DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW.

2020-21

“Banking and Insurance Law”

“Final Draft”
“Complaints under Section 138 of Negotiable Instruments Act”

Submitted to: Submitted by:

Dr. Aparna Singh Varchasva Gupta

Assistant Professor (Law) Enroll. No. 180101161

Dr. RMLNLU, Lucknow. Section – B

Contents

INTRODUCTION...........................................................................................................................................3
EVOLUTION OF THE ACT IN PURSUANCE WITH SECTION 138, NEGOTIABLE INSTRUMENTS ACT, 1881......4
PROCEDURE FOR FILING A COMPLAINT UNDER SECTION 138....................................................................7
JURISDICTIONAL DEVELOPMENT UNDER SECTION 138...............................................................................8
CRITICAL ANALYSIS....................................................................................................................................11
CONCLUSION.............................................................................................................................................15
REFERENCES..............................................................................................................................................16
INTRODUCTION

The term "Negotiation" is a does not necessarily imply anything more than the assertion that the
paper possesses the negotiable quality. Generally speaking, it applies to any written statement
given as security, usually for the payment of money, which may be transferred by endorsement
or delivery, vesting in the party to whom it is transferred a legal title on which he can support a
suit in his name. The term signifies that the note or paper writing to which it is applied, possesses
the requisites of negotiability.

A negotiable instrument is one, therefore, which when transferred by delivery or by endorsement

and delivery, passes to the transferee a good title to payment according to its tenor and
irrespective of the title of the transferor, provided he is bona fide holder for value without notice
of any defect attaching to the instrument or in the title of the transferor; in other words, the
principle nemo dat quod non habit does not apply, It is the element of negotiability that make a
contract founded upon paper thus adopted for circulation different in many particulars from
other contracts known to law.1

The early origin of these instruments is a matter of speculation among text writers. In primitive
societies, the system of bills of exchange could not, of course, have existed; for firstly, money
which it represents was not invented till long after, and secondly, the art of writing was a thing
unknown to them. When the system of bartering became inconvenient, a common medium of
exchange and an instrument of an easily convertible character was found necessary, and money
came into use. It might have had its humble origin, but when once the utility of money was
found, it was never lost sight of.

In the case of Rangachari(N.) v Bharat Sanchar Nigam Ltd.2 , the Apex Court pointed out that
The Law merchant treated negotiable instruments as instruments that oiled the wheels of
commerce and facilitated quick and prompt deals and transactions. This continues to be in the
position as now recognized by legislation, though possibly a change is taking place with the
advent of credit cards, debit cards and so on. It was said that negotiable instruments are merely
instruments of credit, readily convertible into money and easily passable from one hand to

1
Bhashyam and Adiga's The Negotiable Instruments Act, 19th Edition, Bharat Law House, New Delhi
2
Rangachari(N.) v Bharat Sanchar Nigam Ltd. 2007 (3) Supreme 626
another. With expanding commerce, growing demand for money could not be met by mere
supply of coins and the instrument of credit took function of money which they represented and
thus became by degrees, articles of traffic. A man dared not dishonor his own acceptance of bill
of exchange, lest his credit be shaken in the commercial world.

EVOLUTION OF THE ACT IN PURSUANCE WITH SECTION 138,

NEGOTIABLE INSTRUMENTS ACT, 1881

Negotiable Instruments have been used in commercial world for a long period of time as one of
the convenient modes of transferring money. Development in banking sector and with the
opening of new branches, cheque became one of the favourite Negotiable Instrument.

A cheque is an acknowledged bill of exchange that is readily accepted in lieu of payment of

money and it is negotiable. However, by the fall of moral standards, even these Negotiable
Instruments like cheques issued, started losing their credibility by not being honoured on
presentment. It was found that an action in the civil court for collection of the proceeds of
negotiable instrument like a cheque tarried, thus defeating the very purpose of recognizing a
negotiable instrument as a speedy vehicle of commerce.3

Consequently, the Section 4 of the Banking, Public Financial Institutions and Negotiable
Instruments Laws (Amendment) Act, 1988, inserted Chapter XVII in the Negotiable Instruments
Act, 1881 (hereinafter the "NI Act"). The statement of object and reasons attached to the Bill
explaining the provisions of the added chapter read as follows:

"This clause [clause (4) of The Bill] inserts a new Chapter XVII in the Negotiable Instruments
Act, 1881. The provisions contained in the new chapter provide that where a cheque drawn by a
person for the discharge of any liability is returned by the bank unpaid for the insufficiency of
funds standing to the credit of the account on which he cheque was drawn or for the reason that
it exceeds the arrangements made by the drawer of the cheque with the bankers for that account,
the drawer of the cheque shall be deemed to have committed an offence. In that case, the drawer
without prejudice to the other provisions of the said Act, shall be punishable with imprisonment

3
Rangacari(N.) v Bharat Sanchar Nagam Limited (2007) 3 Supreme 626.
for a term which may extend to one year, or with fine which may extend to twice the amount of
the cheque, or with both.

The provisions have also been made that to constitute the said offence –

a. such cheque should not have been presented to the bank within a period of six months of
the date of its drawal or within the period of its validity, whichever is earlier; and

b. the payee or the holder in due course of such cheque should have made a demand for the
payment of the said amount of money by giving a notice, in writing to the drawer of the
cheque within fifteen days of the receipt of the information by him from the bank
regarding the return of the cheque unpaid; and

c. the drawer of such cheque should have failed to make the payment of the said amount of
money to the payee or the holder in due course of the cheque within fifteen days of the
receipt of the said notice.

It has also been provided that it shall be presumed, unless the contrary is proved, that the holder
of such cheque received the cheque in discharge of a liability. Defenses which may or may not
be allowed in any prosecution for such offence have also been provided to make the provisions
effective. "

The Bill provided certain considerable safeguards to ensure that genuine and honest customers of
the bank were not harassed. These safeguards included-

a. that no court shall take cognizance of such offence except on a complaint, in writing
made to the payee or the holder in due course of the cheque;

b. that such complaint is made within one month of the date on which the cause of action
arises; and

c. that no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the

first class shall try any such offence.4
In the case of Dalmia Cement(Bharat) Ltd. V Galaxy Traders and Agencies Ltd.4, the Apex
Court referred to the object of Section 138 of the Act. The court observed that the Act was
enacted and section 138 thereof incorporated with a specified object of making a special
provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is
concerned. The law relating to the negotiable instruments is the law of commercial world
legislated to facilitate the activities in trade and commerce making provision of giving sanctity to
the instruments of credit which could be deemed to be convertible into money and easily
passable from one person to another.

The offence under section 138 is not a natural crime like hurt or murder. It is an offence created
by a legal fiction in the statute. It is a civil liability transformed into a criminal liability, under
restricted conditions by way of an amendment to the Act, which is brought into force only in
1989. Till then, the offending acts referred to in section 138 constituted only a pure civil liability.
Legitimately, the legislature thought it fit to provide for adequate safeguards in the Act to protect
honest drawers from unnecessary harassment.

However, the sections 138 to 142 of the said Act were found deficient in dealing with dishonour
of cheques. Thereby, the Negotiable Instruments (Amendment and Miscellaneous Provisions)
Act, 2002, inter alia, amended sections 138, 141 and 142 and inserted new sections 143 to 147 in
the said Act. These sections aimed at speedy disposal of cases relating to dishonour of cheque
through their summary trial as well as making them compoundable. Punishment provided under
section 138 too was enhanced from one year to two years. These legislative reforms aimed at
encouraging the usage of cheque and enhancing the credibility of the instrument so that the
normal business transactions and settlement of liabilities could be ensured.

What came into the forefront of all the disputed regarding section 138, was essentially with
regard to the appropriate court in which the complaint could be filed by the payee in case a
cheque has been dishonoured. This jurisdiction issue has been interpreted by the courts from
time to time and the law has witnessed a considerable number of changes throughout. The
developments in the law relating to the dishonor of cheques have been traced further in the
paper.

4
Banking, Public Financial Institutions and Negotiable Instruments Laws(Amendment) Bill, 1988
PROCEDURE FOR FILING A COMPLAINT UNDER SECTION 138

The Section 143 of the Negotiable Act, post amendment by the legislature in the year 2001,
specifically provides for all offences under the Chapter are to be tried by Judicial Magistrate of
First Class or Metropolitan Magistrate (hereinafter "MM") in accordance with the Summary
Trial provisions of sections 262 to 265 of CrPC. It has been provided for that in a case under the
section 138 of the Act, the Magistrate is empowered to pass a sentence of imprisonment upto one
year and fine exceeding Rs. 5000/-. It further provides that if at the commencement or during the
course of summary trial, MM finds that nature of case was such that a sentence of imprisonment
exceeding one year may have to be passed or for some other reason MM comes to conclusion
that case should not be tried summarily, the Magistrate has to pass an order after hearing the
parties, giving reasons as to why he would like to try the case not in a summarily manner but as a
summon trial and he could recall witnesses who may have been examined and proceed with the
case to hear it as a summon trial case.5 However, the procedure so prescribed could not resolve
the issues arising from the adversities to adopt the summary procedure. The absence of the
parties for the hearing or the absence of the respective advocates, were highly detrimental to the
objective behind prescribing a summary procedure to be followed in cases of dishonour of
cheques. Subsequently, in the case of Rajesh Agarwal v. State and Others6, the Hon'ble Delhi
High Court prescribed certain guidelines with respect to the summary trial procedure which
would be followed with respect to offences under section 138. The summary trial procedure to be
followed for offences under section 138, would thus be as under:

Step I: On the day complaint is presented, if the complaint is accompanied by affidavit of
complainant, the concerned MM shall scrutinize the complaint & documents and if commission
of offence is made out, take cognizance & direct issuance of summons of accused, against whom
case is made out.

5
Section 143, The Negotiable Instrument Act, 1881
6
Rajesh Agarwal v. State and Others (2010) ILR 6 Del
Step II: If the accused appears, the MM shall ask him to furnish bail bond to ensure his
appearance during trial and ask him to take notice u/s 251 Cr. P.C. and enter his plea of defence
and fix the case for defense evidence, unless an application is made by an accused under section
145(2) of NI Act for recalling a witness for cross examination on plea of defence.

Step III: If there is an application u/s 145(2) of NI Act for recalling a witness of complainant,
the court shall decide the same, otherwise, it shall proceed to take defence evidence on record
and allow cross examination of defence witnesses by complainant.

Step IV: To hear arguments of both sides.

Step V: To pass order/judgment.

JURISDICTIONAL DEVELOPMENT UNDER SECTION 138

The Act is silent on the matter pertaining to the relevant jurisdiction with respect to filing of
criminal complaint in case the offence of Dishonour of the cheque is committed under Section
138. Since the Criminal courts are approached, the issue needs to be examined from the point of
view of the Criminal Procedure Code, 1973. Section 177 of CrPC provides that "Every offence
shall ordinarily be inquired into and tried by a Court within whose local jurisdiction it was
committed". Section 178 provides that "(a) When it is uncertain in which of several local areas
an offence was committed, or (b) Where an offence is committed partly in one local area and
party in another, or (c) Where an offence is a continuing one, and continues to be committed in
more local area has one, or (d) Where it consists of several acts done in different local areas, It
may be inquired to or tried by a court having jurisdiction over any of such local areas."

Thus, in all the above situations, the court having jurisdiction over any of such local areas may
try the offence.
The jurisdiction is explained with reference to the Landmark cases
of K.BhaskaranVs.SankaranVaidhyanBalan and Anr7 and the later case
of DashrathRupsinghRathod v. State of Maharashtra& Anr10, while assessing the position
before and after these judgements.

Position Before "K.BHASKARAN" Case

 Jugal Kishore Arun v. V.A. Neelakandan11

Bellie, J. observed, that a prosecution for issuing of a cheque without sufficient funds in
the Bank, will have to be instituted before the Court within whose jurisdiction the cheque
was issued.

 In P.K. Muraleedharan v/s C.K.Pareed and Anr8

Kerala High court held thatthe place where the creditors resides or the place where the
debtor resides cannot be said to be the place of payment unless there is any indication to
that effect either expressly or impliedly. The cause of action as contemplated in S. 142 of
the Act arises at the place where the drawer of the cheque fails to make payment of the
money. That can be the place where the Bank to which the cheque was issued is located.
It can also be the place where the cheque was issued or delivered. The Court within
whose jurisdiction any of the above mentioned places falls has therefore got jurisdiction
to try the offence under Section 138 of the Act.

 M/s. Essbee Food Specialties and Ors. v. M/s. Kapoor Brother

High Court of Punjab and Haryana on the question of jurisdiction stated as under: As to
the question of jurisdiction, it is to be considered that the issuance of the cheques and
their dishonoring are only a part of cause of action; the offence was complete only when
the petitioner failed to discharge their liability to the respondent-firm. For discharging a
debt, it is the debtor who has to find out his creditor and since in the present case, the
respondent, who is the creditor, has its office at Panchkula, the Court at Ambala had the
territorial jurisdiction.

7
K. Bhaskaran Vs. SankaranVaidhyanBalan and Anr (1999) 7 SCC 510
8
P.K. Muraleedharan v/s C.K.Pareed and Anr1993(1)ALT(Cri)424
  Rakesh NemkumarPorwal v/s Narayan DhonduJoglekar and anr.

The anatomy of S. 138 comprises certain necessary components before the offence can be
said to be complete, the last of them being the act of non-payment inspite of 15 days
having elapsed after receipt of the final notice. It is true that the cheques may have been
issued by the accused at his place of residence or business, the Bank on which it is drawn
being often located at a second spot and inevitably the complainant or the payee has his
place of residence or business at yet another location. It was for this reason that the
Kerala High Court in the case of P.K.Muralendharanv.C.KPareed15, took the view that
any of the three Courts could exercise jurisdiction. In our considered view, where
undoubtedly each of the components constitute a stage in the commission of the of-
fence, the final non-payment being the ultimate one, S. 178 Cr.P.C. would clearly apply
to an offence of this type."

 Gautham T. V. Centre v. Apex Agencies

High Court of Andhra Pradesh held that the Court within whose jurisdiction the cheque is
given, or where the information of dishonour is received or where the office of the payee
is situate, will have jurisdiction to try the offence.

 Canbank Financial Services Ltd. v/s Gitanjali Motors and Ors9

Delhi High Court held that the place where the cheque was given or handed over is
relevant and the Courts within that area will have territorial jurisdiction. Also held, "Then
as per Section 179 when an act is an offence by reason of anything which has been done
and of a consequence which has ensued. The offence may be inquired into or tried by a
court within those legal jurisdictions such thing has been done or such consequence has
ensued. Payment of cheque against an account having sufficient funds to meet the
liability under the cheque is one act while dishonor of the cheque is a consequence of
such an act. Therefore, as per Section 179 also the place where the cheque was given or
handed over will have jurisdiction and the courts of that place will have jurisdiction to try

9
Canbank Financial Services Ltd. v/s Gitanjali Motors and Ors 1995
 the offence. Likewise, for purposes of Section 178(b) payment of cheque may be one part
of an offence and dishonor of the cheque may be another part and, therefore, both places
i.e., place where the cheque was handed over and the place where it was dishonored will
have jurisdiction."

 SanjaiMakkar and Ors.Vs.Saraswati Industrial Syndicate Limited and Ors.10

The High Court of Allahabad held "...so far as territorial jurisdiction is concerned, the
cause of action arises at a place where the cheque was drawn, or a place where the cheque
was presented, or a place where the payee made a demand for payment of the money by
giving a notice in writing to the drawer within the stipulated period and at a place where
the drawer failed to make the payment within 15 days of the receipt of notice."

CRITICAL ANALYSIS

Negotiable Instrument is a written instrument signed by the maker of the instrument that contains
an unconditional promise or order to pay an exact sum of money on demand or at an exact future
time, to a specific person, or to order, or to its bearer. According to s.13 of the Negotiable Act
1881, a Negotiable instrument can be a Promissory Note, a bill of exchange or a Cheque payable
either to order or to the bearer.

The previous chapter in the Negotiable Instrument Act 1881 (hereinafter N.I. ACT) dealt with
‘Notaries Public’ and s.138 had the title of ‘Power to appoint notaries public’. The amended
version i.e., Chapter XVII of the Act deals with ‘On Penalties in case of dishonor of certain
cheques for insufficiency of funds in the account’. Under this Chapter, s.138 is titled with
‘Dishonor of cheque for insufficiency etc., of funds in the account.

10
SanjaiMakkar and Ors. Vs. Saraswati Industrial Syndicate Limited and Ors1999
S.138 [1] states that Where any cheque drawn by a person on an account maintained by him with
a banker for payment of any amount of money to another person from out of that account is
returned by the bank unpaid, either because of the amount of money standing to the credit of that
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 that bank, such person shall be deemed to have
committed an offence and shall without prejudice to any other provisions of this Act, be
punished with imprisonment for a term which may extend to one year, or with fine which may
extend to [thrice] the amount of the cheque or with both.

However, to avail these remedies, the holder of the cheque has to fulfill the following conditions:

1. i) The cheque has been presented to the bank within a period of six months from the date
on which it is drawn or within the period of its validity, whichever is earlier

2. ii) The payee or the holder in due course of the cheque, as the case may be, makes a
demand for the payment of the stipulated 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, and

iii) The drawer of such cheque fails to make the payment of the stipulated amount of money to
the payee or, as the case may be, to the holder in due course of the cheque, within 30 days of the
receipt of such notice.

People use cheques rather than carry around large amount of cash because of the reduced
security risk. The definition of a cheque has been given in section 6 of the N.I. Act as a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise than on
demand. A cheque maybe defined as an unconditional order in writing drawn on a banker signed
by te drawer, requiring the banker to pay on demand a sum certain in money to or to the order of
a specified person or to bearer and which does not order any act to be done. The section lays
down few requirements such as the Condition for honor of cheque, sufficiency of fund, proper
form, justification for not paying cheque and liability in case of dishonor of cheque.

 Liability in case of dishonour of cheque:

A common incident in financial transaction is dishonor of cheques. When someone goes to a
bank and presents a cheque issued by some other person or company, and if the bank refuses to
pay money against the cheque due to insufficient fund in the account concerned, the person or
company who issued the cheque commits an offence. The person commits this offense shall be
punished with imprisonment for a term which may extend to one year, or with fine which may
extend to thrice the amount of the cheque, or with both. Along with this remedy, the holder of
the cheque shall retain his right to establish his claim through civil court if whole or any part of
the value of the cheque remains unrealized.

When a cheque is dishonored, the drawee bank immediately issues a ‘Cheque Return Memo’ to
the banker of the payee mentioning the reason for non-payment. According to many lawyers, this
memo must be kept carefully preserved and claim can be made within 30 days of cheque
dishonor. Such claim notice shall be served by personal delivery, by registered post with A/D or
may be by publication in the widely circulated newspaper. If the drawer fails to pay within this
period, then a cause of action will arise against him.

In such scenario, claimant must file a case before the Court of Judicial Magistrate of First Class
within the next 30 days from the date when such cause of action arose. Maintaining the
timeframe state above is the key to file action under the NI Act.

The banker is liable for non-payment of cheque if, although there are insufficient funds of the
customer in account, he has otherwise contracted to honour them e.g. by an arrangement with his
customer for an overdraft or by direct promise to pay the cheque. The banker is also liable if he
dishonors a cheque after misleading the customer into believing that there were sufficient funds
to meet the cheque.

  Order 37 of the Code of Civil Procedure 1908 deals with Recovery suit which can be used in
Recovery of payment of Negotiable Instruments. This Order governs recovery of payment
regarding dishonored cheques in a short time. These sort of cases are considered to be strict
liability and the verdicts are given fast. Apart from the Order, a general money suit can be filed
to recover the payment of a dishonored cheque. Under sections 406/420 of the Bangladesh Penal
Code 1860, this can be claimed as Fraud and the claimant can file a petition at the Magistrate
Court.
Effectiveness and Application of s.138 in Present day:

There are significant problems in Bangladesh regarding identification of cheques. There are no
cheque guaranty card, there is an identity crisis, the hassle of insufficient fund, closed accounts,
stopped cheques, cheques issued with different signature and little knowledge about cheque
dishonor. If a person transfers a signed cheque to someone, then he is bound to pay the amount at
any cost, or else he will be liable under s.138 of the N.I.Act to pay triple the deserved amount
and an imprisonment of 1 year for committing a civil offence. The Court observes a very strict
mindset in terms of bounced or dishonor cheques. At the most serious civil cases, Warrants of
Arrest are issued and bail becomes difficult to get.

The operation of section 138 of the Act, 1881 cannot be obstructed or, in any way, circumvented
by the mere fact of filing of a suit by the drawer of the dishonored cheque in civil Court
whatever allegations may be in the plaint about the same and the relief prayed for therein,
because such a device shall totally make the section itself nugatory. In Habibur Rahman
Howlader v State and another turn of cheques. So there is no valid ground for quashing the
proceeding under s.138 of the Act.

In Satya Harayan Poddar v State and another, it was seen that even though the case is premature
and it was filed before the expiry of 15 days from the date of receipt of the notice, the proceeding
is not liable to be quashed. In SM Anwar Hossain v Shafiul Alam (Chand) & Another, it was held
that prosecution will arise on the failure to pay the amount within 15 days of the receipt of the
notice of the complainant under clause (c) of s.138 of the N.I.Act. In Nurul Islam v State and
another,it was held that the rule of law about the peremptory application of the special law in
place of the general law for trial of an offense hardly applies when the offenses are distinct under
the two laws.
CONCLUSION

As we trace the history and establishment of the Negotiable Instruments Act,1881 and focus on
the jurisdictional debate under Section 138, which deals with dishonor of cheques, we analyse
the necessities which forced the Courts and the Government to adopt landmark changes in the
law. The latest change and the present prevalent law being the 2015 Ordinance, has the effect of
nullifying the law as laid down by the Supreme Court in 2014, Dasrat Rathod case. The legal
effect of the Ordinance is that, so as to institute a complaint under Section 138, the same must be
instituted as per : If the cheque is delivered for collection through an account, the branch of the
bank where the payee or holder, maintains the account, is situated; or If the cheque is presented
for payment by the payee or holder otherwise through his account, the branch of the drawee bank
where the drawer maintains the account, is situated. This law comes with a promise to solve and
aid in not only the speedy disposal of the pending cases pertaining to complaints under 138, but
also to bring a sanctity to the system by seeking to clamp down on defaults in payments. It
clarifies the legal position as to jurisdiction and also seeks to keep up with the modern banking
system.

REFERENCES

Articles & Journals

1. Anjana Dave, An Analytical Study of the Provisons relating to Dishonour of Cheques under
Chapter XVII of the Negotiable Instruments Act, 1881, Vol. 7 Issue 5, Pacific Business Review
International,2014

2. Ganga Dutt Sharma, Jurisdiction of Cases for Dishonour of cheque in the Pretext of the
Statutory Laws & Recent Judgements, Vol. 3 Issue 9, Global Journal for Research Analysis,
2014

Books
1. Avtar Singh, Laws of Banking and Negotiable Instruments, (2011 Ed), Eastern Book
Company

2. Bhashyam and Adiga's,The Negotiable Instruments Act, (19th Ed.), Bharat Law House, New
Delhi

3. The Negotiable Instruments Act, 1881, (2015 Ed.), EBC Publishing Pvt. Ltd