Landmark Judgments on Section 138 of NI Act in 2017

January 09, 2018

Delhi HC says Yes to Mediation for Offence under Section 138 of Negotiable Instruments Act, 1881

Case name: Dayawati v. Yogesh Kumar Gosain (Delhi High Court)

In a remarkable judgment passed by the Delhi High Court, the Court has drawn a distinction between traditional criminal cases and offence under Section 138 of Negotiable Instruments Act, 1881 to hold that it is legal to refer a criminal compoundable case as one under Section 138 of NI Act to mediation.

The Court in the case also expounded the procedure that is to be followed in cases of mediation for offences under Section 138 of NI Act and also delineated the contents of the settlement.

In this recent judgement delivered by the Delhi High Court in the case of Dayawati v. Yogesh Kumar Gosain[1], the Court held that it is legal to refer a criminal compoundable case as one under Section 138 of NI Act to mediation.

In the case the fundamental issue related to settlement of disputes in criminal law through alternative dispute mechanisms.

The Court in order to arrive at its decision studied distinction between the kinds of criminal offences i.e. compoundable and non-compoundable offences. The Court stated that though an express statutory provision enabling the criminal Court to refer the complainant and accused persons to alternate dispute redressal mechanisms has not been specifically provided by the Legislature, however, the Code of Criminal Procedure does permit and recognize settlement without stipulating or restricting the process by which it may be reached. There is thus no bar to utilizing the alternate dispute mechanisms including arbitration, mediation, conciliation (recognized under Section 89 of CPC) for the purposes of settling disputes which are the subject matter of offences covered under Section 320 of the Code of Criminal Procedure.

Other key observations made by the Court in the case are:

That Section 138 of NI Act was introduced to inculcate faith in the efficacy of banking operations and credibility in transacting business of negotiable instruments.

Distinction between traditional criminal offences and offences under Section 138 of NI ActThe Delhi High Court to clarify on the difference between traditional criminal offences and offence under Section 138 of NI Act made reference to plethora of judgements. For instance in the case of Kaushalya Devi Massand v. Roopkishore Khore[2] drew the following distinction between the traditional criminal offences and the offence under Section 138 of NI Act observing thus:

“Having considered the submissions made on behalf of the parties, we are of the view that the gravity of a complaint under the Negotiable Instruments Act cannot be equated with an offence under the provisions of the Penal Code, 1860 or other criminal offences. An offence under Section 138 of NI Act, is almost in the nature of a civil wrong which has been given criminal overtones.”

That cases arising under Section 138 of NI Act are really “civil cases masquerading as criminal cases”. The statutory object in effect appears to be both punitive as also compensatory and restitutive in regard to cheque dishonouring cases. The judgment notes that Chapter XVII of the enactment is a unique exercise which bears the dividing line between civil and criminal jurisdictions and that it provides a single forum to enforce a civil and criminal remedy[3].

Unlike that for other forms of crime, the punishment under Section 138 of NI Act is not a means of seeking retribution, but is more a means to ensure payment of money. The complainant’s interest lies primarily in recovering the money rather than seeing the drawer of the cheque in jail. The threat of jail is only a mode to ensure recovery. As against the accused who is willing to undergo a jail term, there is little available as remedy for the holder of the cheque[4].

That proceedings under Section 138 of NI Act have a special character. They arise from a civil dispute relating to dishonoring to a cheque but may result in a criminal consequence. Even though the statute is punitive in nature, however, its spirit, intendment and object is to provide compensation and ensure restitution as well which aspects must received priority over punishment. The proceedings under Section 138 of the NI Act are therefore, distinct from other criminal cases. It is well settled that they are really in the nature of a civil wrong which has been given criminal overtones.

The Delhi Hugh Court also rendered answers to the following questions in the case. Relevant extract from the judgement is reproduced below:

Question I: What is the legality of referral of a criminal compoundable case (such as on under Section 138 of the NI Act) to mediation?

It is legal to refer a criminal compoundable case as one under Section 138 of the NI Act to mediation.

Question II: Can the Mediation and Conciliation Rules, 2004 formulated in exercise of powers under the CPC, be imported and applied in criminal cases? If not, how to fill the legal vacuum? Is there a need for separate rules framed in this regard (possibly under Section 477 of the Cr.P.C.)?

The Delhi Mediation and Conciliation Rules, 2004 issued in exercise of the rule making power under Part-10 and Clause (d) of Sub-section (ii) of Section 89 as well as all other powers enabling the High Court of Delhi to make such rules, applies to mediation arising out of civil as well as criminal cases.

Question III: In cases where the dispute has already been referred to mediation – What is the procedure to be followed thereafter? Is the matter to be disposed of taking the very mediated settlement agreement to be evidence of compounding of the case and dispose of the case, or the same is to be kept pending, awaiting compliance thereof (for example, when the payments are spread over a long period of time, as is usually the case in such settlement agreements)?

The Delhi High Court in the case also enumerated the procedure that is to be followed for Mediation for offences under Section 138 of NI Act.

Procedure for Settlement of Offence through Mediation under Section 138 of NI Act

  1. When the respondent first enters appearance in a complaint under Section 138 of the NI Act, before proceeding further with the case, the Magistrate may proceed to record admission and denial of documents in accordance with Section 294 of the Cr.P.C., and if satisfied, at any stage before the complaint is taken up for hearing, there exist elements of settlement, the magistrate shall inquire from the parties if they are open to exploring possibility of an amicable resolution of the disputes.
  2. If the parties are so inclined, they should be informed by the Court of the various mechanisms available to them by which they can arrive at such settlement including out of Court settlement; referral to Lok Adalat under the Legal Services Authorities Act, 1987; referral to the Court annexed mediation centre; as well as conciliation under the Arbitration and Conciliation Act, 1996.
  • Once the parties have chosen the appropriate mechanism which they would be willing to use to resolve their disputes, the Court should refer the parties to such forum while stipulating the prescribed time period, within which the matter should be negotiated (ideally a period of six weeks) and the next date of hearing when the case should be again placed before the concerned Court to enable it to monitor the progress and outcome of such negotiations.
  1. In the event that the parties seek reference to mediation, the Court should list the matter before the concerned mediation centre/mediator on a fixed date directing the presence of the parties/authorized representatives before the mediator on the said date.
  2. If referred to mediation, the Courts, as well as the mediators, should encourage parties to resolve their overall disputes, not confined to the case in which the reference is made or the subject matter of the criminal complaint which relates only to dishonouring of a particular cheque.
  3. The parties should endeavour to interact/discuss their individual resolutions/proposals with each other as well and facilitate as many interactions necessary for efficient resolution within the period granted by the Court. The parties shall be directed to appear before the mediator in a time bound manner keeping in view the time period fixed by the magistrate.
  • In the event that all parties seek extension of time beyond the initial six week period, the magistrate may, after considering the progress of the mediation proceedings, in the interest of justice, grant extension of time to the parties for facilitating the settlement.

Contents of the settlement

If a settlement is reached during the mediation, the settlement agreement which is drawn-up must incorporate:

(a) a clear stipulation as to the amount which is agreed to be paid by the party;
(b) a clear and simple mechanism/method of payment and the manner and mode of payment;
(c) undertakings of all parties to abide and be bound by the terms of the settlement must be contained in the agreement to ensure that the parties comply with the terms agreed upon;
(d) a clear stipulation, if agreed upon, of the penalty which would enure to the party if a default of the agreed terms is committed in addition to the consequences of the breach of the terms of the settlement;
(e) an unequivocal declaration that both parties have executed the agreement after understanding the terms of the settlement agreement as well as of the consequences of its breach;
(f) a stipulation regarding the voluntariness of the settlement and declaration that the executors of the settlement agreement were executing and signing the same without any kind of force, pressure and undue influence.

Thereafter, the mediator should forward a carefully executed settlement agreement duly signed by both parties along with his report to the Court on the date fixed, when the parties or their authorized representatives would appear before the Court.

Proceedings before the Court

The magistrate would adopt a procedure akin to that followed by the civil Court under Order XXIII of the C.P.C.

The magistrate should record a statement on oath of the parties affirming the terms of the settlement; that it was entered into voluntarily, of the free will of the parties, after fully understanding the contents and implications thereof, affirming the contents of the agreement placed before the Court; confirming their signatures thereon. A clear undertaking to abide by the terms of the settlement should also be recorded as a matter of abundant caution.

A statement to the above effect may be obtained on affidavit. However, the magistrate must record a statement of the parties proving the affidavit and the settlement agreement on Court record.

The magistrate should independently apply his judicial mind and satisfy himself that the settlement agreement is genuine, equitable, lawful, not opposed to public policy, voluntary and that there is no legal impediment in accepting the same.

Pursuant to recording of the statement of the parties, the magistrate should specifically accept the statement of the parties as well as their undertakings and hold them bound by the terms of the settlement terms entered into by and between them.

Upon receiving a request from the complainant, that on account of the compromise vide the settlement agreement, it is withdrawing himself from prosecution, the matter has to be compounded. Such prayer of the complainant has to be accepted in keeping with the scheme of Section 147 of the NI Act.

At this point, the trial Court should discharge/acquit the accused person, depending on the stage of the case. This procedure should be followed even where the settlement terms require implementation of the terms and payment over a period of time.

In the event that after various rounds of mediation, the parties conclude that the matter cannot be amicably resolved or settled, information to this effect should be placed before the magistrate who should proceed in that complaint on merits, as per the procedure prescribed by law.

Question V: If the Mediated Settlement Agreement, by itself, is taken to be tantamount to a decree, then, how the same is to be executed? Is the complainant to be relegated to file an application for execution in a civil Court? And if yes, what should be the appropriate orders with respect to the criminal complaint case at hand. What would be the effect of such a mediated settlement vis-a-vis the complaint case?

The settlement reached in mediation arising out of a criminal case does not tantamount to a decree by a civil Court and cannot be executed in a civil Court.

However, a settlement in mediation arising out of referral in a civil case by a civil Court, can result in a decree upon compliance with the procedure under Order 23 of the C.P.C. This can never be so in a mediation settlement arising out of a criminal case.

The entire case can be accessed here.

Scheme of Prosecution under Section 138 of NI Act Different from Scheme of CrPC

Case name: N. Harihara Krishnan v. J. Thomas (Supreme Court)

In a recent verdict pronounced by Two-Judge Bench of the Supreme Court, the Court elaborated on the scheme of prosecution under Section 138 of Negotiable Instruments Act, 1881 and also the ingredients that are elementary for constituting an offence under this provision.

Scheme of Prosecution under Section 138 of NI Act

While elucidating on the law relating to Dishonor of cheque, the Supreme Court stated that the scheme of prosecution in punishing under Section 138 of NI Act is different from the scheme of Code of Criminal Procedure. Section 138 of NI Act creates an offence and prescribes punishment. No procedure for the investigation of the offence is contemplated.

The prosecution is initiated on the basis of a written complaint made by the payee of a cheque. Obviously such complaints must contain the factual allegations constituting each of the ingredients of the offence under Section 138. Those ingredients are:

  • that a person drew a cheque on an account maintained by him with the banker;
  • that such a cheque when presented to the bank is returned by the bank unpaid;
  • that such a cheque was presented to the bank within a period of six months from the date it was drawn or within the period of its validity whichever is earlier;
  • that the payee demanded in writing from the drawer of the cheque the payment of the amount of money due under the cheque to payee; and
  • such a notice of payment is made within a period of 30 days from the date of the receipt of the information by the payee from the bank regarding the return of the cheque as unpaid.

It is obvious from the scheme of Section 138 of NI Act that each one of the ingredients flows from a document which evidences the existence of such an ingredient. The only other ingredient which is required to be proved to establish the commission of an offence under Section 138 of NI Act is that inspite of the demand notice referred to above, the drawer of the cheque failed to make the payment within a period of 15 days from the date of the receipt of the demand. A fact which the complainant can only assert but not prove, the burden would essentially be on the drawer of the cheque to prove that he had in fact made the payment pursuant to the demand.

Ingredients to Constitute an Offence under Section 138 of NI Act

That a person drew a cheque. The identity of the drawer of the cheque is necessarily required to be known to the complainant (payee) and needs investigation and would not normally be in dispute unless the person who is alleged to have drawn a cheque disputes that very fact.

That the payee of the cheque did in fact comply with each one of the steps contemplated under Section 138 of NI Act before initiating prosecution. Because it is already held by this Court that failure to comply with any one of the steps contemplated under Section 138 would not provide “cause of action for prosecution”.

Therefore, in the context of a prosecution under Section 138, the concept of taking cognizance of the offence but not the offender is not appropriate. Unless the complaint contains all the necessary factual allegations constituting each of the ingredients of the offence under Section 138, the Court cannot take cognizance of the offence.

That disclosure of the name of the person drawing the cheque is one of the factual allegations which a complaint is required to contain. Otherwise in the absence of any authority of law to investigate the offence under Section 138 of NI Act, there would be no person against whom a Court can proceed.

That there cannot be a prosecution without an accused. The offence under Section 138 is person specific. Therefore, the Parliament declared under Section 142 that the provisions dealing with taking cognizance contained in the Code of Criminal Procedure should give way to the procedure prescribed under Section 142. Hence the opening of non obstante clause under Section 142 of NI Act. It must also be remembered that Section 142 of NI Act does not either contemplate a report to the police or authorise the Court taking cognizance to direct the police to investigate into the complaint.

The entire case can be accessed here.

SC Issues Directions for Speedy Disposal of Dishonor of Cheque Cases

Case Name: M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta (Supreme Court)

In this case, Two-Judge Bench of Supreme Court made some key observations regarding dishonor of cheque cases and also issued directions for speedy disposal of cheque cases Section 138 of NI Act.

Some key observations of the Apex Court in the case with reference to offence under Section 138 of NI Act

  • Offence under Section 138 of the Act is primarily a civil wrong.
  • Burden of proof is on accused in view presumption under Section 139 but the standard of such proof is “preponderance of probabilities”. The same has to be normally tried summarily as per provisions of summary trial under the Code of Criminal Procedure.
  • The Court can close the proceedings and discharge the accused on satisfaction that the cheque amount with assessed costs and interest is paid and if there is no reason to proceed with the punitive aspect.
  • That the object of the provision being primarily compensatory, punitive element being mainly with the object of enforcing the compensatory element, compounding at the initial stage has to be encouraged but is not debarred at later stage subject to appropriate compensation as may be found acceptable to the parties or the Court.
  • Though compounding requires consent of both parties, even in absence of such consent, the Court, in the interests of justice, on being satisfied that the complainant has been duly compensated, can in its discretion close the proceedings and discharge the accused.
  • Recording of Evidence in Cheque Dishonor cases- Since evidence of the complaint can be given on affidavit, subject to the Court summoning the person giving affidavit and examining him and the bank’s slip being prima facieevidence of the dishonor of cheque, it is unnecessary for the Magistrate to record any further preliminary evidence. Such affidavit evidence can be read as evidence at all stages of trial or other proceedings.
  • Case to be tried summarily- The manner of examination of the person giving affidavit can be as per Section 264 of CrPC. The scheme is to follow summary procedure.

Speedy Disposal of cases under Section 138 of NI Act

The Supreme Court in the case took a strong note of increasing number of cases instituted under Section 138 of NI Act . The Court also stated that the magnitude of challenge posed by cases filed under Section 138 of the Act, which constitute about 20% of the total number of cases filed in the Courts (as per 213th Report of the Law Commission) and earlier directions of this Court in this regard, it appears to be necessary that the situation is reviewed by the High Courts and updated directions are issued.

Use of modern technology for speedy disposal of casesThe Court took into consideration use of modern technologies for enabling speedy disposal of cases under Section 138 of NI Act  and noted that use of modern technology needs to be considered not only for paperless Courts but also to reduce overcrowding of Courts. There appears to be need to consider categories of cases which can be partly or entirely concluded “online” without physical presence of the parties by simplifying procedures where seriously disputed questions are not required to be adjudicated. Traffic challans may perhaps be one such category.

Atleast some number of Section 138 cases can be decided online. If complaint with affidavits and documents can be filed online, process issued online and accused pays the specified amount online, it may obviate the need for personal appearance of the complainant or the accused. Only if the accused contests, need for appearance of parties may arise which may be through Counsel and wherever viable, video conferencing can be used. Personal appearances can be dispensed with on suitable self-operating conditions.

Other Directions Issued by the Court in the case

  • In every complaint under Section 138 of NI Act, it may be desirable that the complainant gives his bank account number and if possible e-mail ID of the accused. If e-mail ID is available with the Bank where the accused has an account, such Bank, on being required, should furnish such e-mail ID to the payee of the cheque.
  • In every summons, issued to the accused, it may be indicated that if the accused deposits the specified amount, which should be assessed by the Court having regard to the cheque amount and interest/cost, by a specified date, the accused need not appear unless required and proceedings may be closed subject to any valid objection of the complainant.
  • If the accused complies with such summons and informs the Court and the complainant by e-mail, the Court can ascertain the objection, if any, of the complainant and close the proceedings unless it becomes necessary to proceed with the case.
  • In such a situation, the accused’s presence can be required, unless the presence is otherwise exempted subject to such conditions as may be considered appropriate. The accused, who wants to contest the case, must be required to disclose specific defence for such contest.
  • In case the trial is to proceed, it will be open to the Court to explore the possibility of settlement. It will also be open to the Court to consider the provisions of plea bargaining. Subject to this, the trial can be on day to day basis and endeavour must be to conclude it within six months.
  • The guilty must be punished at the earliest as per law and the one who obeys the law need not be held up in proceedings for long unnecessarily.

The entire case can be accessed here.

NCLT- Proceedings under Section 138 of NI Act is Different from Proceedings under the Insolvency and Bankruptcy Code, 2016

(In the matter of R.G. Shaw & Sons Pvt. Ltd. – NCLT)

In this recent case before the National Company Law Tribunal (NCLT), the Petitioner had filed application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor on account of default in making payments to Creditors.

The Corporate Debtor in the case alleged that the Petitioner has not come with clean hands as the Petitioner has suppressed the fact that it has also initiated proceedings under Section 138 of NI Act on account of dishonored cheques.

The NCLT while dismissing the argument of corporate debtor held that the proceedings under Section 138 of NI Act is a different proceeding and liability occurs when a cheque is dishonored.

The entire case can be accessed here.

Only Handing over of Dishonored Cheque does not Attract Offence under Section 138 of NI Act

Case name- Smt. Asha Baldwa v. Ram Gopal (Supreme Court)

In the case, the Petitioner had instituted petition under Section 482 of CrPC  for quashing of the entire proceeding of criminal case qua the petitioner for offence under Section 138 of NI Act.

In the case, it was alleged that the dishonored cheque was handed over to the present respondent by the petitioner and, therefore, she was consenting party to the act of giving the cheque and hence responsible for any proceedings in consequence of giving the cheque.

The Petitioner in the case contended that as per Section 141(2) of the Negotiable Instrument Act, 1881 the allegation can only be levelled against the Company or its partners or its Directors only when the offence was committed with the consent or connivance or, is attributable to, any neglect on the part of, any director, manager, secretary or partners.

Key takeaways from the case

That the legislative intention while making a specific provision of Company/Firm was that any person who was not directly responsible or merely a Director of Company or Firm could be held guilty for the alleged offence, only if he had committed offence with the consent of such person.

That on a bare reading of the complaint as well as the record, it is clear that only role of the petitioner is that she handed over the cheque but it has not been alleged that what was her role in consenting to the offence that is a default or dishonoring of the cheque.

That the purport of the special law under the Negotiable Instrument Act is to ensure that the promise to pay is abided by the person so promising. The provision under Section 139 of the NI Act is that it shall be presumed that the holder of a cheque received the cheque of the nature referred to in Section 138 of NI Act for the discharge, in whole or in part, of any debt or other liability.

That the legislative intention was that the holder of the cheque shall be entitled to receive the amount so promised from the person from whom the cheque is received. Any person, other than the person could be held responsible under Section 141(2) of the NI Act only when he is an office bearer of the Company of Firm.

That a bare reading of the complaint as well as the relevant law, on the face of it, makes it clear that the offence is not made out against the present petitioner as she neither issued the cheque and it has not been attributed to her and the allegation was that she had handed over the cheques which does not mean she had consented to offence by any stretch of imagination.

The entire case can be accessed here.

Cheque Bounce case: Reminder notice of dishonor of cheque to the drawer

Case name: N. Parameshwaram Unni v. G. Kannan & Anr. (Supreme Court)

In a recent case, N. Parameshwaram Unni v. G. Kannan & Anr., the Supreme Court held that a reminder notice to a drawer of cheque cannot be construed as an admission of non-service of the first notice by the complainant. The Court further observed that from the perusal of relevant sections it is clear that generally there is no bar under the N.I. Act to send a reminder notice to the drawer of the cheque and usually such notice cannot be construed as an admission of non-service of the first notice by the appellant as has happened in this case.

The Court in the case also opined that in plethora of cases it has been held that when a notice is sent by registered post and is returned with postal endorsement “refused” or “not available in the house” or “house locked” or “shop closed” or “addressee not in station”, due service has to be presumed. Though in process of interpretation right of an honest lender cannot be defeated as has happened in this case.

The case can be accessed here.

Also read Notice of Dishonor of Cheque: Law and Important Judgments

Also read FAQ’s on Dishonor of Cheque

Also read Landmark Supreme Court Judgment on Sec 138 of Negotiable Instruments Act

 

 

 

 

 

 

 

 

[1] 243 (2017) Delhi Law Times 117 (DB), decided on October 17, 2017

[2] (2011) 4 SCC 593

[3] Rule Vijayan v. Baby, (2012) 1 SCC 260

[4] Damodar S. Prabhu v. Sayed Babalal H, (2010)50 SCC 663

About the Author

Shilpi Sharan

- Shilpi Sharan is the Editor at Vakilno1.com - an Advocate with extensive knowledge in myriad fields of Law. She has a flair of writing and has legal publications in national and international law magazines to her credit. She focuses on legal research and aims at raising public awareness of laws in India.