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Negotiating the Negotiable Instrument Act

February 29, 2012

Negotiable Instruments Act 1881, is the act dealing with the negotiable instruments in India. The act provides for all the different types of Negotiable Instruments such as Promissory note, Hundis, Bill of exchange and Cheques. The instruments have some commercial value which is its face value or lesser which is called discount. These instruments can be traded till date of it becoming due and this is done at the discounted price. The person who issues is called drawer and the person in whose name it is issued is called drawee and all other persons holding it in some contractual exchange are called holders in due course. The currency and the bank notes are not the Negotiable Instruments. In the present day scenario most important provisions of the Negotiable Instruments Act 1881 are the provisions relating to the Dishonor of Cheques.

Chapter XVII of the Negotiable Instruments Act, Section 138 to 147 deal with the penal provisions in the cases where the drawer of the cheque fails to honor his commitment and the banker on behalf of the drawer, returns the cheque with the reason of insufficiency etc.. of the funds in the account. The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument. Thereafter there was an amendment in the year 2002 wherein the punishment and the penalty in the case of offence was increased and hence the provision of section 138 of the NI Act 1881 stands as under:

Section 138: 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 provisions of this Act, be punished with imprisonment for ["a term which may extend to two year"], 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 induce 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 cheques 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: For the purpose of this section, "debt or other liability" means a legally enforceable debt or other liability].

Plane reading of the provision states that the when a person draws a cheque on the account maintained by him in such cases only he can be held liable for offience and the cheque is returned by the bank unpaid, either because of amount of money standing to the credit of that account is insufficient or if it exceeds the amount arranged to be paid from that account by an agreement made with that bank. But thereafter in view of the judgments of the Hon'ble Supreme Court of India and Hon'ble High Courts all over India the view is that the cheques returned for the reason of the stop payment or even account closed by the drawer are also covered in the purview of the Act. 

But there are certain cases wherein the cases are filed by the holder in due course against the Drawee of the Cheque. Yes, This is an interesting scenario. Think of a situation when the person who has received a post dated cheque as a holder in due course and deposits the same in the account and the same is dishonored. Is the drawee or the payee of the cheque responsible? No. The account is not maintained by the Drawee/payee. The proceedings under the Section are to be initialised against the Drawer and not the payee. These proceedings can be initiated by the holder in due course or the drawee as the case may be. But it has to be against the Drawer.

This scenario was recently considered by the Hon'ble Gujarat High Court in Pal Cospo (I) Pvt Ltd. Vs State of Gujarat and Another. The High Court held that the payee of the cheque cannot be said to have committed an offence if the cheque endorsed by him to the holder in due course is dishonored and is returned by the bank of the Drawer of the Cheque.

The Hon' ble Supreme Court in case of Jugesh Sehgal(2009 (14) SCC 683) in para 13 has observed and held as under :-

13. It is manifest that to constitute an offence under Section 138 of the Act, the following ingredients are required to be fulfilled;

 (i) a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain amount of money to another person from out of that account;

 (ii) the cheque should have been issued for the discharge, in whole or in part, of any debt or other liability;

 (iii) that 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;

 (iv) that cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of the 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 the bank;

 (v) the payee or the holder in due course of the cheque 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 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.

 (vi) the drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice.

Being cumulative, it is only when all the aforementioned ingredients are satisfied that the person who had drawn the cheque can be deemed to have committed an offence under Section 138 of the Act.”

The offence under the Negotiable Instruments Act 1881 is a technical offence and being part of a civil/contractual transactions court do strict interpretation of its provisions. Therefore when the person accepts a cheque for satisfaction of legal debt or liability he she should take care of the aspects enumerated herein above to see that the transaction is safe and sound and the money that is due can be recovered.

The commercial/merchant transactions are mainly dependent on the cheques and therefore it is very important for every person to know the provisions of the Act which effect their day to day transactions and  business.

 

Punit Juneja

Juneja Legal

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