Why cheque bouncing provisions under NI Act are ineffective?


GS Rao

Cheque bouncing cases are taking at least three to five years for recovery of money. This delay defeats the very purpose of the NI Act

Cheques are very convenient instruments used in business transactions. To promote the efficacy of the banking operations and to enhance credibility of cheques, Section 138 to Section 147 were incorporated in Negotiable Instruments Act, 1881 (the Act).

The NI Act makes the drawer of cheque liable for penalties in case of dishonour of cheques due to insufficiency of funds or for the reason that it exceeds the arrangements made by the drawer. The NI Act also contains sufficient safeguards to protect the drawer of cheques as he is given an opportunity to make good the payment of dishonoured cheque when a notice demanding payment is served on him by the payee.

This article analysis’s the effectiveness or lack of effectiveness of the cheque bouncing provisions. It is necessary to refer to the provisions of the NI Act, with regard to cheque bouncing provisions for better appreciation of the main thrust of this article.

Commission of offence & procedure for filing of complaint:

An offence under the NI Act shall be deemed to have been committed, if the following conditions are satisfied (Section 138):

Cheque must have been drawn by a person (the drawer) in favour of a payee on his bank account for making payment of either in whole or partial discharge of a legally enforceable debt.

Cheque must have been returned by the banker to the payee or holder in due course due to insufficient balance in the account of the drawer or it exceeds the arrangement he had with the bank.

Additional conditions:

Cheque must be presented within six months from the date of cheque or its validity period whichever is earlier. (Cheque validity period is now reduced to three months)

The payee or holder in due course must demand payment of the cheque amount by written notice within 15 days of receipt of notice.

Such notice must be issued within 30 days from the date of receipt of memo of dishonour from bank and the drawer of cheque neglects or fails to pay demanded sum within 15 days from the date of receipt of the notice.

Presumption in favour of holder

According to Section 139 of Act, there is a presumption in favour of the holder of cheque that he received the cheque in discharge of a legally enforceable whole debt or part of the debt, unless contrary is proved.

Thus onus is thrust on the drawer of the cheque to prove that cheque is not issued in discharge of legally enforceable debt.

When cause of action arises for filing a complaint?

Once the drawer fails to make payment of demanded sum, cause of action for filing complaint under NI Act arises on expiry of the notice period and remains till 30 days. Complaint should be filed within 30 days from the date of cause of action as per Section 142 of NI Act. In case of delay, this Section gives power to the magistrate to condone the delay, if sufficient cause is shown by the complainant.

Recent trend of apex court judgments

Recently, the Supreme Court in the case of MSR Leathers vs S. Palaniappan & Anr, reversed its earlier judgment in Sadanandan Bhadran vs Madhavan Sunil Kumara (1998) SCC514 and held that a payee or holder of a cheque can now issue a statutory notice to the drawer each time the cheque is dishonoured and institute proceedings on the basis of a second or successive statutory notice as well. This was intended to favour the payee as he can overcome 30 days limitation period with each presentation.

Moreover, if cheque is honoured on subsequent presentation, this prevents filing of complaint and leads to less number of 138 cases. In the case of Ms. Laxmi Dyechem vs State of Gujarat & Ors Leathers vs Palaniappan division bench of apex court set aside the verdict of Gujarat High Court which had held that criminal proceedings for dishonoring of cheque can be initiated only when the cheque is dishonoured because of lack of sufficient amount in the bank account and not in case where a cheque is returned due to mismatch of signature of account holder.

Cognizance of offence

Section 142 of Act mandates that no court shall take cognizance of the offence unless a complaint in writing is given by the payee or holder in due course as the case may be and such complaint has to be made within one month from the date of cause of action.

A look at Amendments to NI Act

Now let us examine how the amendments made to NI Act with the insertion of Sections 143 to 147(effective from 06.02.2003) brought strength to deal with certain deficiencies noticed in the Act. Salient features of amendments are as follows:

Time limit for issuance of notice for demanding payment of dishonoured cheque amount is increased from 15 days to 30 days from the date of receipt of banker’s memo of dishonour. (Section 138}

Imprisonment term has been extended up to two years in place of one year. Similarly the amount of fine is increased to double the amount of the cheque dishonoured. {Section 138}

It recognised serving of summons by post/courier approved by session’s court for speedy trial/ prosecution. In case of refusal to receive summon, it shall be deemed to have been duly served on certification by the authorised person of postal department or courier for this purpose. {Section 144}.

The most important of all is that evidence of complainant may be given by way of an affidavit and such an evidence can be a basis for issuance of summons. Discretion has been given to court to accept affidavit on evidence and only on request of the accused summon. {Section 145}

Bankers memo can be accepted as prima facie evidence for cognizance of offence {Section 146}

Another notable feature is that Section 147 permits compounding of the offence which means an escape route is provided for avoiding imprisonment even during the trial.

It is clear from the above amendments that the main thrust of these amendments was to provide for a speedy and time bound trial. Courts have been given power to try the offence by summary trial for expeditious disposal of 138 cases and Section 143 states that endeavour shall be made to complete the trial within six months from the date of the complaint.

What is the ground reality?

According to recent media reports, about 30% of cases pending in the country are relatable to NI Act cases and violations under Motor Vehicles Act which is a cause for huge concern. This is an indicator of the state of affairs of pending NI Act cases. Despite existence of well framed law on paper, why the number of pending cases u/s 138 is quite alarming?

Let us now look for the possible causes for delay in Section 138 cases which can be avoided or improved for better results. It is very disappointing to note that cheque bouncing cases are taking at least three to five years just like a civil suit for recovery of money. This delay defeats the very purpose of the NI Act.

One of the main reasons for delay is attributable to less number of judicial magistrates in comparison to the increasing number of 138 cases.

Banks have been offering loans more liberally and collect post dated cheques in advance and in many of the cases the judgment of the financial capacity is wrong or in their endeavor is to reach targets for loans disbursal

In many of the courts, magistrates are caught in dilemma about as to whether CRPC (Code of Criminal Procedure) is to be followed or special provisions of NI act to are to be followed. A discretion has been given to the courts and every magistrate has to exercise such power judiciously.

It is noticed that some of the courts still follow the archaic system of for serving of summons which takes at least six months while the upper time limit of six months is specified for disposal. E-mails / fax / fast courier are not used for serving of summons and in many cases, the accused manages with the post department desk server and returns the summon resulting in serving of summons second time.

Adjournments are granted liberally and no efforts are made to complete evidence and cross examination on the same day. This is the usual practice adopted by the advocate of the accused for mutual benefit.

What is the way forward?

Newly inserted provisions of the Act would be rendered nugatory, if complaints filed under Section 138 of the Act are not disposed of expeditiously. The judicial system itself is portrayed in poor light, when Section138 cases take three to five years before final judgment is passed.

Fast track courts should be created to deal exclusively 138 cases.

Number of posts of magistrates should be increased and expeditious steps must be taken for filling up of vacancies of posts of magistrates.

The Courts have to be strict in not allowing adjournments to the accused

Trial of cases once commenced must be daily till judgment is passed. Once evidence taken on affidavit accused must be made to be present for allowing cross examination. Endeavour should be made to dispose off cases within a maximum period of six months from the date of complaint or at worst should not stretch beyond one year. High courts should monitor the pending cases.

Appeals should not be allowed unless the accused gives valid reasons or brings out deficiencies in judgment of lower court.

Frivolous appeals should be dismissed as sufficient safeguards exist to take care of interests of accused. Once fine levied or imprisonment should not be reduced in appeals so that the punishment acts as deterrent.

Amendments should be made to empower courts to direct accused for deposit of full amount of the cheque before the trial starts as it will compel accused to settle for compounding at the earliest. Penalties should be levied for delaying compounding of offence as directed by Supreme Court in the case of Damodar S Prabhu vs Sayed Babalal H.

Overriding clause is provided to exercise judicial discretion to apply CRPC provisions to the extent it is felt necessary. Keeping in view this, courts must adopt suitable and effective procedure to ensure expeditious disposal of 138 cases to achieve the objective of the Act.

To conclude:

NI Act provisions are beneficial to the payees as without going to the civil court and apply pressure for realisation of cheque amount. At a time, when the apex court and other courts have been passing landmark judgments to strengthen faith in cheques, the Inter Ministerial group’s suggestion for settlement of cheque bouncing cases out of court by invoking arbitration and conciliation, Lok Adalats on the lines of Section 89 of CPC comes as a shocker.

Another big road block is likely to come. If suggestion of IMG, is accepted, it may result in going back to the days of filing of suits for recovery of money. Therefore the government may focus on improving the infrastructure facilities and efficacy of the courts to facilitate expeditious disposal of 138 cases.

The writer is the deputy general manager-legal at OCL India Ltd.

Read more:

Cheque dishonoured: A step-by-step guide for legal recourse

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