OVERVIEW OF SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT

Introduction

Section 138 of the Negotiable
Instruments Act, 1881 (“the Act”) is one of the few
provisions which is equally well known both by lawmen and laymen. The section
imposes a criminal liability in case of a dishonoured or bounced cheque.
According to a 2008 Report of the Law Commission of India, over 38 lakh cheque
bouncing cases were pending at the Magistrate level as of October 2008. Over 10
years have passed since that Report and this figure is expected to have
leapfrogged!! The Magistrate Court is the first Court in the hierarchy of
criminal justice in India and if this entry level forum itself is clogged one
can very well understand why justice in India often takes so long. This Article
looks at some of the important facets of this Act including key recent changes
which have been introduced in the Act.  

When
does the section get triggered?

Let us briefly examine the impugned
section. Section 138 of the Act provides that if any cheque is drawn by a
person (drawer) in favour of another person (payee)
and if that cheque is dishonoured because of insufficient funds in the drawer’s
bank account, then such drawer is deemed to have committed an offence. The
penalty for this offence is imprisonment for a term which may be extended to 2
years and / or with a fine which may extend to twice the amount of the cheque.

In order to invoke the provisions
of section 138, the following three steps are necessary:

(i)    the
cheque must be presented 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;

(ii)    once the payee is informed by the bank about the dishonour of the
cheque, then he must within 30 days of such information make a demand for the
payment of the said amount of money by giving a notice in writing, to the
drawer of the cheque; and

(iii)   the drawer of such cheque fails to make the payment of the said
amount of money to the payee of the cheque, within 15 days of the receipt of
the said notice.

A fourth step is specified u/s.142
of the Act which provides that a complaint must be made to the Court within one
month of the date from which the cause of action arises (i.e., the notice
period). A rebuttable presumption is drawn by the Act that the holder of the
cheque received it for the discharge, in whole or in part, of any debt or other
liability.

It is 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, or any debt
or other liability.

Thus, in order to prosecute a
person for an offence u/s. 138, It is manifest that the following ingredients
are required to be fulfilled:

(a)   a
drawer must have drawn a cheque on his bank account for paying a sum to the
payee;

(b)   the
cheque should have been issued for the discharge of any legally enforceable
debt / liability;

(c)   the
payee must present such cheque within 3 months from the date on which it is
drawn or within the period of its validity whichever is earlier;

(d)   such
cheque is returned by the drawer’s bank as unpaid, because of insufficient
funds;

(e)   on
such cheque getting bounced, the payee demands repayment in writing and sends
such notice within 30 days of the dishonour intimation from the bank; and

(f)    even
after receipt of such written notice, the drawer fails to make payment of the
said amount of money to the payee of the cheque within 15 days of the receipt
of the said notice.

To illustrate, suppose a cheque is
deposited in a bank and the intimation of dishonour is received by the payee on

1^st November 2018, then he has time till 30^th November
2018 to send a demand Notice to the drawer. Assuming that the Notice is
received by the drawer on 30^th November 2018, then he has time till
15^th December 2018 to make good the payment. If not done, then the
payee can file a complaint starting 16^th December 2018. The
complaint must be made by the payee within a period of 1 month from the date on
which the cause of action arises u/s. 138. It may be noted that a month is
defined under the General Clauses Act, to mean a month reckoned according to
the British Calendar. Thus, in this example, the last date for filing the
complaint would be 15^th January 2019. This definition is relevant
since in several cases, it is presumed that a month means a period of 30 days
for filing a complaint. This becomes all the more relevant with a cause of
action which arises in the month of February. Thus, the maximum period is 1
month and not 30 / 31 days.

Who
can be Prosecuted in the cases u/s 138?

Various decisions have established
who can be prosecuted u/s. 138 in the case of dishonouring of a cheque. These
can be briefly summarised as follows:

(a)   The
drawer of the cheque himself in case of an individual drawer;

(b)   In
a case where the drawer is a company/firm / LLP – the Partners / the Directors
and the persons concerned for running of the company / firm / LLP including the
Managing Director, Designated Partner or any other officer of the entity with
whose consent or connivance the offence has been committed. Section 141 of the
Act regulates offences by companies and makes the directors, manager, secretary
and other officer of the company liable if the offence is attributable to any
neglect on their part.

The following Table indicates the
persons who can be implicated in case of a company / LLP:

The Supreme Court has made it clear
in a catena of judgments that the complainant has to make out specific
averments to rope in directors u/s. 141 of the Act. Further, the Supreme Court
in the following Judgments have laid down the principle that the complainant
needs to demonstrate how and in what manner the director was responsible and
was in charge of affairs of the company:

a)    National Small Industries Corp. Ltd vs. Harmeet Singh Paintal and
Anr., 2010 All MR Cri 921

b)    Saroj Kumar Poddar vs. State (NCT of Delhi) and Anr., 2007 ALL MR
Cri. 560

c)    N. K. Wahi vs. Shekar Singh and Ors., 2007 (9) SCC 481

A company functions through its directors and officers who are responsible for
the conduct of the business of the company. A criminal liability on account of
dishonour of cheque primarily falls on the drawer company and is extended to
officers of the company. The normal rule in the cases involving criminal
liability is against vicarious liability, that is, no one is to be held
criminally liable for an act of another.

The legal position concerning the
vicarious liability of a director in a company which is being prosecuted for
the offence u/s. 138 came up for consideration before the Supreme Court on more
than one occasion. In a landmark decision in the case of National Small
Industries Corporation Limited vs. Harmeet Singh Paintal and Anr, 2010 ALL MR
CRI 921 the Supreme Court has laid down the following principles:

(a) The primary responsibility is
on the complainant to make specific averments as are required under law in the
complaint so as to make the accused vicariously liable. For fastening the
criminal liability, there is no presumption that the director knows about the
transaction.

(b) Section 141 does not make all
the directors liable for the offence. The criminal liability can be fastened
only on those who, at the time of commission of the offence, were in charge of
and were responsible for the conduct of business of the company.

(c) Vicarious liability can be
inferred against a company only if the requisite statements, which are required
to be averred in the complaint, are made so as to make the accused therein
vicariously liable for offence committed by the company along with averments in
the complaint containing that the accused were in charge of and responsible for
the business of the company and by virtue of their position they are liable to
be proceeded with.

(d)   Vicarious liability on the part of a person must be pleaded and
proved and not inferred. (There is no presumption u/s. 139 of the Negotiable
Instruments Act of vicarious liability)

(e) The person sought to be made
liable should be in charge of and responsible for the conduct of the business
of the company at the relevant time. This has to be averred as a fact as there
is no deemed liability of a director in such cases. The Court has reiterated
the position taken by it in its earlier decisions including the landmark
judgment delivered by it in the case of SMS Pharmaceuticals Ltd. vs.
Neeta Bhalla,2005 (4) Mh.L.J. 731.

In the case of Central Bank
of India vs. Asian Global Limited 2010 AIR(SC) 2835, the Supreme Court
has laid down that the allegations have to be clear and unambiguous showing
that the directors were in charge of and responsible for the business of the
company.

In this respect, the Act has taken
due care of Government nominated Directors and they shall not be liable for
prosecution under u/s. 138 r.w.s 141 of the Negotiable Instruments Act. Sadly,
such an exemption does not exist for Independent Directors!

Where
should a cheque bouncing complaint be filed?

One of the most litigious issues in
relation to a bounced cheque has been which Court has jurisdiction over a case?
Say, a debtor which has its registered office in Ranchi, Jharkhand issued a
cheque drawn on a Ranchi bank to a creditor based in Mumbai and the cheque once
deposited in the Mumbai bank bounces. Now, should the complaint be filed in
Mumbai or in Ranchi?

This answer could make a big
difference since the ease of filing a case in one’s own city or State is
manifold as compared to a remote location. This issue saw several Supreme Court
and High Court decisions leading to a see-saw one way and the other. A slew of
decisions came out strongly in favour of the accused unlike the earlier
decisions which were pro-complainant. Let us look at the history and the
current position on this very important aspect which made several creditors and
banks jittery.

A two-member bench of the Supreme
Court in K Bhaskaran vs. Sankaran Vaidhyan Balan (1999) 7 SCC 510
laid down five important components for filing a complaint u/s. 138 of the Act:

(a)   Drawing of the cheque,

(b)   Presentation of the cheque to the bank,

(c)   Returning the cheque unpaid by the drawee bank,

(d)   Giving notice in writing to the drawer of the cheque demanding
payment of the cheque amount, and

(e)   Failure of the drawer to make payment within 15 days of the receipt
of the notice

The Apex Court finally concluded
that since an offence could pertain to any of the above five acts there could be
five offences which could be committed at five different locations and hence,
the suit could be filed in any Court having jurisdiction over these locations.

 Thus, the complainant can select any of the
five Courts for filing his complaint within whose jurisdiction the five acts were
done.

However, a subsequent Supreme Court
decision in the case of Dashrath Rupsingh Rathod vs. State of
Maharashtra, Cr. A. No. 2287 /2009 Order dated 1^st August 2014
led to debtors across the Country celebrating and creditors panicking. It
overruled all the earlier decisions on this subject and held that the case u/s.
138 had to be filed only where bank of the accused was located. This was
because of the fact that the offence of cheque dishonour has occurred where the
bank of the accused was located. Hence, in the above example, the creditor
would have had to file his case before the Magistrate Court of Ranchi! Imagine
the sheer harassment it would cause the creditor and that too to recover his
own money.

This decision caused a great deal
of inconvenience to litigants and finally the Parliament amended the Act with
effect from 15^th June 2015 by inserting sub-section (2) in section
142 of the Act to define the jurisdiction for filing the case. It states that
if the cheque is delivered for collection through an account, then the
complaint would be filed at a place where the bank branch of the payee is
situated. Continuing with our above example, since the Mumbai-based creditor
deposited his Ranchi debtor’s cheque in his Mumbai Bank Account, the complaint
would be filed before the Metropolitan Magistrate of Mumbai. Indeed, a welcome
relief! The Constitutional Validity of this provision was challenged in the
case of Vikas Bafna & Ors vs. UOI, WP (C) 1351/2016 (Cha). It
was contended that the amendment took away a valuable right of the accused to
defend himself properly and that since the amendment nullified a Supreme Court
decision it was Constitutionally invalid. The Chattisgarh High Court negated
this plea and held that all laws which cause some hardship cannot be treated as
being constitutionally invalid.

Process
of Complaint

The process of filing a complaint
u/s. 138 of the Act is as follows:

(a)   A
complaint under the Act is filed by the payee before a Magistrate or JMFC (Judicial
Magistrate First Class) or Metropolitan Magistrate (only for the 4 Metros).

(b)   The
complainant is examined u/s. 200 of the Criminal Procedure Code (CrPC) where
his verification statement is filed. For the complainants verification can be
filed by way of an Affidavit also.

(c)   The
Magistrate then issues a Process u/s. 204 of the CrPC. or dismisses the
complaint u/s. 203 of the Code.

(d)   Once
the process is issued, summons are sent to the accused.

(e)   After
the summons are issued, if the accused does not appear before the Court, then a
Warrant of Arrest is issued.

(f)    Once
the accused appears before the Court, he has to secure bail and the plea of the
accused is recorded.

In this respect, there has been an important
amendment with effect from 1^st September 2018
to the Negotiable Instruments Act vide the insertion of section 143A. This
section states that if the accused pleads not guilty to the accusation made in
the complaint, then the Magistrate may direct the Accused to pay to the
complainant an interim compensation of up to 20% of the amount of the
cheque. The interim compensation has to be paid within 60 days from the
date of the order. If the accused does not pay the same the same can be
recovered as if a fine was levied as per section 421 of the CrPC.

Two salient features of this
important amendment which are worth noting are as follows:

(i)    The
power to ask an accused to pay interim compensation is discretionary with the
Magistrate and is not mandatory. The words used are “may order”
and not “shall order”. Hence, it is not that in each and every
case, the Court would order interim compensation, it may decide to avoid it
altogether in a case.

(ii)    Further, the interim compensation is not a fixed sum of 20% of
the cheque amount. It is an amount of up to 20% and hence, it could be any sum
even lower than 20% of the cheque amount. Thus, for instance, the Court may
order the accused to pay 5% as interim compensation.

(g)   Once
plea is recorded, the complainant has to file his evidence.

(h)   After
the evidence of the complainant /prosecution is recorded, the Magistrate
records the statement of the accused where questions are put to the accused
based on the evidence filed by the complainant. After the statement is recorded,
the accused has a choice to lead his evidence or has the right to remain
silent.

(i)    Once
the evidence of the accused is closed the matter proceeds for arguments and
judgment.

(j)    The
Court would then pass a judgment either of conviction of the accused or of his
acquittal. A judgment of conviction is appealable by the drawer in the Court of
Sessions. If an acquittal is given, then a leave has to be sought by the payee
from the High Court to file an Appeal in the High Court within 60 days of the
acquittal order.

Conclusion

One can only hope that given the
gravity of the violations and the consequences, the Government amends the
Negotiable Instruments Act to exempt Independent and Non-executive Directors.
In fact, such an amendment is also welcome in other similar statutes
prescribing a criminal liability on the directors. SEBI which has been the
driving force behind the corporate governance movement in India should take up
this matter with the Government. If we want more independent directors on our
companies, then we must make laws to facilitate the same!