Negotiable Instrument, a piece of paper that entitles a person to a sum of money transferable from one person to another, which makes it an essential source of finance for business and help them do the business with ease.
Earlier, it was only money primarily used to trade products, but now Negotiable instruments have made such trade easier and provide security to the traders.
MEANING AND DEFINITION OF NEGOTIABLE INSTRUMENT
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 negotiable Instrument was required to avoid high cash transactions and give legal effect to such an instrument; 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 Negotiable instrument. Still, Section 13 of the NI act defines Negotiable Instrument as “a promissory note, bill of exchange, or cheque payable either to order or the bearer.”
In ancient times, when trading used to take place only on cash payment, that was not notes but coins, traders usually got 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 NOTE 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 used to apply. And in case if parties were Hindus or Muslims, their personal law was used to govern.
FEATURES OF NEGOTIABLE INSTRUMENTS
- Easily transferable: Negotiable Instruments are freely and easily transferable without any formalities by delivery or by endorsement.
- Must be in writing: Negotiable Instruments cannot be oral; they must be in writing, either handwritten, printed, engraved.
- Time of payment: The date of payment of the amount should be specific; it cannot get paid as per the buyer’s willingness.
- The payee should be certain: The person to whom the payment is to be made. There can be any number of people or corporations, but they should be certain.
TYPES OF NEGOTIABLE INSTRUMENT
Negotiable Instrument Act,1881 recognizes three types of negotiable instruments they are:
- Promissory Note
- Bills of Exchange
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 one who makes the promissory note or who promises to pay is a maker.
- Payee: The person who receives the amount is 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 they are:
- Drawer: The one who makes the bill of exchange or gives an order to pay a certain sum of money is the drawer.
- Drawee: The person who gets 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.
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 one who draws the cheque, i.e., who signs the cheque, is a drawer.
- Drawee: In the cheque case, the drawee is always a bank.
- Payee: The payee is the person who receives 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 get dishonoured due to various reasons like stale cheques, insufficiency of funds, alteration, irregular signature, etc., and such dishonour of cheques gets 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 creates, dishonour of cheques on the ground of insufficiency of funds, a statutory offence. There can be many reasons for the dishonour of a cheque. But cheque for discharge of legal liability gets dishonoured despite legal notice; payment is not made, then it is considered a criminal offence.
Even if a dishonour of cheque is a criminal offence, it is not required to prove the mens rea as any other criminal offence.
Here, in this section, dishonour of cheque 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.
ESSENTIAL 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 gets 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 gets presented within three months from the drawn date.
- Notice should get filed within thirty days of receipt of information from the bank regarding the dishonour of the cheque.
- The drawer of the cheque has made the payment within fifteen days of the receipt of the notice.
EXCEPTION OF SECTION 138 NI Act
The proviso of Section 138 provides with the exception where section 138 is not applicable if:
- The cheque is not presented in the bank within three 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 thirty days of receipt of information from the bank regarding the return of the cheque unpaid.
- The drawer has paid the amount within fifteen days of receipt of the legal notice of dishonour of the cheque.
OFFENCES UNDER THE SECTION 138 OF THE NI ACT,1881
Under Section 138, an offence is primarily a civil wrong where the burden of proof is on the accused.
Section 138 of the NI Act considers the following as an offence in case of dishonour of cheque:
- The cheque gets dishonoured due to insufficient funds in the account: The cheque gets 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 gets 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 is more than the amount agreed with the bank by the account holder.
PUNISHMENT UNDER SECTION 138 Of 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 twice the 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.
THE TIME FRAME OF OFFENCE UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENT ACT,1881
- Cheque presented within three months of validity period whichever is earlier
- Demand for payment of the due amount by giving notice within thirty days from receipt of the memo from the bank
- Payment of debt, by the drawer, within fifteen days from receipt of notice
- Filing complaint within thirty days from the expiry of the fifteenth 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 twice to 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. And 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 also include a default sentence while making an order for the compensation payment.
WHAT IS QUASI-CRIMINAL?
The very general and literal meaning of a quasi-criminal is a civil proceeding that results in a criminal penalty, e.g. Imprisonment.
It can be said that a quasi-criminal proceeding is a proceeding where some element of a criminal proceeding is present in civil proceedings but not all the elements. It includes violations of law or ordinance, family court proceedings, motor vehicle actions, regulatory offence, equity proceedings, contempt of court cases etc.
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:
- The provision has both punitive punishment and fine, which is double the amount of cheque being dishonoured, its interest and cost of the proceeding.
- It aims to allow the drawer to pay back the cheque amount by serving notice to the drawer.
- It is not mandatory to prove mens rea under Section 138 of the Negotiable Instrument Act,1881.
- 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 two years and a fine that may amount to double the amount of cheque and by the adoption of the Code of Criminal Procedure.
Yogendra Pratap Singh v. Savitri Pandey
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 got 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.
Hence, the complainant filed the complaint under section 138 of NI ACT,1881
In this case, the status of premature complaint was in question.
In this case, the Hon’ble Supreme Court held that no cause of action arises until the period of fifteen days is passed. The Court is barred from taking cognizance of any complaint made before the passing of fifteen days of receipt of the notice, even if fifteen days have passed since the notice gets served.
Ripudaman Singh v. Balkrishna
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 got dishonoured for the reason of ‘insufficient funds’.
A legal notice was served, and after the non-payment, a complaint was filed under Section 138 of the NI Act even after service of notice.
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. But a payment made in pursuance of such agreement constitutes a duly enforceable debt for section 138.
Hence, a complaint under section 138 of the negotiable instrument act is maintainable when there is the dishonour of cheque issued under and in pursuance of the agreement to sell.
The Negotiable Instrument Act deals with negotiable instruments provision, which plays a significant role in the commercial world. It is initially a civil lawsuit but to ensure the liabilities get discharged on time; criminal law provisions are also added in the act that makes it a quasi-criminal law.
Section 138 ofwthe NI Act protects the payee from the illegal part of the drawer. It criminalizes the dishonour of cheques in cases like the amount of cheque is more than the fund in the account or exceeds the amount agreed with the bank.
What legal action should be taken in case of dishonour of cheque?
A cheque holder or the payee can file the criminal complaint and civil suit under section 138 of the Negotiable Instrument Act.
Whether dishonour of cheque is a criminal offence?
Yes, dishonour of cheque is a criminal offence and is punishable with imprisonment, which may extend to two years or with a fine that may extend to twice the amount of the cheque or both.
Whether a single complaint is maintainable for the dishonour of several cheques?
A single complaint can only get filed for three dishonoured cheques.