WHETHER HOLDER OF CHEQUE CAN INITIATE PROCEEDINGS OF PROSECUTION UNDER SECTION 138 OF NEGOTIABLE INSTRUMENT ACT, 1881 FOR THE SECOND TIME IF HE HAS NOT INITIATED ANY ACTION ON EARLIER CAUSE OF ACTION?

[Mr. M. GOVINDARAJAN]

Section 138 of the Negotiable Instrument Act, provides that 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 money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have been committed an offence 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. 

Proviso to Section 138 stipulates three conditions precedent, which must be satisfied before the dishonour of a cheque can constitute an offence and became punishable:

The cheque ought to have been 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 of cheque ought to make a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;

The drawer of such a  cheque should have failed to make 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.

Section 142 of the section provides that no court shall take cognisance of any offence punishable under Section 138 of the Act except upon a complaint, in writing, made by the payee, or, as the case may be, by the holder in due course and such complaint is made within one month of the date on which the cause of action arises under Section 138.  No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class is competent to try any offence punishable under Section 138. taxmanagementindia.com

In ‘M.S.R. Leathers V. S. Palaniappan and others’ – 2012 (10) TMI 232 - SUPREME COURT four cheques were issued by the company on 4.08.1996 in favour of the respondent which were presented to the bank for collection on 21^st November, ’96.  The cheques were dishonoured for insufficiency of funds.  A notice was issued to the company on 8^th January 97 demanding payment of amount covered by the cheques.  The respondent was assured by the appellant company that necessary funds will be made available and advised to present the cheque again.   The respondent presented the cheque again in the bank on twenty first January ’97.  The same was dishonoured on the next day.  A statutory notice was issued by the  respondent to the  company for making payment within fifteen days from the date of receipt of the notice.  Since no payment was made the respondent filed a complaint before II Metropolitan Magistrate, Madras for the offence punishable under Section 138 of the Act.  The company put forth the following contention:

The complaint had not been filed within 30 days of the expiry of the notice based on the first dishonour of the cheque;

The statutory notice was n served upon the accused persons.

The Metropolitan Magistrate dismissed the complaint.  The respondent approached  the High Court.   The High Court allowed the revision and quashed the orders passed by the Magistrate.  The appellant therefore approached Supreme Court.

The Supreme Court held that neither Section 138 or Section 142 or any other provisions contained in the Act forbids the holder or payee of the cheque from presenting the cheque for encashment on any number of occasions within a period of six months of its issue or within the period of its validity whichever is earlier.  There is nothing in the above said provisions to oblige the holder/payee of a dishonoured cheque to necessarily file a complaint even when he was acquired an indefeasible right to do so.  The fact that an offence is complete need not necessarily held to launch of prosecution especially when the offence is  not a cognisable one.  It follows that the complainant may, even when he has the immediate right to institute criminal proceedings against the drawer of the cheque either at the request of the holder/payee of the cheque or on his own volition, refrain from instituting the proceedings based on the cause of action that has accrued to him.  Such a decision to defer prosecution may be impelled by several considerations but more importantly it may be induced by an assurance which the drawer extends to the holder of the cheque that given some time the payment covered by the cheques would be arranged, in the process rendering a time consuming and generally expensive legal course unnecessarily.  It may also be induced by a belief that a fresh presentation of the cheque may result in encashment for a variety of reasons including the vicissitudes of trade and business dealings where financial accommodation given by the parties to each other is not an unknown phenomena.  Suffice to say that there is nothing in the provisions of the Act forbids the holder/payee of the cheque to demand for service of a fresh notice the amount covered by the cheque should there be a second oa successive dishonour of the cheque on its presentation.

The Supreme Court did not accept the argument that while a cheque is presented afresh the right to prosecute the drawer, if the cheque is dishonoured, is forfeited only because the pre3vious dishonour had not result in immediate prosecution of the offender even when a notice had been served upon the drawer.   The Supreme Court further held that that so long as the cheque remains unpaid it is the continuing obligation of the drawer to make good the same by either arranging the funds in the account on which the cheque is drawn or liquidating the liability otherwise.  It is true that a dishonour of the cheque can be made a basis for prosecution of the offender but once, but that is far from saying that the holder of the cheque does not have the discretion to choose out of several defaults, one default, on which to launch such a prosecution.  The omission or the failure of the holder to institute prosecution does not, therefore, give any immunity to the drawer so long as the cheque is dishonoured within the validity period and the conditions precedent for prosecution are satisfied.