Section 138 of Negotiable Instruments Act

WHAT IS A CHEQUE?

(Section 6) A “cheque” 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. This expression includes “a cheque in the electronic form” and “a truncated cheque”.
WHAT IS AN E-CHEQUE?

Electronic cheque (e-cheque) is the image of a normal paper cheque generated, written and signed in a secure system using digital signature and asymmetric crypto system. An electronic cheque is nothing more than an ordinary cheque produced on a computer system and instead of signing it in ink, it is signed using the digital equivalent of ink. After the coming into force of The Negotiable
Instruments (Amendment And Miscellaneous Provisions) Act, 2002, legal recognition has been accorded to e-cheques and they have been brought at par with the normal cheques. Now, a ‘cheque’ includes an echeque.
SECTION 138

Section 138 Negotiable Instruments Act comes into force for Dishonour of cheque for insufficiency, etc., of funds in the account:

The Section states:

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 honor 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 provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both: -1-

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 thirty 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 purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

Therefore, for the OFFENCE to qualify UNDER SECTION 138:
a) The cheque should have been issued for the discharge, in whole or part, of any debt or other liability. b) The cheque should have been presented within a period of six months or within its validity period whichever is earlier.
c)

The payee or holder in due course should have issued a notice in writing to the drawer within 30 days of the receipt of information by him from the Bank regarding the return of the cheque as unpaid. d) After receipt of the said notice from the holder in due course, the drawer should have failed to pay the cheque within 15 days of receipt of the said notice.

GROUNDS FOR DISHONOUR OF CHEQUE
A.

If the Funds present in the account are insufficient.

B. Besides the above, the Courts have also accepted some other heads which though expressly do not say ‘insufficient funds’ but are implied to mean the same.
B.1.

Account Closed: Closure of account would be an eventuality after the entire amount in the

account is (NEPS MICON LTD. AND OTHERS VS. MAGMA LEASING LTD.)

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B. 2.

Stop Payment instructions: Once the cheque has been drawn and issued to the payee and the

payee has presented the cheque, ‘stop payment’ instructions will amount to dishonour of cheque.
(MAHENDR S. DADIA VS. STATE OF MAHARASHTRA)
B.3.

Refer to drawer: is an expression which also qualifies under section 138 of the Negotiable

Instruments Act, 1881 which means that there were not sufficient funds with the bank in the account of the respondent (LILY HIRE PURCHASE LTD. VS. DARSHAN LAL).
B.4.

Not a clearing member: Cheque returned with endorsement ‘not a clearing member’. To attract

the provisions of section 138 NI Act, the cheque should be presented with the bank on which it is drawn (CHAIRMAN, JAWAHAR COOPERATIVE URBAN BANK LTD. AND OTHERS VS.
RAMANJANEYA ENTERPRISES, HYD.).

PROCEDURE OF FILING AND TIME LIMIT
If the cheque is returned unpaid from the bank, the bearer should collect the returned cheque and cheque return memo from the bank. A notice should be served to the drawer within thirty (30) days of return of the cheque informing the drawer about dishonor of the cheque.
If the drawer does not pay the amount of cheque within fifteen (15) days of receipt of the notice, the drawee can file a criminal complaint under Section 138 of NI Act, within next one month in the court where the cause of action has taken place.
COMPLAINTS AGAINST A COMPANY (DIRECTOR’s LIABILITY):

Section 141 of Negotiable Instruments Act says:

(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:
– Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.
– Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government

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or a financial corporation owned or controlled by the Central Government or the state
Government, as the case may be, he shall not be liable for prosecution under this Chapter.
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly,
Explanation-For the purposes of this section,

(a)”company” means any body corporate and includes a firm or other association of individuals;and (b) “director”, in relation to a firm, means a partner in the firm.

The Hon’ble Supreme Court has held that merely being a director of a company is not sufficient to make a person liable under section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of section
141 is that 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 and there is no deemed liability of a director in such cases.
Supreme Court has also held that for the directors of the company to be made liable for an offence under sec 138, the complaint must contain specific allegations against directors as to how directors are in charge and responsible for conduct of business of company. Mere allegation in complaint that accused persons are directors and responsible officers of the company is not sufficient.
RECENT DEVELOPMENTS IN SECTION 138 OF N.I. ACT CASES
The Supreme Court (“Court”) has, in its recent decision in Dashrath Rupsingh Rathod v. State of
Maharashtra & Anr.1, held that in cases of dishonor of cheque, only those courts within whose territorial limits the drawee bank is situated would have the jurisdiction to try the case.
Additionally, the Court also directed that pending cases in which the accused had not been properly served would be returned to the complainants for filing before the appropriate courts (i.e. having territorial jurisdiction), which filing is required to be done within 30 days of return.

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However, post this judgment, The President of India promulgated an Ordinance [called the
“Negotiable Instruments (Amendment) Ordinance, 2015”] on 15 June 2015 as per which certain amendments have been made in the Negotiable Instruments Act, 1881. Jurisdiction to file cases of cheque bouncing has now been changed by this Ordinance superseding the judgment dated 1 August
2014 of the Supreme Court in the case of Dashrath Rupsingh Rathod v. State of Maharashtra, (2014)
9 SCC 129. Now a cheque dishonor case under Section 138 of the Negotiable Instruments Act, 1881, will have to be filed in a court at a place as per the provisions of Section 142(2) of the Negotiable
Instruments Act, (which has been inserted by this new Ordinance), and even all pending cheque bouncing cases will also be transferred to the courts as per this new provision.

In the Negotiable Instruments Act, 1881, a new sub-section (2) has been inserted in Section 142, which now lays down as under: “(2) The offence under section 138 shall be inquired into and tried only by a court within whose local jurisdiction,—(a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or (b) if the cheque is presented for payment by the payee or holder in due course otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated. Explanation.—For the purposes of clause (a), where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.”

Secondly, a new Section 142A has been inserted in the Negotiable Instruments
Act, 1881, has been inserted, which lays down as under:

“142A. (1) Notwithstanding anything contained in the Code of Criminal
Procedure, 1973 or any judgment, decree, order or directions of any court, all cases arising out of section 138 which were pending in any court, whether filed before it, or transferred to it, before the commencement of the Negotiable Instruments (Amendment)

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Ordinance, 2015 shall be transferred to the court having jurisdiction under sub-section
(2) of section 142 as if that sub-section had been in force at all material times.

(2) Notwithstanding anything contained in sub-section (2) of section 142 or subsection (1), where the payee or the holder in due course, as the case may be, has filed a complaint against the drawer of a cheque in the court having jurisdiction under subsection (2) of section 142 or the case has been transferred to that court under sub-section
(1), and such complaint is pending in that court, all subsequent complaints arising out of section 138 against the same drawer shall be filed before the same court irrespective of whether those cheques were delivered for collection or presented for payment within the territorial jurisdiction of that court.

(3) If, on the date of the commencement of the Negotiable Instruments
(Amendment) Ordinance, 2015, more than one prosecution filed by the same payee or holder in due course, as the case may be, against the same drawer of cheques is pending before different courts, upon the said fact having been brought to the notice of the court, such court shall transfer the case to the court having jurisdiction under sub-section (2) of section 142 before which the first case was filed and is pending, as if that sub-section had been in force at all material times.”

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IMPLICATIONS OF THE SECTION 142

The jurisdiction of filing cheque dishonor cases under Section 138 of the N.I. Act is now changed by the above Ordinance as under:
a) Now a cheque bouncing case can be filed only in the court at the place where the bank in which the payee has account is located. For example, if you are based at Delhi and you have an account in a bank in a particular area of Delhi. You receive a cheque from someone in Mumbai. You present your cheque in Delhi in the bank where you have your account. Now, if this cheque is dishonored, then the cheque bounce case can be filed only in Delhi in the court which has jurisdiction over the area where your bank is located.
b) Secondly, once you have filed a cheque bounce case in one particular court at a place in this manner, subsequently if there is any other cheque of the same party (drawer) which has also bounced, then all such subsequent cheque bounce cases against the same drawer will also have to filed in the same court (even if you present them in some bank in some other city or area). This will ensure that the drawer of cheques is not harassed by filing multiple cheque bounce cases at different locations. So, even multiple cheque bounce cases against the same party can be filed only in one court even if you present the cheques in different banks at different locations.

c) Thirdly, all cheque bounce cases which are pending as on 15 June 2015 in different courts in India, will be transferred to the court which has jurisdiction to try such case in the manner mentioned above, i.e., such pending cases will be transferred to the court which has jurisdiction over the place where the bank of the payee is located. If there are multiple cheque bounce cases pending between the same parties as on 15 June 2015, then all such multiple cases will be transferred to the court where the first case has jurisdiction as per above principle.
d) Thus, this new Ordinance now introduces some clarity and uniformity in the matter of cheque dishonor cases. This Ordinance takes care of the interests of the payee of the cheque while at the same time also taking care that the drawer of the multiple cheques is not harassed by filing multiple litigations at different locations to harass him (if more than one cheque has bounced).

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