Criminal Liability Under Section 138 of Negotiable Instruments Act, 1881

Introduction
Dealings in cheques are vital and important not only for the banking point of view but also for the commerce and industry and the economy of the country. Advent of cheques in the market have given a new dimension to the commercial and corporate world at a time when people have preferred to carry and execute a small piece of paper called cheque than carrying the currency worth the value of cheque. But pursuant to the rise in dealings with cheques also rises the malpractice of giving cheques without any intention of honoring them. Before 1988 there being no legal penal provisions to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them in the vent of such cheque not being honoured by the drawer. Of course on dishonour of cheques accrues a civil liability. However in reality the processes to execute civil liability becomes notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To ensure credibility of the negotiable instrument, a criminal offence was inserted in Negotiable Instruments Act, 1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 which were further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002
Scope
Section 138 of Negotiable Instruments Act, 1881 creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds etc out of the account maintained by a drawer. Section 138 of the Act creates statutory offence of the acts, which are not criminal in real sense, but are acts, which in public interest are prohibited., They are really only a summary mode of enforcing a civil right. Normally in criminal law existence of guilty intent is an essential ingredient of a crime. However the Legislature have created an offence of absolute liability or strict liability under Section 138 of Negotiable Instruments Act, 1881 where ‘mens rea’ is not at all necessary. Further the creation of the strict liability is an effective measure by encouraging greater vigilance to prevent usual callous or otherwise attitude of drawers of cheques in discharge of debts or otherwise attitude of drawers of cheques in discharge of debts or otherwise.

The circumstances under which dishonour of cheque takes place or that may contribute to the situation would be irrelevant and are required to be totally ignored.

In Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar the Bombay High Court held that:
"A clear reading of Section 138 leaves no doubt in our mind that the circumstances under which such a dishonour takes place are required to be totally ignored. In such case, the law only takes cognizance of the fact that the payment has not been forthcoming and it matters little that any of the manifold reasons may have caused that situation."
Requirements of the Section 138 of Negotiable Instruments Act, 1881
Section 138 creates an offence for which the mental element is not necessary. It is enough if a cheque is drawn by the accused on an account maintained by him with a banker for payment of money to another person out of the account maintained by him for the discharge in whole or in part, of any debt or other liability due. Therefore, whenever the cheques are on account of insufficiency of funds or reasons referable to the drawer’s liability to provide for funds, the provisions of section 138 of the Act would be attracted, provided the following conditions are satisfied:

1. Account Maintained
Existence of “an account" at the time of issue of cheque is a condition precedent for attracting penal liability for the offence under this section The words "that account" in the section denote to the account in respect of which the cheque was drawn. No doubt if any person manages to issue a cheque without an account with the bank concerned its consequences would not snowball into the offence described under section 138 of the Act. For the offence under section 138 of the Act there must have been an account maintained by the drawer at the time of the cheque was drawn.

S. 138 does not specifically cover the case where the payment has been stopped by the drawer or where the account has been closed prior to the endorsement of the cheque. However the Hon’ble Supreme Court has expressly held in Electronics Trade & Technology Development Corporation Ltd Case that if on issuance of the notice of dishonor by the payee or the holder in due course to the drawer, demanding payment within 15 days from the date of the receipt of such a notice, and if the drawer does not pay the due amount, the statutory presumption of dishonest intention, subject to any other liability, would stand satisfied. Whatever may be the ground or reason on the basis of which the cheque was dishonored by a bank, whether it may be “stopped payment by drawer” or “signature differ” or any other ground, if the offence under the section is made out, then the payee has the right to initiate proceedings. The court should only take into consideration whether the payment has been made by the drawer within 15 days of notice issued by the payee after the dishonour of cheque or not. A division Bench of the Madras High Court in Veeraraghvan v. Lalith Kumar stated that the endorsement account closed would mean that though the account was in operation when the cheque was issued, the subsequent act of closing of the account is prima facie referable to the “intention of the drawer not to make payment”
The court also ruled that any reason for dishonour is an offence. The reason given was that that effect is to be given to the intention of the legislature, which is evident from the language of the title to Section 138 of the Act which states “Dishonour of cheque for insufficiency, etc., of funds in the accounts”. The court observed that the addition of the word “etc.” cannot be considered to be an accident.
2. Issue of Cheque in discharge of a debt or liability

The cheque issued unpaid by the bank must have been issued in discharge of a debt or other liability wholly or in part. Where a cheque is issued not for the purposes of discharge of any debt or other liability, the maker of the cheque is not liable for prosecution under section 138 of the Act. A cheque given as a gift or for any other reasons and not for the satisfaction of any debt or other liability, partly or wholly, even if it is returned unpaid will not meet the penal consequences.
If the above conditions are fulfilled, irrespective of the mental conditions of the drawer he shall be deemed to have committed an offence, provided the other three requisites are fulfilled:

a) Presentation of the cheque within six months or within the period of its validity:

The cheque must have been presented to the bank within a period of six months from the date on which it is drawn or its period of validity, whichever is earlier. Thus if a cheque is valid for three months and is presented to the bank within a period of six months the provisions of this section shall not be attracted. However if the period of validity of the cheque is not specified or prescribed the cheque is presented within six months from the date the cause of action can arise. The six months are taken from the date the cheque was drawn.
b) Return of the cheque unpaid for reason of insufficiency of funds.
The cheque must be returned either because the money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the arrangement made to be paid from that account by an agreement with the bank. Even if the cheque is returned with the endorsement "account closed" or “stop payment, Section 138 of the Act is attracted.

c) Issuance of Demand Notice:
Issue of the notice of dishonour demanding payment within thirty days of receipt of information as to dishonour of the cheque. The payee or the holder in due course of the cheque has to give a notice in writing making a demand for payment of the said amount of money to the drawer of the cheque. Such notice must be given within 30 days of information from the bank regarding the return of cheque as unpaid. If, within 15 days of the service of notice, the drawer does not make the payment, the payee can file a complaint before the jurisdictional magistrate within one month from the end of the 15th day. If the payee fails to make a complaint within the period of one month, as stated above, no proceedings can lie under s. 138 of the Act, and the only recourse available would be to initiate recovery proceedings before the competent civil court. The mode of notice is provided under Section 94 of the Negotiable Instruments Act, 1881, which states that the notice of dishonor may be given to a duly authorized agent of the person to whom it is required to be given or to the legal representatives in the event the drawer has died. Any demand made after the dishonour of cheque will constitute a notice. The notice may be oral or written and if it is written, it could be sent by post and it may be in any form/style. The essential condition to be satisfied is that that it must inform the party to whom it is given, either in express terms or by reasonable intimation that the instrument has been dishonored. If this principle is taken in practical approach, the word ‘post’ does not emphasis that it has to be a registered post or UPC. It could be sent even by fax. A courier sent and the POD of the same is sufficient discharge of the obligation of making a demand for the amount under the dishonored cheque. The medium of notice may at times even be in person or through a messenger and would constitute to be a valid notice
d) Failure of the drawer to make the payment within fifteen days of the receipt of the payment

After the receipt of the above notice the drawer of the cheque has to make payment of said amount of money to the payee or to the holder in due course of the cheque within 15 days of the receipt of the notice. If the payment is not made after the receipt of the notice within stipulated time a cause of action for initiating criminal proceedings under this section will arise.
In Sadanandan Bhadran v. Madhavan Sunil Kumar, the Supreme Court held that that on each presentation of a cheque and its subsequent dishonour, a fresh right accrues in favour of the holder but there accrues no fresh cause of action. The holder may, without taking pre-emptory action in exercise of his right under clause (b) of s. 138, can go on presenting the cheque during the validity of the cheque. A cheque should be presented within 6 months of the date of drawing, to the bank. There is no restriction as to how many times a cheque can be presented to the bank within the period of its validity. If the cheque gets dishonored, the payee has to make a demand for the payment of the said amount by giving a notice in writing to the drawer of the cheque, within 30 days of the receipt of information from the bank regarding the dishonor of the cheque.
But, once a notice under clause (b) of s. 138 of the Negotiable Instruments Act, 1881 is given, the holder is then deemed to have forfeited such right, and in the case of failure of the drawer, to pay the money within the stipulated time, the drawer would be held liable for the offence and the cause of action for filing the complaint would arise.

A criminal complaint under s. 138 of the Negotiable Instruments Act, 1881 could also be made after giving statutory notice to the signatory of the cheque. This section provides that the dishonor of a cheque for the reason of “insufficiency of funds” or for the reason that the amount covered by the cheque was not arranged for, constitutes a penal offence punishable 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 both.



Section 141 of the Negotiable Instruments Act, 1881 extends criminal liability for the offence of dishonour of cheques to officers of the company. Every person who, at the time the offence was committed, was in charge of and was responsible to the company for the conduct of its business, is deemed to be guilty of the offence and is liable to be proceeded against and punished.

Question of maintainability of criminal charge with a civil liability:

There is nothing in law to prevent the criminal courts from taking cognizance of the offence, merely because on the same facts, the person concerned might also be subjected to civil liability or because civil remedy is obtainable. Civil and criminal proceedings are co extensive and not exclusive. If the elements of the offence under section 138 of the Negotiable Instruments Act are made out on the face of the complaint petition itself, enforcement of the liability through a civil court will not disentitle the aggrieved person from prosecuting the offender for the offence punishable under section 138 of the Act. On dishonour of a cheque, civil and as well as criminal proceedings may be initiated. A suit for recovery of the cheque amount (including cost and interest) could be filed under the summary procedure provided in Order XXXVII of the Code of Civil Procedure, 1908.

Conclusion:
The circumstances under which a dishonour of cheque takes place or that may contribute to the situation are irrelevant and are required to be totally ignored.
In Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar, the Bombay High Court said:

“A clear reading of Section 138 leaves no doubt in our mind that the circumstances under which such a dishonour takes place are required to be totally ignored. In such case, the law only takes cognizance of the fact that the payment has not been forthcoming and it matters little that any of the manifold reasons may have caused that situation.”
When once a cheque is issued and the same is proved, a presumption under s. 139 of the Negotiable Instruments Act would arise with regard to consideration. The accused can rebutt the presumption but the burden is on him to dislodge it.
The Supreme Court in Modi Cements v. Shri Kunchil Kumar Nandi ruled that even if notice were issued stopping payment before the payee had deposited the cheque in bank, an offence under S.138 would be complete.
Though insertion of the penal provisions have helped to curtail the issue of cheque lightheartedly or in a playful manner or with a dishonest intention and the trading community now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonoured cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine, the only option left with the complainant is to file civil suit. The provisions of the Act do not permit any other alternative method of realization of the amount due to the complainant on the cheque being dishonored for the reasons of "insufficient fund" in the drawer’s account. The proper course to be adopted by the complainant in such a situation should be by filing a suit before the competent civil court, for realization/ recovery of the amount due to him for the reason of dishonoured cheque, which the complainant is at liberty to avail of if so advised in accordance with law
(The author of the article can be reached at jsrobort@yahoo.com or 9810350712)
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