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WHETHER A COMPLAINT UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 ACT WOULD BE MAINTAINABLE AGAINST A PERSON WHO WAS NOT THE DRAWER OF THE CHEQUE WHICH ULTIMATELY CAME TO BE DISHONOURED ON PRESENTATION

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WHETHER A COMPLAINT UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 ACT WOULD BE MAINTAINABLE AGAINST A PERSON WHO WAS NOT THE DRAWER OF THE CHEQUE WHICH ULTIMATELY CAME TO BE DISHONOURED ON PRESENTATION
By: Mr. M. GOVINDARAJAN
December 5, 2010

Sec. 138 of the Negotiable Instrument Act, 1881 deals with dishonor of cheque for insufficiency etc., of funds in the account.   It provides where any cheque drawn by a person on 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 the bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which extend to twice the amount of the cheque, or with both.

 The cheque for the above purpose should be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.   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 a 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.   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.

The issue to be discussed in this article is whether a complaint under Sec. 138 of the Act would be maintainable against a person who was not the drawer of the cheque from an account maintained by him, which ultimately came to be dishonored on presentation.   The said question has been elaborately discussed by Supreme Court in 'P.J. Agro Tech. Limited and others V. Water Base Limited' - (2010) 99 CLA 30 (SC).

In the said case the appellant No. 1 is an agro based company having varied interests in providing feed supplements, vaccines, etc.,   The appellant Nos. 2 and 3 are the Managing Director and Chairperson of the appellant No.1 company.  The respondent No. 1 company approached the appellant company for distribution of prawn feed manufactured by it.  Inasmuch as, the said venture did not turn out to be very successful, the appellant company took a decision to discontinue its dealings with the respondent No. 1 company.   Therefore the appellant settled all its outstandings with the respondent No.1 Company and also gave an authorization letter to the respondent company to collect all other dues directly from the customers of the appellant company, who had bought the feed but were yet to pay the price. The customers were also duly informed about the said decision of the company. 

On 4th October, 2001 the appellant company requested the respondent company to coordinate with one Shri K. Balashankar Reddy, the then General Manager at Nellore, for collecting the dues which were still outstanding.  The said letter has been accepted by the respondent company.  On 13.12.2002 the appellant company received a notice from the respondent company under Section 138 of the Negotiable Instruments Act, 1881 wherein it was stated that a cheque issued by K. Balashankar Reddy on 25.11.2002 , drawn on the State Bank of Hyderabad, Nellore Branch has been returned dishonored with the endorsement 'Account closed". The notice also demanded repayment of the cheque from the appellants.

The appellant company replied to the notice on 26.12.2002 stating that they never had any account with the State Bank of Hyderabad and the cheque in question had not been issued by the appellant company.  No reply has been received from the respondent company.  But a summon has been received from Metropolitan Magistrate Court, Chennai. The said summon was challenged before the High Court on the following grounds:

  • The company did not have any account with State Bank of Hyderabad and that cheque had been issued by K. Balashankar Reddy from out of his personal savings bank account;
  • None of the directors had signed the said cheque;
  • The complaint was an abuse of the process of court and had been filed with the sole motive of extracting money from the appellants;

    The High Court dismissed the petition holding that the cheque had been issued by K. Balashankar Reddy to meet the liability of the appellant No. 1 company and its directors on their request and that as a result they have been rightly prosecuted under Sec. 138 of the Act. 

    The said order of High Court has been challenged by the appellants before Supreme Court raising the following contentions:

    Both the Magistrate as well as the High Court had failed to consider in their proper perspective the provisions of Sec. 138 of the Negotiable Instruments Act,1881;

  • To attract the provisions of Sec. 138 it was necessary that a cheque would have to be drawn by a person on an account maintained by him with his banker and if the cheque was dishonored it would be deemed that such person had committed an offence  and would, without prejudice to any other provision of the 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 order to maintain an action against a person under Sec. 138 it would be necessary to show that the cheque had been issued by such person on an account maintained by him, which fact was absent in the instant case as far as the appellants are concerned;
  • The cheque has been drawn by respondent No. 11 in his personal capacity on his bank and upon dishonor thereof, only he could be prosecuted under Sec. 138 of the Act;
  • The proceedings against the company and its directors were not maintainable.

    The respondent company vehemently objected the arguments put forth by the appellants.  It was contended that the cheque had been issued by the respondent No. 11 to liquidate the dues of the appellant company and its directors, the High Court had quite justifiably refused to quash the complaint filed by the respondent No.1 Company.

    The Supreme Court analyzed the provisions of Sec. 138.  It held that it is clear that in order to attract the provisions of Sec. 138 a cheque which is dishonored will have to be drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person from out of that account for the discharge, in whole or part of any debt or any other liability.   It is only such a cheque which is dishonored which would attract the provisions of Sec. 138 of the above Act against the drawer of the cheque.   The Supreme Court held that in this case the cheque which had been dishonored may have been issued by the respondent No. 11 for discharging the dues of the appellant company and its directors to the respondent company.   The company may have a good case against the appellant company for recovery of its dues before other for a, but it would not be sufficient to attract the provisions of Sec. 138 of the Act.  The appellant company and its directors cannot be made liable under Sec. 138 of the Act for a default committed by the respondent No. 11.  The Supreme Court further held that an action in respect of a criminal or a quasi criminal provision has to be strictly construed in keeping with the provisions alleged to have been violated.   The proceedings in such matters are in personam and cannot be used to foist an offence on some other person, who under the statute was not liable for the commission of such offence.  The Supreme Court allowed the appeal.

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    By: Mr. M. GOVINDARAJAN - December 5, 2010
     
     
     

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