse burden of proof.
In the case of Rangappa v. Sri Mohan (2010), the SC said that Section 139 is an example of a ‘reverse onus' clause that has been included in furtherance of legislative objective of improving the credibility of negotiable instruments. Also since Section 138 imposes a regulatory burden and the settled position is that when an accused has to rebut the presumption under Section 139, the standard of proof for doing that is that of ‘preponderance of probabilities’ and if the defense creates a doubt of a legally enforceable debt or liability, the prosecution can fail.
Cheque must have been presented to the bank within 3 months (a/c to RBI guidelines) from the date it was drawn or within the period of its validity.
Cheque must be unpaid due to either of the two grounds :-
- insufficiency of funds
- exceed the amount arranged to be paid from the account
Other ways to dishonor exist apart from the above two methods as the intention is to punish dishonest intention while making the cheque, rather than a strict interpretation of the section. The SC has ruled other grounds too in other cases. Eg:-
Irrespective of whatever the reason is, if a certain act is done or ommitted with the purpose or intention of preventing the honor of cheque, it will fall within the scope of Section 138
If the drawer has given an intention to the bank to stop payment after the cheque has been issued (countermanding), Section 138 can apply as prima facie the intention behind issuing a cheque and then countermanding payment on it seems dishonest.
Closing the bank account after issuing the cheque constitutes malafide intention.
Thus we see that Section 138 can be applied wherever the instance of dishonor seems to happen due to dishonesty or arises from malafide intention.
A notice should have been given to the drawer within 30 days
This is done so that the drawer has an opportunity to properly honor the cheque if such dishonor has been caused due to some honest error.
If no payment is received from the drawer within 15 days of receipt of notice by him, the cause of action arises, and now the holder can initiate legal proceedings against the drawer.
Cognisance :-
Section 142 talks about the cognisance of such cases. The cognisance shall be taken by a Judicial Magistrate of the first class, only after a written complaint has been submitted to him by the payee or holder in due course of the cheque. This complaint should be brought in within one month of the date on which the cause of action arises. In case of complaints made later than that, the complainant will have to satisfy the court that he had sufficient cause for not making a complaint.
In case of cheque delivered for collection through an account, the cases shall be tried in courts within whose local jurisdiction the account of the payee or holder in due course is.
If the cheque is presented for payment, the court within whose local jurisdiction the branch of the drawee bank where the drawer maintains its account lies.
Procedure :-
Section 143 talks about the procedure to be followed by the court in trying such cases. Cases of dishonor of cheques are to be tried summarily, following the procedure laid down from Section 285 -288 of Bhartiya Nagrik Suraksha Sanhita (Section 262-265 of Cr.P.C.). (summary procedure)
These cases are to be tried summarily and the magistrate is empowered to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine not exceeding five thousand rupees. If the magistrate feels that the case is fit for more punishment, or that it would be undesirable to try the case summarily, he will hear the parties, record a statement to that effect and then proceed with the trial according to the Samhita.
The judge shall also try for day-to-day hearings of the case till its conclusion and record adjournments in writing. All in all, the judge should try to complete the trial as expeditiously as possible and attempt to conclude the trial within 6 months of the filing of the complaint. But suchpracticality and the achievement of the objects of these sections should be balanced consistently with the interests of justice.
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