Negotiable Instrument Disputes

Every business deals with the number of transactions daily. Certain documents are required to work with these transactions. These are known as Negotiable Instruments. In India, a law governing these negotiable instruments to enhance trust without compromising their legality is the Negotiable Instrument Act, 1881. 

The Act defines “Negotiable Instrument” as a promissory note, bill of exchange or cheque payable either to order or to bearer. 

Negotiable Instruments are of the following types:

• Commercial Bills
• Promissory Note
• Cheque
• Commercial Paper
• Treasury Bills
• Bank Draft

One of the major issues faced in the business while transactions are Cheque bounce. It leads to breaches of trust, humiliation, and financial loss. “Cheque” is a bill of exchange when drawn on a specified banker and not expressed to be payable otherwise than on-demand, and it includes the electronic image of a truncated cheque and a cheque in the electronic form (Section 6 of the Act).

SECTION 138 OF THE ACT

The section of the act deals with the dishonor of cheques due to insufficient funds. 

Where any cheque drawn by a person from an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank. And such person shall be deemed to have committed an offense and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both

Provided that nothing contained in this section shall apply unless— 

1. the cheque has been presented to the bank within six months from the date on which it is drawn or within the period of its validity, whichever is earlier; 
2. the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving notice; in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and 
3. the drawer of such cheque 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.

Explanation.—For this section, “debt of other liability” means a legally enforceable debt or other liability”

The requisite to attract this Section are as follows:

• The drawer must have issued a cheque to the payee or complainant on a bank account that he maintains.
• A cheque must have been issued to discharge any debt or other liability, in whole or in part.
• The cheque is to be presented to the bank within six months of its issuance or its validity. The condition which comes first is applied.
• The bank should return the cheque unpaid to the payee due to insufficiency of funds or the amount exceeds the limit to be paid from that account by way of agreement with the Bank. 
• The payee needs to demand payment of the amount by giving notice to the drawer of the cheque within 30 days after he came to know about the cheque dishonoring from the bank. 
• The cheque drawer does not pay the amount due to the payee within 15 days of receiving the notice.
• The complaint is filed before the Court of Chief Judicial Magistrate/Chief Metropolitan Magistrate within 1 month of the date of expiry of the 15 days of receipt of the notice.

Jurisdiction 

Section 142(2) of the Act sets the jurisdiction to try or inquire about the dishonoring of cheque cases. It says that such cases come under the local jurisdiction – the bank branch of the payee, where the payee presents the cheque for payment, is situated.

The process to Proceed with the Case:

Criminal Recourse

1. When the drawer fails to make the payment within 15 days of the payee’s receipt of the notice, the complainant/payee may file a criminal case of cheque dishonoring under Section 138 of the NI Act in writing against the drawer within 30 days of the payee’s receipt of the notice.
2. The complaint is to be filed before the Court of Chief Judicial Magistrate/Chief Metropolitan Magistrate.
3. A summons is issued to the accused/drawer if the court finds solidity in the complainant’s case. If the accused is restrained from appearing before the court, he can be issued with a bailable warrant. On subsequent failure, a non-bailable warrant on him can be issued.
4. The court orders the accused to furnish a bail bond, to ensure his presence during the trial, and to take notice of Section 251 Cr.P.C., which allows him to enter a plea of defense and fix the case for defense evidence unless the accused makes an application for recalling a witness for cross-examination under Section 145(2).
5. The Court in question must ensure that the complainant is examined in chief, cross-examined, and reexamined within three months of being assigned the case.
6. Availability of witnesses to the complaint and accused must be there for cross-examination as and when the court requires.
7. Instead of having the witnesses testify in court, the Court can accept their affidavits. 

Civil Recourse

1. A “summary suit” under Order 37 of the Civil Procedure Code, 1908 can be executed by the complainant. 
2. A Judicial Magistrate of the first class or by a Metropolitan Magistrate has the power to try such cases and the provisions of sections 262 to 265 (both inclusive) of the Code of Criminal Procedure, 1973 (2 of 1974) Code shall, as far as may be, apply to such trials. 
3. Every trial under this section must be completed as quickly as possible, and every effort must be made to complete the trial within six months of the complaint’s filing.
4. Under this, an accused cannot defend his case, to defend himself he needs to take permission from the court. 

PENALTY

• If any person found guilty under section 138 of the Act, he shall be deemed to have committed an offense and shall, without prejudice to any other provision of this Act, be punished with imprisonment for 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. 
• In the case of any conviction in a summary trial under section 143 of the NI Act, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees.

APPEAL

An appeal against an order of conviction for the offense punishable under section 138 of the said Act, an appeal is maintainable under Section 374 (3) in the Code of Criminal Procedure 1973:

(3) Save as otherwise provided in sub-section (2), any person,-

1. convicted on a trial held by a Metropolitan Magistrate or Assistant Sessions Judge or Magistrate of the first class, or of the second class, or
2. sentenced under section 325, or
3. in respect of whom an order has been made or a sentence has been passed under section 360 by any Magistrate, may appeal to the Court of Session.

Other provisions

It is a very common question to ask- 

1. Whether we can file a complaint after the expiry of the limitation period of 30 days? 

Section 142(b) clearly states that a complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to section 138. However, the section’s proviso refers to the Court’s ability to take cognizance of a complaint after the prescribed period if the complainant proves to the Court that he had sufficient cause for not filing a complaint within that period.

In the case of Birendra Prasad Shah v. State of Bihar (2019), The Supreme Court stated that the court can take cognizance of a complaint under section 138 of the NI Act after the prescribed period if the complainant shows that he had sufficient cause for failing to file a complaint within that period.

• Is a legal notice sent after the expiry of the limitation period of 30 days valid?

If a payee is unable to send the legal notice to the drawer for payment of the amount within 30 days of the dishonoring of the cheque by the bank. He cannot avail of the provisions of section 142 for condolence of delay. The provision of section 138 of the Act is mandatory. 

As per Section 138 (b) of the Act, the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving notice; in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid. 

In such a case, there are two options a payee can opt for:

• If the cheque is still in the validity period, he can again present it to the bank and this time on dishonoring can send a legal notice within 30 days of such receipt of information by the bank.
• A payee can opt for a civil suit or summary suit as applicable against the drawer for recovery of money presuming it is a legally enforceable debt.