Negotiable Instruments - An Introduction
Negotiable instruments are crucial tools used in commercial and financial transactions. They make doing business easier for the parties. When money is needed, they can also provide a source of financing. It could also be defined as a ‘certificate of financial ownership. Therefore, a paper that physically reflects a payment obligation is called an instrument. Only if the possessor or someone acting on their behalf signs an instrument will it be in a deliverable state. The right to payment in the contract is expressly stated in the document, and it is stated that the right will only be transferred after full delivery. The true owner of the instrument is the one who is in possession of it and has that right. Section 13 of the Negotiable Instruments Act (1881), expressly states that,
“A negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.”
Negotiable Instruments are divided into 2 types i.e., by Statute and by Usage, given below:
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Negotiable Instruments by Statute: Promissory notes, Bills of exchange and Cheque.
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Negotiable Instruments by Usage: Bank notes, drafts, Share warrants, Bearers, Debentures, Dividend warrants and Treasury bills.
What is Cheque Bounce?
A Cheque is a “bill of exchange” payable on demand. The issuer of the cheque is known as ‘drawer’ whereas in whose favour the cheque is issued is known as ‘drawee’. A cheque bounces when a bank doesn’t honour a payment. When a cheque is returned by the bank unpaid, it is said to be dishonoured or bounced.
The numerous reasons for cheque dishonour/ cheque bounce can be - insufficiency of funds, signatures not identical, closed account, presentation of the cheque after three months, the holder of the account halted payments, differences between the words and numbers on the cheque, presence of only one signature where both required for a joint account, deceased customer, unsoundness of customer, or exceeding the overdraft cap.
Section 138 of Negotiable Instruments Act, 1881
Section 138 (a) of the NI Act, exclusively deals with cheque dishonour cases and is therefore not concerned with the dishonour of negotiable instruments. It states that -
“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 honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank….”
Ingredients of Section 138
Section 138 of the NI Act is a penal provision dealing with the Dishonour of cheques. It is not constituted as an offence in itself but to become an offence, they must satisfy the following elements :
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There must be a ‘Drawer’ of the cheque;
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The drawee bank must be presented the cheque;
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The cheque has to be written to pay off an existing obligation or debt recoverable in the court;
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The Cheque is required to be presented within six months or within the validity period (whichever is earlier);
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If there is insufficient money or the amount requested, the cheque must be returned unpaid;
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The drawer must get a written notice of the dishonour within 30 days; and
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The drawer of the cheque must fail to pay within 15 days of receiving the notice.
It should be highlighted that, upon the payment of the obligation within the allotted 15 days, no offence will be constituted. Only when the debt is not paid within 15 days is it considered a violation of Section 138 of the NI Act, and the offender, without any prejudice, faces a maximum sentence of two years in prison, a maximum fine of twice the amount of the cheque, or a combination of both. Furthermore, it is insufficient for the accused to merely present or deliver the cheque in order to acknowledge any debt or liability. The complainant must provide proof that a cheque was written for any outstanding debt or obligation. Therefore, if a cheque is given as a gift and is returned unpaid, the provisions of Section 138 of the Act will not apply.
Jurisdiction
Given the elements of Section 138, the Honourable Supreme Court in the matter of ‘K. Bhaskaran v. Sankaran Vaidhyan Balan ruled that the prosecution could be started in any of the following locations:
1. The location at which the cheque was drawn;
2. Where payment was required to be made;
3. Where cheque was to be presented;
4. Where the cheque was dishonoured; or
5. Where the notice was delivered to a drawer.
The procedure of filing a cheque bounce complaint [In the light of Indian Bank Association v. Union of India]
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If you have been aggrieved due to a cheque bounce issue, the first step is to contact a lawyer with a practice in Negotiable Instrument matters.
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The following basic documents are necessary to file a Complaint under section 138 of the Negotiable Instruments Act.
- Memo of Parties
- Complaint U/S 138 Negotiable Instruments Act, 1881
- Pre-Summoning Evidence/ By Way Of Affidavit (in some courts)
- List of Witnesses
- List of Documents with Documents
- Vakalatnama in favour of the Counsel
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Once a lawyer is appointed, he or she will be filing a suit under Section 138 of the NI Act in the court which has jurisdiction over the case at hand.
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On the day that the complaint under Section 138 of the Act is presented, the Metropolitan Magistrate/Judicial Magistrate shall examine the complaint and, if the complaint is supported by an affidavit and the affidavit and any supporting documents are found to be in order, take cognizance and direct the issuance of summons.
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Both in the pre-summoning stage and the post-summoning stage, the affidavit that the complainant filed along with the complaint for taking cognizance of the offence is sufficient to be taken into consideration as evidence. A complainant is not obligated to conduct a second self-examination.
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When issuing summons, the Metropolitan Magistrate/Judicial Magistrate should use a practical and realistic approach. Summons should be addressed properly and transmitted by both mail and email using the complainant's email address. In appropriate circumstances, the court may use the police or another court in the area to help serve the accused with the notice. A brief date needs to be set in order to give notice of appearance. If the summons is returned unserved, action must be done right away.
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Within three months of assigning the matter, the competent Court shall make sure that the complainant is subjected to an initial, cross, and reexamination. Instead of having the witnesses testify in person, the court has the option of accepting their affidavits. As and when the Court gives instructions to this effect, witnesses for the complaint and the accused must be accessible for cross-examination.
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Once the proceedings are complete, the court shall issue the final judgement.
Punishment For Cheque Bounce
If found guilty of a violation of Section 138 of the Negotiable Instrument Act of 1881, the offender may be sentenced to up to two years in prison, a fine up to double the amount of the cheque, or both. The requirements from Sections 138 to 142 were added with the intention of increasing the credibility of a cheque for simple liability settlement. Although the Act is largely a civil legislation, penalties for violations were established to ensure the smooth operation of any transaction.
It is important to note that Section 29 of the Criminal Procedure Code deals with the magistrate's ability to impose a punishment. An example of this would be that a Judicial Magistrate of First Class could not issue a fine of more than 10,000. By introducing Section 143(1) of the NI ACT, Amendment Act No. 55 of 2002 eliminated this issue and gave magistrates the authority to impose fines that exceeded their ceiling, which was set at double the amount of the cheque.
Important Points To Remember [via case laws]
The Supreme Court ruled that a cause of action is not considered to have arisen until 15 days had passed. As a result, the Court cannot consider a complaint that was filed before the 15-day period had passed.
A payee can bring a cheque for encashment many times before the expiration of three months from the date it was drawn or within the validity of the cheque, whichever comes first.
According to Section 142 of the Act, the complaint must be submitted by the payee or bearer of the cheque in good faith. If the payee is a natural person, he or she may make a complaint; otherwise, a natural person must represent the payee if it is a firm, company, or other legal entity.
It was held that an application under Section 302 of the CrPC may be made by the complainant's legitimate heirs.
It was held that "account closed," "payment stopped," and "referred to the drawer" are all considered insufficient money.
Time-barred debt cannot be legally enforced.
Dealing with False Cheque Bounce cases and Legal Remedies
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Obtaining crucial papers: The most important requirement is that the drawer has a copy of each required document as proof, such as Financial statements; Cheques drawn on banks, Copies of the cheque etc. It is helpful because, in the event of legal complications, the drawer must demonstrate in court that a transaction was completed using a cheque he issued.
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The information must be received from the bank: One must speak with their bank right once they learn of a case of a phoney cheque being bounced. Because it must be verified whether or not the cheque issued has actually bounced. The bank will verify and explain the reasons for such a cheque bounce.
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Rebuttal or counter-reply to legal notice: A person has 30 days to respond to a legal notice regarding a bounced cheque after receiving it and he should hire a lawyer right away who can deliver a prompt response within 30 days. Additionally, there is a good likelihood that the lawsuit will be dropped after sending a legal notice.
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Counter Case: After hiring a lawyer to represent in court in a fake cheque bounce case, the victim can - file a criminal complaint, or a defamation claim demanding damages or if the investments have suffered, the victim may also file a claim for damages.
Landmark Judgements
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The Hon'ble High Court held in ‘Somnath vs. Mukesh Kumar’, that a complaint under Section 138 is not maintainable when the questioned cheque was issued in relation to a debt that was past due. Similar to this, supari money used in criminal activity is not a debt that can be recovered lawfully, and a complaint under Section 138 cannot be maintained in such circumstances.
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In the case of ‘Krishan Lal More and another vs. M/s Bibby Financial Services India Pvt. Ltd. And, the Hon'ble High Court held that Section 202 of the Criminal Procedure Code's provisions are not relevant to the complaints submitted in accordance with Section 138 of the Negotiable Instrument Act.
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In ‘Damodar S. Prabhu Vs. Sayed Babalal H.’, the Supreme Court ruled that if parties compound the offence in Trial court defendants will be required to pay 10% of the cheque's value as compounding fees. Compounding fees for Supreme Court cases will be 20% and 15%, respectively. Madhya Pradesh State Legal Services Authority vs. Prateek Jain, however, the Honourable Supreme Court decided. that the Lok Adalat may waive the same for settlements made in Lok Adalat for reasons that must be noted.
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In ‘V.K. Bhat vs. G. Ravi Kishore and another, it was held that If a complaint is dismissed under Section 138 of the Act by default, it is equivalent to an acquittal under Section 256 of the Criminal Procedure Code.
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In ‘Rajan Singhal v State of U.T. Chandigarh and Ors.’ According to the Punjab and Haryana High Court, there was clear evidence of mala fide intent in the case when the accused issued a check drawn on a locked account. The Indian Penal Code's Section 420 and the Negotiable Instruments Act's Section 138 both define cheating as a crime, and the accused may be charged with both crimes.
The NI Act is intended to be primarily a civil law, but a hint of criminal law has been added to it to ensure that the drawer is released from his liability, making it a quasi-criminal law. If the drawer does not pay the amount on the cheque, the Act's criminal provisions may apply to him. To protect the innocent drawer and provide him with a chance to correct his omission, a clause referring to "notice" has been introduced. This demonstrates that the legislature's main goal was not to turn it into criminal legislation. The complainant has the right to submit a complaint when the drawer fails to release his obligation within fifteen days after the reception of the notice.
