CHEQUE BOUNCE CASES UNDER NEGOTIABLE INSTRUMENTS ACT, 1881- WHETHER FORMER DIRECTOR IS RESPONSIBLE?

CHEQUE BOUNCE CASES UNDER NEGOTIABLE INSTRUMENTS ACT, 1881- WHETHER FORMER DIRECTOR IS RESPONSIBLE?

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By K P C Rao,

B.Sc., LL.B., FICWA., FCS.,

kpcrao.india@gmail.com

Introduction

Cheques are very convenient instruments which can be issued to settle payments or obligations in a contract or even to give gifts. Section 138 to 142 are incorporated in Negotiable Instruments Act, 1881 (N I Act) with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument. The main object is to introduce financial discipline in business dealings. The N I Act makes the drawer of cheque liable for penalties in case of dishonour of cheques due to insufficiency of funds or for the reason that it exceeds the arrangements made by the drawer. The N I Act also contains sufficient safe guards to protect the drawer of cheques by giving him an opportunity to make good the payment of dishonoured Cheque when a demand is made by the payee.

History of the ACT and objective of Amendments

The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 to insert a new Chapter XVII with Sections 138 to 142. These new sections came into force w.e.f 1.4.1989.

The Act was further amended in 2002 by inserting Sections 143 to 147 w.e.f 06/02/2003 to deal with certain deficiencies noticed in the Act. Object of the amendment is to held person criminally responsible for his acts in Commercial transactions Trade and Business dealings with people carried out carelessly or without sense of responsibility. Salient features of amendment are acceptance of Bankers memo of dishonour as prima facie evidence, evidence of witness or accused on affidavit, serving of summons by post/courier for speedy trial/prosecution, increase of period for issuance of notice by payee and enhancing of punishment. Thus the main thrust of the amendment is to provide for a speedy and time bound trial, punishment of 2 years and double the amount of the cheque as fine. Another notable feature is that it provides for compounding of the offence.

Offence under the NI Act

Offence under Section 138 of the NI Act shall be deemed to have been committed, if the following conditions are satisfied:

a)     Cheque must have been drawn by a person(the drawer) in favour of a payee on his bank account for making payment

b)     Such payment must be either in  whole or partial discharge of a legally enforceable debt

c)     Cheque must have been returned by the Banker to the payee or holder in due course due to insufficient balance  in the account of the drawer or it exceeds the arrangement  he  had with the bank,

Criteria to be fulfilled

a)     Cheque must be presented within a period of 6 months[1] from the date of cheque or its validity period whichever is earlier.

b)     The payee or holder in due course must demand payment of the  cheque amount by written notice within 15 days of receipt of notice

c)     Such notice must be issued within 30 days from the date of receipt of  intimation of dishonour from bank and

d)     The drawer of cheque fails to pay demanded sum within 15 days from the date of receipt of the notice

Punishment for offence  

                       

The punishment provided for the offence u/s 138 is imprisonment for a term which may extend to a maximum period of 2 years or with a fine which may extend to a maximum of twice the amount of the cheque or with both.

Let us now shift our focus to certain requirements for making out an offence and for initiating prosecution. It is equally important for us to examine legal issues settled by judgments of Supreme Court. These judgments paved way for filling up deficiencies in the Act and also in some cases provided for clarifications wherever ambiguity existed.

1)     Post dated cheque and its dishonour

           

Every cheque shall be presumed to be drawn on the date mentioned on the face of the cheque. A post dated cheque is a bill of exchange when it is written or drawn and it is not payable on demand until the date shown on the cheque. If post dated cheque is dishonoured because of its presentation before it became payable on demand, no offence u/s 138 can be alleged. The controversy is settled by the decision of the Supreme Court in Anil Kumar Sawhney Vs Gulshan Rai[2]. In this case Supreme Court held that a post dated cheque is a bill of exchange and it becomes a cheque under the NI act only on the date which is written on the said cheque and period of six months has to be reckoned from the date of the cheque.

2)      Jurisdiction

 Most often people are confused about the place where criminal Compliant can be filed under the NI Act, as the Act is silent on this matter. Since the Criminal courts are approached, the issue needs to be examined from the point of view of   the Criminal Procedure Code. Section 177 of Criminal Procedure Code provides that every offence shall ordinarily be inquired into and tried by a Court within whose local jurisdiction it was committed. Section 178 provides that offence may be tried at by a court having jurisdiction over any of the local areas where offence is committed. It is possible that an offence may be committed in several local areas or partly in one area and partly in another area. It is also possible that some times offence may consist of several acts done in different areas In all the above situations, the court  having jurisdiction over any of such local areas may try the offence.

Judgments on Jurisdiction

The judgment of Supreme Court in K Bhaskaran V sankaran Vaidyaa Balan and Anr[3] dealt with this issue elaborately. The Hon’ble Supreme court opined that offence can be completed only with concatenation of a number of acts, namely, drawing of cheque, presentation of cheque, returning of the cheque by the bank, notice by payee and failure of drawer of cheque within 15 days of receipt of notice. Any one of the courts under whose jurisdiction the above acts have taken place can try the offence. In other words complainant can file compliant in any one of the courts where the cause of arises or acts have been committed.

In Harman Electronics (P) Ltd and Anr Vs National Panasonic India Ltd.[4], the Hon’ble Supreme Court had the occasion to examine the issue of jurisdiction again. In this case the appellant is a resident of Chandigarh issued a cheque which was dishonoured. The cheque was issued at Chandigarh where the complainant had a branch and was presented at Chandigarh. Notice demanding payment however was issued by the complainant from its Head office at Delhi to the accuser’s office at Chandigarh. On failure to respond to the notice, a complaint was filed in Delhi. Both lower court and High court have placed reliance on K Bhaskaran V sankaran Vaidyaa Balan and Anr case and held that Delhi court also has jurisdiction. The Appellant/Respondent in appeal contended that Chandigarh court had jurisdiction to try the offence but his appeal was dismissed. But in appeal, the Supreme Court held that a court derives jurisdiction when a cause of action arises. Jurisdiction cannot be conferred for any act of omission or commission on the part of the accused. Issuance of notice would not give rise to cause of action but communication of the notice would and therefore Delhi High court would not have jurisdiction and it directed for transfer of the case pending in Delhi to Chandigarh court.

3)      Successive presentation of cheque and Cause of action

Usually when a cheque is dishonoured, the drawer is informed and sometimes he advises to present the cheque again as in the mean time he must have arranged for funds or some credits have come into his accounts just after dishonour or made arrangement with his bankers. What is the risk in such cases? In Sadanandan Bhadrant Vs. Madhavan Sunil Kumar,[5] Supreme Court ruled that a cheque can be presented any number of times during its validity period by the payee. However on each presentation of the cheque and its dishonour, a fresh right accrues in his favour and not cause of action to file complaint.

Once he chooses to give a notice u/s138 (b) and the drawer fails to pay within the stipulated time, the cause of action for filing the complaint will arise immediately on the following day of expiry of 15 days notice period and remains alive till 30 days. Complaint has to be filed before expiry of 30 days from the date of expiry of notice period.

If a complaint is filed before expiry of 15 days notice period, it becomes a premature complaint and it will be dismissed. If complaint is filed after expiry of 30 days complaint will be dismissed on the ground of limitation. So one has to be clear about cause of action and filing of complaint before the limitation period runs out.

4)      Presumption as to Legally enforceable debt

Section 139 says that it shall be presumed, unless the Contrary is proved, that the holder of a cheque received the Cheque for discharge, in whole or in part, or any debt or other liability. Supreme court  reiterated the contents of section 139  in the case of KN Bena V Muniyappan & Another,[6]  that the  onus is on the accused to prove by cogent evidence that there was no debt or liability.

5)     Instructions in Bank’s memo

The payee bank while returning the cheque gives reason for dishonour.  Most often it mentions reasons such as “exceeds the arrangement” or “refer to drawer”. Some times “stop payment “instruction is also ticked. All these reasons of dishonour will lead to a presumption of dishonour of cheque. The Supreme Court in the case of Modi Cements Ltd Vs M/s V Kuchikumar Nandi,[7] ruled that once the cheque is issued by the drawer, a presumption under S. 139 in favour of holder must follow and merely because the drawer issues a notice to the drawee or to the Bank for stoppage of the payment, it will not preclude an action under Section 138 by the drawee or the holder of a cheque in due course. This judgment overruled it previous Judgment in M/s. Electronics Trade and Technology Development Corpn. Ltd., Secunderabad Vs M/s. Indian Technologists and Engineers (Electronics) Pvt. Ltd and another, Supreme court reiterated the same views in MMTC Ltd  & Anr Vs. Ms. Medchal Chemicals & Pharma(P) Ltd [8].

  

6)     Notice and its requirements

The NI Act is silent about the manner of service of notice. However, sending by notice by registered post is desirable as it will be easier to prove service of notice. In M/s SIL Import,. USA v. M/s. Exim Aides Silk Exporters[9], the Supreme court ruled  that if notice envisaged in cl. (b) of the proviso to S. 138 was transmitted by Fax, it would be a compliance with the legal requirement therefore notice demanding payment can be sent by Fax is also equally acceptable.

If notice is sent by the payee at the correct address of the drawer, it would be deemed to be a proper service of notice. Sometimes notice issued is refused or unclaimed by the addressee. In situations such as this, it is well settled that a notice refused to be accepted by the addressee can be presumed to have been served on him. In the cases of Harcharan Singh Vs Shivrani,[10] and Jagdish Singh v. Natthu Singh,[11] the Supreme Court held that presumption of issuance of notice and receipt can be inferred in such cases. Courts should not adopt an interpretation which will help the dishonest evader and thereby defeats the very purpose of the Act. If Acknowledgment card is not received, how the period for filing complaint will be decided? In cases such as this, on expiry of 45 days period from the date of notice, action can be taken for filing a complaint.

It must be remembered that the notice issued must demand payment of cheque amount in categorical terms and demand should not be vague. Notice cannot be an omnibus demand. The supreme court in the case of Suman Sethi Vs Ajay K Churiwala & Anr,[12] ruled that the said amount of money occurring in clause (b) and (c) of section 138 refers to the words ‘payment of any amount of money’ stated in the main section 138. It implies that the demand has to be made for the amount of the cheque dishonoured.

The object of the notice is to give another chance to the drawer of the cheque to make up for his default.

7)     Presumption as to consideration

In the case of AV Murthy Vs B.S Nagabasavanna,[13] it was held that dismissal of a complaint at the threshold, on the ground that the debt is time barred, erroneous and not proper, as consideration is presumed u/s 118 of NI Act.

8)     Dishonour of cheques by companies under SICA

Supreme Court in the case of Kusum Ingots & alloys Ltd Vs. Pennar patterson securities Ltd & ors,[14] held that criminal prosecution for dishonour cheques is neither a proceeding for recovery of money nor for enforcement of a security. Prosecution against the Directors of Sick companies would not be suspended merely on the ground that proceedings against sick companies are suspended u/s 22 of SICA.

           

9)     Cheque dishonour and Directors’ liability

Many cases have been filed by Directors u/s 482 of the Code of Criminal procedure, for quashing of complaints. If a complaint is filed against a company and its directors, presumption will be drawn as per Section 141 of the NI Act against them unless they rebut this presumption. Normally it is the Managing Director who looks after the day to day affairs is supposed to be in the knowledge of the affairs of the company on day to day basis. Once a notice is served on all directors, the burden is on them to show that they are not liable to be convicted or it will be a good defense, if they can show that at the relevant time they were not in-charge of the affairs of the company. Same is the case with the partnership firm.

 In the case of Apparel Export Promotion Council[15] the Supreme Court on 08/11/2011 held that for proceeding against a director of a company in a cheque bounce case, a mere bald statement that he or she was in charge of and was responsible to the company for conduct of its business is not sufficient.

In this case, the Apparel Export Promotion Council filed a complaint in 2005 under Section 138 of Negotiable Instruments Act against M/s Lapareil Exports (P) Ltd and cited the appellant Anita Malhotra, who was a director, as one of the accused. Ms. Malhotra's plea for quashing the complaint on the ground that she had resigned from the post of director in August 1998 and that she could not be cited as an accused was rejected by the Delhi High Court. The present appeal is directed against this judgment.

Allowing the appeal, the Apex Court said: “Inasmuch as the reply to the statutory notice contains specific information that she had resigned from the company in 1998, the complainant was not justified in not referring the same in the complaint and arraying her as accused No.3 in the complaint filed in 2005. The annual return dated September 30, 1999 which provides the details about the existing directors clearly show that the appellant was not a director at the relevant time. Had the High Court considered the contents of the certified copy of the annual return, which clearly shows that the appellant has not been shown as director of the company, it could have quashed the criminal proceedings insofar as the appellant is concerned?”

The Court held: “We hold that the appellant has validly resigned from the directorship of the company even in the year 1998 and she cannot be held responsible for the dishonour of the cheques issued in the year 2004” and quashed the complaint insofar as the appellant was concerned.

Therefore, keeping in view the risk, Nominee Directors of Central or State government or a Financial Corporation owned or controlled by the Central Government or the State Government, as the case may be, are exempted from prosecution under NI Act.

10)Compounding of offence

Section 147 provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973, (Cr PC) every offence punishable under NI Act shall be compoundable. Before introduction of section 147 divergent views were expressed by various high courts including Supreme Court. Critical analysis of judgment of Supreme Court in Rajneesh Aggarwal Vs Amit J Bhalla[16] leads one to conclude that once the offence is committed, any payment made subsequent thereto will not absolve the accused of the liability. However, a joint compromise petition filed may be considered as a mitigating factor while awarding punishment for offence. Criminal proceedings cannot be quashed simply because accused made a deposit of cheque amount in the court. When offence u/s 307 (Cr PC) is compounded u/s 320(Cr PC), why an offence u/s 138 cannot be compounded especially when both the parties file a compromise petition?

In Anil Kumar Haritwal and another Vs Alka Gupta and another,[17] Supreme Court considered the prayer of the parties allowed the appeal and set aside the conviction and sentence imposed on the appellants in the interest of justice and also in view of the fact that Section 147 of the Negotiable Instruments Act permits compounding of the offence.

Conclusion

The  insertion of the penal provisions has helped to curtail the issue of cheque lightheartedly or in a playful manner or with a dishonest intention and now the trading community 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 dishonoured 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.

Although, the NI Act provides for expeditious disposal of trial, the cases in the lower courts move at a snail’s pace. Therefore, an effective monitoring of the cases and streamlining the system is required for speedy disposal of cases in lower courts to achieve the objective of the Act. 

[Published in Circuit, Monthly magazine of ICAI, Hyderabad]

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[1] The period has been reduced to 3 months from the date of instrument w.e.f 01/04/2012 by Reserve bank of India vide its circular No.RBI/2011-12/251; DBOD.AML BC.No.47/14.01.001/2011-12 dated 04/11/2011

[2] Anil  Kumar Sawhney Vs Gulshan Rai;(1993) 4 SCC 424

[3] Bhaskaran V sankaran Vaidyaa Balan and Anr (1999) 7 SCC 510

[4] Harman Electronics(P) Ltd and Anr Vs National Panasonic India Ltd(2009)1 comp  LJ 29 (SC)

[5] Sadanandan Bhadrant Vs. Madhavan Sunil Kumar AIR 1998 SC 3043

[6] KN Bena V Muniyappan & Another, AIR 2001 SC 2895

[7] Modi Cements Ltd Vs M/s V Kuchikumar Nandi AIR SC 1998 1057

[8] MMTC Ltd  & Anr Vs. Ms. Medchal Chemicals & pharma (P) Ltd. AIR 2002 SC 182

[9] M/s. SIL Import, USA v. M/s. Exim Aides Silk Exporters" AIR 1999 SC 1609

[10] Singh Vs Shivrani AIR 1981 SC 1284

[11] Jagdish Singh v. Natthu Singh, AIR 1992 SC 1604

[12] Suman Sethi Vs Ajay K Churiwala & Anr AIR 2000 SC 828

[13] AV Murthy V B S Nagabasavanna 2002 Cr LJ 1449 SC

[14] Kusum Ingots  & alloys Ltd  Vs Pennar patterson securities Ltd & ors AIR 2000 SC 954

[15] The Hindu dated: 09/11/2011.

[16] Rajneesh Aggarwal Vs Amit J Bhalla (2001)1SCJ 13

[17] Anil Kumar Haritwal and another Vs Alka Gupta and another, AIR 2004 SC 3978