TERM PAPER ASSIGNMENT

Submitted by: Rupesh Sharma, 1502004 (Section B)

Section 138, Negotiable Instruments Act 1881: Dishonour of cheque for
insufficiency, etc., of funds in the account
The Case of Dashrath Roopsingh Rathod Vs. State of Maharashtra & Anr.
Introduction to the business issue
The age of online transactions has begun and is here to stay but still there are a
large number of people who use non-online means like cheques, drafts etc. for
payments to other parties. Cheque is a convenient way of payment which is
accepted by a majority of people. But with convenience, there is a great underlying
risk which can be easily understood by any person who has ever issued a cheque.
The cheque issued by a person (payer) to another person (payee) is like permission
granted to the payee to demand an amount from the bank of the payer where the
payer maintains an account. When the cheque is presented to the payer's bank for
receiving the payment, the bank checks the amount standing to the credit of the
payer and if found sufficient, debits the payer's account by the mentioned amount.
The problem kicks in when the payer's bank account does not have sufficient credit
balance and the bank has to return the cheque unpaid to the payee. This
phenomenon is termed as "Cheque Bounce". Right now there are an estimated 18
lakhs cheque bounce cases across India, of which about 38,000 are pending in high
courts.
The immediate effect of dishonor a cheque is that the payer's bank issues a
Cheque Return Memo to the banker of the payee citing the reason for nonpayment. The payees banker shall handover the dishonored cheque and the memo
to the payee. Now the choice of action lies with the payee who can either file a legal
case or can still present the cheque within the valid time period i.e. six months from
the date of issue of the cheque.
Cheque being a popular and convenient negotiable instrument and "dishonor of
cheques" is a very common issue. Looking at the number of cases piled up with
courts, businesses which are victims in such cases need quick redressal of the same
where they seek to get their due payments along with damages suffered by them.
Every day accountants are dealing with payments to be received via cheque.
Crystal clear laws and fitting punishment on this offence is what is going to reduce
instances of "dishonor of cheques". This will also make cheques a reliable
negotiable instrument on which businesses can rely upon.
The issue which has been explained in this paper relates to the place of trial majorly
which had not been dealt with clarity until December 2015 when the parliament
passed the amendment in the NI Act regarding the same. The issue is whether the

case must be tried in a court under whose jurisdiction the payees bank is located
i.e. the place where the cheque got dishonored or the court under whose jurisdiction
the payers bank is located i.e. the place where the cheque was drawn. In either of
the cases, one of the parties shall have to travel to the other place to attend the
hearing which is a pain.
Legislations applicable to the business issue
It Section 138 contained in the Negotiable Instruments Act deals with this issue of
"dishonor of cheques". The payee can proceed to the court of law for dishonor of
cheque only if the amount mentioned in the cheque is towards discharge of a debt
or any other legal liability of the payer towards payee i.e. a legally enforceable debt
or other liability. Mere issuance of a cheque say for the purposes of gift, or towards
lending a loan or for unlawful purposes would not amount to legal liability and the
drawer cannot be prosecuted in such cases. The section defines the act of dishonor
of cheque for insufficiency, etc., of funds in the account and terms the payer at
default as deemed to have committed an offence. It clearly mentions that the payer
"shall, without prejudice to any other provisions of this Act, be punished with
imprisonment for 19 [a term which may be extended to two years], or with fine
which may extend to twice the amount of the cheque, or with both".
It also contains the following 3 conditions which are to be fulfilled before the victim
is provided with any legal help:

The cheque has to be presented to the bank within a period of six months
from the date on which it is issued or within the period of its validity,
whichever is earlier.
The payee or the holder in due course of the cheque should make a demand
for the payment of the said amount of money by giving a notice in writing, to
the author of the cheque (payee), within thirty days of the receipt of
information by him from the bank regarding the return of the cheque as
unpaid.
The payer fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the cheque,
within fifteen days of the receipt of the said notice.

If no payment is received by the payee during the stipulated time period then
he/she may proceed to file a complaint in the court of the jurisdictional magistrate
within one month from the date of expiry of fifteen days prescribed in the notice.
If the payee fails to file the complaint within thirty days, the complaint becomes
barred by limitation of time. The jurisdictional magistrate court may refuse to
entertain such a belated complaint. However, if the payee has sufficient reasons to
justify delay in filing the complaint, he may make an application before the
magistrate along with the complaint, to explain the reasons for delay and seek
condoning of delay. Cognizance of the complaint may be taken if the Court is

satisfied that the payee had sufficient cause for not making the complaint within the
prescribed period.
The relevant case laws (if any)
Payment towards Security
The Supreme Court of India while passing its judgment on petition and direct
transfer Criminal Complaint No.3960 of 2008 titled M/s Timex Group India Ltd. v. M/s
Apex Distributers & Anr. said that if the cheque is payment towards security then
the dishonoring of cheque shall not be treated as an offence.
The Court of Jurisdiction
Till recently, the complaint against the drawer of cheque had to be filed in the
jurisdiction of the court where the payer's bank branch was located. In a very recent
amendment to the Act, this has been changed and the complaints can now be filed
by the payee in the court under whose jurisdiction the payee's bank branch is
located. Following are some of the aspects related to the judgments passed in the
past:
Issue of a statutory notice demanding payment of the cheque amount
If the aggrieved party i.e. the payee gets a statutory notice from the court under
which the payee's bank branch is located, then also the offence shall be legally tried
only in the court under whose jurisdiction the bank branch of payer is located. In
Harman Electronics (P) Ltd. v. National Panasonic India (P) Ltd. (2009) 1 SCC 720
this aspect was examined at length. The Court ruled that issue of a statutory notice
cannot amount to a valid ground for conferring jurisdiction upon the Court
concerned to trial of an offence under Section 138.
That position has been reiterated in a the decision delivered on 1st August, 2014 by
this Court in Dashrath Roopsingh Rathod v. State of Maharashtra & Anr. Criminal
Appeal No.2287 of 2009. In this case, court had overruled the earlier decision
delivered by a two-Judge Bench of this Court in K. Bhaskaran vs. Sankaran
Vaidhyan Balan & Anr. (1999) 7 SCC 510 upon which the respondent sought their
contention that Delhi Court (payees Jurisdiction area court) could exercise
jurisdiction based on the fact that notice of demand of the cheque amount was
issued from Delhi.
The Impact of the Judgment
This decision of the Court clarified a very controversial issue pertaining to the
offence of dishonor of cheques under Section 138 of the Act. An aggrieved party
who wishes to file a complaint for dishonor of a cheque will only be able to file a
complaint in the court having territorial jurisdiction.

In the pending cases (where recording of evidence has not yet begun), the
complainant will be required to file the complaint before the appropriate court
within 30 days of such return. Return of proceedings may also lead to further
procedural red-tape and consequential delays. In some instances, a complainant
may now find it cumbersome to prosecute a complaint before the appropriate court,
which may well be in another city. This judgment made it difficult for the
complainants who would now have to keep travelling between their city and the city
where the court having territorial jurisdiction is located.
The Supreme Court acknowledged that there was a massive misuse of the criminal
justice system with a view to cause hardship, harassment and inconvenience to the
accused. While a complainant will not be able to file multiple complaints before
different courts which could harass an accused, a possible consequence may also
be a significant shift in the acceptability of a cheque drawn on an inconveniently
located bank. Additionally, in cases of intra-state business dealings, creditors may
well prefer to avoid any such potential complications and press for alternative and
risk-less payment. This would have had a negative impact on the inter-state
business where cheques are much less likely to be used as medium of payment.
The present amendment in the N.I. Act would provide relief to the payee as the
cases can be filed in the courts in their city only. The legislation also mandates
centralization of cases against the same drawer.
The clarification of jurisdictional issue is in the interests of the complainant and
would also ensure a fair trial. This clarity on jurisdictional issue for trying the cases
of cheque bouncing would increase the credibility of the cheque as a financial
instrument.
The statement issued after the recent parliamentary proceedings says "This is
expected to help the trade and commerce in general and allow the lending
institutions, including banks, to continue to extend financing to the productive
sectors of economy, as the process of pursuing the cheque bouncing cases relating
to loan default has been made simpler and efficient...,"
References:

Section 138 in The Negotiable Instruments Act, 1881: indiankanoon.org

Government Notifies New Norms to Deal With Cheque Bounce Cases (PTI):
profit.ndtv.com
CHEQUE BOUNCING IS A CRIMINAL OFFENCE IN INDIA by B. K. R. Rao:
creative.sulekha.com
Transfer Petition in Section 138 of N.I. Act by M. Murali Mohan:
freelegalconsultancy.blogspot.in
Dishonour of cheques: Supreme Court clarifies territorial jurisdiction:
www.nishithdesai.com
Cheque bounce rule changed: www.telegraphindia.com