This study examines the legal principles governing liability for individuals in cheque dishonour cases, recent judicial interpretations, legislative provisions, and practical implications for businesses and individuals involved in cheque transactions.
11.06.2024
Day- 9
Introduction:
A cheque that is returned unpaid upon presentation to the bank is called a "dishonoured" cheque. There was no obligation in the event of a cheque dishonouring before 1988. The Negotiable Instruments Act of 1881 was amended to include Section 138, which enforced criminal and civil collective culpability for dishonoured checks, penalties, and temporary incarceration. The intention behind this addition was to increase public confidence in checks as legitimate forms of payment. Check dishonouring is predicted to rise as more banks send out cheques for money transfers. The legislation contemplated giving such offences criminal and civil penalties as a punishment—the recently added clauses raised concerns about possible penalties for the cheque drawer. Nonetheless, the overwhelming majority of instances for legal redress indicate that evil still exists. The primary goal of the Act is to legitimise the process by which the instruments it considers can be transferred by direct negotiation, just like any other product.
Understanding cheques and dishonour of cheques:
A check is a bill of exchange due only upon demand and drawn on a designated banker. It is an unconditional written order, signed by one person to another, requiring the banker to pay a certain amount of money to a designated person or bearer or to the direction of that person. When a cheque is handed to the bank and is not accepted or paid, it is considered dishonoured. This is a cheque that a client of the bank wrote on their behalf, but the bank refused to honour it when the payee or the payee’s authorised agent presented it. The bank’s reason for the dishonoured cheque was reportedly a complete lack of money or insufficient funds in the account from which the cheque was taken. A cheque is considered dishonoured by non-payment under Section 92 of the Act if the maker of the note, the acceptor of the bill or the drawee of the cheque defaults on payment after being properly requested to do so.
The legal framework of dishonour of cheque:
Introduced in 1988 as a criminal remedy, the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act aimed to uphold the integrity of negotiable instrument holders and provide a swift recourse against defaulters. Sections 138 through 147 of the Act address dishonoured checks, other remedies, and various penalties. According to Section 138, dishonouring a cheque due to inadequate money in the account carries a two-year jail sentence or a 1ne if the cheque is returned unpaid. Presumptions under Section 139 that the check was received in settlement of a debt or other obligation. According to Section 140, a person writing a cheque cannot claim ignorance of the inadequacy of the credit amount in their account. A new definition of crime is introduced in Section 141(1), which also describes offences committed by corporate entities. A 1rm is prosecutable for the crime if it is deemed to be a guilty party. According to Section 142, an offence may be recognised after one month from the day the cause of action arises if a written complaint is 1led. The drawer may not be prosecuted if there is no evidence of the notice of demand being served.
Notwithstanding any restrictions in the Code of Criminal Procedure, 1973 (2 of 1974), Section 143 allows for a summary trial in certain instances. A 1st-class or metropolitan magistrate will try all cases under this chapter, and the requirements of Sections 2G2 through 2G5 of the code will be applicable. The summons–serving procedure is outlined in Section 144, while Davit’s evidence is covered in Section 145. Bank slips are regarded as prima facie evidence of specific facts under Section 14G, and all violations punished under the Act are compoundable under Section 147.
Dishonour of cheque under section 138 of NI Act, 1881:
A cheque that is returned unpaid because there is not enough money or because it exceeds the allowable limit is defined in Section 138 of the Negotiable Instruments Act of 1881. When someone pays with a cheque, they are the drawer, not the payee. The statute regulates both the conduct of crimes and their prosecution. Dishonouring a cheque has penalties such as 1nes and jail time, but it also has protections for drawers in cases where dishonouring happens for non-dishonest motives.
When the statutory term has passed, and the drawer has not made the payment within that time frame, is prosecution permitted under Section 138, which also mandates issuing a notice directing the drawer to make the covered payment?
Liability of A drawer of a dishonour cheque: Civil Liability:
If a cheque is returned unpaid, the drawer becomes the holder’s principal debtor. Like any creditor, the holder may sue the drawer in civil court to reclaim the funds, making him accountable as the primary debtor. In most cases, the judiciary has also decided that the pending criminal proceedings would not stop the prosecution of civil suits from proceeding. It could be feasible to use both treatments at once.
Criminal Liability:
A criminal crime is committed by the drawer when a cheque they have drawn is returned by the drawee for lack of funds. The Negotiable Instrument Act of 1881 addresses a drawer’s criminal responsibility if a cheque is returned unpaid under sections 138 through 142.
Conviction under one statute does not exclude prosecution under another as the nature of the offence under S. 420 of the IPC and S. 138 of the Act divers. The Andhra Pradesh High Court’s full bench ruled in the 1994 case of A Veerbhadra Rao vs. Government of A.P. that the issuer of a check or postdated cheque implicitly guarantees the payee that the cheque would be honoured when it is submitted to the bank in the regular course of business. Even with the addition of S.138 to the Act, if dishonest intent was proven at the time the cheque was issued, a prosecution under
S.420 IPC may still be brought in this case.
Exceptions to Criminal Liability:
Cheques issued in discharge of liability:
The cheque must be written oI in whole or part as payment for whatever obligation the drawer may have to the payee. In Kumar v. Bapsons FootWear (1995), a complaint was made stating that the accused issued a dishonoured cheque during business. Through a petition, the complaint was contested in court. According to the complaint, the accused issued the cheque during their business. Hence, the court granted the petition, 1nding that the essential requirement for an offence under section 138 of the Act that the cheque be drawn for the discharge in whole or part of any debt or other liability had not been met.
Cheques presented as gifts:
If the goal of the cheque was not to settle a debt or other obligation, the creator of the cheque is immune from prosecution. If the cheque is returned as a gift or present and the bank refuses to honour it, the creator of the cheque is not prosecuted. No criminal liability may be proven if neither of the two requirements listed in section 138 is satisfied.
Absence of mens-rea:
Because the phrase "such person will be judged to have committed an offence" is expressly stated in Section 138, establishing a stringent obligation. For there to be serious culpability, the bank must return the cheque for one of the two reasons specified in this section. No violation is committed if the cheque is returned for any other reason. The mens rea concept cannot be applied to the crime under Section 138 because of its unique legislative requirements.
Dishonour of Cheque by companies:
The parties’ honesty and integrity are essential for business transactions, mainly when checks are involved. When a bank dishonours a cheque, the payee may suffer severe losses, harm, or inconveniences that undermine the legitimacy of commercial dealings. Section 141 of the Negotiable Instruments Act of 1881 governs a corporation functioning via its directors and
o cials. The company’s socials are also subject to criminal punishment for cheque dishonour, but drawer 1rm is primarily responsible. Vicarious responsibility is generally prohibited in criminal prosecutions; however, some exceptions can be made because of statutes that impose accountability on third parties.
When a business’s cheque is returned unpaid, the following individuals are also deemed responsible for the offence and may face legal action and punishment. All individuals who were accountable to the company and in charge of its business operations at the time the offence was committed; any director, manager, secretary, or other over of the company whose negligence allowed the company to execute the offence under section 138; and any of these individuals whose consent and complicity allowed the offence under section 138 to be committed.
Anyone in control of a company’s operations during the office is criminally charged with dishonouring a cheque under Section 141. This covers directors who, at the time, were not in charge of the company’s operations. For directors to be held accountable for violations of Section 141, they must furnish specific averments attesting to their culpability for the company’s actions. A 1rm is covered by Section 141’s definition of a company. Suppose a partner in a 1rm was in control of the business. In that case, if the offence was committed with the partner’s knowledge or permission, or if the offence resulted from carelessness, the partner may be found responsible for the offence committed by the 1rm.
Company’s power to issue negotiable instruments:
According to Oriol Industries v. Bombay Mercantile Bank Ltd., the ability to issue negotiable instruments is a key component of the Companies Act. The Supreme Court of India held that a 1rm could not assert jurisdiction to issue a cheque under Section 2G of the Act’s 1st section, as it does not establish substantive or procedural law. This situation is covered by Section 89 of the Companies Act, which states that for a company to be bound by a negotiable instrument, it must have been issued on its behalf and meet two requirements: The document must be prepared, drawn, accepted, or endorsed in the business’s name, by the company, on behalf of the company, or its account. The individual creating, drawing, approving, or accepting the document must also possess the power granted to them by the company in this respect.
These conditions must be met by the plain language of the tick on its face. The significance of this criterion is demonstrated by a Privy Council ruling in Sadasuk Janki Das v. Sir Kishen Pershad when the Council considered a requirement akin to that under Section 27 of the Act. According to the PC, a negotiable document’s front or back should prominently include the name of the person, people, or company charged with it. This will enable everyone to clearly and quickly identify who will be responsible for what when the document is passed from person to person.
It must follow that the defectively issued negotiable instrument cannot be enforced against the corporation if the fundamental conditions of Section 89 are not met. The Bombay High Court ruled in The Bank of Bombay v. H. R. Cormack that a company cannot be held liable for a bill or note unless it states clearly that it was intended to be drawn, accepted, or made on its behalf. Additionally, Section 47 of the Indian Companies Act, 195G (Section 89 of the current Act) prohibits the admission of any evidence unrelated to the bill or note.
Case laws:
- Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel V. Hitesh Mahendrabhai Patel:
The Gujarat High Court’s decision was overturned by the Supreme Court, which held that even in cases when the cheque is returned unpaid after being presented for the entire amount, the section 138 complaint is not uploadable. To clarify that section 138 of the NI Act is only applicable when a legally enforceable debt remains on the day the cheque is written, the court cited the Indus Airways Private Limited v. Magnum Aviation Private Limited case.
Simply Satyanarayana Rao v. India Renewable Energy Development Agency Limited is another
An instance where the respondent took out a loan to establish a power project and secured it with postdated checks. The court decided that whether or not there existed a legally enforceable debt on the date listed in the cheque would determine whether section 138 should be applied. The court also utilised the mischief rule of interpretation, emphasising that the legislative aim to suppress the mischief and promote the remedy must be considered when interpreting section 138 of the NI Act.
The court concluded with a historic ruling that says a cheque can be endorsed in compliance with Sections 5G and 15 of the NI Act if it has a notation on the cheque itself attesting to the partial payment of a debt or if the note is attached to the cheque. If the endorsed cheque is returned when the full amount is requested, the drawee may avail themselves of Section 138’s provisions.
Gajanand Burange v. Laxmi Chand Goyal
The appeal stems from a ruling rendered on November 28, 2018, by a single judge of the Chhattisgarh High Court, which overturned the appellant’s acquittal for a crime covered under Section 138 of the Negotiable Instruments Act, 1881. The respondent charged the appellant with accepting a cash loan and providing a cheque for repayment. The trial court cleared the respondent of wrongdoing after it 1led a complaint against the appellant under 1-2-2011. The High Court found the appellant guilty of an infraction punishable under Section 138 of the NI Act, which also granted an order of Rs 3 lakhs as 1ne. Two questions were raised: (A) May an infraction covered by Section 138 of the Negotiable Instruments Act, 1881 be recognised based only on a complaint submitted before the end of the 15-day notice period that must be given to the cheque drawer by Section 138(c) of the Act? (b) Despite the one-month deadline set by Section 142(b) for the 1ling of this kind of complaint having passed, may the complainant still submit the complaint?
The Supreme Court noted that until the allotted 15 days have passed, no complaint may be made for an offence under Section 138 of the NI Act. According to the court’s ruling, the payee or holder of the cheque may register a new complaint within a month after the criminal case’s decision date. Any delay in 1ling the complaint will be excused under Section 142 of the NI Act’s proviso to clause (b).
Conclusion:
A company’s directors are not responsible for returned checks unless they are joint directors, managing directors, or the check’s signature. They might use a trial before the Magistrate Court or apply for section 482 quashing proceedings in the High Court to establish their innocence. This is because they have no bearing on the actions taken by the Magistrate Court by Sections 138 and 141 of the Negotiable Instruments Act of 1881.
Bibliography:
- https://www.lawteacher.net/free-law-essays/business-law/liability-of-companies-for-disho nor-of-cheques-business-law-essay.php#ftn2
- https://www.toppr.com/guides/business-laws-cs/negotiable-instruments-act/de1nition-of- negotiable-instruments/
- https://www.scconline.com/blog/post/2023/01/04/compilation-of-important-judgments- of-supreme-court-and-high-courts-regarding-section-138-of-the-negotiable-instruments-ac t-1881/
- https://corpbiz.io/learning/liability-of-1rm-in-case-of-dishonour-of-cheque/#:~:text=In% 20this%20 judgement%2C%20the%20 Supreme,well%20as%20the%20company%20 alone
- https://www.mondaq.com/india/directors-and-o cars/115944G/liability-of-directors-in-c ase-of-dishonor-of-cheque
G. https://blog.ipleaders.in/vicarious-liability-under-negotiable-instruments-act-1881/
