Dishonour of Cheques : Section 138 of the Negotiable Instrument Act, 1881

What is Cheque?

As per Section 6 of the Negotiable Instrument Act, 1881, a ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Definition of Drawer and Payee

As per Section 7 of the Negotiable Instrument Act, maker of a bill of exchange, a promissory note or cheque is called the ‘drawer’ and the person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the ‘payee’.

Purpose and Object behind the incorporation of Section 138 of the Negotiable Instrument Act.

The offence under Section 138 of the Negotiable Instrument Act is a statutory offence. This Section excludes mens rea by creating strict liability. It does not say that there should be a direct nexus between the person who commits the act and the offence. The purpose behind the incorporation of Section 138 of the Negotiable Instrument Act is to lend credibility for cheque transactions. The object is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments.

Section 138 of the Negotiable Instrument Act reads as follows: - 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, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both.

Provided that nothing contained in this section shall apply unless - 

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or as the case may be, to the holder in due course of the cheque within fifteen days of the receipt of the said notice.

Explanation- ‘debt or other liability’ means a legally enforceable debt or other liability.

Ingredients of Section 138

(i) drawing of the cheque;
(ii) presentation of the cheque to the bank;
(iii) returning the cheque unpaid by the drawee bank;
(iv) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount; and
(v) failure of the drawer to make payment within 15 days of the receipt of the notice.

It is incumbent upon the complainant to establish a case under Section 138 of the Negotiable Instrument Act, that the cheque was dishonoured only for want of funds in the account and not for the other reason. If a cheque is returned on account of any structural defect, that is, any defect in its form, want of signature, date has not been properly written, figure of the amount has been over written or erasures in the drawer's name, etc., the same will not amount to an offence punishable under Section 138 of the Act.

But on November 27, 2012, in M/s Laxmi Dyechem vs. State of Gujarat & Ors, the Apex Court held that where the drawer of the cheque changed his signature with a fraudulent intention that such change in signature would result in dishonour of cheque, in such situation mismatch of signature of drawer on cheque with the specimen signatures would constitute dishonour within the meaning of Section 138 of the Act subject to the condition that the drawer fails to make payment within the stipulated time despite receiving statutory notice under Section 138 of the Act.   

Liability of a Company under Section 138

Section 141 of the Negotiable Instrument Act lays down the liability of a company and its officers for an offence under Section 138 of the Act.

Section 141 of the Negotiable Instrument Act reads as follows: - (1) If the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was incharge 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 he offence and shall be liable to be proceeded against and punished accordingly.

The proviso of Section 141(1) lays down that no such person can be so held liable if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.

 The second proviso of Section 141(1) further lays down that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or the State Government, as the case may be, he shall not be held liable.

Sub-Section 2 of Section 141 of the Act provides that where any offence under the Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation- (a) ‘company’ means any body corporate and includes a firm or other association of individuals; and (b) ‘director’, in relation to a firm, means a partner in the firm.

Who can file complaint; how and when?

The complaint for offence under Section 138 read with Section 142 after the dishonouring of the cheque can be filed either by the payee or the holder thereof. Whether the person is holder thereof is a question of fact and has to be pleaded. The complaint can only be filed in writing by the payee or the holder thereof in due course.

The payee is free to present the cheque repeatedly within its validity period but once notice has been issued and payment not received within 15 days of the receipt of the notice, payee has to avail the very cause of action arising thereupon and file the complaint. Complaint has to be filed within one month from the day immediately following the day on which the period of 15 days from the date of receipt of the first notice by the drawer expires.

No form of notice is prescribed in clause (b) of the proviso to section 138, the requirement is that the notice shall be given in writing within 30 days of receipt of information from the bank regarding return of the cheque as unpaid and in the notice a demand for payment of the amount of the cheque has to be made. If no such demand is made, the notice would fall short of its legal requirement.

Further it is not the giving of the notice but its receipt by the drawer which culminates in the cause of action. It is no doubt true that the receipt of the notice has to be proved, but if the notice is refused by the addressee, it may be presumed to have been served. In a case where notice is not claimed even though sent by registered post, with the aid of Section 27 of the General Clauses Act, the drawer of the cheque may be called upon to rebut the presumption which arises in favour of service of notice.

   

Place where complaint is to be filed

For purposes of Section 178(d) of the Code of Criminal Procedure, where an offence consists of several acts done in different local areas, it may be inquired into or tried by a Court having jurisdiction over any of such local areas.

In Nishant Aggarwal vs. Kailash Kumar Sharma, (2013) 10 SCC 72, the Apex Court observed that if the five different acts namely (i) drawing of the cheque; (ii) presentation of the cheque to the bank; (iii) returning the cheque unpaid by the drawee bank; (iv) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount; and (v) failure of the drawer to make payment within 15 days of the receipt of the notice, which are the components of offence under Section 138 of the Negotiable Instrument Act were done in five different localities, any one of the Courts exercising jurisdiction in one of the five local areas can became the place of trail for the offence under Section 138 of the Act and the complainant would be at liberty to file a complaint at any of those places. In other words, the complainant can choose any one of those Courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done.

On 01-08-2014, the Apex Court in Dashrath Rupsingh Rathod vs. State of Maharashtra, (2014) 9 SCC 129 held that the territorial jurisdiction is restricted to Court within whose local jurisdiction offence was committed which is where cheque is dishonoured by bank on which it is drawn and complaint will be maintainable only at place where cheque stands dishonoured. 

But after the Negotiable Instrument (Amendment) Ordinance, 2015 which was published in the Gazette of India on 15th June, 2015 the offence under Section 138 shall be inquired into and tried only by a court within whose local jurisdiction-

(a) 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

(b) if the cheque is presented for payment by he payee or holder in due course otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

Explanation- For the purposes of clause (a), where a 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. 

Offence of dishonour of cheque committed along with other offences in a single transaction- Territorial jurisdiction :-

The relief introduced by Section 138 of the NI Act is in addition to the contemplations in the IPC. It is still open to such a payee recipent of a dishonoured cheque to lodge a First Information Report with the police or file a complaint directly before the concerened Magistrate. All remedies under IPC and CrPC are available to such a payee if he chooses to pursue this course of action, rather than a complaint under Section 138 NI Act. He can also always file a civil suit for recovery wherever the cause of action arises in civil law.

Trail

All offences under the Negotiable Instrument Act are to be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate summarily and the provisions of Sections 262 to 265, both inclusive of the Code of Criminal Procedure shall apply to such trails. The trail Court has to look into the following main features, viz., the date of issuing of the cheque, the date of dishonouring of the cheque by the bank, the date of issuing notice, and the date of filing of the complaint in Court; if these facts are borne out from allegations in the complaint, the Court is entitled to take cognizance of the same.

High Court’s power under Section 482 of the Code of Criminal Procedure

The power of quashing criminal proceedings by the High Court should be exercised very stringently and with circumspection. In the cases where the petitioner is able to show to the Court that there was no existing debt or liability at the time of presentation of the cheque for encashment on the basis of the conduct of the complainant or admissions made by the complainant though that may be in other legal proceedings, then in such cases, the proceeding can be terminated and the accused should not be asked to face the trail till it is concluded. 

Further, a complaint filed in a Court under the territorial jurisdiction of High Court of a State, cannot be quashed by the High Court of another State.

Disclaimer: Above content are for general use and information. Consult your Lawyer before acting upon these information.

Partnership under Indian Partnership Act, 1932

A partnership arises from a contract. It is a form of business organization, where two or more persons join together for jointly carrying on some business.

Section 4 of the Indian Partnership Act, 1932 defines partnership as follows: - ‘partnership’ is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Person who have entered into partnership with one another are called individually ‘partner’ and collectively ‘a firm’ and the name under which their business is carried on is called the ‘firm name’.

Essentials of Partnership

(i) there must be an agreement entered into by all the persons concerned; 

(ii) the agreement must be to share the profits of a business; and 

(iii) the business must be carried on by all or any of the persons concerned acting for all i.e. each partner carries on business for himself as principle and also as an agent for the other partners.

Who can be a partner in a firm?
  

In terms of Section 11 of the Indian Contract Act, only such persons as are competent to contract, are of sound mind, major and are not disqualified from contracting by any law in force would be entitled to become partner. This would mean that a lunatic, a minor, a firm or a trust who are not persons competent to contract in the eye of law as such would not be entitled to become partners.

The law however, recognizes partnership firm as a distinct personality only for the purpose of income tax by varieties of specific provision under the Income Tax Act. It is also a separate legal entity under Sales-tax law. Further the agreement by a minor is void but he is capable of accepting benefits. In consonance with this position of law, Section 30(1) of the Indian Partnership Act provides that a minor may not be a partner in a firm but with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.

Since the partnership is ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, Section 11 of Companies Act prohibits partnership consisting of more than ten members for banking business and twenty members in other businesses, unless it is registered as company under Companies Act, 1956. In the case of a private company the minimum number is two and the maximum is fifty whereas in the case of a public company the minimum number of members should be seven but there is no limit to the maximum number.

Registration of partnership firm.

The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non registration of a firm yet Section 69 of the Partnership Act cut short the capacity of unregistered firm and its partner to sue. This disability is too great compelling force to bring the firm to registration.

The application for registration has to be made in the prescribed form and the same has to be accompanied by the prescribed fee. The application must state the following: -

(i) the firm name;

(ii) the place or principal place of business of the firm;

(iii) the names of any other places where the firm carries on business;

(iv) the date when each partner joined the firm;

(v) the names in full and permanent addresses of the partners; and

(vi) the duration of the firm. However, if no period is fixed in the deed of partnership and no provision is made for its determination the partnership shall be deemed to be a partnership at will.

The statement shall be signed by all the partners, or by their agents specially authorized in this regard. Each person signing the statement shall also verify it in the manner prescribed by Section 58(2) of the Partnership Act.

A firm may be got registered at any time after the creation of partnership. It is not necessary that it should be registered at the time of its formation. Once the registration is made it would continue to be valid in the eyes of law until the same was cancelled. There is no need of fresh registration on the death of a partner or when there is otherwise any change in the constitution of the firm. In such cases, it is sufficient to notify the Registrar about the changes so that he could note the same in the relevant register (Girdharmal vs. Dev Rai, AIR 1963 SC 1587).

The Supreme Court in the judgment in Yasin Khan vs. Shreeram Finance Corporation, AIR 1989 SC 1769, considered a case where there was a change in the partners of the firm and since the corresponding change was not notified to the Registrar and therefore, on the date of suit, the current partners were not shown in the Register of Firms, the Apex Court held that the suit was not maintainable. The relevant test would be whether on the date of the suit, the firm was registered and the names of the partners were shown in the Register of Firms. But in Raptakos Brett & Co. Ltd vs. Ganesh Property, (1998) 7 SCC 184, the Supreme Court has observed that even if the suit is filed by an unregistered partnership firm against a third party and is treated to be incompetent as per Section 69 subsection (2) of the Indian Partnership Act, if pending the suit before a decree is obtained, the plaintiff puts its house in order and gets itself registered, the defect in the earlier filing which even though may result in treating the original suit as still born, would no longer survive if the suit is treated to be deemed to be instituted on the date on which registration is obtained. If such an approach is adopted, no real harm would be caused to either side.  

When a suit has been dismissed on grounds of non-registration, a fresh suit after the registration of the firm is maintainable. The same is not barred as res-judicata as the dismissal of a suit because of non-registration is not a decision of the case on its merits (Malhotra & Co. vs. Ramesh Mistri, AIR 1971 P&H 212).

If a firm is unregistered, a suit by a partner for the rendition of accounts without a prayer for the dissolution of the firm is not maintainable. In Basantlal vs. Chiranjilal, AIR 1968 Pat 96, one partner of an unregistered firm sued the other partner after the dissolution for recovery of money in respect of accounts between them, it was held that such an action was maintainable after the dissolution of the firm.

In Ramesh Kumar Bhalotta vs. Lalit Kumar Bhalotta, AIR 2001 Pat 174, a partner of an unregistered firm filed a suit against the firm claiming declaration of share, proper administration of firm and rendition of the accounts of the firm. The suit was dismissed as barred under Section 69(1) of the Indian Partnership Act.

The same partner subsequently filed another suit praying for the dissolution of the firm, and the accounts of the dissolved firm. It was held that the subsequent suit was maintainable as it was permissible under Section 69(3)(a) and dismissal of the earlier suit was no bar to the present suit. Moreover, the suit was not barred under Order 2, Rule 2 of the CPC; as the cause of action under the two suits was different.

A suit by unregistered firm is not barred by Section 69(2) of the Partnership Act if a Statutory right is being enforced. In M/s Haldiram Bhujiawala vs. M/s Anand Kumar Deepak Kumar, AIR 2000 SC 1287, the Apex Court has observed that a suit for perpetual injunction to restrain the defendant from infringing plaintiff’s trade mark and passing defendant’s goods as those of the plaintiff, and a claim of damages in that regard, is not barred by Section 69(2) of the Act. Such right does not arise out of contract. In such a case there is enforcement of a statutory right arising under the Trade Mark Act.

If the action against a third party is not based on contract but on tort, fraud or any other wrongful act, the same is not hit by Section 69(2) of the Partnership Act and the action for the same is maintainable. Thus when the action relates to wrongful detention of property, the action being founded on tort rather than contract, the same is maintainable. Similarly, a suit for the recovery of the price of goods obtained by fraud is also maintainable as the action in such a case does not arise out of contract.

Disclaimer: - All the contents are for general use and information. Consult your Lawyer before acting upon these information.