Negotiable Instruments Act, 1881: A Critique [1] – By Rajat Mathur
POLICY /OBJECT–
Object of introducing Section 138 of the Negotiable Instruments Act, 1881 was to enhance the acceptability of cheques in settling liabilities, and to build a culture of use of cheques.
Statement of Objects and Reasons set out in The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 [Act 66 of 1988], which amendment inserted Section 138 in the statute book.
Statement of Objects and Reasons set out in the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (w.e.f. 6-2-2003) (2002 Amendment).
N.I. Act, 1881 is not merely penal in nature but is to maintain the efficiency and value of a negotiable instrument by making the accused honour the negotiable instrument and paying the amount for which the instrument had been executed and object of bringing Sections 138 to 142 of the Negotiable Instruments Act on statute appears to be to inculcate faith in the efficacy of banking operations and credibility in transacting business of negotiable instruments. (See: Lafarge Aggregates & Concrete India (P) Ltd. vs. Sukarsh Azad) [2].
Avowed intendment of Amendment Act, 2002 was to enhance the acceptability of cheques. (See: Dashrath Rupsingh Rathod vs. State of Maharashtra) [3].
To safeguard the faith of the creditor in the drawer of the cheque” and “curb cases of issuing cheques indiscriminately by making stringent provisions and safeguarding interest of creditors. (See: Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd) [4].
To restore the credibility of cheques as a trustworthy substitute for cash payment. (See: Goa Plast (P) Ltd. v. Chico Ursula D’Souza) [5].
Compensatory aspect is to be given priority over punitive aspect (See: Damodar S. Prabhu vs. Sayed Babalal [6]; Rangappa v. Sri Mohan [7]; R. Vijayan v. Baby [8] & Suganthi Suresh Kumar v. Jagdeeshan [9]).
Various amendments took place in N.I. Act in the years 1991 – 2002 – 2005 & lastly, in 2018 (jurisdictional amendments on account of Rathore case, supra)
N.I. Act is a strict liability offence or penal statute – See: SC decision of Aparna A. Shah [10].
N.I. Act to be tried as summons trial u/Chapter-XX (S.251-259, CrPC)
N.I. Act by virtue of 2018 amendment also to be tried u/Summary trial u/Chapter-XXI (S.260-265, CrPC) with addition of S.143, N.I. Act.
N.I. Act case to be tried by Magistrate Court and not Sessions Court.
As per settled view of Courts till date – case u/ N.I. Act case to be finished within 6 months, but invariably, the process of trial becomes a punishment for the Complainant than the result of filing it.
TEST FOR OFFENCE / GIST OF OFFENCE u/N.I. ACT, 1881–
Failure to pay the liability [11] (Note: inability to pay [12] does not kick start offence u/this Act).
Initial burden is on Complainant to show that cheque is a valid instrument u/S.138 proviso of N.I. Act r/w S.118(a) r/w S.139, N.I. Act, and after it, burden shifts on to accused to rebut.
BASIC PRESUMPTIONS U/N.I.ACT–
Presumptions (“shall”) in favour of Complainant u/ N.I. Act case –:
S.118 (‘a to g’) – Presumption of negotiable instrument for – valid consideration (a); as to date (b); time of acceptance (c); as to time of transfer (d); as to order of indorsements (e); as to stamp (f) and lastly, as to holder is a holder in due course (g).
S.139 – presumption in favour of holder of cheque (as referred in S.138) that cheque issued for valid discharge of debt or liability (whole or part).
S.140 – no defence in N.I. Act available to accused that he had no “reason to believe” that cheque would be dishonored on presentment.
S.146 – bank/s slip or memo is prima facie proof of dishonor of cheque
CHECK LIST TO KICK START OFFENCE U/N.I. ACT, 1881–
Complainant in order to file case u/ N.I. Act has to fulfill as pre-requisite the conditions as set out in proviso to S.138, N.I. Act [13].
INTER-PLAY OF N.I.ACT WITH OTHER STATUTES –
N.I. Act in its application to be r/w Civil Procedure Code, 1908 (for summons, production of documents, interrogatories etc.), Criminal Procedure Code, 1973 [applicability of S.202 (issue pending in SC) or applicability of S.251 (to be finally determined) and also with Indian Evidence Act, 1872 (for conducting evidence etc.), which makes applicability of N.I. Act very interesting yet complicated.
Also, there are various other linkages such as: with IBC, NCLT, DRT and other statutes, which are constantly developing.
TYPES OF DEFENCES AVAILABLE TO ACCUSED UNDER N.I. ACT, 1881 –
A. Possible Technical objections–:
Jurisdictional objection [S.142(2)]
Limitation objection [S.142(1)]
Defect in the notice to accused [S.138 proviso (b)], eg: notice issued to the wrong person or in case of more than one notice issued to accused, earlier notice termed as final, whereas, as per law, last notice sent is deemed to be the correct notice u/this Act.
If complaint u/this Act filed beyond limitation, then delay not condoned unless it is reasonable and sufficient cause shown as per [proviso to S.142(1)].
Complainant served notice only on AR/authorized representative of accused but not on accused company – law says: – both should have been made as accused (See: Anil Hada vs. Indian Acrylic Ltd.) [14] & followed up in Kejriwal Mining Private Ltd [15] and Madan Amlokchand Mutha [16].
B. Possible Defences on merit –
Cheque is without consideration – thus, not valid cheque.
No debt or liability as accused denies his signature on alleged cheque – thus, no valid cheque.
Material alteration in a cheque, signature etc. u/s 87, N.I. Act, 1881 – thus, not valid cheque.
Multiple cheques and notices – then last cheque and notice, respectively is valid and not earlier – thus, if complainant filed and relied upon earlier cheque and notice, then no valid u/N.I.Act.
Accused liable only when he fails to make payment and not because of inability of accused – in latter case, no offence made out in Kusum Ingots Alloys Ltd. vs. UOI [17].
C. No vicarious liability (Section 141 of N.I. Act, 1881)
3 categories of persons [18] can be discerned from S.141 as brought within purview of penal liability through legal fiction. They are: (1) The company which committed the offence, (2) Everyone who was in charge of and was responsible for the business of the company, (3) ‘any other person’ who is a director or a manager or a secretary or officer of the company, with whose connivance or due to whose neglect the company has committed the offence. (See: Anil Hada vs. Indian Acrylic Ltd.)
If the offence was committed by a company it can be punished only if the company is prosecuted. But instead of prosecuting the company if a payee opts to prosecute only the persons falling within the second or third category the payee can succeed in the case only if he succeeds in showing that the offence was actually committed by the company. In such a prosecution, accused can show that company has not committed the offence, though such company is not made an accused, and hence the prosecuted accused is not liable to be punished. Section 141 of this Act – provision do not contain a condition that prosecution of company is sine qua non for prosecution of the other persons who fall within the second and the third categories [19]. (See: Anil Hada vs. Indian Acrylic Ltd.)
Expression ‘Company’ in Explanation to S.141(2) of this Act also includes Body Corporate, a Firm or Association of Individuals (AOI) and director in relation to a firm, includes a partner in the firm.
Section 141 states – when company is the drawer of a cheque, then such company is the principal offender under Section 138 of the Act and the remaining persons are made offenders by virtue of the legal fiction created by the legislature as per the section. Hence the actual offence should have been committed by the company, and then alone the other two categories of persons can also become liable for the offence. (See: Anil Hada vs. Indian Acrylic Ltd.)
Section 141(1) – Offence by companies:- if person who committed an offence is a ‘company’, then every person who at relevant time was either “incharge of, and was responsible” to the company for conduct of business, as well as the company [20] – shall be deemed to be guilty of the offence.
If nominated or independent director [21] made accused without any specific averment in complaint filed u/N.I.Act – then he cannot be prosecuted merely by virtue of his holding office or employment with Private Company or PSU Company or Financial Corporation etc.
If retired director or partner of a company or partnership respectively, made accused even though, they retired before the date of issuance of the cheque.
There is no concept of vicarious liability u/CrPC nor under N.I. Act in view of Section 141, N.I. Act – however, u/s.141(2) [22], where offence committed by Co. and it is proved also that said offence is said to have been committed with consent, connivance or neglect of its Director, Manager, Secretary or other Officer of Co., then such persons shall be deemed to be guilty of that offence & shall be prosecuted.
Lead case is SMS Pharmaceutical case [23]– no vicarious liability of director under N.I. Act, 1881.
IMPORTANT PROPOSITIONS READ AS UNDER –:
Unregistered partnership firm can maintain complaint under Section 138 of this Act for dishonor of cheque, as it is neither a right conferred by a contract nor by the Partnership Act, 1932, rather it is a right conferred by a statute being penal in nature, as held by Rani Kapoor vs. Silvermount (Delhi HC) [24], which took note of earlier case laws & discussed the view of P&H [25], Kerala [26], Karnataka [27] and Allahabad [28] High Court in line with Supreme Court (“BSI Ltd. Case”) view, except with Andhra Pradesh High Court [29], which gave a contrary view. BSI Ltd vs. Gift Holdings Pvt. Ltd [30] that “a criminal prosecution is neither for recovery of money nor for enforcement of any security etc. Section 138 is a penal provision the commission of which offence entails a conviction and sentence on proof of the guilt in a duly conducted criminal proceedings. Once the offence under Section 138 is completed the prosecution proceedings can be initiated not for recovery of the amount covered by the cheque but for bringing the offender to the penal liability”.
Supreme Court in Haldiram Bhujiawala and Anr. [31] held that a suit is not barred by Section 69(2) if a statutory right or a common law right is being enforced.
Cross examination to be done by accused sparingly, necessary and delicately u/S.145(2) in light of his/her defence and also makes the ground of later defence evidence, he may choose to lead.
Defence evidence to be led only if need arises or else runs counter-productive.
For disputed signatures, accused may either refer signatures to private lab or may request Court by application to refer both ‘admitted’ signatures and ‘disputed’ signatures to Forensic Examination, which has more reliability as evidence as opposed to private lab.
In case of multiple cheques, the last cheque is valid & not earlier cheques u/N.I. Act (See: Sukumar Exports case”–2008/09 SC), unless successive cause of action is invoked, proved by Complainant.
Material variation in signatures is a valid defence u/s 87 N.I. Act, 1881.
Exclusion of arraignment of nominated or independent director of company in routine manner is deprecated in view of S.141, N.I.Act r/w S.149, Companies Act, 1956 (See: Sujata Shirolkar case, K.P.Balaraj case [32].
In Joseph vs. Phillips Carbon Black case [33], (followed up in Ghanshyamdas Lalchand Chandak [34]) issue is pending in SC whether Section 202 CrPC regarding conduct of inquiry, can be applied to N.I.Act, 1881 proceedings or not.
Inability of person to pay because of restraint order passed in BIFR-SICA-IBC proceedings is not the same as ‘failure to discharge the liability or debt as punishable u/N.I.Act, 1881. (Kusum Ingot case, supra)
Signatory person along with accused company both, are to be arraigned as accused persons for maintainability of S.138 case (Anil Hada case, supra).
Section 319 CrPC can be applied to N.I.Act, during course of trial, provided firstly, notice u/S.138 N.I.Act was served at origin to proposed accused and not otherwise, and secondly; if evidence comes up on record during trial against this proposed accused as per test laid down in Hardeep Singh Constitution Bench case (2014 – SC).
Parallel cheating criminal case be initiated against accused u/s 420 IPC, in addition to S.138, N.I.Act. [35]
In case of delay in filing of case u/N.I.Act, file condonation of delay application with sufficient cause [36] and not otherwise.
As per Associated Cement Co. Ltd case [37], it was held that held that if a Complaint is made in the name of an incorporeal person (like a company or corporation), it is necessary that a natural person represents such juristic person in the Court. Further, held that Court looks upon the natural person to be the Complainant for all practical purposes. When the Complainant is a body corporate, it is the de-jure Complainant; it must necessarily associate a human being as de-facto complainant to represent the former in Court. Thus, even presuming, that initially there was no authority, still the Company can, at any stage, rectify that defect. At a subsequent stage, the Company can send a person who is competent to represent the company. Complaints could thus not have been quashed on this ground.
Issue of criminal liability u/N.I.Act vis-à-vis IBC is a subject matter of debate and law is yet to be developed on this inter-play by SC.
In case of a merger of company and a partnership firm, the liability of original people of both entities, if any, will remain strictly as personal liability and not vicariously post-merger on new entity.
If case an accused company u/N.I.Act goes under liquidation during pendency or prior to commencement of case, then Complainant to implead and serve notice necessarily on the Official Liquidator and make him/her a party to this proceeding or else case cannot proceed further.
If person dies who is an accused u/N.I.Act, then his/her legal representative cannot be impleaded as accused, because firstly this Act does not allow vicarious liability and secondly, it is a strict liability offence. However, civil remedy of recovery via suit for recovery can be an option against LRs of the accused.
Section 173(8) CrPC cannot be applied to N.I.Act for the reason that this Act is a complaint case procedure and former applies only to Police Report Case Procedure.
Retired partner who has severed all ties with a firm, cannot be roped in as an accused post his retirement provided the cheque in issue is dated post his retirement or that if it is precedes his retirement then he had no tangible role in it to play.
Part payment of money by accused after commencement of case u/N.I.Act, will not absolve him from liability but it can at best be a mitigating circumstance and can use it in trial.
In case of non-payment on account of defective goods supplied by Complainant, accused can take the defence that said fact of defects in goods ought to be communicated to Complainant prior to commencement of case and this defence is in line with case of Indus Airways Pvt. Ltd [38] but was distinguished in Sampelly Satyanarayana Rao [39].
If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier, the cheque cannot be said to have been drawn for an existing debt or liability as held in Indus Airways Pvt. Ltd case, ibid.
An accused cannot press for discharge under this Act post the stage of S.251 CrPC [40] being governed by Summons case r/w Summary case procedure, implying that once plea of accused is recorded u/S.252 CrPC, then procedure contemplated under Chapter XX of CrPC has to be followed by taking the trial to its logical conclusion as held in Subramanium Sethuraman [41]. Equally, S.258 CrPC [42] also does not apply to N.I. Act proceedings, as former does not apply to complaint case. However, recently in 2017, SC in Meters and Instruments Pvt. Ltd. case [43], held that notwithstanding S.258 CrPC, on limited ground of compounding only, proceedings can be put to an end under this Act at any stage of the proceedings, by relying upon interpretation of necessary application of CrPC application to NI Act by use of expression as far as may be [44] used u/S 143 of this Act.
Delhi High Court has consistently taken a view since 2010 and till date, that in case of summons wrongly issued to accused persons under this Act, then the remedy available to accused is to approach the concerned Trial Court and not approach High Court directly and take all such pleas as available under this Act at the stage of S.251 CrPC, notwithstanding Adalat Prasad [45]coming in their way to take such pleas, ibid, at the stage of charge, ibid.
Even if a matter is referred by a criminal court under Section 138 of Act and by virtue of deeming provisions, the award passed by the “Lok Adalat” based on a compromise has to be treated as a decree capable of execution by a Civil Court as held in K.N. Govindan Kutty Menon vs C.D. Shaji [46].
In every complaint under Section 138 of 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 email ID to the payee of the cheque as held in Meters and Instruments Private Limited, ibid.
Re: Summons sent and procedure: – Magistrate should adopt a pragmatic and realistic approach while issuing summons. Summons must be properly addressed and sent by post as well as by e-mail address got from the complainant. Court, in appropriate cases, may take the assistance of the police or the nearby Court to serve notice to the accused. For notice of appearance, a short date be fixed. If the summons is received back un-served, immediate follow up action be taken – this direction given by SC in Indian Bank Association & Ors. v. Union of India [47].
Taking effect from Section 144 of the Act, Sections 62, 66 and 67 of CrPC and directions of this Court, the Magistrate may opt for one or many of the methods of service of summons, including service through speed post or the courier services, Police Officer or any other person, e-mail or through a Court having territorial jurisdiction – Despite service of summons issued through aforesaid mediums, the problem of non-execution of further process persists. While summon may be issued through aforementioned modes, bailable warrants and non-bailable warrants are to be executed through police as per Section 72 of CrPC. Many a time, police as serving agency, does not give heed to the process issued in private complaints. Courts also remain ambivalent of this fact, requiring the complainant to pay unjustified process fee, repeatedly and avoid taking action against negligent police officers. The coercive methods to secure the presence of accused viz. attachment indicated in Section 82 and 83 CrPC, are seldom resorted.
Mandatory directions for expeditious disposal of trial of cases under this Act: (a) Trial of cases relating to Section 138 of Act must be with nature of Summary Trial unless reasons call for Summons Trial, which is always exceptional. (b) Evidence of the Complainant must be conducted within 3 months of assigning the case. (c) Endeavour must be made to conclude the trial within 6 months from date of filing of Complaint. (d) Trial, as far as practicable, must be held on a day to day basis unless reasons exist to do otherwise. See: Indian Bank Association and Meters and Instruments cases, ibid [48].
(I am thankful to Sh. Sidharth Luthra, Senior Counsel)
***
Rajat Mathur is a practicing lawyer in Delhi [B.Com (H) SRCC, DU] [LLB, Law Faculty, DU]. Despite gaining experience in Civil and Tax Law, he has worked extensively on the criminal side and has represented bureaucrats and Government Servants in matters related to the ‘Coal Block Allocation Scam case’. At 33 years of age, Mr. Mathur got the controversial acquittal of former Coal Secretary, Mr. H. C. Gupta, a decorated IAS office (now retired) in the high-profile case.
[Assisted by Dishant Vashisht, Adv.]
[1] Referred: Sidharth Luthra, (Sr.Counsel) Online Lecture delivered @ https://youtu.be/2pv-LKtvyhk and referred Commentaries on Negotiable Instruments Act, 1881, Indian Partnership Act, 1932 and Code of Criminal procedure, 1973.
[2] (2014) 13 SCC 779 (P.7 & 8)
[3] (2014) 9 SCC 1291 (P.15, 15.1, 15.2 & 19)
[4] (2008) 2 SCC 305 (P.11, 16-17, 19)
[6] (2010) 5 SCC 663 (P.4,6,7,18,19,25)
[8] (2012) 1 SCC 260, (P.16-19)
[11] Offence punishable u/S.138, N.I. Act, 1881
[13] Proviso (a,b,c) of Section 138, NI Act, 1881
[14] (2000) 1 SCC 1 (P.12,13,21)
[15] (2019) 3 RCR Criminal 384
[16] MADAN AMLOKCHAND MUTHA V. ARVIND AMBALAL SHAH & ANR
[18] Anil Hada case – (2000) 1 SCC 1 at P.10
[19] Anil Hada case – (2000) 1 SCC 1 at P.13
[20] Company as well ‘every person’ as set out in clause (1) of S.141 shall be deemed to be guilty.
[21] Section 141(1) (2nd proviso) of NI Act, 1881
[22] Non Obstante Clause to S.141(1) of N.I. Act,1881
[24] 242 (2017) DLT 363 at P.11
[25] Capital Leasing and Finance Co. vs. Navrattan Jain at P.25
[27] (2004) 1 KCCR 49 at P.5
[29] (2000) CriLJ 2386 at P.15
[30] (2000) 2 SCC 737 at P.19-20 (lead case)
[32] Pending under challenge in SC (SLP) (subject to correction)
[33] (2016) 11 SCC 105 – pending challenge in SC (SLP: 2019-20)
[35] Illustration (d) of S.415 IPC (See: Pg.568 of Universal– Criminal Manual, 2019 Edition)
[36] Proviso to S.142(1)
[40] Framing of notice – akin to framing of charge
[41] (2004) 13 SCC 324 (P.4-8,16,17)
[42] Stopping of Proceedings
[44](1979) 2 SCC 529 (P.10,11)
[48] (2014) 5 SCC 590 and (2018) 1 SCC 560
Disclaimer: The views or opinions expressed are solely of the author.
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