What is a Negotiable instrument?
A negotiable instrument is a document which promises a person specific sum of money. It is transferable by mere delivery or by endorsement and delivery. Section 13 of the Negotiable Instrument Act, 1881 (hereafter NI Act) defines ‘negotiable instrument’ as a promissory note, bill of exchange or cheque, payable either to order or bearer.
The negotiable instruments originated from ancient barter system. To mitigate the risks of carrying actual money like gold coins, the system was developed by the tradesmen. For example, the Hundi system of merchant guilds of India.
The introduction of Cheque as negotiable instrument brought the risks of dishonoring of cheque. To safeguard the interests of cheque drawee, the Banking Public Financial Institutions and Negotiation Instruments Clause (Amendment) Act, 1988 inserted the Sections 138 to 142.
Following Sections of the NI Act are discussed in detail – Sections 138, 139, 141 and 143
SECTION 138
Section 138 of the NI Act concerns with dishonor of only one type of negotiable instruments, i.e. cheque.
To attract Section 138 following ingredients should be met:
Dishonour of cheque for insufficiency of funds
Payment in discharge of a debt or liability legally enforceable
Cheque presented within 6 months from date of issue
Drawer should be communicated of such dishonour within 30 days
Drawer failed to pay within 30 days of notice
Payee to make complaint in writing within one month
Explanation:
The complaint under Section 138 will not be maintainable if the cheque is issued for time barred debt. This was held in Somnath vs Muskesh Kumar decided in 2015.
The debt to be recovered should be a legally recoverable debt. Most importantly, the cheque must be issued for an existing debt. A cheque that was issued as a gift and gets dishonored, will not attract Section 138.
The terms ‘insufficient funds’ also include closing of account by the drawer or ‘refer to drawer.’ Thus, drawer cannot shake-off the liability if the cheque is dishonored because of either of the reasons. For this purpose, the 30-day notice period to drawer was added as a safeguard to prevent hasty action.
Another safeguard is the proviso (c) of Section 138. The offence under Section 138 completes only after the drawer fails to pay on expiry of 15 days after serving notice.
INTERPRETATION OF SECTION 138 IN JUDICIAL PRONOUNCEMENTS
Limitation period can be overcome if: MSR Leathers vs S.Palaniappan & Anr, 2002: The Apex Court reversed its earlier judgment in Sadanandan Bhandran vs Madhvan Sunil Kumar, 1998, and held that payee can overcome 30 days limitation period, if she or holder of cheque issues a statutory notice to the drawer each time the cheque is bounced.
When to initiate criminal proceedings: In Ms Laxmi Dyechem vs State of Gujarat, 2012, the Apex Court set aside the Gujarat High Court verdict that had held that criminal proceedings for dishonoring a cheque can be initiated only when the cheque is dishonored for the lack of sufficient fund in bank.
Section 138 not attracted if the account is not in the name of the accused: This was held in Jugesh Sehgal Vs Shamsher Singh Gogi, 2009. For the person to be held liable for offence under Section 138, the cheque must be drawn for the Account in his name.
SECTION 139 –
Section 139 read along with Section 118 of the NI Act gives a presumption in favor of holder of the cheque. Unless contrary is proved, it will be presumed that the holder of the cheque received the cheque of the nature referred in Section 138. The burden of proof shifts on the accused; however, the complainant is not absolved from the liability to show that cheque was issued for legally enforceable debt or liability.
It is important to note that presumption under Section 139 is not regarding ‘existence of legally recoverable debt.’ It is only regarding the issuance of cheque for any debt or liability. This element was highlighted in Goa Plast Pvt Ltd vs Shri Chico Ursula D’Souza, decided in 1996. The accused and complaint were in employee and employer relationship. The employer-complainant failed to prove existence of any debt or liability. The Bombay High Court held that the complainant failed to prove that the cheque was issued for legal liabilities.
SECTION 141-
This Section is applied if the person committing offence under Section 138 is a company. Under this Section that person who is in-charge of the company is ip so facto liable and deemed to be guilty of the offence committed, if following elements are met:
The person in-charge had knowledge of the offence,
And if s/he had knowledge, no due diligence exercised to prevent commission of such offence.
The Section is not applicable on Directors nominated by State of Central government.
To prove the grounds under Section 141, the application of judicial mind of the Magistrate is important. It becomes the duty of the Magistrate to find out whether the accused person falls under the categories given under Section 141. Thus, the burden of proof shifts on the complainant to prove to show that the accused at the time of commission of offence was in charge and responsible for the company. The position ‘in-charge’ is not restrictive to Director only.
It is also important to prove a specific accusation against each Director of role played by her. This was held in Sushatna J. Sarkar & Ors vs State of Maharashtra, 2013. The Court observed that criminal liability cannot be applied on those who at the time of commission of offence were in charge and were responsible for the conduct of company.
Whether or not prosecution of company is essential for prosecution of person in-charge under Section 141 has undergone a shift in jurisprudence from Anil Gupta vs Star India Pvt Ltd. Co., 2014 & Anr to Standard Chartered Bank vs State of Maharashtra & Anr., 2016. Earlier, company was not considered essential for prosecution to bring the company in-charge within ambit of Section 141, but in Standard Chartered Bank, the Supreme Court held that complaint under Section 138 is not maintainable without making Company a party. However, if the disputed cheque is drawn on the personal account of an employee, then the company is discharged from any liability. This was held in Maniuddin Abdul Sattar Shaikh Vs Vijay D.Salvi, 2015.
SECTION 142-
Section 142 of the NI Act deals with procedure regarding taking cognizance under Section 138 and Jurisdiction.
There is bar created on taking cognizance of the offence under Section 138 unless it is a written complaint by payee or holder of the cheque. The complaint can be filed by the holder of the power of attorney; however, if latter is not aware of the facts, then recording of payee’s statement is essential.
Such complaint shall be made within one month of the date on which cause of action arises under clause (c) of the proviso to Section 138. The cause of action arises when notice is served to the drawer and drawer fails to make payment within 15 days. The 2002 Amendment empowers the Magistrate to take cognizance beyond the limitation period of one month by condoning delay if sufficient cause is shown.
Clause (2) of Section 142 inserted by Amendment Act of 2015 limits the jurisdiction to:
Where cheque is delivered for collection through an account- where payee maintains account.
Where cheque is presented for payment by payee – where drawer maintains account.
The issuance of process begins only after compliance of these parameters and jurisdiction.
SECTION 143 A -
To check the misuse of procedural code, where the drawers used the delay tactics to obtain stay on the proceedings led to the insertion of Section 143-A, along with Section 148, by 2018 Amendment to the NI Act.
Section 143 A read along with Section 148, empowers the Court to direct the drawer to provide interim compensation during the pendency of civil appeals or criminal complaint.
The scope of the Section is explained further through the case laws:
Himanshu Gupta vs Narayan Reddy, 2022: The scope of Court’s power regarding interim compensation under Section 143-A were addressed here. The Karnataka High Court ruled that court can direct payment of interim compensation even without the complainant making an application praying for the same; however, this must be as per the principles of natural justice.
Ginni Garments & Anr vs Sethi Garments, 2019: This was the first case to discuss whether Section 143 A is prospective or retrospective. The Punjab and Haryana High Court ruled that Section 143A has prospective effect because the amended provision provide for interim compensation through coercive means. If it is made retrospective then it will have devastating effect if the person is not in position to pay. Thus, it is prospective as it warns the accused of consequences in advance.
Rajesh Soni vs Mukesh Verma, 2021 and Bachchan Devi & Anr vs Nagar Nigam, 2008:
The Chhattisgarh High Court in the Rajesh Soni case relied on the Supreme Court judgment in Bachchan Devi case of 2008 and held that the power to give interim relief is directory not discretionary. In this, the Courts examined the use of auxiliary verb ‘may’ used in Section 143-A.
SUMMARY SUIT VS SECTION 138
In matters concerning cheque bounce and recovery of amount, the aggrieved person has two options – Recovery through Section 138 of NI Act, which is the primary law, or Summary Suit.
Summary Suit is an alternative civil complaint which is filed as per Order XXXVII of the Civil Procedure Code, 1908. It can be instituted in the competent court having pecuniary jurisdiction.
Section 138 of NI Act brings criminal liability against the defaulter, while summary suit under CPC is a civil remedy. Compared to ordinary suit, the recovery of money is faster in summary suit as the Courts do not hear the defense. One can file a complaint under Section 138 and correspondingly proceed with the summary suit for the same.
CONCLUSION
A key element of smooth economic activity is the expeditious trial of disputes. For that purpose, the Amendments of 2002, 2015 and 2018 were brought to strengthened the NI Act by putting a check on misuse of trial procedure and empowered the Court with granting interim compensation.
Despite these novel measures, the pendency of cases, after the MV Act disputes, is highest under NI Act. It is not the shortcoming of the new provisions but other factors that are defeating the objective of NI Act. For example, the shortage of judicial magistrates, easy loans without proper investigation are some of the factors giving rise to number of disputes and pendency. Another important factor is not realizing full potential of special provisions of NI Act.
Some suggestions to overcome these challenges are: Exercising adjournments as limited option, setting up fast track courts, strict timeline for disposal to be followed, frivolous grounds of appeals to be set aside. To prevent the accused form using any delay tactic, the power of the Court should be extended to direct the accused to deposit full amount of the cheque at the beginning of the trial.
BIBLIOGRAPHY
CASES
1. Himanshu Gupta vs Narayan Reddy, (Kar) Crl Petition 3555 of 2022
2. Rajesh Soni vs Mukesh Verma, (Chhattisgarh) CRMP No. 562 of 2021
3. Ginni Garments & Anr vs Sethi Garments, 2019, Punjab and Haryana Court
4. Somnath vs Mukesh Kumar, 2015, Crl. Misc. No. M-37264 of 2014
5. Ms. Laxmi Dyechem vs State of Gujarat & State of Gujarat & Ors Leathers vs Palaniappan.
6. Goa Plast Pvt Ltd vs Shri Chico Ursula D’Souza, Crl Appeal No. 37 of 1995
7. Bachchan Devi & Anr vs Nagar Nigam, (SC) Civ Appeal 992 of 2008
8. Sushatna J. Sarkar & Ors vs State of Maharashtra, Crl Writ Petition No. 1861 of 2013
9. Anil Gupta vs Star India Pvt Ltd. Co., 2014 & Anr, SLP (Crl) No. 7039 of 2007
10. Standard Chartered Bank vs State of Maharashtra & Anr., 2016, 6 SCC 62
11. Maniuddin Abdul Sattar Shaikh Vs Vijay D.Salvi, 2015, Crl Appeal No. 1472 of 2009
12. Jugesh Sehgal Vs Shamsher Singh Gogi, 2009, RCR (Crl) 712 (SC)
13. MSR Leathers vs S. Palaniappan & Anr, SC, Crl Appeal no. 261-264 of 2002
14. Sunil Kumar vs Yog Raj, 2002 (2) ALD Cri 311
15. K.K.Ahuja vs V.K.Vora, Crl Appeal No. 1130-31 of 2003
16. Sadanandan Bhadran vs Madhavan Sunil Kumara, 1998, SCC 514
Statutes
17. Code of Civil Procedure, 1908, No. 5, Acts of Parliament, (India)
18. Negotiable Instruments Act, 1881, Act No. 26 of 1881, Acts of Parliament (India)
19. Banking Public Financial Institutions and Negotiation Instruments Clause (Amendment) Act, 1988, Act 066 of 1988.
20. Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, Act No. 55 of 2002.
21. Negotiable Instruments (Amendment) Act, 2015, Act No. 26 of 2015
22. Negotiable Instruments (Amendment) Act, 2018, Act No. 20 of 2018
Written By,
Vartika Sharma,
Intern, Chanchlani Law World
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