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Published: Fri, 02 Feb 2018
Criminal liability under negotiable instruments act
The Negotiable Instruments Act, 1881 was basically introduced to define the law relating to the various aspects of the different negotiable instruments like Promissory Notes, Bills of Exchange and Cheques. But the increasing use of these negotiable instruments necessitated the introduction of a number of amendments in the Negotiable Instruments Act with the main aim of making the use of the negotiable instruments easy. Amongst all the amendments made in the Negotiable Instruments Act the amendment responsible for the insertion of the Chapter XVII into the Act  can be considered to be the most important one as it helped in bringing about a revolutionary change with respect to the use of cheques. Prior to this amendment the scope of misuse of the power to issue cheques was on a rise in spite of the available civil remedy and the criminal remedy under Sec 420 of the Indian Penal Code. And the cheques being a part and parcel of the commercial transactions people started loosing faith in the cheque system at large. So there was a need to curb down such misuse of the power to issue cheques and the insertion of the Chapter XVII by the Banking, Public Financial Institutions and Negotiable Instruments Laws ( Amendment) Act, 1988 (66 of 1988) was blessing in disguise for the payee, the people who were the worst affected in case of such misuse. Chapter XVII as a whole deals with Penalties in case of Dishonour of Certain Cheques for insufficiency of funds in the accounts of the drawer of the cheques. This chapter consists of a total of ten sections amongst which Section 138 is of utmost importance. Section 138 speaks of dishonour of cheques for insufficiency, etc. of funds in the account of the drawer. This section imposes criminal liability on the person who is responsible for issuing a cheque to another person for the fulfillment of his liability without having sufficient funds in his account. This section actually forces a person to think twice before issuing a cheque if he has minimal funds in his accounts as because such issuance of cheques may land the drawer of the cheque in jail even if he had no dishonest intention to cheat the payee.
Understanding the concept of cheques and importance in Commercial World:
The word cheque is a very well known concept and every individual who operates an account in a bank is familiar with the concept of cheques. It is a very famous negotiable instrument which is very much essential in world of commerce. In simple words cheque can be said to be a written order instructing a financial institution which is a bank to pay a certain sum of money to a particular person on demand.  Cheque as a negotiable instrument is a piece of paper which promises to pay its owner the amount written over it either on demand or as per the date mentioned on it. So the cheque can be said to be a negotiable instrument which is negotiable by delivery.  It is generally presumed that once the cheque is delivered to the payee by the drawer of the cheque the payment of money to the payee will be made in due course of time and so the date on which the cheque is delivered is considered to be the date on which the payment is made irrespective of the fact as to when the cheque is presented for payment. 
When we try and analyze the facts with regards to the development of the cheques as an important negotiable instrument we realize that the origin of the cheques can be traced far back in the seventeenth century in England. The scriveners who were basically the writers and drafters of contracts and other documents and who were also entrusted with the money as well as estates of the local people were the first persons who started the concept of borrowing, lending money and paying and charging of interest on the amount which was borrowed or lent by them. But the actual credit for discovering the concept of cheques goes to the goldsmiths of England. The reason behind it is that the merchants of England prior to the civil war used the King’s Mint to save the surplus money available with them. But just before the civil war the King forcefully took away a large portion of the saved money there by causing a great deal of loss to the merchants. As a result of this the merchants were forced to find some other alternative option where they could save their hard earned money. This confusion made the merchants to go to the goldsmiths who accepted to save their surplus amount. The merchants’ money were accepted by the goldsmiths by giving receipt notes to them which were duly signed by the goldsmiths. The goldsmiths made good use of the money by lending the same to the other merchants. The merchants even encouraged the goldsmiths to pay up the money to their creditors by writing a short letter to them which authorized the goldsmiths to pay up the merchant’s debts. The letter sent by the merchants to pay up their debts later took the form of order notes which ordered the goldsmiths to pay up the debts of the merchants. These notes were also known as drawn notes. It is from this concept of drawn notes that the concept of cheques came into being  .
The cheques play a vital role in the commercial world as because it relieves the businessmen from the burden of carrying currency notes to each and every place they go to carry on their business. From this we can understand that cheques actually have undertaken the function of money.  It is a small piece of paper which is enough to pay off all the debts of the drawer. Cheques have actually oiled the wheels of commercial transactions by facilating quick and prompt commercial transactions.  In a developing Country like India cheques have really helped in the development of the economy by facilating quick commercial transactions which would not have been possible in case of absence of cheques. The importance of cheques in the commercial world can be understood from the fact of introduction of electronic cheques by Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002. The concept of electronic cheque is defined as a cheque which contains the exact mirror image of a paper cheque and is generated, written and signed in a secured system ensuring the minimum safety standards
with the use of digital signature (with or without biometric signature and asymmetric crypto system).  The Electronic Cheques are valid as a paper cheque itself. These cheques are more safe and secure in comparison to the paper cheques and these cheques do not even require the payee to personally approach the banker to pay the debt of the drawer. These chequese are basically sent by mail to the person to whom the drawer has an intention to make the payment in order to fulfill his debt or liability and that person deposits the same with the banker. On deposition of such cheque with the banker the banker is obliged to make a transfer of payment from the account of the drawer who actually issued the cheque into the account of the person to whom the cheque was credited. This process of cheque transfer makes process of commercial transactions quite easy and feasible. So we can say that the introduction of cheques is actually a blessing in disguise for the commercial trade.
Understanding the concept of Dishonour:
When a cheque drawn by the drawer is presented for payment with the banker by the payee and the banker refuses to satisfy the claim of the payee then such a process is known as dishonour of cheques. The dishonour of cheque or refusal to satisfy the claim of the payee by the banker may be due to varied type of reasons like insufficiency of funds in the drawers account, closure of the account of the drawer due to any legal reasons etc. This process of dishonour of cheque gives a right to the person in whose name the cheque is issued to take the issuer of the cheque to the Court of Law for not being able to discharge his debt or liability either due to insufficiency of funds or due to closure of account.
Further section 92 of the Act defines, a cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.
In the case of K. Venkatasubbaya vs. P.R. Rao Tobacco Co.  , the court held that a promissory note, Bills of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the Bill or drawee of the cheque makes default in payment upon being duly required to pay the same as against section 92 applied to all the three types of instruments like promissory notes, cheques and bills of exchange.
Need for an Amended Provision to prevent such dishonour:
Prior to the introduction of Section 138 by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988) all the issues relating to dishonour of cheque and the consequent non payment of the debt vested a right in the payee of the cheque to approach the civil courts for recovery of the amount which was due. But due to the absence of a specific provision which made the drawer of the cheque criminally liable for dishonour of cheque the payee had the right to seek relief under Sec 420 read with Sec 415 of the Indian Penal Code. Sec 420 of Indian Penal Code which provides for cheating and dishonestly inducing delivery of property imposes the burden on the payee to prove dishonest intention on the part of the drawer while issuing a cheque. That means to charge the drawer for cheating under Sec 420 of the Indian Penal Code the payee had to prove mens rea or guilty intention on the part of the drawer to cheat the payee. But such proving on the part of the payee was not always possible as because the element of deception could not be inferred in the absence of any evidence to prove that the drawer had the intention to cheat the payee during the time the cheque was issued. The remedy available in case of a civil suit was also no better as because the relief available took a lot of time to be delivered and the cost of civil suit many a times exceeded the debt amount. Due to such prevalent conditions the drawer of the cheque generally went scot free  and the payee had always suffer constantly either in the hands of the drawer or in the hands of the Court itself. This led to the loss of faith of the mercantile community in the concept of cheques as a whole.  In such a back drop there was a need to introduce an amended provision which actually would make the drawer criminally liable in case of dishonour of cheques and provide appropriate relief to the payee. This requirement was fulfilled by the Legislature by introducing Sec 138 along with Chapter XVII in the Negotiable Instruments Act, 1881.
Section 138 of the Negotiable Instruments Act, 1881 and its Significance:
Section 138 of the Negotiable Instruments Act is a pragmatic legislative step to reach justice to the aggrieved.  This section was introduced by the legislature to fill in the void created by the denial of access to justice to the people who were victims of dishonour of cheques. This section basically provides for Dishonur of cheques for insufficiency etc., of funds in the account. As per Sec 138 if under any circumstance the cheque issued by the drawer of the cheque is dishonored or it bounces back due to lack of funds in the account of the drawer or for the reason that it exceeds the arrangements made by the drawer with the bank then the drawer of cheque is liable for such dishonour.  The signifance of Section 138 can be proved from the fact that it not only provides justice to the payee in case of dishonour of cheques but it also gives a chance to the honest drawers to rectify their actions in case of negligent behaviour so as to protect them from the clutches of law and to prevent their harassment at the hands of law. It can be said that Section 138 is a provision which clothes a civil dispute with the garment of criminality. 
Constitutional Validity of Sec 138:
The Constitutional Validity of Sec 138 is in debate from the day the said provision was inserted in the provisions of the Negotiable Instruments Act, 1881. The provision of Section 138 was considered to be unconstitutional and violative of Articles 14, 19 and 21 of the Constitution of India. The Constitutionality of Sec 138 under Article 21 was challenged in the case of Ramawati Sharma v. Union of India  . In this case it was challenged that Sec 138 only aimed at providing punishment in case of cheques and not promissory notes or bills of exchange and that the repayment of loan is only a civil offence and it could not be treated as a criminal offence as per the provisions of Sec 138. The Court was of the view that cheques and promissory notes cannot be treated at the same level as the promissory note only creates liability whereas by issuing a cheque an individual makes a promise of paying a certain amount to the holder of the instrument. The Court further said that under Sec 138 the act of taking a loan is not what is punishable under but the act of promising a person to pay a certain amount by way of cheque and later not doing so due to dishonour. Further in the case of Mohan Krishna v. Union of India  it was challenged that the Section was violative of Article 14 of the Indian Constitution as because it created a line of distinction between natural and artificial persons. That means that as per the provisions of the Section the directorates, or employers of a firm could escape their liability simply by proving that the cheque which was dishonoured was not issued within their knowledge but the same was not applicable to individual persons. The Court was of the view that Article 14 of the Constitution of India prevented class legislation but it never prevented the formation of reasonable classification based upon certain provisions. So it is not violative under Article 14. In addition to that the Court further held that the criminal law of the Country has created a line of distinction in case of natural and artificial persons in order to fasten them with criminal liability. So such an act is not violative under Article 14 of the Indian Constitution. It was further challenged on the ground that the concept of mens rea which is the heart and soul of any criminal offence has been excluded under Section 138. Here the Court was of the view that the legislature could always move a step ahead and substitute the presumption of mens rea either with the creation of absolute or strict liability  and that is what it has done here and so there is no violation.
Necessary Ingredients which attract Section 138:
Section 138 of the NI Act, 1881 was mainly enacted by the Legislature to restore back the faith of the mercantile community with respect to the mechanism of the cheques as a whole. This section was mainly enacted to protect the payee from the dishonest attitude of the drawer of the cheque. But in order to attract liability under Sec 138 certain provisions of the section are to be complied with as specified in case of Anchor Capital of India v. State of Gujarat  . These provisions are as follows: The cheque must be issued in favour of a payee for the discharge either in full or in part of a legally enforceable debt. Then the same cheque must be presented for payment within six months from the date of issue of the cheque or the date of validity which ever is earlier and the cheque should be returned back by the banker as unpaid as because the funds available in the account of the drawer are insufficient for the debt to be paid. After receiving such an information from the banker with regards to the insufficiency of funds the payee must sent a notice intimating the same to the drawer within thirty days of receiving such notice, Then it is the duty of the drawer that within fifteen days of receiving such notice from the payee it has a duty of taking any action to make good the loss suffered by the payee. But if under any circumstances the drawer fails to take any action with regards to the dishonour of cheque then the drawer is considered to be responsible for the loss suffered by the payee without even he having an intention to cheat the payee. So under Sec 138 the concept of criminal liability begins from the point where the drawer even after receiving the notice from the payee fails to take any action in order to prevent such loss suffered by the payee. So a detailed analysis of the Section 138 helps us to understand that the section does not make the drawer criminally liable from the very starting point when the cheque is dishonoured. It gives a chance to the honest drawers to prevent any type of harassment at the hands of law by way of taking any action to make good the loss suffered by the payee after receiving a notice from the payee intimating him about the dishonour of the cheque. So this means that the cause of action with respect to the dishonour of a cheque necessary to make a person criminally liable arises only after the drawer fails to take any action within fifteen days of receipt of the notice from the payee informing him about the dishonour of the cheque to make good the loss suffered by him. In the case of Raman B v. Shasun Chemicals and Drugs Ltd., (2006) 4 CTC 529: (2006) 2 LW (Cri) 775(Mad). It was held that the cause of action for prosecution under the Section 138 does not arise from mere presentment or dishonour of the cheque. It arises only when the drawer defaults in paying up the cheque amount due within fifteen days of receipt of the notice informing him about the dishonour of the cheque. The legislative mandate is that the Drawer should not be prosecuted immediately with the dishonour of cheque but rather he should be given a chance by the payee to rectify his mistake.
Burden of Proof & Criminal Liability under Sec 138:
In cases of criminal liability under dishonour of cheques the burdern of proof lies on the accused who has to prove with the help of the required evidence that the cheque issued were not for the discharge of the existing debt or liability incurred by the drawer during the due course of time  . No burden of proof lies on the complainant to prove with the help of evidence that the said cheque was issued with respect to the discharge of any existing debt or liability incurred by the accused.  In complaints under Section 138 the Courts have to presume that the cheque or cheques issued were merely for discharging the liability of the drawer and such a presumption made by the Court is rebuttable. 
The drawer is considered to be criminally liable for dishonour of cheques when he fails to make payment of the amount which is due to the payee within fifteen days of receipt of notice from the payee intimating him regarding the dishonour of cheque and demanding payment of the said amount. In such a case it is considered that as the chance given to the drawer to pay up the amount due after the receipt of the notice was misused by the drawer and so this makes the Courts presume that even if there was no dishonest intention on part of the drawer then also he is considered to be criminally liable for the dishonour of the cheque. Under such circumstances the drawer may subjected to imprisonment for a term of two years or with fine which may exceed twice the amount of the cheque or with both. But assumption of criminal liability varies from case to case. The option either to prosecute the accused or to lay a suit for recovery lies with the payee or the complainant. The payee is even entitled to pursue both the civil as well as the criminal remedies together. The initiation of criminal proceedings does not bar the payee from initiating the civil proceedings against the accused for recovery of the amount due. In Act. G.N. Raju v. B.S. Jaiprakash & Anr., 2006 Cr LJ 820 (Kant) it was held that if the complainant was successful in getting the fruits of the decree in civil court, it would be helpful only as a mitigating circumstance while imposing sentence under Section 138 of NI Act.
But such a criminal liability will not be attached on the drawer if the cheque issued was not with respect to the discharge of the legally enforceable debt on the part of the drawer, if the cheque issued was a gift without any consideration, if the cheque was returned by due to some technical problems like signature being not clear, or date not mentioned properly, if the complaint made is not within the time limit prescribed by Section 138 and 142 etc.
Importance of Cheques in the Commercial World:
Cheques have played an important role in the development of the commercial world as because they are the instruments which facilitate quick commercial transactions. So the importance of cheques as a negotiable instrument is considered not only in India but all through out the world and the same can be known better if one looks at the provisions dealing with the dishonour of cheques in different Countries. In Scotland a cheque acts as an assignment of particular amount to the payee and if such a cheque is dishonored then all the funds present in the bank account of the drawer are attached and frozen. For the drawer to bring back his account to normalcy he has to deposit some amount of money in his account and then pay the cheque in the bank so that the debts of the payee can be paid off. The drawer can also do the same if he obtains a letter from the payee stating that the payee has no further interest in the cheque and deposits the same in the bank.  Then in case of Australia Section 70 of the Cheques and Payment Orders Act, 1986 makes the drawer or the endorser of a cheque liable for any cheque that is dishonored irrespective of the fact that the drawer received no notice on this behalf.  Section 76 of the Cheques and Payment Orders Act, 1986 also provides that in case of dishonour of cheque it is the right of the payee to receive the payment due from any person liable to pay the cheque and if there is a circumstance under which the indorser is forced to make the payment for dishonour then he has a right to claim the same from the drawer.  In addition to the above mentioned provisions there are other provisions with respect to the payment of damages in case of dishonour of cheuqes in Australia.
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