What is a Cheque?
As per the Negotiable Instruments Act, 1881, a Cheque is a form of bill of exchange drawn on a specified banker and payable only on demand. The maker of the cheque is called a ‘drawer’ and the person in whose favor such cheque is drawn is called the ‘payee’. The person directed to pay the amount is the ‘drawer’. The bank thus acts as a drawer.
A cheque is the most popular form of mode of financial transaction. Its ease of use had made it widely accepted and relied upon method of making and accepting payments on the global level.
What is dishonor of Cheque? What are Provisions Provided for it under Indian laws?
During the course of a transaction, there might occur such an event that where the cheque was drawn by a person for the payment of a sum to another, upon being presented to the banker, is returned unpaid. This might be due to a variety of reason like:
- Insufficient funds in the account maintained with the banker;
- Expired, incorrect, unreadable or scribbled date on the cheque;
- Signature mismatch;
- Damaged, disfigured or stained cheque;
- A difference in the amount mentioned in words and in figures;
- Overwriting on cheques.
Some may not be intentional and instead be a mistake on the part of the drawer, who is ready to rectify the same upon being informed of the same, but there might be situations where the payee has to face a drawer who is reluctant to make payments and has been avoiding his liabilities.
As per Section 138 of the Negotiable instruments Act, 1991, dishonor of cheque or cheque bounce is an offense punishable with:
- Imprisonment for a maximum term of two years, or
- Fine which may be twice the amount payable, or
It must be noted that the act provides that the legal remedy shall be available to the payee only if:
- The cheque is presented within the period of its validity;
- The payee or the holder of the cheque, has mandatorily made a demand for the payment by giving a written notice to the drawer of the cheque within 30 days of the receipt of information of the return of check as unpaid by the bank, and
- The drawer has failed to make the payment of the said amount to the payee or the holder in due course, within a period of 15 days of the receipt of the above-mentioned notice.
- Thus, the key constituents of the offense under Section 138 are:
- A person must have drawn a cheque on a bank account maintained by him.
- The cheque should be issued in discharge of a debtor limited liability partnership, in whole or in part. If the cheque was drawn for lending a loan, as a gift or for any unlawful purpose, then the drawer cannot be prosecuted.
- The cheque has been presented to the bank within the period of its validity.
- The cheque has been returned by the bank as unpaid because of
- Insufficient funds, or
- The amount mentioned in the cheque exceeds the amount that can be paid as per the arrangement with the bank.
- The payee has made a demand for the payment by giving a written notice, within a period of 30 days from the receipt of information from the bank;
- The drawer failed to make payment of the said amount of money within a period of 15 days from the receipt of the said notice; and
- The complaint of the offense is being made within 1 month of the date on which the 15 day period as provided in the written notice expires.
- As per the Act, it shall be presumed that the holder of a cheque received the cheque for the discharge of any debt or other liability, in whole or in part, unless the contrary is proven.
- The Act also restricts the drawer from taking the defense that, ‘when the cheque was issued, he had no reason to believe that the cheque may be dishonored.’
What are the Provisions where the offense is Committed by the Company?
Section 141 of the Negotiable Instruments Act, if the offense under section 138 is committed by a company, the persons who were in charge of, and responsible for the conduct of the daily affairs of the company, at the time the offense was committed, will be considered to be guilty of the offense. The proceedings may be initiated against them and they may be punished accordingly.
The exceptions to the above principle are that he shall not be held liable if-
- he has been nominated as the Director of a company by virtue of his holding any office or employment in by the Government in any manner,
- he exercised all due diligence to prevent the happening of such an offense, or
- He proves that the offense was committed without his knowledge.
What details must be constituted in the Legal Notice?
A Demand Notice is the most important part of proceeding against the defaulter under section 138 NI Act. Thus the notice should include thorough details of the cause of action.
- The notice must mention the name and details of both parties, i.e. drawer and payee;
- Details as to the services and goods involved in the transaction that resulted in the drawing of the cheque, along with the full amount and relevant dates;
- The date when the cheque was presented to the drawee bank;
- Relevant date when the bank informed the payee of the cheque dishonor along with reason provided by the bank and memo number;
- The full amount which the drawer is liable to pay which can include any interest, legal charges and compensation also;
- A request to make such payment within 15 days of the demand notice;
- A statement that the payee shall resort to legal remedies provided to him if the drawer does not pay the amount he is liable to within stipulated time.
- The above-mentioned details shall also be required during filing of the complaint in the competent court. The complaint must be drafted with all the relevant factual matrix and documents like bank memo, a copy of demand notice and a proof of notice getting delivered must be enclosed.
- For the complaint under Section 138, the concept of taking cognizance of the offense but not the offender does not apply. Thus, unlike other complaints of criminal nature, unless the complaint discloses the name of the person who is being accused of the offense, there cannot be a prosecution. The offense under Section 138 is person specific.
Where the complaint under Section 138, Negotiable Instruments Act should be filed?
- Section 142 of the act provides for the provisions for ‘Cognizance of offenses’. According to it, the complaint has to be filed before Judicial Magistrate of the First Class (JMFC) or Metropolitan Magistrate (MM). Today, most District Courts have a designated Magistrate to deal with matters relating to Negotiable Instruments Act.
- For a long time, the act was silent on the territorial jurisdiction, thus Criminal Procedure Code was referred for the same, which provides that the offense shall be tried by that court within whose jurisdiction it has been committed. There have been various judgments regarding the territorial jurisdiction for Section 138 offense.
- The Negotiable Instruments (Amendment) Act, 2015, which come into force on the 15th June 2015, amended Section 142 with respect to the guidelines for territorial jurisdiction. It now states that:
- The offense under section 138 may only be tried by the court within whose local jurisdiction-
- The branch of the bank where the payee or holder in due course, maintains the account, is situated (when the cheque is delivered for collection through an account), or
- The branch of the drawee bank where the drawer maintains the account is situated (when the cheque is presented by the payee or holder in due course, otherwise through an account).
How do the Indian Courts balance criminal and civil nature of Section 138, Negotiable Instruments Act, 1881?
According to the courts, the primary objective of Section 138 and the related provisions of the Negotiable Instruments Act are to provide relief to the complainant who can be when he receives the full amount he is entitled to along with interest and appropriate compensation for the inconvenience suffered by him.
It should be noted that the object of the provision is primarily compensatory and the punitive element has been added to enable effective enforcement of the compensatory element and also to avoid such situations where the complainant suffers.
In a recent judgment, the Supreme Court clarified that the accused under the provisions of Section 138 can be discharged even without the consent of the complainant if the Court is satisfied that the complainant has been appropriately compensated. Therefore, the court has the power to stop the trial and discharge the accused, even in absence of consent of ether parties, if it is satisfied that ‘the cheque amount with assessed costs and interest is paid and if there is no reason to proceed with the punitive aspect’The court was of the belief that the common guidelines of criminal law the accused may only be discharged with the consent of the complaint do not hold good for offenses under Section 138 because such an offense is ‘primarily a civil wrong’.
Is there a Scope of Mediation and Settlement in the Proceedings under Section 138 Negotiable Instruments Act?
The Delhi High Court recently held that the approach of the court treating the proceedings under Section 138 of the NI act as quasi-civil serves justice in a better manner. It was of the approach that in such proceedings, criminal courts must be encouraged to follow the principles of The Code of Civil Procedure and encourage settlements without affecting the rights of the complainant.
The court in its judgment laid down guidelines for the reference of the matter to mediation center and the procedure to be followed while mediation, drafting of settlement deed and court decree based on the settlement. The court also laid down that in the event where the settlement deed and the court decree is not complied with, the Magistrate would direct the payment to be made by accused in the manner in which fines are recovered. The court may also initiate proceedings for Contempt of Court.
What is proposed in The Negotiable Instruments (Amendment) Bill, 2017?
The Negotiable Instruments (Amendment) Bill, 2017 was introduced in Lok Sabha on January 2, 2018, and sought to amend the Negotiable Instruments Act, 1881. It seeks to introduce following provisions:
1. Interim compensation: The Bill inserts a provision allowing the court to direct the drawer to pay an interim compensation to the complainant under circumstances where the drawer pleads not guilty of the accusation. Such interim compensation cannot exceed 20% of the cheque amount and is required to be paid within 60 days of the order.
2. Deposit in case of appeal: The Bill inserts a provision that if an appeal is filed by the convicted drawer, the appellate court may direct him to deposit a minimum of 20% of the amount of compensation or fine awarded which shall be in addition to any interim compensation.
3. Returning the interim compensation: If the drawer is acquitted, the complainant shall have to return the interim compensation or the deposit with an interest within 60 days of the acquittal order.