Landmark Supreme Court Judgment on Sec 138 of Negotiable Instruments Act

Supreme Court Changes ground rule under Section 138 of Negotiable Instruments Act to prosecute a person who had presented the cheque which bounced for insufficiency of funds. Through this judgment, SC provides relief to the holders of bounced cheques under the provisions of the Negotiable Instruments Act

 

cheque bounce

 

 What is a Negotiable Instrument?

The word negotiable means ‘transferable by delivery’ and the word instrument means ‘a written document by which a right is created in favour of some person’. The transfer should be unrestricted and in good faith.
Therefore, a negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, with the payer named on the document. It is an indebtedness to pay an amount and the negotiable instrument is an unconditional guarantee for the same.

Some Examples of Negotiable instruments are Promissory notes, Cheques, Bills of Exchange, bearer bonds, bank notes etc.

The Indian law on Negotiable instruments is governed by the Negotiable Instruments Act of 1881.

About the Act

The Negotiable Instruments Act 1881 was passed in 1882 and was amended in 1989 and 2002, Before 1988 there was no provision to restrain the person issuing the Cheque without having sufficient funds in his account. The only remedy against a Dishonoured cheque was a civil liability accrued. In order to ensure promptitude and remedy against the defaulters of the Negotiable Instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 by amending it with Negotiable Instruments Act, 1988. The second noteworthy amendment was when the parliament enacted the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 which is intended to plug the loopholes. This amendment Act inserts five new sections from 143 to 147 touching various limbs of the parent Act. This act is applicable to the whole of India including the state of Jammu and Kashmir, which was brought under the purview of the act in 1956.

Objective

The objective of the act is to define the various negotiable instruments such a, promissory notes, bills of exchange, cheque etc. Also to prescribe the liability in case of a failure of the instrument to fulfill its debt due to the default on the part of the payer or to curb scrupulous practices adopted to escape liability in respect of negotiable instruments. However, Section 138 in regard to dishonor of cheque attracts criminal liability.

Law on Negotiable Instrument, Section 138

It is manifest that to constitute an offense under Section 138 of the Act; the following ingredients are required to be fulfilled[1]

  1. 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
  2. the cheque should have been issued for the discharge, in whole or in part, of any debt or other liability;
  3. that cheque has been presented to bank within a period of three months from the date on which it is drawn or within the period of its validity whichever is earlier;
  4. 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;
  5. 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 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
  6. 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;

To put it in simpler terms the law stated that the person must owe some amount of money to another and draws a cheque in that regard to fulfil that liability, the cheque be drawn on an account in a bank by him. The cheque was then presented to the bank within 3 months of the date on which it is drawn. However due to insufficiency of funds the cheque is returned by the bank unpaid. The payee (the bank) makes a demand for payment of said amount which the person owed within 30 days of the information received by him (the person who owed the money) that the cheque was returned unpaid; and thereafter the person fails to pay the amount within 15 days of the notice by the bank.

Latest Law

By a landmark judgment, Dashrath Roopsingh Rathod Vs. Stae of Maharashtra & Anr.

In this case, the Supreme Court has changed the basic criteria under Section 138 of Negotiable Instruments Act which is to prosecute a person who had presented the cheque which had been returned due to insufficiency of funds or if the amount exceeds the amount in the bank of the payer.

Earlier, a case under Section 138 could be initiated by the holder of the cheque at his place of business or residence. But, a bench of justices TS Thakur, Vikramjit Sen and C Nagappan ruled that the case has to be initiated at the place where the branch of the bank on which the cheque was drawn is located.

And the judgment would apply retrospectively. This means, lakhs of cases pending in various courts across the country would witness a interstate transfer of cheque bouncing cases.

The bench said: “In this analysis, we hold that the place, situs or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank is located.”

Example: Mr. X who resides in Chennai owes Rs. 1 Lakh to Mr. B who resides in Chandigarh, Mr. X issues a cheque in delhi in favour of Mr. B. The cheque bounces in Ludhiana (place of bank where the cheque is given by Mr. B) for insufficiency of funds.

According to the earlier law Mr. X could have chosen any of the four places. But by the recent judgment the only place for institution of case would be Ludhiana, i.e. where the cheque has dishonored at the payee bank which is located in Ludhiana in this example.

Reasons for passing the new law

The rationale behind this change is that the payers majority being businessmen and traders were using extending credit recklessly and due to the leniency in the provision of Section 138, it was being misused in regards to the place of institution, as sometime the payer had no concern with the place where the cheque was issued and to unnecessarily harass the payee cause hardship of place of institution of case according to their convenience. To curb this practice this judgment aims to get to the root of the issue and resolve it by a strict approach so as to discourage the payer from misusing or carelessly issuing cheques. The hardship of traveling to the location of drawee bank is now on the payer.

The change in the existing law shifts the inconvenience and hardship on the payer because now he would have to travel to the place of the drawee bank where the cheque gets dishonored due to insufficiency of funds. Hence, guaranteeing more precaution by the payer at the time of issuing the cheque.

By Shweta Kaushik, Advocate Punjab & Haryana High Court                                             

 

About the Author

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Vakilno1 is a group of Law Enthusiasts and Legal Experts in India with a passion to provide the latest info and articles on Indian Legal System

 

 

 

 

 

 

Displaying 37 Comments
Have Your Say
  1. Your Name... says:

    Please publish the other short news articles also

  2. Sakshi Sethi says:

    thank you so much. i was in need of it for my moot court preperation.

  3. PRAMOD says:

    Simply Awesome………

  4. PS DHINGRA says:

    Excellent judgment. That was the need of the day to catch hold of the intentional law breakers.

  5. M S Parthasarathy says:

    In these days when cheques of most banks are payable at par at all their Indian branches, and computerisation of clearing of cheques, a payee may well accept cheques drawn on a place other than that of his residence or business or profession, and seek to get the cheques cleared and credited to his account. In such cases, the payee will be put to the inconvenience and hardship of initiating and pursuing legal proceedings at the place where the drawee branch is situated. The court need not have taken such a narrow view of the question of jurisdiction.

    M S Parthasarathy, Author of Cheques in Law and Practice, 6th Edn, Universal, New Delhi

  6. it is ok but what about pending cases of 138

  7. Waht would be status of existing cases, as the judgement is retrospective ..kindly suggest

  8. Anil says:

    The article is little confusing. I would really appreciate if you can clarify the below point.

    Mr. X owes Mr.Y 1 lakh

    X has bank account in Chennai. Y has bank account in Delhi

    on a business transaction they both meet in Mumbai , and X gives a cheque to Y.

    Y goes back to his city , Delhi and presents the check. Cheque bounced for “Insufficiency of funds”

    Can you clarify where the case should be filed ?

  9. […] It is manifest that to constitute an offense under Section 138 of the Act; the following ingredients are required to be fulfilled[1] […]

  10. Shweta says:

    Re: Anil says:

    Anil says:
    October 25, 2014 at 11:29 am

    The article is little confusing. I would really appreciate if you can clarify the below point.

    Mr. X owes Mr.Y 1 lakh

    X has bank account in Chennai. Y has bank account in Delhi

    on a business transaction they both meet in Mumbai , and X gives a cheque to Y.

    Y goes back to his city , Delhi and presents the check. Cheque bounced for “Insufficiency of funds”

    Can you clarify where the case should be filed ?

    ______________________________________

    Solution: The case should be instituted in Delhi where the payee (Y) bank is located according to the recent judgment by the Supreme Court Dashrath Roop Singh Rathod v. State of Maharashtra & Anr. This has been done to avoid inconvenience at the end of the payee i.e. Mr. Y

  11. anil says:

    Thank you for the clarification. .

  12. Anonymous says:

    i think anil case should be filed at chennai since it is the place where drawee bank is situated as referred by hon’ble apex

  13. Anil says:

    I think the latest judgement says it should be done at Delhi.

  14. thank u for latest on the subject

  15. […] Landmark Supreme Court Judgment on Sec 138 of Negotiable Instruments Act Supreme Court Changes ground rule under Section 138 of Negotiable Instruments Act to prosecute a person who had presented the cheque which bounced for insufficiency of funds. […]

  16. Nitin says:

    what about mumbai hogh court judgement stay on at par cheques judgement by supreme court?

  17. govind kumar says:

    Hi..I think place must be Delhi,otherwise it is a bad massage for businesman.

  18. Most confused judgment it increase the crime more over it is harassment to a person who first gave money than he have to go to the place of defaulters place for recovery not a good law

  19. @SanjayDalmia Hey, it is not harassment because first of all he gave money via cheque which got dishonored so literally, he did not give any money. So, after all the inconvenience caused to the payee, it is right that this extra effort put against the payer teaches em a good lesson. Thereby, in future payer will be more precautious before signing off a cheque negligently.

  20. Jagat says:

    Sir,
    It is true the Judgment of Supreme Court Say as above but can we see the effect of this Judgment: Harassment cause to the holder of the cheque. A person Who issue cheque comes now in very comfortable zone. Meaning thereby accuse get more relaxation. This affect the inter state trade. Person who is having genuine case will definately suffer at lot.
    This act made for social welfare and it is quasi criminal proceeding. Through this judgment the load on the Police Station will increase and same will increase corruption also as where the involvement of police is there corruption comes together.I Think this judgment should require review.

  21. Jagat says:

    Sir,
    Again, It is question to think:
    That whether the Hon’ble court can pass an order from Retrospective time or not.

  22. Wagesh says:

    Hello all…In case of Mr. Anil, the legal proceedings should have been done in chennai. If it would have been in delhi then there should be no need of the new judgement by the Hon’bl supreme court.
    @Mr. Goving :- Yes indeed it is a bad message for a businessman. In this verdict the supreme court gave relief to the accused and make it more tedious for the victim. Suppose if i have given u a security cheque and it got dishonoured then you have to visit all the way to my city and legal proceedings can only be done through the jurisdiction where my bank account is situated. Supreme court did that to ease their work load of the lakhs of pending cases. It is the worst judgement one could ever get from the biggest benches in our country. But there is a hope given by Bombay high court as they have given stay order on the said verdict and hopefully everything will be clear on 5th of january 2015.

  23. Revanappa BG says:

    How it is possible to the High Court of Mumbai to stay the verdict of the Supreme Court ?
    Confused discussion

  24. The recent Supreme Court ruling that complaints regarding cheque bounce cases under Sec 138 of the Negotiable Instruments Act have to be filed only where the drawee bank is located (with retrospective effect) causes severe hardship to individual complainants particularly senior citizens in their seventies and eighties, as distinct from corporate bodies/ Business undertakings, who filed cases against unscrupulous persons who issued cheques deliberately with malafide intentions. This ruling needs to be reviewed by the Hon’ble Supreme Court so that such cases continue to be tried at the place where they were instituted regardless of whether recording of evidence after issue of summons has started or not.

  25. Aditya Vikram Sarda says:

    Dear Mam,
    I am little bit confused regarding the supreme court judgment on NI act. Could please suggest me where the case will be filed in following case facts:

    Mr. X issues me a cheuqe of ICICI bank, Mumbai in favour of Mr Y.
    Mr Y deposits the cheque in IDBI Bank, Ranchi Branch, Jharkhand.
    The cheque get returns non paid as the account was closed by Mr X, when the cheque went for clearing.
    In this matter where the case will be filed. It will be Mumbai or Ranchi.
    Please suggest me for the same.
    Regards Aditya Sarda.

  26. yogesh says:

    The honourable judges of supreme court has given lengthy justifications about interpretation of the law without considering the malafide intention of the drawer of the cheque. The ruling should have at least differentiated between corporates/banking and finance companies where they have their branches in most of the cities and file cases in distant areas of the country just to harass their customers and small and medium businesses which contribute to inter-state trade on the basis of security of cheques taken from their parties. This lopsided judgement will encourage the offenders as the fear of section 138 will be reduced thereby harming the very purpose of law. The job of the courts should not only be the strict interpretation of statute but also to uphold the very purpose of law for overall public good.

  27. DILIP K SAHOO says:

    The Landmark Judgement by Supreme Court (3 Judge Bench) could have been more acceptable to the public in it’s TRUE spirit, if Teritorial jurisdiction of the the (holder of the chq)-ie. payee’s parent branch area(where he holds his Ac) could have been added to the scope of filing a case against the payer. (I THINK A PERSON CAN NOT HOLD OR OPEN AN AC WHILE STAYING IN ANOTHER CITY. IT WILL GET CAUGHT UNDER THE BANK’S ‘KYC’ NORM)

  28. satish says:

    what is final decision ? what happened on 5th jan 2015.. can any body explain

  29. I have not issude any cheques or i have not writen any m o u but my business partner has missused my cheques and my signature and made cheque bounse and field 138 against me .with third party.
    please advice what i should do and he appointed Bar council ex-president with his influence and the amount of the cheque is for Rs,6,00,000.00(Six laks only.
    tks
    Suresh Kumar
    Hyderbad

  30. What if you fail to transfer the case in the respective court within one month. What is the solution to that. Pls guide.

  31. DEAR ADV SHWETA YOUR VIEW AND ARTICLE WRITTEN BY YOU ON THE SUBJECT OF JURRISDICTION OF COURT IN 138 Cases. IS WRONG AND MISGUIDING TO READERS. PERHAPS YOU MUST NOT HAVE UNDERSTTOD THE CASE OF DASHRATH RUPSING RATHODS CASE. BECAUSE THE PLACE WHERE THE CHEQUE HAS BEEN DISHONOURED WILL HAVE JURRISDICTION…
    ADV. WAGESH IS CORRECT IN GIVING ADVISE TO ANIL…

    ADV SHAHED ALI ANSARI
    HIGH COURT BOMBAY
    9325143287

  32. patel karan says:

    Plz say me which type of cheque is valid in negotiable act 138 ..means if I give cheque any pertion for sicurity so he can use thet chech in nagotiable act 138 plz ans

  33. somashekar.g says:

    Hai sir , i am a accused under sec 138 NI ACT , due to loss in my life i couldnt clear the cheque , i hv to attrnt court 0n 18 th feb , honestly i want to clear the amount , wat the way for my required time , wat would i get good in law , i m worried so much hvng my eife n child ,as m in very bad finanatial crisis at the momment , how can i take time ,

  34. J kumar gadhvi says:

    Thanks for clarification

  35. G.Deb says:

    The cheque given to me by the drawer was dishonoured by the bank. Then after amicable settlement the drawer gave me another post dated cheque including interest which again dishonoured by the bank stating reason as “Refer to Drawer”. Subsequently I come to know that the drawer is a fraud builder company. Now I thought to go for a criminal case under sec-138 of NI act. Is it possible? Please advice me.

  36. hemant says:

    my question is that if a settlement took place between the parties and part payment paid by the accused to the complainant after that can court pass a order and said to complainant to returned back the whole amount of part payment to the accused.

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