Analysis: Section 138, Negotiable Instrument- NI ACT, 1881

Negotiable Instrument (NI) entitles a person to a sum of money transferable from one person to another, which makes it an essential for finance for business and helps them perform business with ease.

Earlier, money was primarily used to trade products, but now NIs have made such trade easy and provide security to traders.

MEANING AND DEFINITION OF NI

The word ‘negotiable’ means transferable from one person to another, and the term ‘instrument’ means a document of title of money (as described by Prof. Goode).

A NI is required to avoid high cash transactions and has legal effect; to provide this legal effect, in India, Negotiable Instrument Act,1881 was enacted.

Negotiable Instrument Act, 1881, does not provide a proper definition of the NI. Section 13 of the NI act defines NI as ‘a promissory note, bill of exchange, or cheque payable either to order or the bearer’.

HISTORICAL BACKGROUND

When trading used to take place only on cash payment using coins, traders would be wary of getting robbed by pirates for the wealth that they used to carry with them.

To avoid such robberies, a system was made to issue a letter of credit by the creditor to the trader of another country who is the debtor to the third person as stated by the creditor.

NI Act developed with the custom and usage of trade in general. This branch of law differs from country to country, but the outline of the act is similar.

Before enacting the Negotiable Instrument Act, 1881, the English Bill of Exchange Act and laws relating to promissory Notes were in force.

The Negotiable Instrument Act, 1881 was passed based on a bill drafted by the Law Commission Act,1866, based on the Principles of English law.

Before NI ACT, 1881, when Europeans were trade parties, English Law was applicable. In case of parties being Hindus or Muslims, their personal law was used for governance.

FEATURES OF NIs

• Easily transferable: Negotiable Instruments are freely and easily transferable without any formalities by delivery or by endorsement.
• Must be in writing: NIs cannot be oral; they must be in writing, either handwritten, printed, engraved.
• Time of payment: The date of payment of the amount should be specified; it cannot be paid as per the buyer’s willingness.
• The payee should be certain: The person to whom the payment is to be made should be specified. There can be any number of people or corporations, but they should be certain.

TYPES OF NEGOTIABLE INSTRUMENT

Negotiable Instrument Act,1881 recognizes the following three types of NIs:

1. Promissory Note
2. Bills of Exchange
3. Cheque

PROMISSORY NOTE

As explained under Section 4 of the NI Act, 1881, a promissory note is an instrument in writing signed by the instrument maker that contains a promise to pay a certain sum of money to a certain person or the bearer of the instrument.

Parties to Promissory Note

• Maker: The maker makes the promissory note or who promises to pay is a maker.
• Payee: The person who receives the amount is the payee.

BILLS OF EXCHANGE

A bill of exchange as defined under Section 5 of the Negotiable Instrument Act,1881, is an instrument in writing signed by the instrument maker. It contains an unconditional order, directing a person to pay a certain sum of money either to the bearer or to a certain person other than the bearer of the instrument.

Parties to Bills of Exchange

As mentioned under Section 7 of the NI Act,1881, there are generally three parties to bills of exchange:

• Drawer: The person who makes the bill of exchange or gives an order to pay a certain sum of money is the drawer.
• Drawee: The person who is directed to pay a certain amount.
• Payee: The person whose name is written in the instrument or who receives the amount or who orders to pay the amount is the payee.

CHEQUE

A cheque, a bill of exchange drawn on a specified banker, is always payable on demand as defined under Section 6 of the Negotiable Instrument act,1881.

Parties to Cheque

• Drawer: The person who draws the cheque, that is, who signs the cheque, is a drawer.
• Drawee: In the cheque case, the drawee is always a bank.
• Payee: The payee is the person receiving the payment of the cheque.

SECTION 138 OF NEGOTIABLE INSTRUMENT ACT,1881

A cheque is an instrument that is used regularly for business transactions and to make payments. Certainly, cheques are dishonoured due to various reasons such as stale cheques, insufficiency of funds, alteration, irregular signature. Such dishonour of cheques is dealt with under Section 138 of the Negotiable Instrument Act,1881.

The objective behind the incorporation of Section 138 was to promote the banking sector’s efficiency and ensure the credibility of cheques used in banking transactions.

Section 138 deals with the dishonour of cheques on the ground of insufficiency of funds, which is a statutory offence. There can be many reasons for the dishonour of a cheque. However, cheque bouncing is a criminal offence in case of the cheque being dishonoured despite legal notice; payment is not made.

Even if a dishonour of cheque is a criminal offence, then it is not required to prove the mens rea as any other criminal offence.

In this section, cheque dishonour creates a strict liability and effectively prevents the usual carelessness of drawers.

Section 138 of the NI Act,1881, explains the essentials, exceptions, and punishment in the case of dishonour of cheque.

ESSENTIALs OF SECTION 138 NI Act

• The drawer must have legally enforceable debt or liability to pay a certain amount to the payee, and a cheque is drawn to discharge such debt or liability.
• The cheque is returned unpaid due to insufficient funds, or it exceeds the amount to be paid from that account as per the agreement made with the bank.
• The cheque is presented within three months from the drawn date.
• Notice should be filed within 30 days of receipt of information from the bank regarding the dishonour of the cheque.
• The drawer of the cheque has made the payment within 15 days of the receipt of the notice.

EXCEPTION OF SECTION 138 NI Act

Section 138 is not applicable in the following cases:

• The cheque is not presented in the bank within 3 months or its validity period, whichever is earlier.
• In due course of the cheque, the payee or holder has not demanded the payment by giving notice within 30 days of receipt of information from the bank regarding the return of the cheque unpaid.
• The drawer has paid the amount within 15 days of receipt of the legal notice of dishonour of the cheque.

OFFENCES UNDER SECTION 138 OF THE NI ACT,1881

Under Section 138, an offence is primarily a civil wrong when the burden of proof is on the accused. Section 138 of the NI Act considers the following actions as an offence in case cheque dishonour:

• The cheque is dishonoured due to insufficient funds in the account: The cheque is dishonoured due to fewer funds than mentioned in the cheque in the account of the cheque drawer.

  Insufficiency of funds includes ‘account closed’ and ‘payment stopped’, as held in the case of Laxmi Dyechem v. State of Gujarat.

• The cheque is dishonoured because the amount exceeds the amount agreed with the bank: The dishonour of the cheque is due to the amount mentioned in the cheque being more than the amount agreed with the bank by the account holder.

PUNISHMENT UNDER SECTION 138 of the NI Act

Section 138 provides both civil and criminal liability for the dishonour of cheques.

Civil Liability: Section 138 provides civil liability by imposing a fine two times dishonoured cheques.

Criminal Liability: Section 138 provides criminal liability by providing punishment of imprisonment of two years or offline or both. The drawer for criminal liability is prosecuted under Section 138 of the Indian Penal Code, 1860.

TIME FRAME OF OFFENCE UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENT ACT, 1881

1. Cheque presented within 3 months of the validity period whichever is earlier
2. Demand for payment of the due amount by giving notice within 30 days from receipt of the memo from the bank
3. Payment of debt, by the drawer, within 15 days from receipt of notice
4. Filing complaint within 30 days from the expiry of the 15-day notice period

COMPENSATION TO BE RECOVERABLE UNDER SECTION 138 OF NI ACT,1881

Under Section 138, in case of dishonour of cheque, the court can direct the cheque drawer to pay the amount two times the amount mentioned in the cheque to the payee.

Compensation awarded under Section 138 of the Negotiable Instrument Act by the court is recoverable as a fine. In case of default in payment of compensation, the amount can be recovered as the procedure provided under Section 421 of the Code of Criminal Procedure.

In case of non-payment of compensation, the court can include a default sentence while making an order for the compensation payment.

WHAT IS QUASI-CRIMINAL CASE?

The very general and literal meaning of a quasi-criminal is a civil proceeding that results in a criminal penalty, for example, imprisonment.

Thus, a quasi-criminal proceeding is a proceeding where some element of a criminal proceeding is present in civil proceedings but not all elements. It includes violations of law or ordinance, family court proceedings, motor vehicle actions, regulatory offence, equity proceedings, contempt of court cases.

QUASI-CRIMINAL NATURE OF SECTION 138

In the case of P. Mohanraj v. M/s Shah Brothers Ispat Pvt. Ltd., the court ascertained the nature of Section 138 of the NI Act as follows:

1. The provision has both punitive punishment and fine, which is double the amount of cheque being dishonoured, its interest and cost of proceedings.
2. It aims to allow the drawer to pay back the cheque amount by serving notice to the drawer.
3. It is not mandatory to prove mens rea under Section 138 of the Negotiable Instrument Act, 1881.
4. Under Section 138 of Negotiable Instrument Act, 1881, Proceedings come under the ambit of Section 14 Insolvency and Bankruptcy Code, 2016.

The quasi-criminal nature of Section 138 can easily be understood by including punitive punishment of imprisonment up to 2 years and a fine that may amount to double the amount of cheque and by the adoption of the Code of Criminal Procedure.

CASE LAWS

Yogendra Pratap Singh v. Savitri Pandey

FACTS:

In the discharge of liability, the accused, to repay the balance amount incurred on the purchase of the second-hand winding machine, issued a cheque of Rs. 40000/- in favour of the complainant, drawn on State Bank of India, Inderlok, Delhi. The cheque was dishonoured due to insufficient funds, and even after the expiry of the service period of notice dated 14.03.2014, the cheque amount was not paid.

The complainant filed the complaint under Section 138 of NI ACT, 1881

In this case, the status of premature complaint was in question.

The Supreme Court held that no cause of action should arise until 15 days have passed. The Court is barred from taking cognisance of any complaint made before the passing of 15 days of receipt of the notice, even if 15 days have passed since the notice is served.

Ripudaman Singh v. Balkrishna

FACTS:

In this case, two people sold their agricultural land to Mr X, who made the part payment for the property and issued two post-dated cheques to the sellers.

The cheque was dishonoured for the reason of ‘insufficient funds’. In response, a legal notice was served, and after non-payment, a complaint was filed under Section 138 of the NI Act.

In this case, the Supreme Court observed that the cheques were issued under the pursuance of an agreement to sell. However, an agreement to sell does not create interest in immovable property. However, a payment made in pursuance of such agreement constitutes a duly enforceable debt for Section 138.

A complaint under Section 138 of the negotiable instrument act is maintainable when the cheque is dishonored issued under and in pursuance of the agreement to sell.

CONCLUSION

The Negotiable Instrument Act deals with negotiable instruments provision, which plays a crucial role in the commercial world. NI act was initially a civil lawsuit but to ensure the liabilities get discharged on time, criminal law provisions were added to make the act quasi-criminal law.

Section 138 of the NI Act protects the payee from the illegal part of the drawer. It criminalises the dishonour of cheques in cases such as the amount of cheque is more than the fund in the account or exceeds the amount agreed with the bank.