A cheque is a widely used method of payment and post-dated cheques are frequently used in various transactions in business life. Post-dated cheques are given to provide a certain accommodation to the drawer of the cheque. Therefore, it becomes necessary to ensure that the drawer of the cheque does not abuse the accommodation given to him. The Negotiable Instruments Act, 1881 ("Act") deals with negotiable instruments, such as promissory notes, bills of exchange, cheques etc. Chapter XVII containing Sections 138 to 142 was introduced with the aim of inculcating confidence in the efficacy of banking operations and giving credibility to negotiable instruments employed in business transactions. If a party issues a cheque as a mode of deferred payment and the payee of the cheque accepts the sameon the faith that he will get his payment on due date, then he should not suffer on account of non-payment.
The penal provisions contained in Sections 138 to 142 of the Act have been enacted to ensure that obligations undertaken by issuing cheques as a mode of deferred payment are honoured. Section 138 of the Act provides for circumstances under which a case for dishonour of cheques is filed.1 The ingredients required for complying with Section 138 are as follows:
- a person must have drawn a cheque for payment of money to another for the discharge of any debt or other liability;
- that cheque has been presented to the bank within a period of three months;
- that cheque is returned by the bank unpaid, either because insufficient of funds or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank;
- the payee makes a demand for the payment of the money by giving a notice in writing to the drawer within 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
- The drawer fails to make payment to the payee within 15 days of the receipt of the notice.
Procedure that is followed in matters with regard to Section 138 of the Act is as follows:
- A legal notice is to be issued to the drawer within 15 days of dishonor of cheque by registered post with all relevant facts. The drawer is given a time of 15 days to make the payment, if the payment is made then the matter is served and the issue is settled. On the other hand if the payment is not made then the complainant is to file a criminal case process under Section 138 of the Act, against the drawer within 30 days from the date of expiry of 15 days specified the notice,with the concerned magistrate court within the jurisdiction.
- The complainant or his authorized agent should appear in the witness box and provide relevant details for filing the case. If the court is satisfied and finds substance in the complainant, then summons will be issued to the accused to appear before the Court.
- If after being served with the summons the accused abstains himself from appearing then the court may issue a bailable warrant. Even after this if the drawer does not appear a non-bailable warrant may be issued.
- On appearance of the drawer/accused, he may furnish a bail bond to ensure his appearance during trial. After which the plea of accused is recorded.In case he pleads guilty, the court will post the matter for punishment. If the accused, denies the charges then he will be served with the copy of complaint.
- The Complainant may present his evidence by way of affidavit and produce all documents including the original in support of his complaint. The complainant will be cross examined by the accused or his counsel.
- The accused will be given an opportunity to lead his evidence. The accused will also be afforded an opportunity to submit his documents in support of his case, as well as witnesses in his support. Accused and his witnesses will be cross examined by the complainant.
- The last stage of the proceeding is that of the arguments after which the court will pass a judgment.If the accused is acquitted then the matter ends, but the complainant can go on further appeal in the High Court, similarly if the accused is convicted he can file an appeal in the Sessions Court.
It must be noted that the offence under Section 138 of the Act, has been made compoundable.
Recent Supreme Court rulings for speedy disposal of cases under Section 138 of the Act:
In 2017, Delhi High Court in Dayawati v. Yogesh Kumar Gosain took into account the question whether an offence under Section 138, which is a criminally compoundable case, could be settled by mediation.2 The Court held that even though an express statutory provision enabling the criminal court to refer the complainant and accused persons to alternate dispute redressal mechanisms has not been specifically provided by the Legislature. The Code of Criminal Procedure ("Cr.P.C.") does permit and recognize settlement without stipulating or restricting the process by which it may be reached. Thus, there is no bar to utilizing the alternate dispute mechanisms including arbitration, mediation, conciliation (recognized under Section 89 of Civil Procedure Code, 19083) for the purposes of settling disputes which are the subject matter of offences covered under Section 320 of the Cr.P.C. It also stated the proceedings under Section 138 of the Act is distinct from other criminal cases and are really in the nature of a civil wrong which has been given criminal overtones.
In Meters and Instruments (P) Ltd. v. Kanchan Mehta, the Honourable Supreme Court after taking into consideration the object of introducing Section 138 and other provisions of Chapter XVII of the Act, observed as under4:
"18. From the above discussion following aspects emerge:
18.1. Offence under Section 138 of the Act is primarily a civil wrong. Burden of proof is on accused in view presumption under Section 139 but the standard of such proof is "preponderance of probabilities". The same has to be normally tried summarily as per provisions of summary trial under the Cr.P.C. but with such variation as may be appropriate to proceedings under Chapter XVII of the Act. Thus read, principle of Section 258 Cr.P.C.5 will apply and the Court can close the proceedings and discharge the accused on satisfaction that the cheque amount with assessed costs and interest is paid and if there is no reason to proceed with the punitive aspect.
18.2. The object of the provision being primarily compensatory, punitive element being mainly with the object of enforcing the compensatory element, compounding at the initial stage has to be encouraged but is not debarred at later stage subject to appropriate compensation as may be found acceptable to the parties or the Court.
18.3. Procedure for trial of cases under Chapter XVII of the Act has normally to be summary. The discretion of the Magistrate under second proviso to Section 143, to hold that it was undesirable to try the case summarily as sentence of more than one year may have to be passed, is to be exercised after considering the further fact that apart from the sentence of imprisonment, the Court has jurisdiction under Section 357(3) Cr.P.C.6 to award suitable compensation with default sentence under Section 64 IPC and with further powers of recovery under Section 431 Cr.P.C.7 With this approach, prison sentence of more than one year may not be required in all cases.
18.4. Since evidence of the complaint can be given on affidavit, subject to the Court summoning the person giving affidavit and examining him and the bank's slip being prima facie evidence of the dishonour of cheque, it is unnecessary for the Magistrate to record any further preliminary evidence. Such affidavit evidence can be read as evidence at all stages of trial or other proceedings. The manner of examination of the person giving affidavit can be as per Section 264 Cr.P.C.8 The scheme is to follow summary procedure except where exercise of power under second proviso to Section 143 becomes necessary, where sentence of one year may have to be awarded and compensation under Section 357(3) is considered inadequate, having regard to the amount of the cheque, the financial capacity and the conduct of the accused or any other circumstances."
The Negotiable Instruments (Amendment) Act, 2018 which came into effect from September 1, 2018 allows the Court trying an offence related to cheque bouncing, to direct the drawer to pay interim compensation not exceeding 20% of the cheque amount to the complainant within 60 days of the trial court's order to pay such compensation. This interim compensation may be paid either in a summary trial or a summons case where the drawer pleads not guilty to the accusation made in the complaint; or upon framing of charge in any other case. Furthermore, the Amendment also empowers the Appellate Court, hearing appeals against conviction under s. 138, to direct the appellant to deposit a minimum 20 % of the fine/compensation awarded, in addition to interim compensation.
The recent steps undertaken by the judiciary and the changes brought by the legislature are steps in the right direction. But there is a need to realise the commercial realities in India and further expedite the process of recovery to discourage delays caused by the accused, unnecessary adjournments and frivolous appeals. Courts in India are overburdened and lack basic infrastructure to deal with dishonoured cheque cases.It is vital that people have faith in the integrity and honesty of the system. However, reliability of cheques in commercial dealings has been eroded to a great extent. Dishonour of cheque causes financial loss, inconvenience and injury to the payee.
We, accordingly, recommend as under:
- The number of Magistrates exclusively meant for cheque bounce cases should be doubled. Special Courts can be set up to deal with such cases. The Government mustprovide for funds needed to meet the costs involved in increasing the number of Magistrates, their supporting staff and other infrastructure.
- There should be no more than fifty matters before a judge on a particular day. Twenty-five in the morning session and twenty-five in the afternoon session.
- In order to address the time concern,
the following suggests the following:
- Before the Court's time i.e. before 11 AM. the Court's Judicial clerk should sit for one hour, take roll call and entertain applications for adjournment by consent, adjourn the cases which appear to him require adjournment. In case where the Magistrate's judicial attention/time is required, can be put up with remark by the Judicial clerk and those cases should be kept at 11 AM for judicial scrutiny.
- Judicial time from 11 AM should be exclusively devoted to taking down the evidence.
- The above will save Court's time of almost 1 to 2 hours a day.
- No court fees for victims of cheque-bounce cases as he is not making a fresh monetary claim.
- Further, Section 139 of the Act9 mandates that unless the contrary is proved, it is to be presumed that the holder of a cheque received the cheque of the nature referred to in Section 138, for the discharge, in whole or in part, of any debt or other liability. This presumption is rebuttable by the accused by leading cogent evidence that there was no debt or liability. Once such rebuttal evidence is adduced and accepted by the court the evidential burden shifts back to the complainant. In this regard, it has to be noted by the Courts that the accused is given an opportunity twice to prove his innocence, first when the bank informs him about insufficiency of funds, and the second time he can raise his defence at the time of notice served under Section 138 of the Act. If he fails to do so, then the Court should presume that he is guilty and start process forthwith. In case of false cases, heavy costs should be imposed on the complainant.
- Since it is a quasi judicial proceeding, the intent is that the Court should take innovative approach and not succumb to technicalities. Technicalities should be found and turned down with firm hand.
- Magistrates must take suo moto action and a four hearing procedure should be followed. If the accused does not show up at the first hearing, a non-bailable warrant must be issued. At the second hearing the accused must show cause and file a defence. At the third hearing cross examination should be conducted. At the fourth hearing arguments should take place after which a judgment must follow.
Credit is given on trust and good faith. It is in the interest of the justice system that these reforms are brought as expeditiously as possible to further ease the process of doing business in India. Section 138 of the Act should not be used by person who borrows money on credit to delay his commitment to pay and it is the duty of the Court to ensure that it is not made a party to such dilatory tactics.
1. Dishonor of cheque for insufficiency, etc., of funds in the accounts: Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that 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 that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both:
PROVIDED that nothing contained in this section shall apply unless-
a) the 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.
b) the payee or the holder in due course of the cheque, as the case may be, 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 fifteen days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and
c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.
Explanation: For the purpose of this section, "debt or other liability" means a legally enforceable debt or other liability.
2. Dayawati v. Yogesh Kumar Gosain 2017 SCC Online Del 11032.
3. Settlement of disputes outside the Court: (1) Where it appears to the court that there exist elements of a settlement which may be acceptable to the parties, the court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observation of the parties, the court may reformulate the terms of a possible settlement and refer the same for-
c) judicial settlement including settlement through Lok Adalat; or
(2) Where a dispute had been referred-
a) for arbitration or conciliation, the provisions of the Arbitration and Conciliation Act, 1996 shall apply as if the proceedings for arbitration or conciliation were referred for settlement under the provisions of that Act.
b) to Lok Adalat, the court shall refer the same to the Lok Adalat in accordance with the provisions of sub-section (1) of section 20 of the Legal Services Authority Act, 1987 and all other provisions of that Act shall apply in respect of the dispute so referred to the Lok Adalat;
c) for judicial settlement, the court shall refer the same to a suitable institution or person and such institution or person shall be deemed to be a Lok Adalat and all the provisions of the Legal Services Authority Act, 1987 shall apply as if the dispute were referred to a Lok Adalat under the provisions of that Act;
d) for mediation, the court shall effect a compromise between the parties and shall follow such procedure as may be prescribed.
4. Meters and Instruments (P) Ltd. v. Kanchan Mehta (2018) 1 SCC 560.
5. Power to stop proceedings in certain cases: In any summons- case instituted otherwise than upon complaint, a Magistrate of the first class or, with the previous sanction of the Chief Judicial Magistrate, any other Judicial Magistrate, may, for reasons to be recorded by him, stop the proceedings at any stage without pronouncing any judgment and where such stoppage of proceedings is made after the evidence of the principal witnesses has been recorded, pronounce a judgment of acquittal, and in any other case, release the accused, and such release shall have the effect of discharge.
6. Order to pay compensation: (1) When a Court imposes a sentence of fine or a sentence (including a sentence of death) of which fine forms a part, the Court may, when passing judgment, order the whole or any part of the fine recovered to be applied-
a) in defraying the expenses properly incurred in the prosecution;
b) in the payment to any person of compensation for any loss or injury caused by the offence, when compensation is, in the opinion of the Court, recoverable by such person in a Civil Court;
c) when any person is convicted of any offence for having caused the death of another person or of having abetted the commission of such an offence, in paying compensation to the persons who are, under the Fatal Accidents Act, 1855 (13 of 1855 ), entitled to recover damages from the person sentenced for the loss resulting to them from such death;
d) when any person is convicted of any offence which includes theft, criminal misappropriation, criminal breach of trust, or cheating, or of having dishonestly received or retained, or of having voluntarily assisted in disposing of, stolen property knowing or having reason to believe the same to be stolen, in compensating any bona fide purchaser of such property for the loss of the same if such property is restored to the possession of the person entitled thereto,
(2) If the fine is imposed in a case which is subject to appeal, no such payment shall be made before the period allowed for presenting the appeal has elapsed, or, if an appeal be presented, before the decision of the appeal,
(3) When a Court imposes a sentence, of which fine does not form a part, the Court may, when passing judgment, order the accused person to pay, by way of compensation, such amount as may be specified in the order to the person who has suffered any loss or injury by reason of the act for which the accused person has been so sentenced,
(4) An order under this section may also be made by an Appellate Court or by the High Court or Court of Session when exercising its powers of revision,
(5) At the time of awarding compensation in any subsequent civil suit relating to the same matter, the Court shall take into account any sum paid or recovered as compensation under this section.
7. Money ordered to be paid recoverable as a fine: Any money (other than a fine) payable by virtue of any order made under this Code, and the method of recovery of which is not otherwise expressly provided for, shall be recoverable as if it were a fine:
Provided that Section 421 shall, in its application to an order under Section 359, by virtue of this section, be construed as if in the proviso to sub-section (1) of Section 421, after the words and figures 'under Section 357', the words and figures 'or an order for payment of costs under Section 359' had been inserted.
8. Judgment in cases tried summarily: In every case tried summarily in which the accused does not plead guilty, the Magistrate shall record the substance of the evidence and a judgment containing a brief statement of the reasons for the finding.
9. Presumption in favour of holder: It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.