To the Point
In the modern commercial world, where transactions often rely on trust and convenience, cheques remain a popular mode of payment. However, one of the most recurring problems that disturb financial transactions is the dishonour of cheques due to insufficient funds, closed accounts, or mismatched signatures. The dishonour of a cheque not only disrupts business relationships but also causes financial hardship to the payee. In response to this issue, Section 138 of the Negotiable Instruments Act, 1881 was introduced to penalize such acts and restore confidence in cheque transactions.
The section transforms what would otherwise be a civil liability into a criminal offence, thereby making the consequences more serious and the enforcement more effective. This article explores in depth the nature of criminal liability under Section 138, legal interpretations, the judicial response, and the safeguards given to both drawer and payee.
Use of Legal Jargon
To understand this legal topic thoroughly, it is essential to grasp the commonly used legal terms associated with cheque bounce cases:
- Drawer: The person who writes and signs the cheque.
- Drawee: The bank where the drawer holds the account and on which the cheque is drawn.
- Payee: The person to whom the cheque is payable.
- Dishonour: Refusal by the bank to make payment due to reasons like insufficient funds or account closure.
- Legally Enforceable Debt: A debt which is recognized and enforceable under the law.
- Notice of Demand: A formal legal notice sent by the payee to the drawer after cheque bounce, demanding payment.
- Mens rea: Latin term for “guilty mind”; generally required in criminal offences but not applicable in cheque bounce cases under Section 138.
- Cognizable offence: Offences where police can arrest without warrant; however, offences under Section 138 are non-cognizable and bailable.
- Compoundable offence: An offence which can be settled between the complainant and accused.
The Proof
Section 138 of the Negotiable Instruments Act lays down specific ingredients that must be fulfilled to constitute a criminal offence:
- Issuance of Cheque: A person (drawer) must have issued a cheque to another person (payee) for the discharge of any debt or legal liability. If the cheque is not issued in relation to a legal debt or liability, Section 138 does not apply.
- Presentation within Validity: The cheque must be presented to the bank within its validity period, which is currently three months from the date on the cheque.
- Return of Cheque: The bank must return the cheque unpaid due to:
- Insufficient funds
- Account closed
- Mismatch of signature
- Exceeds arrangement
- Any other similar reason indicating the drawer’s fault
- Service of Legal Notice: Within 30 days from the receipt of the dishonour memo, the payee must send a legal notice to the drawer demanding payment.
- Failure to Pay within 15 Days: If the drawer does not pay the cheque amount within 15 days of receiving the notice, the cause of action arises.
- Filing of Complaint: The payee can file a complaint before the Magistrate within one month after the expiry of the 15-day period.
- Presumption in Favour of Holder: Under Section 139 of the Act, the court presumes that the cheque was issued for the discharge of a debt or liability unless proven otherwise by the drawer.
Note: The offence is complete only if all these steps are fulfilled. Non-compliance with even one can lead to dismissal of the complaint.
Abstract
The Negotiable Instruments Act, 1881 is a central legislation that governs various negotiable instruments such as cheques, promissory notes, and bills of exchange. It promotes confidence in trade by ensuring that payments made through such instruments are reliable.
Section 138 was inserted in 1988 to deal specifically with the issue of cheque bounce, which had become a rampant problem in trade and commerce. Prior to this amendment, only civil remedies were available, which were often time-consuming and ineffective.
The purpose of Section 138 is both penal and compensatory. While it criminalises the act of cheque bounce, the ultimate aim is to ensure that the payee gets the due amount in a time-bound manner. Over the years, courts have interpreted the section in a way that balances the rights of both parties—the drawer is given a chance to make good the payment, and the payee is protected against fraud or negligence.
Despite its efficiency, Section 138 cases have flooded the judicial system, leading to delays. To address this, the government and judiciary have made several procedural reforms, such as allowing summary trials, online filing, and promoting settlement through mediation.
CASE LAWS~
1. Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd. [(2001) 6 SCC 463]
Facts:
- Dalmia Cement supplied goods to Galaxy Traders, who issued cheques as payment. Upon presentation, the cheques were dishonoured with the remark “account closed.” Dalmia Cement sent a legal notice, but no payment was made within 15 days, leading to a complaint under Section 138.
Issue:
- Whether dishonour due to “account closed” is covered under Section 138 of the Negotiable Instruments Act.
Held:
- The Supreme Court held that closure of an account by the drawer amounts to dishonour, just like insufficient funds. The purpose of Section 138 is to uphold financial credibility and trust in cheque transactions. Closure of the account was seen as an intentional avoidance of payment, thus punishable under the law.
Importance:
- It broadened the scope of Section 138.
- Confirmed that “account closed” is equivalent to insufficient funds.
- Strengthened the payee’s protection against dishonest practices.
2. MMTC Ltd. v. Medchl Chemicals & Pharma (P) Ltd. [(2002) 1 SCC 234]
Facts:
- MMTC filed a complaint after a cheque issued by Medchl Chemicals bounced. The accused argued that no legally enforceable debt existed, and the complaint should be quashed.
Issue:
- Does the complainant need to prove the debt at the initial stage of filing a complaint under Section 138?
Held:
- The Supreme Court ruled that at the time of taking cognizance, the Magistrate need not go into the detailed proof of debt. There is a statutory presumption under Section 139 that the cheque was issued for a legally enforceable liability. It is for the accused to rebut this presumption during trial.
Importance:
- Clarified that the complainant doesn’t need to prove debt at filing stage.
- Helped prevent premature dismissal of genuine complaints.
- Reinforced the presumption in favour of the payee under Section 139.
- Conclusion
- Cheque bounce is not merely a breach of financial etiquette; it is a punishable offence that can cause economic distress and tarnish business relationships. Section 138 serves as a critical legal provision to ensure financial accountability and discipline. It has proven to be an effective tool to reduce casual issuance of cheques and to uphold the credibility of financial instruments.
- However, like any legal provision, misuse is also possible. There have been cases where cheques were misused or where genuine disputes were converted into criminal complaints. The courts have thus tried to maintain a fine balance between protecting the payee’s rights and ensuring that honest drawers are not harassed.
- Going forward, steps such as decriminalising minor cheque bounce cases, fast-track courts, and mandatory mediation before trial can help ease the burden on the judiciary and ensure quicker justice. The emphasis should remain on compensation rather than punishment wherever appropriate.
FAQ
1.Can a cheque issued as a gift or donation attract Section 138?
No. The cheque must be issued for a legally enforceable debt or liability. Gift or donation cheques do not fall under the purview of this section.
2. What if the drawer pays the amount after receiving the legal notice?
If the drawer pays within 15 days of receiving the notice, no offence is made out under Section 138, and the complaint cannot be filed.
3. Can a company be prosecuted under Section 138?
Yes. If a company issues a bounced cheque, both the company and the officers responsible for the conduct of its business can be prosecuted.
4. Is Section 138 applicable to bounced electronic cheques or ECS?
Yes. The scope of Section 138 has been expanded through amendments and judgments to include digital instruments like electronic cheques and ECS (Electronic Clearing System) transactions.
5. Can a cheque bounce case be withdrawn after filing?
Yes. Since it is a compoundable offence, the complainant and accused can reach a settlement and withdraw the case with the court’s permission.
