NIA - Dishonouring of Cheque - Can Prosecution be initiated under Section 138 for second time if it was not initiated

on earlier cause of action ?

Yes : Supreme Court

By TIOL News Service

NEW DELHI, OCT 09, 2012: IN 1998, in Sadanandan Bhadran v. Madhavan Sunil Kumar,
the Supreme Court held that a combined reading of Sections 138 and 142 of the Negotiable Instruments Act left no
room for doubt that cause of action under Section 142(b) can arise only once. The conclusion observed by the court is
supported not only by Sections 138 and 142 but also by the fact that the dishonour of cheque gives rise to the
commission of offence only on the failure to pay money when a notice is served upon the drawer in accordance with
clause (b) of the proviso to Section 138. The Court further held that if the concept of successive causes of action were
to be accepted the same would make the limitation under Section 142(b) otiose.

This decision of the Apex Court was followed in several cases and is almost held to be the decided Law of the land.

In the present case, four cheques for an amount of Rs. ten lakhs came to be dishonoured. A notice was issued under
Section 138 of the NIA. The respondent assured that the funds would be available and the cheques were again
presented to the Bank, which were again dishonoured. Again a notice was issued and no payment was received. So, a
complaint was filed before the Metropolitan Magistrate for the offence punishable under Section 138 read with
Section 142 of the Act. The Magistrate took cognizance and issued summons to the respondents in response whereto
the respondents entered appearance and sought discharge primarily on the ground that the complaint had not been
filed within 30 days of the expiry of the notice based on the first dishonour of the cheque . The Magistrate upon
consideration dismissed the applications for discharge which order was then assailed by the respondents before the
High Court of Madras in Criminal Appeal.

The High Court has, by the order impugned in this appeal, allowed the revision and quashed the orders passed by the
Magistrate relying upon the decision of the Supreme Court in Sadanandan Bhadran s
case according to which a complaint based on a second or successive dishonour of the cheque was not maintainable if
no complaint based on an earlier dishonour , followed by the statutory notice issued on the basis thereof, had been
filed.

The matter is before the Supreme Court. At the time of hearing, the Bench expressed its reservation about the
correctness of the view taken in Sadanandan Bhadran s case and referred the matter to a Larger Bench.

The Larger Bench over ruled the decision in Sadanandan Bhadran.

Proviso to Section 138, is all important and stipulates three distinct conditions precedent, which must be satisfied
before the dishonour of a cheque can constitute an offence and become punishable.

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The first condition is that the cheque ought to have 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.

The second condition is that the payee or the holder in due course of the cheque , as the case may be, ought to make 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.

The third condition is that the drawer of such a cheque should have failed to make 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.

It is only upon the satisfaction of all the three conditions mentioned above and enumerated under the proviso to
Section 138 as clauses (a), (b) and (c) thereof that an offence under Section 138 can be said to have been committed
by the person issuing the cheque .

Section 142 of the Negotiable Instruments Act governs taking of cognizance of the offence and starts with a non-
obstante clause. It provides that no court shall take cognizance of any offence punishable under Section 138 except
upon a complaint, in writing, made by the payee or, as the case may be, by the holder in due course and such
complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to
Section 138.

The Supreme Court observed,

¶A careful reading of the above provisions makes it manifest that a complaint under Section 138 can be filed only
after cause of action to do so has accrued in terms of clause (c) of proviso to Section 138 which, happens no sooner
than when the drawer of the cheque fails to make the payment of the cheque amount to the payee or the holder of the
cheque within 15 days of the receipt of the notice required to be sent in terms of clause (b) of proviso to Section 138
of the Act.

What is important is that neither Section 138 nor Section 142 or any other provision contained in the Act forbids the
holder or payee of the cheque from presenting the cheque for encashment on any number of occasions within a
period of six months of its issue or within the period of its validity, whichever is earlier.¶

Cause of Action
: The Supreme Court further observed, 'The expression' cause of action' is more commonly and easily understood in
the realm of civil laws. The expression is not defined anywhere in the Code of Civil Procedure to which it generally
bears relevance but has been universally understood to mean the bundle of facts which the plaintiff must prove in
order to entitle him to succeed in the suit.

Section 142 of the Negotiable Instruments Act is perhaps the only penal provision in a statute which uses the
expression 'cause of action' in relation to the commission of an offence or the institution of a complaint for the
prosecution of the offender. A careful reading of Sections 138 and 142, makes it abundantly clear that the cause of
action to institute a complaint comprises the three different factual prerequisites for the institution of a complaint.
None of these prerequisites is in itself sufficient to constitute a complete cause of action for an offence under Section
138.

The expression 'cause of action' appearing in Section 142 (b) of the Act cannot therefore be understood to be limited
to any given requirement out of the three requirements that are mandatory for launching a prosecution on the basis of

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a dishonoured cheque .

There is, nothing either in Section 138 or Section 142 to curtail the said right of the payee, leave alone a forfeiture of
the said right for no better reason than the failure of the holder of the cheque to institute prosecution against the
drawer when the cause of action to do so had first arisen. Simply because the prosecution for an offence under
Section 138 must on the language of Section 142 be instituted within one month from the date of the failure of the
drawer to make the payment does not militate against the accrual of multiple causes of action to the holder of the
cheque upon failure of the drawer to make the payment of the cheque amount.

That brings us to the question whether an offence punishable under Section 138 can be committed only once as held
by this Court in Sadanandan Bhadran's
case (supra). The holder of a cheque as seen earlier can present it before a bank any number of times within the
period of six months or during the period of its validity, whichever is earlier. This right of the holder to present the
cheque for encashment carries with it a corresponding obligation on the part of the drawer to ensure that the cheque
drawn by him is honoured by the bank who stands in the capacity of an agent of the drawer vis-à-vis the holder of the
cheque . If the holder of the cheque has a right, as indeed is in the unanimous opinion expressed in the decisions on
the subject, there is no reason why the corresponding obligation of the drawer should also not continue every time the
cheque is presented for encashment if it satisfies the requirements stipulated in that clause (a) to the proviso to
Section 138. There is nothing in that proviso to even remotely suggest that clause (a) would have no application to a
cheque presented for the second time if the same has already been dishonoured once.

Purpose of the Act

: It is trite that the object underlying Section 138 of the Act is to promote and inculcate faith in the efficacy of
banking system and its operations, giving credibility to Negotiable Instruments in business transactions and to create
an atmosphere of faith and reliance by discouraging people from dishonouring their commitments which are implicit
when they pay their dues through cheques. The provision was intended to punish those unscrupulous persons who
issued cheques for discharging their liabilities without really intending to honour the promise that goes with the
drawing up of such a negotiable instrument. It was intended to enhance the acceptability of cheques in settlement of
liabilities by making the drawer liable for penalties in case the cheque was dishonoured and to safeguard and prevent
harassment of honest drawers.

Held: the decision in Sadanandan Bhadran's case is overruled. Prosecution based upon second or successive
dishonour of the cheque is also permissible so long as the same satisfies the requirements stipulated in the proviso to
Section 138 of the Negotiable Instruments Act.

(See 2012-TIOL-96-SC-MISC-LB)

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