Evolution of Section 138 of Negotiable Instrument Act, 1881

Author 1: Aman Bohra, Author 2: Akshay Yadav

5th Year B.A. LL.B (Hons.)
Manipal University, Jaipur

Introduction

Negotiable Instrument being termed as one of the most convenient and reliable modes of making payment, soon after the development of the banking sector which leads to establishment of many banks, cheques being the easiest way of making a payment.

According to Section 6 of the Negotiable Instruments Act, (Amendment & Miscellaneous Provisions) Act, 2002, cheque means ‘It is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form’. Bill of exchange is a Negotiable Instrument in writing which contains an unconditional order from the drawer to release the certain sum of amount in favour of Payee towards which the signatory (drawer) holds the liability to pay such specific amount. There are many Negotiable Instruments but Cheques are the most common method of payment and also the post-dated cheque are more often used in day-to-day life when it comes to making transactions within business. Post-dated cheques are the leverage given to the drawer, and such leverage must not be abused by the drawer. When the bank refuses to pay the amount to the payee mentioned in the cheque due to the insufficiency of funds or other reasons. As soon as the cheque is dishonoured, the drawee bank issues a ‘Cheque Return Memo’ to the Payee Banks stating a reason for such default. Such a condition is called ‘Dishonour of Cheque’ and then such accommodation is abused by the drawer.

Cheque is a prominent Negotiable Instrument, used in lieu of payment being acknowledged by everyone. However cheques have lost their credibility by getting dishonoured on the date of presenting.  In the case of N. Rangacari V. Bharat Snachar Nigam Ltd.,[1] Court specified that when the proceeds of a negotiable instrument such as a cheque are lingered in the civil court, the purpose of a negotiable instrument being a speedy vehicle of commerce is defeated.

Amendment Act, 1988

To deal with the above mentioned issues, Chapter XVII was added in the Negotiable Instruments Act, 1881 by section 4, Banking, Public financial Institutions and Negotiable Instrument (Amendment) Act, 1988 just to promote efficiency in banking operations and to ensure credibility in transacting business through cheques and the obligation taken under to pay the amount through cheque should be honoured and while conducting a business the transparency should be maintained and protect the honest drawer from being harassed. The only principle section which deals with dishonour of cheque is Section 138 of the Negotiable Instrument Act, 1881 which makes the ‘dishonour of cheque’ a crime, but it is a crime created by a statute of fiction, as there was no provision under the Indian Penal Code which gives any substantial value to deal with such issue. Section 138 imposes both criminal as well as civil liability upon a defaulter (drawer) by imposing fine and punishment which may extend upto 2 years.

In the matter of Kusum Ignots and Alloys Ltd V. Pennar Peterson Securities Ltd[2] ,the Apex Court mentioned the basic ingredients to be fulfilled in order for an offence under Section 138 of the Negotiable Instruments act to be committed, which are:-

  • A person shall draw a cheque for payment to another person for the purpose of discharging himself from any liability or debt.
  • The cheque must be presented to the bank in 3 months.
  • When the cheque is presented it shall be returned by the bank as a reason for insufficient funds or the amount stated in the cheque exceeds from what is agreed with a certain bank.
  • After which the payee shall make the demand for the unpaid amount by issuing a notice to the drawer of cheque within 15 days of such information from the bank against the return of cheque left unpaid.
  • Where the drawer of such cheque fails to pay the original amount to the payee within 15 days of such notice.

 

Amendment Bill, 2015

It was observed by the legislature that sections 138 to 142 are deficient and wanting in dealing with dishonour of cheque, so the Negotiable Instrument (Amendment and Miscellaneous Provisions) Act, 2002 amended the section 138, 141 and 142 and also inserted new sections 143 to 147 in the said act, for speedy disposal of the cases through summary trial and as compoundable offence. Imprisonment under Section 138 was increased from one year to two years. The intention of the legislature behind such changes was to promote the usage of cheque amongst the public and enhance the reliability of Negotiable Instrument such as cheques, so that the transactions and liability in business could be ensured. And the dispute was essentially with regards to the jurisdiction of the court where the complaint by payee can be filed in case of dishonour of a cheque, as the jurisdiction issue was interpreted by the court from various occasion to occasion. As per the amendment act 2015, all the cases related to cheque bounce should be filed in the court as per section 141(1) and 142(2) of the same act, and all the pending cheque bounce case was also transferred as per the Amendment Act.

Amendment, 2018

Amendment in 2018 changed the legal scenario of Section 138 of the Negotiable Instrument which says “Court trying an offence related to dishonour of cheque, drawer has 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 may be paid either in a summary trial or a summons case where the drawer pleads not guilty; or upon framing of charge in any other case. Furthermore, the appellant can be directed by the Appellate Court, to deposit 20% of the fine/Compensation awarded to interim compensation while hearing appeal against conviction under Section 138 of Negotiable Instrument Act, 1881. 

Decriminalising the offence of Cheque Dishonour

Economies all across the world have been affected due to the present scenario of Covid-19. A major set-back can be seen in various sectors of the world, which leads to unemployment and financial disaster, leading to major economic crises not in one country but across the globe. To curb as well as to re-develop the economy, the Central Government of India came up with a plan to promote and encourage the business in various sectors to overcome the financial distress, and to attract both domestic and foreign investors to invest in the country.  This is being encouraged through various amendments in the Companies Act, 2013, Prize Chits and Money Circulation Schemes (Banning), Act, 1978, Insurance Act, 1938, SARFAESI Act, Pension Fund Regulatory & Development Authority Act, Payment and Settlement Systems Act, NABARD Act, 1981, Banking Regulation Act, RBI Act and the finance ministry has purposes to decriminalize the Section 138 of Negotiable Instrument Act, 1881.

Government’s intention is to bring a balanced legislation by making the offenses which are of less serious nature to be compounded and criminals to be punished. If the proposal is accepted will have both positive and negative impact and intention to bring dishonour of cheque under criminal jurisprudence is to ensure credibility and timely payment by the drawer.

Conclusion

The said proposal has received mixed reactions from different-different sectors of the country; now it’s totally upon the ministry to decide which part to keep and which part to decriminalize in order to achieve the required goal. Most importantly the Bar Council of India has opposed the decriminalization of the said offence as a whole on which Chapter XVII is based will collapse and there will be huge hike in cheque fraud cases. Payee protection from such fraud is held to be of paramount consideration will cease to exist.

Only the big corporations will be benefited from such decriminalization of cheque as they don’t fear litigation. Getting away with the criminal liability of directors will work as an escape for them.

On the Other hand, other measures can be taken into consideration which will work as grundnorm for the banks to levy penalty or fine for the drawer cheque in case of a cheque dishonor which is no sufficient in our country, instead of going with the said proposal of dishonor of cheque.

 

References:

[1] 2007 ALL MR (Cri) 1437 (S.C.)

[2] (2000) 2 SC 745

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