Use and misuse of cheques has become very common in both business and personal transactions. Every day lakhs of cheques are issued and collected for different purposes such as donations, payments, deposits, debt clearance, security and many other purposes. At times, some of these cheques get bounced when presented for encashment to banks and the persons who have drawn the pay the cheque amount.
The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988) has inserted Chapter XVrI in the Negotiable Instrument Act, 1881 with effect from 1" April, 1989. The effect of the new provisions is that any cheque drawn by a person for the discharge of any liability is returned by the bank unpaid for the reason of the insufficiency of the amount of money standing to the credit of the account on which the cheque was drawn or for the reasons that it exceeds the arrangements made by the drawer of the cheque with the bankers for that account, the drawer, without prejudice to the other provisions of the said Negotiable Instrument Act, 1881, shall be punishable 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.
The fine imposed may be up to double the bounced / dishonored cheque amount and a whole or a part of it will be awarded to the cheque holders as compensation. If the accused is incapable or refuse to pay fine and prefers imprisonment in civil prison, the Cheque holder will not get any money under this complaint. The alternative for him is to file a separate suit for recovery of the cheque amount.
The remedy under section 138 of the Negotiable Instruments Act, 1881, is available only if the cheques are issued to clear debt or liability, a notice is sent properly demanding .the payment of cheque amount and the demanded amount is not paid within time by the cheque drawer. A complaint under section 138 will not succeed if the bounced cheques have been issued to pay donations, to advance loan or towards allotment of shares etc. Tn short, cheques not issued towards debt or liability. However when the cheque is issued, it will be presumed that it is towards the debt or liability and it is left to cheque drawers to establish in courts otherwise. They can avoid punishment only if they establish that the dishonoured cheques are not issued towards debt or liability and the filing of complaint is not in order, otherwise they are liable for punishment. Thousands of cases are being filed every day in Indian courts under the Section 138 since the success is almost guaranteed and there in no court fee/expenses, apart from advocates fee Most of these cases are settled amicably before the final judgment for various reasons. Accused will come for settlement when he has no records to disprove legal liability and the complaint filed is in order.
The complainants normally agree for settlement since the Ilitigation may prolong for long duration and finally if the accused is imprisoned by the Court, the complainant may not get back his money. Courts also encourage settlement of disputes by the parties. Suppose after the cheque is issued to the payee or to the holder in due course and before it is presented for encashment, notice is issued to him not to present the same for encashment and yet the payee or holder in due course presents the cheque to the bank for payments, when it is returned on instructions, section 138 does not get attracted.
The cheque in question should have been issued to discharge whole or a part of a debt or liability. As such, a cheque given as a gift will be outside the purview of chapter XVII of the Negotiable Instrument Act, 188l.The cheque in question should be presented within months or its specific validity period, whichever is earlier.
The payee or holder should give notice demanding payment within days of his receiving information of dishonor, which should be for no other reason than for insufficiency of funds.
Drawer can make payment within fifteen days of receipt of the notice and only if he fails to do so, he is liable to be prosecuted. Complaint can be made only by the payee or the holder in due course within one month ofthe arising of the cause of action.
According to section 138 of the Negotiable Insruments Act, 1881, for constituting an offence under the Act, mental elements are not necessary. It is enough if a cheque is drawn by an accused on an account maintained by him with a banker for payment of any amount to another person from that account for discharge in whole or in part, of any debt or other liability. Therefore, whenever cheques are returned 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:
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 non-availability of money standing to the credit of the drawer, the payee has to make demand for payment as provided for in clause (b) of the proviso. 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 the cheque was drawn.
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.
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 arises. The six months period is taken from the date the cheque was drawn.
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
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 of infonnation from the bank regarding the return of cheque as unpaid.
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 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.
The Bombay High Court has held in Om Prakash Bhojraj Maniyar Vs Swati Girish Bhide and others (1992 CIVIL COURT CASES 436 BOMBAY) that it would not attract the Penal provisions of S.138 when the cheque is returned as account closed by the drawer. The strict construction of the specific wording of Section 138 of the said Act makes the dishonour of a cheque penal only in two contingencies that IS, ins efficiency of funds and exceed arrangements; and as such in no other case the dishonor of a cheque can be held to be penal under the said Section. The maxim "expressum facit cessare tacitum" enunciates the principle that the express mention of one thing implies the exclusion of another.
But the Kerala High Court has a different view and has held that the penal provisions of the S.138 are attracted. In Krishnan Nair Vs Jaseentha [1998(3) CIVIL COURT CASES 206 (KERALA)] it has been held that if the drawer of the cheque closes his account after the cheque was issued and before the cheque reaches the bank, the cheque is bound to be returned unpaid on the ground of want of sufficient amount in the account of the drawer. Even in such cases, offence under S.138 of the Act must be deemed to have been committed or else it will give premium to those unscrupulous persons who issue cheques and immediately thereafter, before the cheque is presented for collection, close their account and plead that they did not commit offence punishable under S.138 of the Act. The purpose of introducing S.\38 of the Act in the statute book will be defeated. S\38 of the Act is intended to prevent dishonestly on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account maintained by him in a bank and induce the payee or holder in due course to act upon it and it was held that provisions of S.138 are attracted.
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