The term “Negotiation” does not necessarily imply anything more than the assertion that the paper possesses the negotiable quality. Generally speaking, it applies to any written statement given as security, usually for the payment of money, which may be transferred by endorsement or delivery, vesting in the party to whom it is transferred a legal title on which he can support a suit in his name. The term signifies that the note or paper writing to which it is applied possesses the requisites of negotiability.
A negotiable instrument is one, therefore, which when transferred by delivery or by endorsement and delivery, passes to the transferee a good title to payment according to its tenor and irrespective of the title of the transferor, provided he is bona fide holder for value without notice of any defect attaching to the instrument or in the title of the transferor; in other words, the principle Nemo dat quod non-habit does not apply, It is the element of negotiability that make a contract founded upon paper thus adopted for circulation different in many particulars from other contracts known to law.
The early origin of these instruments is a matter of speculation among text writers. In primitive societies, the system of bills of exchange could not, of course, have existed; for firstly, money which it represents was not invented till long after, and secondly, the art of writing was a thing unknown to them. When the system of bartering became inconvenient, a common medium of exchange and an instrument of an easily convertible character was found necessary, and money came into use. It might have had its humble origin, but when once the utility of money was found, it was never lost sight of.
In the case of Rangachari(N.) v Bharat Sanchar Nigam Ltd., the Apex Court pointed out that The Law merchant treated negotiable instruments as instruments that oiled the wheels of commerce and facilitated quick and prompt deals and transactions. This continues to be in the position as now recognized by legislation, though possibly a change is taking place with the advent of credit cards, debit cards and so on. It was said that negotiable instruments are merely instruments of credit, readily convertible into money and easily passable from one hand to another. With expanding commerce, growing demand for money could not be met by the mere supply of coins and the instrument of credit took the function of money which they represented aad thus became by degrees, articles of traffic. A man dared not dishonour his own acceptance of a bill of exchange, lest his credit is shaken in the commercial world.
A cheque is a widely used method of payment and post-dated cheques are frequently used in various transactions in business life. Post-dated cheques are given to provide a certain accommodation to the drawer of the cheque. Therefore, it becomes necessary to ensure that the drawer of the cheque does not abuse the accommodation given to him. The Negotiable Instruments Act, 1881 (“Act”) deals with negotiable instruments, such as promissory notes, bills of exchange, cheques etc. Chapter XVII containing Sections 138 to 142 was introduced with the aim of inculcating confidence in the efficacy of banking operations and giving credibility to negotiable instruments employed in business transactions. If a party issues a cheque as a mode of deferred payment and the payee of the cheque accepts the same on the faith that he will get his payment on the due date, then he should not suffer on account of non-payment.
The penal provisions contained in Sections 138 to 142 of the Act have been enacted to ensure that obligations undertaken by issuing cheques as a mode of deferred payment are honoured. Section 138 of the Act provides for circumstances under which a case for the dishonour of cheques is filed. The ingredients required for complying with Section 138 are as follows:
- a person must have drawn a cheque for payment of money to another for the discharge of any debt or other liability;
- that cheque has been presented to the bank within a period of three months;
- that cheque is returned by the bank unpaid, either because insufficient of funds or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank;
- the payee makes a demand for the payment of the money by giving a notice in writing to the drawer within 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
- The drawer fails to make payment to the payee within 15 days of the receipt of the notice. A procedure that is followed in matters with regard to Section 138 of the Act is as follows:
- A legal notice is to be issued to the drawer within 15 days of dishonour of cheque by registered post with all relevant facts. The drawer is given a time of 15 days to make the payment if the payment is made then the matter is served and the issue is settled. On the other hand, if the payment is not made then the complainant is to file a criminal case process under Section 138 of the Act, against the drawer within 30 days from the date of expiry of 15 days specified the notice, with the concerned magistrate court within the jurisdiction.
- The complainant or his authorized agent should appear in the witness box and provide relevant details for filing the case. If the court is satisfied and finds substance in the complainant, then a summons will be issued to the accused to appear before the Court.
- If after being served with the summons the accused abstains himself from appearing then the court may issue a bailable warrant. Even after this if the drawer does not appear a non-bailable warrant may be issued.
- On the appearance of the drawer/accused, he may furnish a bail bond to ensure his appearance during the trial. After which the plea of the accused is recorded. In case he pleads guilty, the court will post the matter for punishment. If the accused denies the charges then he will be served with the copy of the complaint.
- The Complainant may present his evidence by way of affidavit and produce all documents including the original in support of his complaint. The complainant will be cross-examined by the accused or his counsel.
- The accused will be allowed to lead his evidence. The accused will also be allowed to submit his documents in support of his case, as well as witnesses in his support. Accused and his witnesses will be cross-examined by the complainant.
- The last stage of the proceeding is that of the arguments after which the court will pass judgment. If the accused is acquitted then the matter ends, but the complainant can go on further appeal in the High Court, similarly, if the accused is convicted he can file an appeal in the Sessions Court.
It must be noted that the offence under Section 138 of the Act, has been made compoundable.
Recent Supreme Court rulings for speedy disposal of cases under Section 138 of the Act:
In 2017, Delhi High Court in Dayawati v. Yogesh Kumar Gosain took into account the question whether an offence under Section 138, which is a criminally compoundable case, could be settled by mediation. The Court held that even though an express statutory provision enabling the criminal court to refer the complainant and accused persons to alternate dispute redressal mechanisms has not been specifically provided by the Legislature. The Code of Criminal Procedure (“Cr.P.C.”) does permit and recognize settlement without stipulating or restricting the process by which it may be reached. Thus, there is no bar to utilizing the alternate dispute mechanisms including arbitration, mediation, conciliation (recognized under Section 89 of Civil Procedure Code, 19083) to settle disputes which are the subject matter of offences covered under Section 320 of the Cr.P.C. It also stated the proceedings under Section 138 of the Act are distinct from other criminal cases and are really like a civil wrong which has been given criminal overtones.
PROCEDURE FOR FILING A COMPLAINT UNDER SECTION 138
The Section 143 of the Negotiable Act, post amendment by the legislature in the year 2001, specifically provides for all offences under the Chapter are to be tried by Judicial Magistrate of First Class or Metropolitan Magistrate (hereinafter “MM”) under the Summary Trial provisions of sections 262 to 265 of CrPC. It has been provided for that in a case under section 138 of the Act, the Magistrate is empowered to pass a sentence of imprisonment up to one year and fine exceeding Rs. 5000/-. It further provides that if at the commencement or during summary trial, MM finds that nature of the case was such that a sentence of imprisonment exceeding one year may have to be passed or for some other reason MM concludes that case should not be tried summarily, the Magistrate has to pass an order after hearing the parties, giving reasons as to why he would like to try the case not in a summary manner but as a summon trial and he could recall witnesses who may have been examined and proceed with the case to hear it as a summon trial case. However, the procedure so prescribed could not resolve the issues arising from the adversities to adopt the summary procedure. The absence of the parties for the hearing or the absence of the respective advocates were highly detrimental to the objective behind prescribing a summary procedure to be followed in cases of dishonour of cheques. Subsequently, in the case of Rajesh Agarwal v. State and Others, the Hon’ble Delhi High Court prescribed certain guidelines concering the summary trial procedure which would be followed concering offences under section 138. The summary trial procedure to be followed for offences under section 138, would thus be as under:
Step I: On the day complaint is presented, if the complaint is accompanied by an affidavit of the complainant, the concerned MM shall scrutinize the complaint & documents and if the commission of the offence is made out, take cognizance & direct issuance of summons of accused, against whom the case is made out.
Step II: If the accused appears, the MM shall ask him to furnish a bail bond to ensure his appearance during the trial and ask him to take notice u/s 251 Cr. P.C. and enter his plea of defence and fix the case for defence evidence, unless an application is made by an accused under section 145(2) of NI Act for recalling a witness for cross-examination on the plea of defence.
Step III: If there is an application u/s 145(2) of NI Act for recalling a witness of the complainant, the court shall decide the same, otherwise, it shall proceed to take defence evidence on record and allow cross-examination of defence witnesses by the complainant.
Step IV: To hear arguments of both sides.
Step V: To pass order/judgment.
JURISDICTIONAL DEVELOPMENT UNDER SECTION 138
The Act is silent on the matter about the relevant jurisdiction concering the filing of a criminal complaint in case the offence of Dishonour of the cheque is committed under Section 138. Since the Criminal courts are approached, the issue needs to be examined from the Criminal Procedure Code, 1973. Section 177 of CrPC 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 “(a) When it is uncertain in which of several local areas an offence was committed, or (b) Where an offence is committed partly in one local area and party in another, or (c) Where an offence is a continuing one and continues to be committed in the more local area has one, or (d) Where it consists of several acts done in different local areas, It may be inquired to or tried by a court having jurisdiction over any of such local areas.”
Thus, in all the above situations, the court having jurisdiction over any of such local areas may try the offence.
The jurisdiction is explained about the Landmark cases of K.BhaskaranVs.SankaranVaidhyanBalan and Anr and the later case of DashrathRupsinghRathod v. State of Maharashtra & Anr, while assessing the position before and after these judgements.
Position Before “K.BHASKARAN” Case
Jugal Kishore Arun v. V.A. Neelakandan
Bellie, J. observed, that a prosecution for issuing of a cheque without sufficient funds in the Bank, will have to be instituted before the Court within whose jurisdiction the cheque was issued.
In P.K. Muraleedharan v/s C.K.Pareed and Anr
Kerala High court held that the place where the creditors reside or the place where the debtor resides cannot be said to be the place of payment unless there is any indication to that effect either expressly or impliedly. The cause of action as contemplated in S. 142 of the Act arises at the place where the drawer of the cheque fails to make payment of the money. That can be the place where the Bank to which the cheque was issued is located. It can also be the place where the cheque was issued or delivered. The Court within whose jurisdiction any of the above-mentioned places falls has therefore got jurisdiction to try the offence under Section 138 of the Act.
Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd.
In this case, the Hon’ble Supreme Court examined the question of jurisdiction yet again under Section 138 of the Act. Appellant, was from Chandigarh and had issued a cheque which was returned dishonoured, the cheque was issued in Chandigarh to the complainant where he had a branch and was actually present. Notice of payment for the dishonoured cheque was issued from the head office of the complainant in Delhi to the accused office in Chandigarh. Due to failure on the part of the drawer a complaint was filed in Delhi. When the case came before the lower courts as well as the high court, emphasis and reliance were laid down on the ‘K. Bhaskaran Case’ and finally concluded as to that Delhi Court also has ‘jurisdiction’. The appellant/respondent contended that Chandigarh court had the jurisdiction to try the case but his contention was dismissed, finally, leading to an appeal to the Supreme Court. Court held that the court derives its jurisdiction when a cause of action arises and jurisdiction can’t be conferred on or for any act or omission on the part of the accused. Also, held, issuance won’t but communication will give rise to cause of action. Hence, Delhi Court will not have jurisdiction to try the case. The court adjudged on ‘whether a Delhi court would have jurisdiction merely on the ground that the- statutory notice under section 138 was issued from Delhi’. The Hon’ble Supreme Court held that:
A cause of action will not be triggered by the issue of statutory notice but only receipt/acceptance of notice does.
Solely, the specific provisions of Section 138 will make or build an offence and the proviso is merely a condition required for taking cognizance.
A sole issue of notice or presentation of cheque can’t give or provide the court with territorial jurisdiction to try offences under section 138 or it will unreasonably harass the drawer.
New Dimensions To Law – DashrathRupsinghRathod v. the State of Maharashtra & Anr
After the K. Bhaskaran judgement, it was felt at large that the law in its wide expansive amplitude allowed the complainant to rather rampantly abuse and misuse the law to result in hardship and adversity to the drawer, with relative ease. It gave the payee unrestricted power to the payee to single-handedly confer jurisdiction on a place of his convenience, consequently, leading to harassment as the payer had, at times, no concern or relation with the distant places where the cheque was issued or which had no link to the transaction or drawer. The alteration in the law was thus welcomed as a much-required change in prevalent laws as laid down by K.Bhaskaran. The leniency thus was the cause of much upheaval. Thus, the new judgement using a strict approach sought to discourage the payer from misusing or carelessly issuing cheques. Due sympathy was thus shown or given to the drawer.
In fact, the Supreme Court in DashratRathod case has observed rightly that “Courts are enjoined to interpret the law to eradicate ambiguity or nebulousness and to ensure that legal proceedings are not used as a device for harassment, even of an apparent transgressor of the law. Law endeavours to bring the culprit to book and to provide succour for the aggrieved party but not to harass the former through vexatious proceedings.”
The court held that the territorial jurisdiction acc. to section 138 or under the act should exclusively be determined and considered by place/location of the offence. The return of the cheque by the drawer bank only constitutes the commission of an offence under section 138. Hence, the courts within which a drawer bank is located will only have the jurisdiction to try the case.
An offence under section 138 of the Act, will be considered committed as soon as the cheque drawn by the accused on an account maintained by him for the discharge of debt or liability is returned without honoured, either due to insufficiency of funds of the said drawer’s account or the amount exceeds the drawer’s arrangement with the bank. But, the cause of action could be derived or triggered only when:
if the dishonoured cheque is presented to the drawee bank within 6 months from its issue.
if the complainant demands for the questioned amount within 30 days of receipt of his intimation from the concerned bank. (a bank which dishonoured)
if the drawer or the payer of the cheque has failed to pay the amount in question within 15 days of notice given by the complainant, payee or due holder of the cheque.
The general rule stipulated under Section 177 of Cr.P.C applies to cases under Section 138 of the Negotiable Instruments Act. The prosecution in such cases can, therefore, be launched against the drawer of the cheque only before the Court within whose jurisdiction the dishonour takes place except in situations where the offence of dishonour of the cheque punishable under Section 138 is committed along with other offences in a single transaction within the meaning of Section 220(1) read with Section 184 of the Code of Criminal Procedure or is covered by the provisions of Section 182(1) read with Sections 184 and 220 thereof.
The court clearly addressed the term ’cause of action’ and held that the facts constituting the cause of action do not constitute the ingredients of the offence under Section 138 of the Act. And, once the cause of action is triggered in favour of the complainant, the jurisdiction of the court to try the case will be determined by the place where the cheque was returned dishonoured.
In respect of pending cases, it distinguished them into the following categories and suggested actions as follows: a. Cases in which trial has commenced: Cases in which summoning and appearance of the accused have taken place and recording of evidence has commenced will continue at the same court. These cases will be deemed to have been transferred from the court which had jurisdiction to the court where they are tried, as per the relaxation provided in the public interest. b. Cases pending at the pre summoning stage: All other complaints including those where the accused/respondent has not been properly served, cases in which summons have not been issued will be maintainable only at the place where the cheque stands dishonoured.
Position after Dashrath Rathod Case
Vinay Kumar Shailendra v Delhi High Court Legal Services Committee and Anr.
Supreme Court observed “The issue of notice from Delhi or deposit of the cheque in a Delhi bank by the payee or receipt of the notice by the accused demanding payment in Delhi would not confer jurisdiction upon the Courts in Delhi. What is important is whether the drawee bank who dishonours the cheque is situated within the jurisdiction of the Court taking cognizance.”
RamanbhaiMathurbhai Patel v. the State of Maharashtra
In a case before the Bombay High Court, two cheques were issued, one before the Gandhinagar branch of the State Bank of India and one before the Bank of Maharashtra. The cheques being ‘At par’,i.e. multi-city cheques payable at par in all branches of the bank, were payable at all branches of the above-mentioned banks. The cheque was deposited by the complainant in the branches of the banks at Kurla, Mumbai, the nearest available branch of the banks and was dishonoured. So, the issue raised was whether the complaint should be filed at Kurla or at Gandhinagar, as the cheques were payable at par across all the branches. It was held that by issuing cheques payable at all branches, the drawer is given an option to get the cheques cleared from the nearest available branch of the bank and therefore the cause of action has arisen in the jurisdiction of the Metropolitan Magistrate, Kurla Court. The courts in Mumbai will have the jurisdiction to try the offence as the cheques were dishonoured in Mumbai. However, the above decision of the Bombay High Court was challenged in the Supreme Court vide SLP (Criminal) No. 7251 of 2014. This SLP was dismissed by the Supreme Court as withdrawn on 20 March 2015.
New Negotiable Instruments (Amendment) Bill, 2015
It may be noted that the Apex Court ruling in Dashrath Rathod case only takes care of the traditional method of cheque clearance. As per this method, the cheque physically travels from the bank branch where it is presented to the drawee bank branch. The decision thus posed difficulties in the modern-day cheque truncation system, where the cheque does not travel to the drawee bank. Financial institutions and banks pronounced difficulty in coping with the situation.
It has been opined, because with respect to of the rationale for changing the law concerning jurisdiction under section 138 of the negotiable instruments act, 1881 that:
“The proposed amendments to the Negotiable Instruments Act, 1881 (“The NI Act”) are focused on clarifying the jurisdiction related issues for filing cases for offences committed under section 138 of the NI Act. The clarification of jurisdictional issues may be desirable from the equity point of view as this would be in the interests of the complainant and would also ensure a fair trial. The clarity on jurisdictional issues for trying the cases of cheque bouncing would increase the credibility of the cheque as a financial instrument. This would help the trade and commerce in general and allow the lending institution, including banks, to continue to extend financing to the economy, without the apprehension of the loan default on account of bouncing of a cheque.”
The Government proposed the Negotiable Instruments (Amendment) Bill, 201529 to amend the Negotiable Instruments Act, 1882. Concerns had been raised by various stakeholders (creditors, industry associations, financial institutions, etc) expressing apprehensions that the Dashrath Rathod decision will offer undue protection to defaulters at the expense of the aggrieved complainant; and would ignore the current realities of cheque clearing with the introduction of CTS (Cheque Truncation System). In CTS cheque clearance happens only through the scanned image in electronic form and cheques are not physically required to be presented to the issuing branch (drawee bank branch) but are settled between the service branches of the drawee and payee banks.
The Ordinance inserted Section 142(2) in the Principal Act. It reads as follows:
“(2) The offence under Section 138 shall be inquired into and tried only by a court within whose local jurisdiction –
- If the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or
- If the cheque is presented for payment by the payee or holder in due course otherwise through his account, the branch of the drawee bank where the drawer maintains the account, is situated.
Explanation – For the purpose of clause (a), where the cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.”
It also inserts a new Clause 142A, which provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973 or any judgment, decree, order or directions of any court, all cases arising out of Section 138 of the Act which was pending in any court, whether filed before it or transferred to it, before the commencement of the Negotiable Instruments (Amendment) Act, 2015, shall be transferred to the court having jurisdiction under sub-section (2) of section 142 as if that subsection had been in force at all material times. Where the same person has filed cases, in different jurisdictions, against the same drawer of the cheque, then all such cases have to be transferred to the jurisdiction court of the bank branch of the payee, in which he has presented the cheque for payment, is situated.
All complaints between the same parties are to be tried at one place irrespective of where the payee deposits the cheques.
Citing the earlier law to be unfair in as much as it required the creditor to go, the debtor, creditors and stakeholders have welcomed the change.
As we trace the history and establishment of the Negotiable Instruments Act,1881 and focus on the jurisdictional debate under Section 138, which deals with the dishonour of cheques, we analyse the necessities which forced the Courts and the Government to adopt landmark changes in the law. The latest change and the present prevalent law being the 2015 Ordinance, has the effect of nullifying the law as laid down by the Supreme Court in 2014, Dashrath Rathod case. The legal effect of the Ordinance is that, to institute a complaint under Section 138, the same must be instituted as per: If the cheque is delivered for collection through an account, the branch of the bank where the payee or holder, maintains the account, is situated; or If the cheque is presented for payment by the payee or holder otherwise through his account, the branch of the drawee bank where the drawer maintains the account, is situated. This law comes with a promise to solve and aid in not only the speedy disposal of the pending cases about complaints under 138 but also to bring sanctity to the system by seeking to clamp down on defaults in payments. It clarifies the legal position as to jurisdiction and also seeks to keep up with the modern banking system.
This article has been authored by Pushpanjali.