NEGOTIABLE INSTRUMENTS ACT, 1881

NEGOTIABLE INSTRUMENTS ACT, 1881
INTRODUCTION
Advent of cheques in the market have given a new dimension to the commercial and
corporate world, its time when people have preferred to carry and execute a small piece
of paper called Cheque than carrying the currency worth the value of cheque. Dealings
in cheques are vital and important not only for banking purposes but also for the commerce
and industry and the economy of the country. But pursuant to the rise in dealings with
cheques also rises the practice of giving cheques without any intention of honoring them.
Before 1988 there being no effective legal provision to restrain people from issuing cheques
without having sufficient funds in their account or any stringent provision ot punish them
in the vent of such cheque not being honoured by their bankers and returned unpaid. Of
course on dishonour of cheques there is a civil liability accrued. However in reality the
processes to seek civil justice becomes notoriously dilatory and recover by way of a civil
suit takes an inordinately long time. To ensure promptitude and remedy against defaulters
and to ensure credibility of the holders of the negotiable instrument a criminal remedy of
penalty was inserted in Negotiable Instruments Act, 1881 in form of the Banking, Public
Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 which
were further modified by the Negotiable Instruments (Amendment and Miscellaneous
Provisions) Act, 2002[3]. This article endeavours to elucidate the penal provision[4] light
of the amendments and the judicial interpretations.
Scope
Of the ten sections comprising the chapter of the Act, section 138 creates statutory offence
in the matter of dishonour of cheques on the ground of insufficiency of funds in the
account maintained by a person with the banker. Section 138 of the Act can be said to
be falling either in the acts which are not criminal in real sense, but are acts which in
public interest are prohibited under the penalty or those where although the proceeding
may be in criminal form, they are really only a summary mode of enforcing a civil right.
Normally in criminal law existence of guilty intent is an essential ingredient of a crime.
However the Legislature can always create an offence of absolute liability or strict liability
where ‘mens rea’ is not at all necessary.
While elucidating on this aspect the Kerala High Court in K. S. Anto v. Union of India
held that:
“Knowledge or reasonable belief, that pre requisite could be statutorily dispensed with in
appropriate cases by creating strict liability offences in the interest of the Nation.”
Further the creation of the strict liability is an effective measure by encouraging greater
vigilance to prevent usual callous or otherwise attitude of drawers of cheques in discharge
of debts or otherwise attitude of drawers of cheques in discharge of debts or otherwise.
The words as appearing in clause (b) of S. 138 cannot be construed even to imply failure
without reasonable cause in view of the explicit language in which the provision is couched,
the principle of strict liability incorporated in the main enacting clause.
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STATEMENT OF OBJECTS AND REASONS
The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial
Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new
Chapter XVII was incorporated for penalties in case of dishonour of cheques due to
insufficiency of funds in the account of the drawer of the cheque. These provisions were
incorporated with a view to encourge the culture of use of cheques and enhancing the
credibility of the instrument. The existing provisions in the Negotiable Instruments Act,1881,
namely, sections 138 to 142 in Chapter XVII have been found deficient in dealing with
dishonour of cheques. Not only the punishment provided in the Act has proved to be
inadequate, the procedure prescribed for the Courts to deal with such matters has been
found to be cumbersome. The Courts are unable to dispose of such cases expeditiously in
a time bound manner in view of the procedure contained in the Act.
2. A large number of cases are reported to be pending under sections 138 to 142 of the
Negotiable Instruments Act in various courts in the country. Keeping in view the large
number of complaints under the said Act pending in various courts, a Working Group
was constituted to review section 138 of the Negotiable Instruments Act, 1881 and make
recommendations as to what changes were needed to effectively achieve the purpose of
that section.
3. The recommendations of the Working Group along with other representations from
various institutions and organisations were examined by the Government in consultation
with the Reserve Bank of India and other legal experts, and a Bill, namely, the Negotiable
Instruments (Amendment) Bill, 2001 was introduced in the Lok Sabha on 24th July,
2001. The Bill was referred to Standing Committee on Finance which made certain
recommendations in its report submitted to Lok Sabha in November, 2001.
4. Keeping in veiw the recommendations of the Standing Committee on Finance and other
representations, it has been decided to bring out, inter alia, the following amendments
in the Negotiable Instruments Act,1881, namely:—
(i) to increase the punishment as prescribed under the Act from one year to two years;
(ii) to increase the period for issue of notice by the payee to the drawer from 15 days
to 30 days;
(iii) to provide discretion to the Court to waive the period of one month, which has been
prescribed for taking cognizance of the case under the Act;
(iv) to prescribe procedure for dispensing with preliminary evidence of the complainant;
(v) to prescribe procedure for servicing of summons to the accused or witness by the
Court through speed post or empanelled private couriers;
(vi) to provide for summary trial of the cases under the Act with a view to speeding up
disposal of cases;
(vii) to make the offences under the Act compoundable;
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(viii) to exempt those directors from prosecution under section 141 of the Act who are
nominated as directors of a company by virtue of their holding any office or
employment in the Central Government or State Government or a financial
corporation owned or controlled by the Central Government, or the State
Government, as the case may be;
(ix) to provide that the Magistrate trying an offence shall have power to pass sentence
of imprisonment for a term exceeding one year and amount of fine exceeding five
thousand rupees;
(x) to make the Information Technology Act, 2000 applicable to the Negotiable
Instruments Act,1881 in relation to electronic cheques and truncated cheques
subject to such modifications and amendments as the Central Government, in
consultation with the Reserve Bank of India, considers necessary for carrying out
the purposes of the Act, by notification in the Official Gazette; and
(xi) to amend definitions of “bankers’ books” and “certified copy” given in the Bankers’
Books Evidence Act,1891.
5. The proposed amendments in the Act are aimed at early disposal of cases relating to
dishonour of cheques, enhancing punishment for offenders, introducing electronic
image of a truncated cheque and a cheque in the electronic form as well as exempting
an official nominee director from prosecution under the Negotiable Instruments
Act,1881.
6. The Bill seeks to achieve the above objects.
Circumstances of .dishonour
The circumstances under which dishonour of cheque takes place or that may contribute
to the situation would be irrelevant and are required to be totally ignored.
In Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar the Bombay High Court held
that:
“A clear reading of Section 138 leaves no doubt in our mind that the circumstances under which
such a dishonour takes place are required to be totally ignored. In such case, the law only takes
cognizance of the fact that the payment has not been forthcoming and it matters little that any
of the manifold reasons may have caused that situation.”
Ingredients and requirements of the penal provisions
Section 138 creates an offence for which the mental elements are not necessary. It is
enough if a cheque is drawn by the accused 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 discharge in whole or in part, of any debt or other liability due. Therefore, whenever
the cheques are on account of insufficiency of funds or reasons referable to the drawer’s
liability to provide for funds, the provisions of section 138 of the Act would be attracted,
provided the following conditions are satisfied:
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1. Existence of a live account
Existence of a “live account” at the time of issue of cheque is a condition precedent for
attracting penal liability for the offence under this section. A cheque cannot be issued de
hors an account maintained by its drawer with the banker. When the cheque is returned
by the bank unpaid because of the account of money standing to the credit of the cheque,
to make demand for payment as provided for payment as indicated in clause (b) of the
proviso. The words “that account” in the section denote to the account in respect of which
the cheque was drawn. No doubt if any person manages to issue a cheque without an
account with the bank concerned its consequences would not snowball into the offence
described under section 138 of the Act. For the offence under section 138 of the Act there
must have been an account maintained by the drawer at the time of the cheque was
drawn.
2. Issue of Cheque in discharge of a debt or liability
The cheque issued unpaid by the bank must have been issued in discharge of a debt or
other liability wholly or in part. Where a cheque is issued not for the purposes of discharge
of any debt or other liability, the maker of the cheque is not liable for prosecution under
section 138 of the Act. A cheque given as a gift or for any other reasons and not for the
satisfaction of any debt or other liability, partly or wholly, even if it is returned unpaid will
not meet the penal consequences. If the above conditions are fulfilled, irrespective of the
mental conditions of the drawer he shall be deemed to have committed an offence, provided
the other three requisites are fulfilled:
(a) Presentation of the cheque within six months or within the period of its validity
The cheque must have been presented to the bank within a period of six months from
the date on which it is drawn or its period of validity, whichever is earlier. Thus if
a cheque is valid for three months and is presented to the bank within a period of six
months the provisions of this section shall not be attracted. However if the period of
validity of the cheque is not specified or prescribed the cheque is presented within six
months from the date the cause of action can arise. The six months are taken from
the date the cheque was drawn.
(b) Return of the cheque unpaid for reason of insufficiency of funds
The cheque must be returned either because the money standing to the credit of that
account is insufficient to honour the cheque or that it exceeds the arrangement made
to be paid from that account by an agreement with the bank. Even if the cheque is
returned with the endorsement “account closed” section 138 is attracted[15].
(c) Issue of the notice of dishonour demanding payment within thirty days of receipt of
information as to dishonour of the cheque.
The payee or the holder in due course of the cheque has to give a notice in writing making
a demand for payment of the said amount of money to the drawer of the cheque. Such
notice must be given within 30 days[16] of information from the bank regarding the return
of cheque as unpaid[17].
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(d) Failure of the drawer to make the payment within fifteen days of the receipt of the
payment
After the receipt of the above notice the drawer of the cheque has to make payment of
said amount of money to the payee or to the holder in due course of the cheque within
15 days of the receipt of the notice. If the payment is not made after the receipt of the
notice within stipulated time a cause of action for initiating criminal proceedings under
this section will arise.
Constitutional validity of the provisions
In B. Mohana Krishna v. Union of India, the question came up for consideration that whether
the presumption raised in section 139 that the holder of the cheque received the cheque of
the nature referred to in section 138, unless the contrary is established is violative of Article
20 (3) of the Constitution of India. The Court while answering negative held that:
“Unless a person is compelled to be a witness against himself Article 20 (3) has no application.
The person charged under section 138 is not compelled to be a witness against himself. The
presumption of the nature incorporated in section 139 is a common feature in criminal statutes
for example section 12 of the Protection of Civil rights Act. The presumption under section 139
in favour of holder of cheque would not, therefore be violative of Article 20 (3).”
Further such imposition of strict liability was put to judicial scrutiny on grounds of
unreasonableness and arbitrariness in Mayuri Pulse Mills v. Union of India where the
Bombay High Court held that :
“Normally in Criminal law existence of a guilty intent is an essential ingredient of a crime and
the principle is expressed in the maxim ‘actus non facit rum nisi mens sit rea’. This is a general
principle. However the legislature can always create an offence of absolute liability or strict
liability are justified and cannot be said to be unreasonable.”
Section 138 was also put to test in Ramawati Sharma v. Union of India in light of Article
21 of the Constitution of India where the court held that :
“Mere taking of loan is not, thus, made punishable under certain circumstances and after following
certain conditions. It may not, therefore, be stated that the liberty of a person was being curtailed
by an arbitrary procedure or that such a provision is violative of Article 21 of the Constitution”.
In K.S. Anto v. Union of India the question of double jeopardy as enshrined in Article
20 (2) in light of section 138 and section 420 of the Indian Penal Code where the court
held that :
“Offences under section 138 of the Negotiable Instruments Act and section 420 of the Penal Code
are different and the ingredients are different and the ingredients are also different. Convictions
for different offences separately is not barred under article 20 (2). In spite of prosecutions and
convictions under section 138, there will be no constitutional bar in prosecution for an offence
punishable under section 420 of the Penal Code and a prosecution will be if such an offence is
made out.”
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Question of maintainability of criminal charge with a civil liability:
There is nothing in law to prevent the criminal courts from taking cognizance of the offence,
merely because on the same facts, the person concerned might also be subjected to civil
liability or because civil remedy is obtainable. Civil and criminal proceedings are co extensive
and not exclusive. If the elements of the offence under section 138 of the Negotiable
Instruments Act are made out on the face of the complaint petition itself, enforcement of the
liability through a civil court will not disentitle the aggrieved person from prosecuting the
offender for the offence punishable under section 138 of the Act.
Conclusion
Though insertion of the penal provisions have helped to curtail the issue of cheque
lightheartedly or in a playful manner or with a dishonest intention and the trading community
now feels more secured in receiving the payment through cheques. However there being no
provision for recovery of the amount covered under the dishonoured cheque, in a case where
accused is convicted under section 138 and the accused has served the sentence but, unable
to deposit amount of fine, the only option left with the complainant is to file civil suit. The
provisions of the Act do not permit any other alternative method of realization of the amount
due to the complainant on the cheque being dishonored for the reasons of “insufficient
fund” in the drawer’s account. The proper course to be adopted by the complainant in such
a situation should be by filing a suit before the competent civil court, for realization/ recovery
of the amount due to him for the reason of dishonoured cheque which the complainant is
at liberty to avail of if so advised in accordance with law.