OUTLOOK OF DISHONOUR OF CHEQUE WITH CASE LAW STUDY

                                                                          V.G.Ranganath M.L.,(Ph.D)**

ROLE OF THE CHEQUE: In present Commercial World Cheques constitutes an important segment of the payment and settlement scenario of the India. Cheques occupied the prominent place. The cheque is currently the most visible and significant mode of payment in India. Cheques are the creation of ancient business people or western business world. The Advent of English people or Britishers into India gave a path for the expansion of cheques. Promissory Notes, Bill of exchanges and cheques are used in commercial transactions and they are in the nature of contract. These contracts are in special form and introduced as a ‘special contracts’ by passing the Negotiable Instruments Act,1881. Negotiability or Negotiation means transfer. The person to who posses or holds the three instruments can transfer them to another person. The instrument to whom it has transferred, he can transfer to another person. So these instruments  can easily transferable from one person to another. That is the reason, be called as negotiable instruments. Among these instruments Cheque plays a vital role. For this, there are so many reasons.

REASONS FOR THE PROMINENCE OF CHEQUE:

The Cheque become instrumental for easy and convenient in commercial and monetary dealings as mode of payment. The currency note payment of lakhs and crores can be easily made through cheques. For this purpose there was a birth of security and made an opportunity to avail the cheques in course of transactions. It was very easy to carry also. In addition, to this accountability, Income tax rules and regulations, controlling of contentions etc., the business and commercial, corporate bodies of private and public sectors carrying out their transactions through cheques and also become mandatory.

The other reason for the prominence of cheque was if the mode of payment was done by cheque, it creates or leads to specific and irredeemable evidence. For example, Rama Rao lends certain money from Appa Rao without any executing documents or instrument. For this there was no evidence. After some time Rama Rao may deny the borrowing or lending of money. But if Appa Rao gives a cheque to Rama Rao and if Rama Rao presents into his account, then there may be no chance to refuse or deny. From last two decades the utilizing or availing of cheque was unlimited and became very important in routine life. There are other reason also in addition to the above mentioned reasons.

CHEQUE BOOK-ONE OF THE STATUS SYMBOL:

Borrowing is as old as the society itself. Even our vedic literature and purnas mention of money transaction between the various communities of the societies. Ancient History mentions of the large merchant prices and the practice of giving money on a letter produced from a merchant of a  distant place. Even kautilya in his Arthasastra mentions the existence of the Bankers and a system of money transfer by mere letter what we call now “Hundies”. Thus the practice and history of hundis is lost in antiquity. Promissory Notes, Bill of exchange and Cheques as they are called now is a creation of the merchant community of the west but we cannot say such a lending on a chit or paper was not in existence in India prior to European Mercantile community came to India.

Though cheques are not in vogue in India from prehistorical times, cheques came into existence in India as late as the eighteenth century. Cheques have been imported from the west. Even in England, though the business community treated the cheques as negotiable the law of the land frowned on them. It originated in the Law Merchant and by stages the Courts of Law recognized it and developed it in the interests of the business and public convenience. By passage of time they began to play very prominent part in the Business community and the Law of England was adopted to recognize them by passing  the Indian Negotiable Instruments Act, 1881  was passed. The Law-Merchant is not a  closed chapter or is it fixed or stereotyped. From time to time the practices of the business community would change the Courts of Law are not very slow in recognizing them on the principle of mutual confidence and custom. An attempt to evolve uniform rules throughout the world is underway but so far is not successful.

Chapter XVII of Negotiable Instruments Act, 1881 deals with the provisons relating to dishonour of cheque and punishment. Now a days it became prevalent practice to issue the cheque as consideration  for the mode of payment. If the cheque has dishonoured due to insufficiency of funds or the amount exceeds the agreement made with the banker, deemed as an offence. But now a days taking the cheque for pre-consideration and also for security purpose for the future course is very common. This common practice has been misused and drawer of the cheque engrossed in tight corner.

DEFINTION OF CHEQUE:-

Due to development of Information Technology and Globalization, the Government felt to modernize the definition of Cheque by adding the new sentence to earlier definition. For the said purpose Parliament enacted the Negotiable Instruments Act 2002 to the Principal Act Negotiable Instruments Act, 1881.

Definition(before the amendment of 2002): Section 6 of NI Act, 1881: Section 6- "Cheque".-A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

Modified Definition: (Amendment 2002)

Section 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.

Explanation I.-For the purposes of this section, the expressions- (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 house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substitu ing the further physical movement of the cheque in writing.

Explanation II.-For the purposes of this section, the expression "clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.

AMENDMENT IN THE YEAR OF 1988:-

The  Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein 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. The existing provisions in the Negotiable Instruments Act, 1881, namely sections 138 to 142 in Chapter XVII 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 matters has been found to be cumbersome. The Courts are unable to dispose of such cases expeditiously in a time bound manner in view of the procedure contained in the Act.

The object of Section 138 is 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 a negotiable instrument in drawing a cheque without sufficient funds in his account and in inducing the payee or holder in due course to act upon it.

Chapter XVII containing Ss.138 to 142 introduced in the Act in the year of 1988 with the object of inculcating faith in the efficacy of banking operations and giving credibility to negotiable instruments in business transactions. The said provisions were intended to discourage people from not honouring their commitments by way of payment through cheques.

AMENDMENT IN THE YEAR OF 2002

The Act has been amended in the year of 2002 by inserting new sections and certain amendments to old sections carried out. Section 143 to 147 has inserting in the year of 2002.  The Amendment Act of 1988 by which the set of provisions relating to dishnour of cheques was introduced was repealed by the Repealing and Amending Act, 2001, but it did not have any effect upon the amendment of the Negotiable Instruments Act. The Author concentrates on the outlook of the dishonour of cheque with case law study. The Author Concentrates on certain aspects whether section 138 attracts or not. In present day scenario, there is lot of perplexity relating to dishonour of cheque. But every dishonour of cheque may not amounts to offence.

“THE ACTION OF THE PAYEE AGAINST THE DRAWER”

Statutory Changes: The Amendment of 2002 has increased the punishment upto two years and has increased the time for giving notice to 30 days from the earlier 15 days.

Ingredients of liability under section 138:-

The ingredients of liability under the section have been stated in terms of the following points:

1.         The cheque is drawn on the 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 the drawer’s account is insufficient for paying the cheque.

4.         The payee has given a notice to the drawer claiming the amount within 30 days of the receipt of the information from the bank.

5.         The drawer has failed to pay within 15 days from the date of the receipt of notice.

These requirements have been restated as follows:

The object of bringing section 138 on the statute is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. The ingredients which are to be satisfied for making out a case under section 138 of NI Act are:

i) A person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount for the discharge of any debt or other liability;

ii) That 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;

iii) That cheque is returned by the bank unpaid, either because the amount of money standing to the credit of the 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 the bank;

iv) The payee or the holder in due course of the cheque 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 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.

v) The drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice.

If the aforementioned ingredients are satisfied then the person who has drawn the cheque shall be deemed to have committed an offence. The person be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque or with both. The author refers certain case law study in the purview of dishonour of cheque taking certain practical aspect or situation.

Acknowledgement: Acknowledgement after limitation or acknowledgement of time barred debt is not valid. It cannot save limitation[1].

Limitation Aspect: Where the last day of limitation for filing complaint under section 138 of Negotiable Instruments Act happened to be a public holiday, the complaint presented on the next working day would not be barred by limitation[2].

Blank Cheque: A Blank cheque is not cheque under the provisions of the NI Act. To attract Sec.138 of NI Act there should be a valid cheque. A valid cheque not only contain the signature of the drawer but also be complete with all particulars including date, payee’s name and amount[3].

Gift or Donation Cheques: Cheque issued for C.M Welfare fund-dishonoured, it will not attract S.138[4].

Stopping payment of a cheque: In Electronics Trade etc Ltd V Indian Technologist etc.Pvt Ltd[5] .,the question before the Supreme Court was as to whether dishonestly stopping the payment of  a cheque issued by a drawer came within the ambit of Sec.138. It was held that the dishonestly stopping the payment of the cheque, and then failing to pay the amount within 15 days after due notice from the payee amounts to an offence within the meaning of Section 138.

Whether Power of attorney holder can file a complaint u/s.138:- The Power of Attorney Holder of Payee can file a complaint in the name and on behalf of payee. Power of Attorney Holder is competent to file complaint relating to dishonour of cheque[6]. The power of attorney of a payee or a holder in due course of a dishonoured cheque can file a complaint for an offence under section 138 of NI Act after obtaining permission from the court , either before or after filing the complaint[7].

Account Closed: The endorsement “account closed” was held to be an offence under section 138 of the NI Act[8].

Power to condone delay under Section 5 of Limitation Act stood excluded in case of complaint under Section 138 of N.I.Act: Section 142(b) places a completed bar on taking cognizance of an offence, except where complaint was made within one month from the date on which cause of action had arisen. Held, that  power to condone delay under Section 5 of Limitation Act stood excluded in case of complaint under section 138 of  N.I.Act[9].

Effect of death of complainant:- If the complainant was dead, the case could be proceeded with provided the other conditions enumerated were satisfied[10].

 Compromise Petition: It was held that  a joint petition of compromise has been filed by the parties in which it has been stated that they have settled their dispute and grievances. In view of the facts stated in the compromise petition, Hon’ble court permitted the parties to compound the offence[11].

Death of Drawer: Where the drawer of the cheque dies, Prosecution cannot be launched against his heirs. No criminal liability can be fastened on the heirs or legal representatives of the deceased drawer.- Bupinder Lima V State of AP, 1999 6 ALD 143(AP).

Arbitration Proceedings  : It was held that it was not proper, the complaint for dishonour of cheque, quashing of on ground that Complainant had already taken recourse to arbitration proceedings[12].  Non-employee can also file Complaint : It was held if company is the Complainant, it can be represented by an employee or even by an non-employee authorized person.

The requirement of s.142 of NI Act that payee should be the Complainant , is met if the complaint is in the name of the payee. If the payee is a company, necessarily the complaint should be filed in the name of the company. Sec.142 of NI Act does not specify who should represent the company, if a company is the Complainant. A Company can be represented by an employee or even by a non-employee authorized and empowered to represent the company either by a resolution or by a power of attorney.

Statutory Notice : It was held that the statutory notice u/s.138 and 142 of the NI Act, 1881 sent to the correct address of the drawer but returning with the endorsement must be presumed to be served to the drawer and the burden to show that the accused drawer had managed to get an incorrect postal endorsement letter on the complainant and affixed there of have to be considered during trial on the background facts of the case[13].

At present a disproportionately large number of cases involving the dishonour of cheques is choking our Criminal Justice System, especially at the level of Magistrate’s Courts. As per the 213th report of the Law Commission of India, more than 38 lakh cheque bouncing cases were pending before various courts in the country as of October 2008. This is putting an unprecedented strain on our Judicial system.

The parties involved in cheque bounce cases usually seek the compounding of the offence at a very late stage. The interests of justice would indeed be better served if parties resorted to compounding as a method to resolve their disputes at an early stage instead of engaging in protracted litigation before several forums, thereby causing undue delay, expenditure and strain on part of the Judicial system. This is clearly a situation that is causing some concern, since Section 147 of the Act does not prescribe as to what stage is appropriate for compounding the offence and whether the same can be done at the instance of the complainant or with the leave of the Court. The learned Attorney General stressed on the importance of using compounding as an expedient method to hasten the disposal of cases. In this regard, the learned Attorney General  has proposed that this Court should frame some guidelines to disincentivise litigants from seeking the compounding of the offence at an unduly late stage of litigation. In other words, Judicial directions have been sought to nudge litigants in cheque bounce cases to opt for compounding during the early stages of litigation, thereby bringing down the arrears.

Recently in the matter of Damodar S. Prabhu v Sayed Babalal held on May 3, 2010, the Hon’ble Supreme Court has  given certain guidelines relating to the offence of dishonour of cheque as follows[14]:

 

 

THE GUIDELINES

“(i) In the circumstances, it is proposed as follows: (a) That directions can be given that the Writ of Summons be suitably modified making it clear to the accused that he could make an application for compounding of the offences at the first or second hearing of the case and that if such an application is made, compounding may be allowed by the court without imposing any costs on the accused.

(b) If the accused does not make an application for compounding as aforesaid, then if an application for compounding is made before the Magistrate at a subsequent stage, compounding can be allowed subject to the condition that the accused will be required to pay 10% of the cheque amount to be deposited as a condition for compounding with the Legal Services Authority, or such authority as the Court deems fit.

(c) Similarly, if the application for compounding is made before the Sessions Court or a High Court in revision or appeal, such compounding may be allowed on the condition that the accused pays 15% of the cheque amount by way of costs.

(d) Finally, if the application for compounding is made before the Supreme Court, the figure would increase to 20% of the cheque amount.

Let it also be clarified that any costs imposed in accordance with these guidelines should be deposited with the Legal Services Authority operating at the level of the Court before which compounding takes place. For instance, in case of compounding during the pendency of proceedings before a Magistrate’s Court or a Court of Sessions, such costs should be deposited with the District Legal Services Authority. Likewise, costs imposed in connection with composition before the High Court should be deposited with the State Legal Services Authority and those imposed in connection with composition before the Supreme Court should be deposited with the National Legal Services Authority.

16. We are also in agreement with the Learned Attorney General’s suggestions for controlling the filing of multiple complaints that are relatable to the same transaction. It was submitted that complaints are being increasingly filed in multiple jurisdictions in a vexatious manner which causes tremendous harassment and prejudice to the drawers of the cheque. For instance, in the same transaction pertaining to a loan taken on an installment basis to be repaid in equated monthly installments, several cheques are taken which are dated for each monthly installment and upon the dishonor of each of such cheques, different complaints are being filed in different courts which may also have jurisdiction in relation to the complaint. In light of this submission, we direct that it should be mandatory for the complainant to disclose that no other complaint has been filed in any other court in respect of the same transaction. Such a disclosure should be made on a sworn affidavit which should accompany the complaint filed under Section 200 of the CrPC. If it is found that such multiple complaints have been filed, orders for transfer of the complaint to the first court should be given, generally speaking, by the High Court after imposing heavy costs on the complainant for resorting to such a practice. These directions should be given effect prospectively.

17. We are also conscious of the view that the judicial endorsement of the above quoted guidelines could be seen as an act of judicial law-making and therefore an intrusion into the legislative domain. It must be kept in mind that Section 147 of the Act does not carry any guidance on how to proceed with the compounding of offences under the Act. We have already explained that the scheme contemplated under Section 320 of the CrPC cannot be followed in the strict sense. In view of the legislative vacuum, we see no hurdle to the endorsement of some suggestions which have been designed to discourage litigants from unduly delaying the composition of the offence in cases involving Section 138 of the Act. The graded scheme for imposing costs is a means to encourage compounding at an early stage of litigation. In the status quo, valuable time of the Court is spent on the trial of these cases and the parties are not liable to pay any Court fee since the proceedings are governed by the Code of Criminal Procedure, even though the impact of the offence is largely confined to the private parties. Even though the imposition of costs by the competent court is a matter of discretion, the scale of costs has been suggested in the interest of uniformity. The competent Court can of course reduce the costs with regard to the specific facts and circumstances of a case, while recording reasons in writing for such variance. Bona fide litigants should of course contest the proceedings to their logical end. Even in the past, this Court has used its power to do complete justice under Article 142 of the Constitution to frame guidelines in relation to subject-matter where there was a legislative vacuum”.

The Author is V.G.Ranganath, Asst.professor, Padala Rama Reddi Law College, Hyderabad and Research Scholar(part-time),Dr.B.R.Ambedkar College of Law, Andhra University, Visakhapatnam .

E-mail:ranganathvg@yahoo.com

[1] S.Singh v N.Kumar 1999(2) SCC 679: AIR 1999 SC 1047

[2] M/s. Mediworld Infotech, Hyd V M/s C.E.I. Consultancy & Ors:2006 CRLJ 2566.

[3] Shri Alloys steels Ltd V Jayaswala NECO Ltd:AIR 2001 SC1161.

[4] K.M.Sri Hari Rao V State of AP 2002(2) BC 690 AP

[5] AIR 1996 SC.2339

[6] M/s. Shankar Finance & Investments v State of Andhra Pradesh and Ors., AIR 2009 SC 422

[7] K.Ramachandra Rao and others V State of AP and another: ALT 2005 P.1265-66.

[8] In NEPC Micon Ltd V Magma Leasing Ltd.,AIR 1999 SC 1952

[9] Agricultural Market Committee V Sri Sankar Rao and Co.,Adoni, 2004 CRLJ 1291 (AP).

[10] M.Vijaya Kumar V  M.Srinivasa Rao 2004 (1) CRLJ 286(A.P).

[11] Sailesh shyam parsekar V Babu alias Vishwanath and another(2005) 4 SCC 162.

[12] M/S. Sri Krishna Agencies V State of AP and Anr.,AIR 2009 SC 1011.

[13] V.Raja Kumari V P.Subbarama Naidu and Anr., AIR 2004 SCW 6344/ 2004 (8) SCC 744)

[14] Damodar S. Prabhu v Sayed Babalal held on May 3, 2010 available at http://indiankanoon.org/doc/1594211/ (Last Visited on July 7, 2010).

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