Section 138 Negotiable Instruments Act, 1881 - An In Depth Analysis

ABSTRACT

This paper attempts to delineate various aspects of Section 138 of the Negotiable Instruments Act. Section 138 is the principal section dealing with dishonor of cheques. It delves into the history of its establishment, with the reason for its necessary enactment and moves to explain the procedures and process as laid out by the statute as well as the decision of the Hon'ble Delhi High Court in Rajesh Agarwal & Others v State & Another. Seeking to set out clarity on the points of law on relevant territorial jurisdiction for filing a complaint under Section 138 various decisions of the Courts are set out, finally concluding with the latest development in law, The Negotiable Instruments (Amendment) Ordinance, 2015.

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 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 aad 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.

HISTORY AND 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 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 -

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 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 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-

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; that such complaint is made within one month of the date on which the cause of action arises; and 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.5, 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.6

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...