CHAPTER - V

FINDINGS, SUGGESTIONS AND CONCLUSION

FINDINGS:
The research is focussed with the study and analysis of judicial verdicts
delivered by the Hon‟ble High Courts and Hon‟ble Supreme Court of India, in
cheque dishonour cases. This research study explored a large number of corporate
bodies who defaulted in repayment of loans borrowed from banks and financial
institutions. The research indicates that it is not an exhaustive study on judicial
verdicts which are in some cases conflicting and inconsistent that make the
litigants confused. And yet, have found the followings that are the keep instances of
dishonour of cheques as offences under the law, viz the Negotiable Instruments Act;
in India.

1. When offence is deemed committed u/s 138 of Negotiable Instrument Act, 1881.
2. Insufficient funds
3. Stop payment Instruction
4. Existing debt or liability
5. Service of notice
6. Accounts closed
7. Successive dishonour of Cheque
8. Corporate bodies and vicarious liability of directors
9. Company under liquidation
10. Limitation to file complaint
11. Limitation of Legal Fiction
12. Territorial Jurisdiction
13. Presumption under Section 139 of Negotiable Instrument Act, 1881
14. Liability of Surety
15. Mens rea (Intention)
16. Account in joint names
17. Settlement among parties after filling complaint
18. Public Charitable Trust
19. Death of drawer of the cheque before filling the complaint
20. Who can file a complaint?
21. Adequacy of compensation
22. Ingredients for courts taking cognizance of offence

Findings from court verdicts are analysed in this chapter.

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1. WHEN OFFENCE IS DEEMED COMMITTED U/S 138 OF NEGOTIABLE
INSTRUMENT ACT, 1881
The Hon‟ble Supreme court has categorically held that no sooner the
cheque was returned unpaid from the drawee bank, the offence under Section
138 of Negotiable Instrument Act, 1881 stood completed. It was further held that
the return of the cheque unpaid by the drawee bank for the reason envisaged in that
section alone constituted the components of the offence. The court further observed
that the clauses (b) and (c) appended to the proviso to Section 138 just imposed
additional conditions required to be fulfilled, for the accrual of cause of action to
file the complaint.

2. INSUFFICIENT FUNDS
At the time of filing the complaint, the payee or the holder of the
cheque may not know how much balance was in drawer‟s bank account; only
the banker knows how much funds were available. Hence the complaint filed
without mentioning „insufficient funds‟ as reason for dishonour was held valid. It is
common that at the time of issuing the cheque the drawer may not have sufficient
funds in his bank account to honour the cheque; however the drawer after issuing the
cheque but before its presentation for encashment by the payee or the holder in due
course, with the drawee‟s bank, could deposit enough money into his account to
honour the cheque. Therefore the offence is deemed committed only when the cheque
is dishonoured due to not having sufficient funds in the bank account
maintained by the drawer.

3. STOP PAYMENT INSTRUCTION

The Hon‟ble court has held that the drawer might play mischief by giving
„stop payment‟ instruction, finding no funds in his account. After issuing the cheque
the drawer gives instruction to the bank as well as to the payee not to present the
cheque. By giving such stop payment instruction the drawer cannot escape from
the application of section 138 of Negotiable Instrument Act, 1881. Post dated
cheques when dishonoured would attract Section 138 as otherwise it will lose its
credibility and acceptability, if its payments were stopped routinely. The purpose of
the post dated cheque was to provide some accommodation to the drawer of the
cheque. Therefore it was all the more necessary that the drawer of the cheque should
not be allowed to abuse the accommodation given to him by a creditor by way of

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acceptance of a post dated cheque. The contention, that provision of section 138 of
Negotiable Instrument Act, 1881 was not applicable to post-dated cheques, is devoid
of merits. Further, once the cheque was issued by the drawer, a presumption u/s
139 must follow and merely because the drawer had given prior notice instructing
the payee not to present the cheque for collection, it will not prevent action u/s
138 of the Act.

4. EXISTING DEBT OR LIABILITY

A cheque issued for legally enforceable debt or liability only attracts criminal
liability, when it is dishonoured. The cheque issued for repayment of time barred
debt will not come within the clutches of section 138. Dishonour of postdated cheque
rightly attracted liability under Section 138 of Negotiable Instrument Act, 1881.
Postdated cheque was issued in discharging an existing debt is a facility given to the
debtor; abuse of such facility was against the object and purpose of Negotiable
Instrument Act, 1881. Profession fee is a legally enforceable liability. When
existence of legally enforceable debt was not proved no criminal action could
be initiated. The accused having signed and issued the cheque a legal presumption
was to be inferred that the cheque was issued in discharge of a valid debt. A
cheque, issued even to pay the debt of another, Section 138 is applicable, because the
word „any liability‟ would attract such liability.

5. SERVICE OF NOTICE

Service of notice under clause (b) to proviso to section 138 is mandatory. In

the absence of proof of service of notice of demand as required under Section
138(b) of the Act, the complaint filed was not maintainable. Notice sent by
registered post shall be deemed to have been served unless the unserved postal cover
or acknowledgment is received by the payee and the complaint filed is sustainable.
Demanding an amount higher than the cheque amount would invalidate the notice. A
hand written notice issued mentioning the existing loan amount, number and date
of the cheque, name of drawee bank, the date of receipt of information of
dishonour of cheque, making a demand of payment of cheque amount with
warning that if the drawer failed to make the payment, criminal action would be
taken, was valid and fulfilled the requirements of section 138(b) of the Act.
The Hon‟ble court held that lawyer notice contained the words “ kindly

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arrange to make the payment of the cheque, if you intend to avoid the unpleasant
action of my client” was a clear demand under clause 138(b) of Negotiable
Instrument Act, 1881. If the notice contained a higher amount, the cheque amount,
cost and expenses, were shown separately, the notice was valid. The notice sent by
FAX was valid in law. The notice was issued only after expiry of 15 days and the
dishonour of the cheque remained without any further action and no cause of action
accrued. Its corollary was that the payee was not prevented from presenting the
cheque once again within the permitted period and to make use of such presentation
and the subsequent dishonour for a cause of action to be founded for launching a
complaint. When the complaint filed was rejected due to any defect, a rectified
complaint filed beyond the time limit was not valid.

6. ACCOUNTS CLOSED

The Hon‟ble Supreme court has clearly held that after issuing the cheques,
if the drawer closed his account it would certainly attract section 138 of
Negotiable Instrument Act, 1881. The Hon‟ble Supreme court further held that the
High court narrowly construed the word “maintained” in section 138 of the
Act; this section would apply even if the cheque was issued from closed
accounts. The words “on an account maintained by him” with a banker and only on
“that account” the cheque should be drawn, would cover even closed accounts.

7. SUCCESSIVE DISHONOUR OF CHEQUE

The Hon‟ble Supreme court in the case SadanandanBaradan v. Madavan Sunil

Kumar (1998) 6 SCC 514 has held that a combined reading of sections 138(c) and
section 142 of the Negotiable Instrument Act, 1881, cause of action within the
meaning of section 138(c) arises and can arise only once. As the complainant
earlier had recourse to clause (b) of section 138 of Negotiable Instrument Act,
1881 but did not avail of that cause of action that arose in his favour under
section 142(b) of the Act, the complaint filed based on subsequent dishonour was
not maintainable. This decision was overruled by a larger bench of the Hon‟ble
Supreme court in MSR.Leatherv.S.Palaniappan (2013) 1 SCC 177 dated
26.09.2012. The court has held “there is nothing in that proviso to even remotely
suggest that clause (a) would have any application to a cheque presented for the
second time if the same has already been dishonoured once. Indeed if the legislative

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intent was to restrict prosecution only to cases arising out of the first dishonour of a
cheque nothing prevented it from stipulating so in clause (a) itself. In the absence of
any such provision dishonour whether based on a second or any successive
presentation of the cheque for encashment would be a dishonour within the meaning
of section 138 and clause (a) of the proviso thereto”. The court has held that no
new notice was necessary so long as the complaint was filed within one month
from the date on which cause of action arose.

8. CORPORATE BODIES AND VICARIOUS LIABILITY OF DIRECTOR

The Hon‟ble Supreme court has held that “as the company cannot be
sentenced to imprisonment the court has to resort to punishment of imposition of
fine which is also a prescribed punishment. As the company cannot be sentenced
to imprisonment, the court cannot impose that punishment, but when imprisonment
and fine is the prescribed punishment, the court can impose the punishment of
fine which could be enforced against the company”. The Hon‟ble court has
further held that such a discretion can be followed by the court as far as juristic
person was concerned. The court has categorically held that only three category of
persons may be held vicariously liable; they are (i) the company which committed
the offence., (ii) everyone who was in charge of and responsible for the business
of the company, and (iii) any other person who was a director or a manager or a
secretary or officer of the company, with whose connivance or due to whose
neglect the company has committed the offence.” The Hon‟ble apex court overruled
the verdict of Hon‟ble Delhi High court ruling that “ even if the prosecution
proceedings were not taken or could not be continued against the company, it is
no bar for proceeding against the other persons falling within the purview of
sub-section (1) and (2) of section 141 of the Act.” This verdict was overruled
by a three judges bench of Hon‟ble Supreme court, in AneethaHadav.God Father
Travels (P) Ltd., (2012)5 SCC 661 dated 27.04.2012.. The Hon‟ble apex court has
held, “ applying the doctrine of strict construction it is held that commission of
offence by the company is an express condition precedent to attract the vicarious
liability of others. Thus the words „as well as the company‟ appearing in the
section make it absolutely, unmistakably clear that when the company can be
prosecuted, then only the persons mentioned in the other categories could be
made vicariously liable for the offence subject to averments in the petition

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and proof thereof.” The Hon‟ble apex court has further held that individual
notice to directors was not necessary, when the notice as required by law was
served on the company which was the prime accused. The court has also held
when the company was under winding up proceedings, the criminal complaint filed
against the company without leave of the court was maintainable. The court further
held that complaint under Section 138 was against the person specific and not
against the assets of the company. The Hon‟ble apex court has confirmed that
the complaint under section 142 of the Act should be filed only in the name of
the company by any employee/ officer of the company duly authorised by proper
resolution. The court has further held that if the accused was the managing
director, the prefix „managing‟ to the word director made it clear about his
responsibility and no specific averment in the complaint was necessary..

9. COMPANY UNDER LIQUIDATION

The Hon‟ble Supreme Court has held that, even assuming that any disposition
of the property made by a company after commencement of the winding up
proceedings is null and void, that cannot be an escape ground from the offence u/s
138 of Negotiable Instrument Act, 1881. Companies Act does not prohibit
enforcement of debt due from the company. Failure to pay the cheque amount for
whatever reason renders the drawer of the cheque liable for the offence u/s 138.

10. LIMITATION TO FILE COMPLAINT

The payee or holder in due course must file a complaint for offence committed
under section 138 within one month from the date on which cause of action accrued.
The complaint must be in writing and in the name of the payee or holder in due
course. The period of one month means one calendar month and not one
month of thirty days. The notice under clause (b) of Section 138 was served
on 29.09.1995 and that fifteen days time given for making the payment expired
on 14.10.1995; that day to be excluded for counting. The period of one month
was from 15.10.1995 and hence complaint filed on 15.11.1995 was valid. The
Hon‟ble apex court has held six months period for the validity of the cheque,
means six calendar months and not six months of thirty days each (180 days). It
was held for calculating limitation for filing complaint, the date on which the

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complaint was filed and not the date on which the court has taken cognizance
of offence, should be considered.

11. LIMITATION OF LEGAL FICTION

Hon‟ble Supreme court has held “Section 138 of the Negotiable Instrument
Act, 1881 creates a presumption in favour of the holder, there is a deemed
fiction in relation to criminal liability, a presumption in favour of the holder, and
denial of defence in respect of certain aspects.” It was further held that “court has
to apply all those facts and consequences which are identical or inevitable
corollaries to the giving effect to the fiction.”When the accused claimed that he
owed no liability and his cheque leaf was stolen and he has made a complaint
with the police the legal fiction cannot be extended to such cases. Dishonour of
cheque may be due to various reasons. Dishonour of cheque shall be deemed to be
criminal offence only under the two specific reasons mentioned u/s 138 of Negotiable
Instrument Act, 1881 and the fiction cannot be applied to dishonour of cheques due to
other reasons. It is necessary that courts have a duty to ascertain the scope and
purpose for which legal fiction was created by the Legislature. “It is also the
duty of the court to imagine the fiction with all real consequences and instances
unless prohibited from doing so.”

12. TERRITORIAL JURISDICTION

The court observed “the use of the word „the bank‟ in the section is
an indicator of the intention of the Legislature. The bank referred to in proviso
(a) to section 138 of the Act would mean the drawee bank on which the
cheque was drawn and not all banks where the cheque was presented for
collection including the bank of the payee in whose favour the cheque was
issued. The Hon‟ble Supreme court has held ( K.Baskaran v. Sankaran Vaidhyan
Balan (1999) 7 SCC 510 judgment dated 29.09.1999,) “ that the offence u/s 138
of the Act is completed only with the concatenation of a number of acts namely
(i) the drawing of the cheque; (ii) presentation of the cheque to the drawee bank;
(iii) returning the cheque unpaid by the bank; (iv) notice in writing issued to the
drawer demanding the payment of the cheque amount, and (v) failure of the
drawer to make the payment within 15 days of the receipt of the notice.” As
per this verdict, only on the completion of all the five events, the offence

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shall be deemed to have committed u/s 138 of the Negotiable Instrument Act,
1881. The Hon‟ble court held that the Magistrate court in any one of the five
places can take cognizance of offence u/s 138. This verdict was followed in five
cases delivered subsequently by the Supreme court until the case was overruled
by a larger bench in 2014. (Dasrath Rupsing Rathod v. State of Maharastra 191
Comp. Cases 1, (2014) 9SCC 129 dated 01.08.2014)The court has held that
prosecution against the drawer of the dishonoured cheque can be initiated only before
the court within whose jurisdiction the dishonour takes place. In this judgment thirty
three earlier cases were referred. The court has further observed that the period
of validation for a cheque was six months from the date of the cheque till it
was presented to the drawee bank.

The Negotiable Instruments Act 1881 was amended with a view to nullify the
verdict in Dasrath case. Section 142 was renumbered as Sections 142(1) (a), (b) and
(c) and Section 142 (2) (a) and (b) specifying the courts that are competent to take
cognizance of offence committed in cheque dishonour cases.

After this amendment complaints filed u/s 142 of the Negotiable Instrument Act,
1881, shall be tried only by a court, within whose 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 by the payee or holder in due course,

otherwise through an account, the branch of the drawee bank where the drawer
maintains the account, is situated.

A new Section 142-A was inserted that require all cheque dishonour cases pending
in different courts shall be deemed to have transferred to the respective courts having
jurisdiction under the amended Section 142(2)(a) or (b).

These amendments were made effective retrospectively from 15.06.2015.

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13. PRESUMPTION UNDER SECTION 139 OF NEGOTIABLE
INSTRUMENT ACT, 1881

When a cheque is issued for the reasons envisaged in section 138, a legal
presumption is followed that the cheque is issued to discharge a legally enforceable
debt or liability. The court has held that the onus is on the accused to rebut the
presumption u/s 139 of the Act. The court further held that the High Court order was
misplaced in putting the burden of proof on the complainant. The sentence that the
accused to pay Rs.5,55,000/- as fine was confirmed. The Hon‟ble court has held that
the complaint was not maintainable so long the rebutting of the presumption
by the accused was reasonably proved. In one other instance the court has held that
the complainant did not prove that he had sufficient funds to advance the
money to the accused and therefore the complaint filed was not maintainable.

14. LIABILITY OF SURETY

Cheque issued as a surety when dishonoured will also attract liability under
section 138 of Negotiable Instrument Act, 1881. The Hon‟ble Supreme court upheld
the application of section 138 in such cases but directed that the accused‟s
demand that the cheque be sent to Forensic Department for verification of the
validity of the signature should be allowed for rebuttal of presumption.

15. MENS REA (INTENTION)

Mens Rea (criminal intention) is expressly excluded for complaints filed in

cheque dishonour cases. The Hon‟ble Supreme court has held : “It is trite that mens
rea is the quintessential of every crime. The objective of Parliament was to
strengthen the use of cheques distinct from other negotiable instruments, as
mercantile tender and therefore it became essential for Section 138 of the
Negotiable Instrument Act, 1881 offence to be freed from the requirements for
proving mens rea. This has been achieved by deeming the commission of an
offence de hors mens rea not only under Section 138 but also by virtue of the
succeeding two Sections.”

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16. ACCOUNTS IN JOINT NAMES

The Hon‟ble apex court held that under section 138 of the Negotiable
Instrument Act, 1881 in case of issuance of cheque from joint account, both joint
account holders cannot be prosecuted unless the cheque has been signed by
each and every person who were joint holders.

17. SETTLEMENT AMONG PARTIES AFTER FILLING COMPLAINT

The Hon‟ble Supreme court, has held, “ as the offence has been proved, we
have to maintain the conviction. In view of subsequent development and the
grievance of the payee, we are inclined to save the appellant from further jail.
We, therefore, reduce the sentence of imprisonment to the period he had
already undergone. However we maintain the fine sentence of Rs.5,000/-
undisturbed.”

18. PUBLIC CHARITABLE TRUST

The Hon‟ble Madras High Court held that “ a public trust comes within the
explanation to section 141 of Negotiable Instrument Act, 1881 Act and the
provisions of section 138 of Negotiable Instrument Act, 1881 was applicable to a
public trust and the trustees and the criminal proceeding was legally
maintainable. The plea of Economic Offence was rejected, holding that non
payment of private debt was not Economic Offence, the interest of society at
large and welfare of public not affected and hence complaint filed held
maintainable.Sec 138 of the Negotiable Instrument Act, 1881 will also apply to public
charitable trust; the trust and all the trustees are vicariously liable for the offence
committed by the trust.

19. DEATH OF DRAWER OF THE CHEQUE BEFORE FILING THE

COMPLAINT

In cheque dishonour cases civil remedy is available against the legal heirs of
the deceased.

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20. WHO CAN FILE A COMPLAINT

The Hon‟ble Supreme Court held that the complaint filed by power of
attorney was perfectly valid provided the complaint was made in the name of
the payee or the holder in due course of the cheque and the power of attorney
must have witnessed the transaction as an agent of the holder of the cheque.
The power of attorney cannot delegate his power to another person unless specific
provision was given in the power of attorney instrument.

21. ADEQUACY OF COMPENSATION

The amount borrowed was Rs.1,40,00.000/- Cheque issued by the accused

for Rs.5,38,425/- towards interest for the loan, was bounced. The Magistrate
imposed a fine of Rs5,000/- and sentence of imprisonment till rising of the court.
Aggrieved by the verdict, the issue came before the Hon‟ble apex court that
held, that the accused did not pay the interest for last fifteen years and hence
a deterrent sentence was necessary; the court ordered the fine to be paid at
Rs.5,38,425/- and to undergo two years jail. In another case the trial court
sentenced the accused to undergo two years imprisonment and pay compensation of
Rs.1,20,000/- Accused paid the compensation and appealed against imprisonment.
The Hon‟ble Supreme court held that the accused never intended to cheat but
due to tragic circumstances in the family, the cheque issued was dishonoured;
sentence of imprisonment was set aside and fine of Rs.25,000/- was levied.

22. INGREDIENTS FOR COURTS TAKING COGNIZANCE OF OFFENCE

The Hon‟ble court has held that the complainant was present in the court
and deposed and the Magistrate examined him, after such verification the process
was validly initiated; the burden of rebuttal was on the accused. The Hon‟ble court
rejected the contention of the accused that the complainant must also be examined in
addition to power of attorney. The complainant company‟s authorised person filed the
complaint in the name of the payee and it was held valid.

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SUGGESTIONS:

1. Section 138 of the Negotiable Instrument Act, 1881 that provides

sentence of imprisonment for offence committed in cheque dishonour
cases may be amended removing the word imprisonment as punishment
but only fine payable double the cheque amount, interest for the period of
delay and expenses. Courts should be uniform and without discretion in
imposing fine as per law.
2. The payee or holder in due course, shall not be made to seek remedy
in civil court to recover the cheque amount.
3. The Reserve Bank of India may establish a Centre for Enforcement of
Cheque Dishonour cases and create a database wherein all banks must
register dishonour of cheques exceeding five lakh rupees; this information
should be made accessible to the public. The banks should be instructed
not to issue cheques to such defaulters till the entire amount due from
them are cleared.
4. While returning the unpaid cheque the drawee bank should provide
additional information with a reason for the return, of the same instead of
following the age old method endorsing „refer to drawer‟ or „payment
stopped‟. Banks should be more transparent saying whether the cheque
was not honoured due to insufficient funds in the drawer‟s account or
the cheque amount exceeds the arrangement made with the bank. Such
information from the bank would provide transparency to the transaction
which would help both in avoiding unnecessary litigation and in facilitating
quick disposal of the complaints. Therefore it is high time the Reserve
Bank of India or the Association of Nationalised Banks intervened and
made necessary changes in banking practices and in the format/language of
the memo attached while returning unpaid cheques to further the object
of Section 138.
5. Banks usually charge a small service amount when a cheque is bounced,
this is insignificant; the service amount should be effective and deterrent
based on the amount of the cheque and the number of time cheque bouncing
occurred;

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6. If a person commits dishonour of cheque for three times within a period
of twelve months, the issue of cheques by him shall be banned for the
next two years. Enhanced penalty for subsequent cheque bounce instances
can be provided with suitable amendment in the law;
7. Banks may be empowered to freeze the account of the persons, if more than
three instances of cheque dishonour were made within a period of twelve
months;
8. If the person convicted for the offence is a corporate body, the bank accounts
in the name of the company and in the name of persons who are vicariously
liable for the offence, should be notified until the entire amount due from
the accused is paid;
9. In case of cheque amount is one crore and above, if the person convicted
in dishonour of cheque case is a public limited company, the Regulatory
Authority viz S.E.B.I may be advised by the court, not to allow trading
in such company‟s share until the entire amount due from the accused
is paid. Necessary amendments in the law can be made.

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CONCLUSION

The research is focussed with the study and analysis of judicial

verdicts delivered by the Hon‟ble High Courts and Hon‟ble Supreme Court of India,
in cheque dishonour cases. This research study explored a large number of
corporate bodies who defaulted in repayment of loans borrowed from banks and
financial institutions. The research indicates that it is not an exhaustive study on
judicial verdicts which are in some cases conflicting and inconsistent that make
the litigants confused. Despite deterrent punishment provided in law, complaints
against cheque dishonour instances triggered an avalanche of litigations across the
country, which remain unstoppable. It is found in many cases that the accused
challenged criminal complaints more on technical glitches, even though there
was no sufficient funds in the bank account of the drawer to honour the
cheque. In some cases, even for small amount of cheque dishonour, the
accused travel up to the apex court of the country seeking justice and to save
personal honour and dignity from the disgrace of getting imprisoned. Filing of
frivolous complaints will be reduced to certain extent in view of the insertion
of the new sections 143A and 148 that mandate interim compensation to the
complainant payable by the accused. We live in a society surrounded with glaring
inequality and inherited poverty. Imposing sentence of imprisonment on a person
who is unable to pay his debts for genuine reasons, will destroy the high value
of human dignity and freedom enshrined in the constitution. To sum up, sending a
person to jail for his failure to repay the debt borrowed is unreasonable and
unjustified, unless there is an intention of defrauding. As inferred through this
research work, this Act on Negotiable instruments needs necessary changes as
suggested earlier, for refinement that may necessarily serve the business counter
Mounty as well the general public.

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