Negotiable Instruments Act: Dishonour of Cheques

Updated: May 28, 2020

Cheques are widely used in business transactions in India and the number of issues faced arising out of cheques being dishonoured for one reason or the other, are extremely high. Under the Indian law, the option available to a person against the drawer of such dishonoured cheques are (i) initiating civil action in the nature of a civil suit, summary suit or arbitration proceedings basis the nature of transaction and agreement executed between the parties; (ii) initiating proceedings under the Negotiable Instruments Act, 1881 (“NIA”) which provides for criminal liability of drawer of the dishonoured cheques.


Sections 138 to 148 under chapter XVII of NIA provide for penalties in case of dishonour of certain cheques. The purpose of these provisions is to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques. The provisions encourage the use of cheques for business transactions by providing various safeguards against the malafideintention of wrongdoers and is intended to be a deterrent to such persons who issue cheques without serious intention to honour the promise implicit in the issuance of the same.


Offence of dishonour of cheques

The offence of dishonour of cheques is defined under section 138. According to the said provision, the essentials to be satisfied are –

(a) a cheque has to be drawn by a person on an account maintained by such person with the banker (drawer);

(b) the cheque is drawn for payment of any amount of money to another person from that account;

(c) payment is towards the discharge, in whole or in part, of any debt or other liability;

(d) such cheque is returned by the bank as unpaid, either because of the amount of money standing to the credit of that account being insufficient, or, that it exceeds the amount arranged to be paid from that account by an agreement made with that bank.


A person shall be deemed to have committed an offence under section 138, upon satisfaction of the abovementioned essentials and upon the occurrence of the following events within the prescribed timelines. NIA mandates for the following procedure to be followed for exercising rights under section 138 -

(a) Presentation of cheque: Presentation of the cheque to the bank within a period of 3 months from the date on which it is drawn or within the period of its validity, whichever is earlier. The cheque may be presented for a successive time during the validity or time period mentioned herein, if no notice was sent at the earlier instance(s) when it was dishonoured;

(b) Statutory notice to be issued within 30 days from receipt of cheque being dishonoured: In the event of the cheque being dishonoured, the payee or holder (as the case maybe) has to make a demand of the said amount of money by giving a notice in writing to the drawer of the cheque within 30 days from receipt of information by him from the bank regarding the return of the cheque as dishonoured;

(c) Failure to make payment within 15 days: The drawer of the cheque has an opportunity to make payment within 15 days of receipt of the said notice, and failure to do the same is essential for initiating a complaint under section 138.

Filing of complaint under section 138 of NIA

Filing of complaint within a period of 30 days from failure to pay: In the event the payment is not made within 15 days of receipt of the said notice, the payee or Holder (as the case maybe) has the right and duty to file a complaint under section 138 within a month from the expiry of the 15 day period to make the payment.

The Complaint needs to be filed along with certain documents, i.e., original cheque, original return memo issued by the bank, copy of legal notice along with receipt and tracking report, any reply received, proof of enforceable debt or liability along with other affidavits as may be prescribed.

Jurisdiction where a complaint under section 138 of NIA can be filed

The offence under section 138 shall be enquired into and tried only by a court within whose local jurisdiction the branch of the bank where the payee or holder (as the case may be) maintains the account, is situated. In cases where the cheque is presented for payment by the payee or holder, otherwise through an account, then the place where the branch of the drawee bank where the drawer maintains the account, is situated. As a practice, it is advisable that a Complaint is accompanied with a letter from the concerned bank manager certifying that the complainant holds the account at a particular branch, to support the invocation of the territorial jurisdiction of a particular Court.

No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.

Consequences of delay in filing the complaint under Section 138 of NIA

The timelines mentioned under section 138 are mandatory and essential for successful action under section 138 and for the accused to be tried. However, in the event there is a delay in filing of the complaintunder section 138, the cognizance of a complaint may still be taken by the court if the complainant successfully satisfies the court that he had sufficient cause for not making a complaint within such time. However, for this an application for condonation of delay will be required to be preferred and will have to be first decided prior to taking cognizance of the complaint.

Punishment for offences committed under section 138 of NIA

For the offence committed under section 138, the accused shall be punishable with imprisonment for a term which may extend to 2 years; or with fine which may extend to twice the amount of the cheque or with both.

Non-Cognizable Offence

The offence under section 138 is a non-cognizable offence and section 142 states that no court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or holder (as the case may be) in due course of the cheque and in accordance with the applicable timelines and procedure.

Offence under section 138 of NIA is a compoundable offence

Section 143 provides that the offence under section 138 is a compoundable offence. It has been held by the Hon’ble Supreme Court in Metres and Instruments Private Limited and Anr. vs. Kanchan Mehta; (2018) 1 SCC 560, that, compounding at the initial stage of the proceedings has to be encouraged but is not debarred at a later stage subject to appropriate compensation as may be found acceptable to the parties or the court. Usually compounding would require consent of both the parties, however, in certain cases, even in the absence of such consent, the court, in the interest of justice, on being satisfied that the complainant has been duly compensated, can in its discretion close the proceedings and discharge the accused.

Debt or other liability under Section 138 of NIA

For the purposes of section 138, “debt or other liability” means a legally enforceable debt or liability. Section 139 provides that presumption is there in the favour of the holder of the cheque, i.e., the holder of the cheque received it in discharge, in whole or in part, of a legally enforceable debt or other liability. However, such presumption is a rebuttable one and the parameters for such rebuttal have been laid down by courts on a case to case basis. Some of the same are discussed hereinbelow.

The principle of determining whether a cheque is given in discharge of a “legally enforceable debt or liability” has evolved and the provisions have been interpreted by various courts in India.

The issue of applicability of section 138in cases where post-dated cheques have been given has been interpreted on a case to case basis. The question whether a post-dated cheque is for “discharge of debt or liability” depends on the nature of the transaction. If on the date of the cheque, liability or debt exists or the amount has become legally recoverable, then section 138 is attracted. The courts have examined the concept of legally enforceable debt or liability on the basis of whether the post-date cheque is for discharge of an existing debt or liability or whether it represents advance payment without there being a subsisting debt or liability.

InSampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd. 2016 SCC OnLine SC 954, while interpreting the agreement and the clause pertaining to security given towards repayment of instalments, the Hon’ble Supreme Court held that the repayment becomes due under the agreement, the moment the loan is advanced (in this case prior to the date of the cheques) and the instalment falls due. Once the loan was disbursed and instalments have fallen due on the date of the cheque as per the agreement, dishonour of such cheques would fall under section 138.

InRipudaman Singh v. Balkrishna; 2019 4 SCC 767; the Hon’ble Supreme Court, while examining the nature of the agreement to sell before it, held that a payment which is made in pursuance of such an agreement to sell is a payment made in pursuance of a duly enforceable debt or liability for the purposes of Section 138.

InKumar Exports v. Sharma Carpets (2009) 2 SCC 513, the Hon’ble Supreme Court, while dealing with an issue regarding advance for purchase of goods, stated that in the event a cheque was given as advance and the goods were never delivered in accordance with the agreement, then the same would not be in pursuance of a duly enforceable debt or liability and would be a valid defence and rebuttal to the presumption under section 139.

Instances in which a cheque is dishonoured for the purpose of section 138 of NIA

A cheque once presented to the bank may be dishonoured for various reasons. The scope of section 138, where other aspects are satisfied, extends to cases inter aliawhere the cheque has been dishonoured by the bank on account of insufficiency of funds, signature not matching, payment being stopped by the drawer (“stopped-payment”), account of the drawer being frozen for some purpose or for any other reason where the cheque has been dishonoured and the same falls within the purview of section 138.

The dishonour of post-dated cheques and blank cheques are also covered within the purview of offences under section 138. The Hon’ble Supreme Court in Bir Singh v. Mukesh Kumar (2019) 4 SCC 197, analysed the provisions of NIA and held that the cheque being post-dated does not absolve the drawer of a cheque of the penal consequences of section 138. It further held that even a blank cheque leaf, voluntarily signed and handed over by the accused, which is toward some payment, would attract presumption under section 139, in the absence of any cogent evidence to show that the cheque was not issued in discharge of a debt. In cases of a blank cheque handed over as mentioned, it may be filled up by the payee and this act just by itself would not invalidate the cheque. If the cheque is otherwise valid, the penal provisions of section 138 would be attracted.

With regard to blank cheques, it is always desirable that any blank cheque which is accepted is accompanied by a covering letter mentioning the details of the cheque and the purpose for which it is given.

Offences committed by companies/firms and vicarious liability of directors/partners of the companies/firms

Section 141 provides that, apart from the company/firm itself, the following persons shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

(a) every person who at the time of the offence being committed was in charge of and was responsible to the company for the conduct of business of the company/firm; or any director, partner, manager, secretary or other officer of the company/firm, with whose consent or connivance, the offence has been committed. Any person shall not be liable for punishment if he is able to prove that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.

(b) any director, partner, manager, secretary or other officer of the company/firm, if the offence is attributable to any negligence on the part of such person.

From a perusal of the provisions, it is clear that if the person who commits an offence is a company, then the company as well as people in charge of or responsible for the conduct of business of the company at the time of commission of the offence are deemed to be guilty of the offence.

The liability of directors arises from being in charge of and responsible for the conduct of business at the relevant time and not on the basis of merely holding a designation in a company. The Hon’ble Supreme Court in SMS Pharmaceuticals Limited v. Neeta Bhalla (2005) 8 SCC 89, held that every person connected with the company shall not fall within the ambit of Section 141. It is only those persons who were in charge of and responsible for the conduct of the business of the company at the relevant time, who will be liable under the said provisions of NIA. If a director of a company who was not in charge of and was not responsible for the conduct of business of the company at the time of commission of the offence, then he would not be liable under the said provisions of NIA.

For the directors/partners/officers of the company/firm, the notice and especially the complaint should clearly state averments against each of such persons. The fact that the person falls within the parameters of section 141 has to be spelled out. Merely being described as a director in a company or a partner in a firm or officer of the company/firm is not sufficient to satisfy the requirement of section 141. Even a non-director or a non-partner can be held liable under section 141 of the NIA subject to his role being set out in terms of the dishonoured cheque. The details of the offence including the averment that the person accused was in charge of and responsible for the conduct of business needs to be made a part of the averments in the complaint along with other details as may be necessary basis the profile of the accused person and involvement on a case to case basis.

It is mandatory for the Company/Partnership Firm to be made a party to the Complaint

The Hon’ble Supreme Court in Aneeta Hada v. Godfather Travel and Tours (P) Ltd. (2012) 5 SCC 661,held that in the absence of the company being arraigned as an accused, a complaint against the directors was not maintainable. For maintaining prosecution under section 141, arraigning of a company as an accused is imperative. It is clear that when the company can be prosecuted, only then the persons mentioned in other categories could be vicariously liable for the offence subject to the averments in the petition and proof thereof. Similarly, in case of a partnership firm, the firm also needs to arrayed as a party to the complaint along with the other accused such as the partners of the firm.

Rights of a person accused under section 138 of NIA

The onus of proof is on the accused in view of presumption under section 139. Section 139 introduces an exception to the general rule as to the burden of proof and shifts the onus on the accused. This presumption against the accused is a digression from the general rule of ‘right of silence’ and ‘beyond reasonable doubt’ available to an accused in a prosecution under other criminal offences. On merits, it is important for the accused to establish that there is no enforceable debt or liability as has been mentioned herein above. Mere denial or rebuttal by the accused is not enough. The accused has to prove by cogent evidence that there was no debt or liability. Establishing the said fact targets the essentials of a complaint under section 138, and satisfaction of the same would result in acquittal. However, it would depend on the evidence provided on a case to case basis. In this regard, it becomes important to take up the defence in reply to the said notice itself. However, there are different views by courts regarding the defences being taken up at a later stage.

Other technical objections can be raised by the accused on account of the procedure followed by the complainant, i.e., if the timelines mentioned under the law were followed, whether the notice under section 138 was sent along with all details correctly mentioned, whether the complaint has been drafted correctly with proper and essential averments and whether all documents have been filed and brought on record (including the dishonour slip issued by the bank, copy of the cheque, copy and proof receipt of statutory notice etc.).

Additionally, it is important for the accused person to verify the jurisdiction of the complaint and if the same is compliant with the provisions of the NIA. In a lot of instances, complainants file the complaint in a jurisdiction with the aim of harassing the accused, and such complaint is eventually dismissed on account of lack of jurisdiction.

While the above defences are available for an accused person to explore, section 140 provides that it shall not be a defence in a prosecution for an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. The defences of absence of mens rea or wrongful loss or gain are not available to the accused, unlike other criminal offences.

Interim Compensation payable by the accused person

In the event the drawer of the cheque intends to contest the complaint, i.e. if he pleads not guilty to the accusation made in the complaint, then the court trying the offence, under section 143A, may order the drawer of the cheque to pay interim compensation to the complainant and such interim compensation shall not exceed 20% of the amount of cheque.

Such interim compensation shall be paid within 60 days from the date of the order directing interim compensation or within such further period as may be directed by the court on sufficient cause being shown by the drawer of the cheque. This extension shall not be for a period of more than 30 days.

In the event the drawer of the cheque is acquitted, such interim compensation is refundable to the drawer of the cheque along with interest within 60 days from date of order of refund extendable only by 30 days on sufficient cause being shown by the complainant.

Conclusion

The provisions of the NIA and the various precedents available interpreting the said provisions, ensures that the same act as a deterrent to a party from issuing the instrument with a malafideintention to cause wrongful harm to the other party. It is important that each case is approached keeping in mind all essentials as laid down under the applicable law. For payee or holder, it is important that the timelines mentioned under the NIA are complied with and all the requisites under the law are performed including filing the complaint in accordance with the prescribed format along with all relevant documents. From the point of an accused person, it is important that the case be analysed on merits to identify whether an enforceable debt or liability exists along with other technical objections that may be available on a case to case basis.

Kindly treat this as an information update and the same shall not constitute as an advisory by the firm.

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