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Description
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Page No.
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1.
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Offence of Cheque Bouncing - Essential
Ingredients
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1
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2.
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Offence by Companies and Firms
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3
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3.
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Summary of Procedure
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5
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4.
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Complaint with Magistrate and Court Fees
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8
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5.
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Some Special Cases
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10
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6.
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Out-of-court Settlement - Compounding
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14
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Annexure A -
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Format of Notice by Company / firm
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15
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Annexure B -
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Format of Notice by Individual
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17
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Bouncing of a cheque
invites criminal prosecution under section 138 of The Negotiable Instruments
Act, 1881. Punishment for the offence under section 138 of NI Act is
imprisonment up to two years or fine which may extend to twice the cheque
amount or both. The offence is bailable, compoundable and non-cognizable.
Essential ingredients
of an offence under the section can be summed up as follows:
1.
A person must have drawn a cheque on a bank account
maintained by him.
2.
The cheque should have been issued in discharge, in whole
or in part, of any debt or other liability.
3.
The cheque has been presented to the bank within the period
of its validity.
4.
The cheque is returned by the bank unpaid, either because
of funds insufficient or it exceeds the amount arranged to be paid.
5.
The payee makes a demand for the payment by giving a notice
in writing, within 30 days of the receipt of information by him from the bank.
6.
The drawer fails to make payment of the said amount of
money within 15 days of the receipt of the said notice.
7.
Complaint is made within one month of the date on which the
cause-of-action arises.
The following
exception is notable:
When action is not
taken against first dishonor and cheque is presented twice and complaint is
filed against second dishonor, complaint is maintainable. However, the
prosecution is only for the last time the cheque bounced and there cannot be
multiple prosecutions for various times the cheque is returned.
Ø
An offence in terms of section 138 is committed even if the
cheque is returned on the ground of "closure of the account"
Ø
Return of cheque unpaid with the advice "account
operation jointly, other Director's signature required", amounts to
dishonor of the cheque within the meaning of sec. 138
Ø
A cheque is issued on an account which is a joint account
of two individuals (say A and B). A has signed the cheque which bounces. B has
not signed the cheque. Action can be taken under section 138 only against A and
not against B.
Ø
In case a cheque is returned with the comments "Refer
to drawer" it will be a matter of evidence to prove that the drawer had
sufficient funds at the time of return of cheque and that the bank returned the
cheque for some reason other than lack of funds.
Ø
If a cheque is returned due to its payment being stopped by
the drawer, it will be necessary to prove that the drawer had sufficient funds
in his account at the time of return of cheque and the stoppage was for some
other justifiable reason (Discussed in more detail below).
Ø
Absence of Mensrea (criminal intent) is not a
permissible defense in bouncing of cheque.
Section 141 of NI Act
outlines conditions in cases of offences by companies. The following points are
important:
Ø
Every person at the time the offence was committed, was in
charge of, and was responsible for the conduct of the business of the company
is liable to be prosecuted. In other words, directors, secretary and officers
of the company may be liable.
Ø
The company is also liable to be prosecuted.
Ø
If a person proves that the offence was committed without
his knowledge or he exercised all due diligence to prevent the commission of
such offence, he will escape prosecution.
Ø
A person nominated as a Director of a company by virtue of
his holding any office or employment in the Central or State Government or a
financial corporation owned or controlled by the Central Government or the
State Government enjoys exemption from prosecution.
Ø
Company includes partnership firms.
The following
paragraph from the judgment of Supreme Court in the matter of N. Rangachari vs.
Bharat Sanchar Nigam Ltd. (MANU/SC/7316/2007 dated 19.04.2007) explains the law
relating to persons who are deemed to be liable under section 138. Section 141
of the Act creates liability on every person who was in charge of and
responsible for the affairs of the company at the time of issue of the cheque.
It is the responsibility of the accused (and not of the complainant) to prove
that:
(a)
The offence of cheque bouncing was committed by the company
without his / her knowledge, or
(b)
He / she exercised due diligence to
prevent the bouncing of the cheque
Therein, it was provided that if
the person committing an offence under Section 138 of the Act was 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. The scope of
Section 141 has been authoritatively discussed in the decision in S.M.S.
Pharmaceuticals Ltd. (supra) binding on us and there is no scope for
redefining it in this case. Suffice it to say, that a prosecution could be
launched not only against the company on behalf of which the cheque issued has
been dishonoured, but it could also be initiated against every person who at
the time the offence was committed, was in charge of and was responsible for
the conduct of the business of the company. In fact, Section 141 deems such
persons to be guilty of such offence, liable to be proceeded against and
punished for the offence, leaving it to the person concerned, to prove that the
offence was committed by the company without his knowledge or that he has
exercised due diligence to prevent the commission of the offence. Sub-section
(2) of Section 141 also roped in Directors, Managers, Secretaries or other
officers of the company, if it was proved that the offence was committed with
their consent or connivance.
Section 141 of the
Act creates a vicarious liability. In criminal law, the general rule is against
vicarious liability. Hence, section 141 of the Act is exceptional. It makes a
person criminally liable for someone else's actions.
Often directors of an
accused company take defense that the cheque related to a division / project of
the company where they had no involvement or the cheque was issued by a
Director without due authorization from the Board of Directors of the company.
The Supreme Court has ruled (N. Rangachary, supra) that a holder of cheque
cannot be expected to be aware of such matters which relate to
"arrangements within the company in regard to its management, daily
routine, etc." As per the judgment of the Supreme Court, Directors of a
company are prima facie in the position of being "in charge of
affairs".
14. A person normally having bjsiness or commercial dealings with a
compeny, would satisfy himself about its ceditworthiness and reliability by
looking at its promoters and Board of Directors and the nature and extent at
its business and its Memorandum or Articles ot Associa:ion. Other than that, he
may not be aware of the arrangements within the conpaiy in regard to its
management, daily roitlne. etc. Therefore, when a cheque issued to him by the
company is dishonoured, he is expected only to be aware generally of who are
in;harge of the affairs of the company. It i; not reasonable to expect him To
know whether the person who signed the cheque was instructed to do 50 or
whether he has been deprived of his authority to do so when he actually signed
the cheque. Those are matters peculiarly within the knowledge of the company and those in charge
of it. So, a I that a payee of a cneque that is dishonoured tan be expected to
alleqs is that the persons named h the complaint are in charqeof its affairs,
The Directors are prima facie in that position.
Hence, if you are
holder of a bounced cheque issued by a company, it will be reasonable to name
all directors of the company as accused in the complaint under section 138. If
you do not know the names of the directors of the company, please ask a Company
Secretary to conduct a search on the website of Ministry of Company Affairs.
1)
A legal notice on behalf of payee is issued to the
defaulter, within
30 days of dishonor of cheque, by registered post acknowledgement due.
All facts including the nature of transaction, amount of loan and or any other
legally enforceable debt against which the said cheque was issued and the date
of deposit in bank and date of dishonor of cheque should be mentioned in the
notice.
Please refer to Annexure A /
B for format of the notice. An advocate is not needed at the stage of
sending a notice. A notice sent by the holder of the cheque is as good as a
notice sent by an advocate on behalf of the holder.
2)
The person who has issued cheque is directed, through the
notice as mentioned under 1, to make the payment of amount of dishonored cheque
within 15
days. In case, the said payment is made within 15 days of service of
notice, the matter ends.
3)
In case, the said payment is not made within 15 days, the
holder of cheque should file a criminal case in a court within 30 days from the expiry of
notice period of 15 days. It is advisable to have an advocate handle the
matters in the court.
4)
Complaint to be accompanied with affidavit and relevant
documents in original.
5)
The court will hear complainant / advocate of complainant
and issue summons under section 138 of NI Act.
6)
Summons are sent and served through police station where
accused is residing. The summons can also be served by speed post or by
authorized courier service and if not accepted will be treated as duly served
7)
Police action is generally limited to only service of
summons. In case accused remains absent on court date after service of summons,
then warrant is sent to police station to produce accused in court.
8)
The accused and surety are required to appear in court and
submit documents (ownership documents of house or land owned by surety, his
address proof including ration card, election identity card, photo and address
proof of surety and accused). The court will accept the surety and on signing
bonds by accused and surety, the bail will be granted and accused will be
released by court.
9)
Accused / his advocate will cross examine the complainant
& its witness / witnesses
10)
Statement of accused is recorded under section 313 of
Cr.P.C. Accused will be asked to give reply to the questions and allegations
against him
11)
Witnesses of accused to prove his innocence will be
produced and the evidence will be recorded by the court.
12)
Last stage is of arguments of advocates of the complainant
and of the accused.
13)
After hearing final arguments, court will pass the
judgment.
14)
In case the accused is acquitted, the matter ends.
15)
In case accused is convicted, the accused should
immediately thereafter submit bail application and give surety and pray for
time to appeal to Sessions Court. Court will direct him to immediately deposit
fine as per judgment and he will be released thereafter on acceptance of bail
application.
16)
The convict may appeal to Sessions Court within one month
from the date of judgment of lower court.
17)
Criminal appeal with application for suspension of sentence
and for bail will be given hearing by the district and sessions court.
18)
The dispute may go on from District and Sessions court to
High Court and then to Supreme Court.
19)
The matter can be settled at any time between the parties.
In case of any such settlement, an application should be moved before the court
to compound and close the case. In many states, it may be possible to get a
full or partial refund of court fees if the case is closed before charges are
framed.
ü Any agreement /
contract between complainant & accused including order(s) placed (if any)
ü Invoice / Bill
against which dishonored cheque was issued
ü Delivery challan and
acknowledgement, if any, of goods received by the accused (In case of contracts
involving supply of goods).
ü Any other document
that is evidence of creation of debt or liability
ü Dishonored Cheque
ü Bank Memo stating
reason for dishonor of cheque
ü Copy of the legal
notice sent to the accused
ü Proof of dispatch of
the above legal notice
ü Postal Acknowledgment
received from the accused
ü Authority of
competent person (Certified True Copy of Board resolution in case of filing of
complaint by legal representative of a company)
ü Vakalatnama in favour
of the advocate
4. Complaint with Magistrate and
Court Fees
ü Complaint in writing
should be filed by payee or holder in due course.
ü Complaint can be
filed by an advocate / power of attorney or by a duly authorized agent of the
complainant.
ü In case of a company,
a person duly authorized in a meeting of Board of Directors of the Company
should file the complaint. It is advised that a copy of the Board Resolution
should be filed with the court along with the complaint.
ü Complaint to be filed
before Judicial Magistrate of the first class or before a Metropolitan
Magistrate. In most district courts, there are designated magistrates to deal
with NI Act cases. Please check the applicable magistrate based on the location
of the office of the complainant.
ü Complaint should be
made within 30 days of the date of cause of action, which is when the drawer
fails to make payment of the demanded amount of money within 15 days of the
receipt of the notice issued by payee / holder of cheque.
ü If there is delay in
filing of the complaint, the Magistrate can condone the delay.
ü In Madhya Pradesh, the following
court fee is payable from 2011 onwards:
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5. Some Special Cases
Some Special Cases
that deserve attention are as follows:
Cheque issued in
terms of a compromise agreement, not to satisfy any debt or payment due, is not
covered by section 138 of NI Act. (Lalit Kumar Sharma & Anr vs State of
Uttar Pradesh & Anr dated 06.05.08 MANU/SC/2079/2008). Two cheques were
issued by the directors of a company and they were prosecuted. Meanwhile, there
was a settlement under which Rs 5 lakh was to be paid to the creditor. However,
this cheque also bounced, leading to another prosecution. The Allahabad High
Court rejected their plea to quash the proceedings. But on appeal, the Supreme
Court stated that the latter cheque was issued in terms of a compromise
agreement and not to satisfy any debt or payment due. Therefore, the second
instance would not invite prosecution under Section 138. The High Court
judgment was set aside.
Signature on cheque
not matching with the signature in the record of the bank is treated as no
different from "insufficient funds". The following extract from Laxmi
Dyechem vs. State of Gujarat (MANU/SC/1030/2012) makes the position clear:
We find ourselves in
respectful agreement with the decision in NEPC Micon Ltd. (supra) that the
expression "amount of money .... is insufficient" appearing in
Section 138 of the Act is a genus and dishonour for reasons such "as
account closed", "payment stopped", "referred to the
drawer" are only species of that genus. Just as dishonour of a cheque on
the ground that the account has been closed is a dishonour falling in the first
contingency referred to in Section 138, so also dishonour on the ground that
the "signatures do not match" or that the "image is not
found", which too implies that the specimen signatures do not match the
signatures on the cheque would constitute a dishonour within the meaning of
Section 138 of the Act.
So, even if the
cheque is returned with comments "Signature not matching", action can
be initiated under section 138.
Supreme Court in the
matter of M.M.T.C. Ltd. and Anr. v. Medchl Chemical and Pharma (P) Ltd. and
Anr. (MANU/SC/0728/2001) made the following observations:
The accused can thus
show that the "stop-payment" instructions were not issued because of
insufficiency or paucity of funds. If the accused shows that in his account
there were sufficient funds to clear the amount of the cheque at the time of
presentation of the cheque for encashment at the drawer bank and that the
stop-payment notice had been issued because of other valid causes including
that there was no existing debt or liability at the time of presentation of
cheque for encashment, then offence under Section 138 would not be made out.
The important thing is that the burden of so proving would be on the accused.
Thus a court cannot quash a complaint on this ground.
The above position
was reconfirmed by Supreme Court in 2012 in the matter of Laxmi Dyechem vs.
State of Gujarat (MANU/SC/1030/2012). The following extracts are relevant and
interesting.
As already noted, the
Legislature intends to punish only those who are well aware that they have no
amount in the bank and yet issue a cheque in discharge of debt or liability
which amounts to cheating and not to punish those who bona fide issues the
cheque and in return gets cheated giving rise to disputes emerging from breach
of agreement and hence contractual violation. To illustrate this, there may be
a situation where the cheque is issued in favour of a supplier who delivers the
goods which is found defective by the consignee before the cheque is encashed
or a postdated cheque towards full and final payment to a builder after which
the apartment owner might notice breach of agreement for several reasons. It is
not uncommon that in that event the payment might be stopped bona fide by the
drawer of the cheque which becomes the contentious issue relating to breach of
contract and hence the question whether that would constitute an offence under
the NI Act. There may be yet another example where a cheque is issued in favour
of a hospital which undertakes to treat the patient by operating the patient or
any other method of treatment and the doctor fails to turn up and operate and
in the process the patient expires even before the treatment is administered.
Thereafter, if the payment is stopped by the drawer of the cheque, the obvious
question would arise as to whether that would amount to an offence under
Section 138 of the NI Act by stopping the payment ignoring Section 139 which
makes it mandatory by incorporating that the offence under Section 138 of the
NI Act is rebuttable. Similarly, there may be innumerable situations where the
drawer of the cheque for bonafide reasons might issue instruction
of 'stop payment' to the bank in spite of sufficiency of funds in his account.
To sum up, it can be
said that a person has a right to stop payment of a cheque and escape
punishment if both the following conditions are satisfied:
a)
On the day of the dishonor of the cheque there were sufficient funds in the bank
account of the drawer
b)
There was a bonafide reason for the drawer to stop payment 5.4 Cheque Presented Twice
Till very recently a
cheque could only be presented once and the underlying principle was that a
single instrument cannot lead to multiple causes of action. This was based on
the Supreme Court's decision in the matter of Sadanandan Bhadran v. Madhavan
Sunil Kumar (MANU/SC/0552/1998). Based on this the courts took the view that
failure to initiate action based on first presentation led to immunity from
prosecution in case of second presentation.
The Supreme Court has
now reversed (vide MSR Leathers vs. S. Palaniappan and Anr. MANU/SC/0797/2012)
the legal principle that it had laid down in Sadanandan Bhadran v. Madhavan
Sunil Kumar. Relevant extracts are as follows:
We have, therefore,
no manner of doubt that so long as the cheque remains unpaid it is the
continuing obligation of the drawer to make good the same by either arranging
the funds in the account on which the cheque is drawn or liquidating the
liability otherwise. It is true that a dishonour of the cheque can be made a
basis for prosecution of the offender but once, but that is far from saying
that the holder of the cheque does not have the discretion to choose out of
several such defaults, one default, on which to launch such a prosecution. The
omission or the failure of the holder to institute prosecution does not,
therefore,
give any immunity to
the drawer so long as the cheque is dishonoured within its validity period and
the conditions precedent for prosecution in terms of the proviso to Section 138
are satisfied.
We have no hesitation
in holding that a prosecution based on a second or successive default in
payment of the cheque amount should not be impermissible simply because no
prosecution based on the first default which was followed by a statutory
notice and a failure to pay had not been launched. If the entire purpose
underlying Section 138 of the Negotiable Instruments Act is to compel the
drawers to honour their commitments made in the course of their business or
other affairs, there is no reason why a person who has issued a cheque which is
dishonoured and who fails to make payment despite statutory notice served upon
him should be immune to prosecution simply because the holder of the cheque has
not rushed to the court with a complaint based on such default or simply
because the drawer has made the holder defer prosecution promising to make
arrangements for funds or for any other similar reason. There is in our opinion
no real or qualitative difference between a case where default is committed and
prosecution immediately launched and another where the prosecution is deferred
till the cheque presented again gets dishonoured for the second or successive
time.
In the result, we
overrule the decision in Sadanandan Bhadran's case (supra) and hold that
prosecution based upon second or successive dishonour of the cheque is also
permissible so long as the same satisfies the requirements stipulated in the
proviso to Section 138 of the Negotiable Instruments Act.
So, as of date, a
bounced cheque can be represented and if it bounces again, steps mentioned
above can be initiated under section 138 of the NI Act.
6. Out-of-court Settlement -
Compounding
Compounding refers to
a compromise between the victim and the accused whereby the two agree to close
the judicial process. Proceedings relating to cheque bouncing are compoundable.
In other words, at any stage the drawer of the cheque and the holder of cheque
can arrive at a compromise and apply to a court to close the proceedings.
In a case under
Section 138 (R. Raju vs. K. Sivaswamy, MANU/SC/1449/2011), the Magistrate
convicted the accused and sentenced him to undergo one year simple imprisonment
and to pay a fine of Rs. 5000/-, in default, to undergo simple imprisonment for
three months. The Sessions Court confirmed the sentence. The accused filed an
appeal in High Court. During the pendency of the appeal, the parties entered
into an agreement. The complainant applied to the High Court stating that he
had received full money and wanted the offence to be compounded. The High Court
did not grant the application for compounding. However, the Supreme Court
overruled the order of the High Court and allowed compounding. However, the
Supreme Court felt that the time of the judicial process had been wasted and
therefore awarded exemplary costs. The following extract from the judgment sums
it up.
6, In our opinion, since the
Appellant lias wasted the public time, while setting aside the aforesaid orders, the
Appellant should be burdened with exemplary costs, which we quantify at Rs. 50,000/-
which sliall be deposited by the Appellant before the National Legal Services
Authority within three weeks from today. In case, the appellant defaults in
depositing the amnunt, as ordered l>y ns, the National legal Services
Authority is dL liberty to iiiuve lliis Court fur d|jpro|jridl.e
orders.
In conclusion, it can
be said that if one is caught in a case involving bouncing of cheque the option
of a compromise is always open - even when the Magistrate has convicted and the
Sessions Court has confirmed the sentence.
Annexure A - Format for Notice
by Company / Firm for Bounced Cheque
By Registered Post - Acknowledgment Due
(Date)
To,
(Name of the Company / Individual / Firm who issued
the cheque)
(Address)
Subject : Notice under Section 138 of the Negotiable Instruments Act,
1881
Dear Sir / Madam,
We hereby serve the
following notice upon you:
1.
You had issued cheque no...........................................
dated......................... for
Rs............... (Rupees .............................................................. only) drawn on
................................. (Bank Name and Branch Name) against your debt or
liability to
pay us.
2.
We presented the above mentioned cheque. However, the said
cheque was returned unpaid to us by your bank.
3.
Our Bank vide its memo dated.......................... (received by us on..................... )
has informed us that
the cheque is returned unpaid due to ...................................
.................. (reason cited in the memo).
4.
We hereby serve notice on you to pay the aforesaid amount
within fifteen (15) days from the date of receipt of this notice.
5.
5. In case we do not receive the money as
demanded above, we shall be constrained to take legal action against you under
section 138 of the Negotiable Instruments Act, 1881 (Act no. 26 of 1881) as
amended up to date and other relevant laws as applicable.
Regards,
For............................................. (Name of the Company / Firm issuing
the notice)
(Designation
and Signature)
Annexure B - Format for Notice by Individual for Bounced Cheque
By Registered Post - Acknowledgment Due
(Date)
From,
.......... (Name of the Individual who is holder of the
bounced cheque)
(Address)
To,
.......... (Name of the Company / Individual / Firm who
issued the cheque)
(Address)
Dear Sir / Madam,
I hereby serve the
following notice upon you:
1.
You had issued cheque no...........................................
dated......................... for
Rs............... (Rupees................................................................
only) drawn on
................................. (Bank Name and Branch Name) against your debt or
liability to
pay me.
2.
I presented the above mentioned cheque. However, the said
cheque was returned unpaid to me by your bank.
3.
My Bank vide its memo dated.......................... (received
by me on..................... )
has informed me that
the cheque is returned unpaid due to ..................................
.................. (reason cited in the memo).
4.
I hereby serve notice on you to pay the aforesaid amount within
fifteen (15) days from the date of receipt of this notice.
5.
In case I do not receive the money as demanded above, I
shall be constrained to take legal action against you under section 138 of the
Negotiable Instruments Act, 1881 (Act no. 26 of 1881) as amended up to date and
other relevant laws as applicable.
Regards,
(Name and Signature)
