In India, the Negotiable Instruments Act, 1881 governs the use of negotiable instruments like promissory notes, bills of exchange, cheques and many more. It plays an important role in regulating the growth of banking and commercial transactions and legalises the system of negotiable instruments.
The term ‘Negotiable’ means ‘transfer by endorsement or delivery’ and the term ‘Instrument’ means ‘any legal document in writing, which is created in favour of any person.
Therefore, Negotiable Instruments are written statements implying payment of money, either on demand or within a particular time period with the drawer’s/payer’s name on it.
History and background
In India, Negotiable Instruments Act, 1881 codifies the law governing transactions involving negotiable instruments. As can be seen, this is a law passed during the British Era which continues till date to govern economical transactions.
As per the Negotiable Instrument Act, there are various negotiable instruments; such as cheques, promissory notes, bills of exchange, bank notes, etc. However, for day to day transactions, cheque is the most widely used negotiable instrument in businesses today.
Cheque
Section 6 of the Act defines a cheque as a bill of exchange 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’
Parties to a ‘cheque’
A cheque is a negotiable instrument that involves different parties for its processing. Here they are:
- Drawer – Is the maker of the cheque
- Drawee – Is the person thereby directed to pay.
- Payee – Is the person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid.
- Holder – Of the cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.
Introduction
Dishonor of cheque :- According to the Negotiable Instruments Act 1881, when the drawer pays off his lability to the payee through cheque and bank returns the cheque unpaid due to insufficient balance or any other reason on the account held by the drawer, the liability/debt remains due to the drawer and the amount remains unpaid. This is known as the dishonuor of cheque.
The return of cheque can be because of insufficient funds in the account or due to exceeding the limit of the amount which was agreed to be paid by the bank. Such a default by any person, creates a liability.
Conditions for prosecution
- The cheque should have been drawn by the drawer on an account maintained by him.
- The cheque should have been returned or dishonoured because of insufficient funds in the drawer’s account.
- The cheque is issued towards discharge of a debt or legal liability.
- After receiving the notice, if the drawer doesn’t make the payment within 15 days from the day of receiving the notice, then he commits an offence punishable under Section 138 of the Negotiable Instruments Act.
If the cheque was issued as a gift, towards lending a loan or for unlawful purposes, then the drawer cannot be prosecuted in such cases.
Procedure to file a complaint Under Section 138 of the Act
Sec 138 of the Negotiable Instruments Act 1881 provides for the following steps to lodge a complaint for dishonour of cheque:
- Dishonour of Cheque(s):
The complainant should have deposited the cheque drawn in his/its favour, which cheque(s) has been returned unpaid or has been dishonoured due to:- Insufficiency of fund in the account of the drawer;
- Issuance of stop payment instructions by the drawer to the drawer’s bank;
- Amount of cheque exceeding the arrangement with the drawer bank.
- Notice asking for payment of dues:
A legal notice for cheque dishonor is neccessay before any action.This Act provides that, once the cheque has been dishonoured, a notice needs to be issued (by registered A.D.) to the drawer within 30 days of the receipt of memo from drawee bank that the cheque is dishonoured. The legal notice for cheque dishonour to be sent should mention the following points;- The cheque issued was presented for payment in bank;
- The cheque was subsequently dishonoured for the reason provided by the drawee bank (which should be any of the three reasons provided in Para 1 above);
- Asking for payment for sum written on cheque within a period of 15 days from the date of receipt of notice.
- Filing complaint:
Where on the receipt of notice, if the drawer after the dishonor of cheque remains silent or refuses to pay the money within 15 days from the date of receipt of notice, then a criminal complaint should be filed against the drawer (“Accused”) within next 30 days from the expiry of time period provided to the drawer. - Place of filing the complaint:
The place for filing the complaint shall be determined based on any of the following;- Place of the bank on which the cheque is drawn;
- Place where cheque is presented to the bank and the same is dishonoured;
- Place of residence/business of the complainant;
- Place of residence/business of Accused;
- Place from where the notice is sent to the drawer of the cheque demanding the cheque amount.
- Contents of criminal complaint:
A complaint should contain complete details about the complainant, Accused, details of the transaction, details of the notice sent to Accused, jurisdiction clause, limitation clause, prayers asking for compensation and punishment for the Accused. The complaint should also be accompanied with all the important attachments i.e. the list of witnesses, list of all original documents and copies, board resolution giving authority to a person to file complaint on behalf of the company (if applicable) etc. - Issuance of summons:
Upon filing of complaint and completion of all procedural aspects, the Magistrate/JMFC before whom the complaint is filed shall verify the documents and upon subsequent verification of the Complainant, shall issue summons against the Accused. - Post – Issuance of summons:
On issuance of summons, the Accused may appear or may not appear.
On appearance of the Accused; the plea of the Accused shall be recorded and the proceedings shall be conducted as per Section 262 and 265 of CrPC.
Where Accused fails to appear; A Bailable warrant shall be issued against the Accused. Even after this, where the Accused fails to appear, a Non-Bailable warrant will be issued. If the Accused appears, the procedure will be the same as in the case of issuance of summons.
However, If the Accused fails to secure his attendance, then by courts order, Accused shall be declared absconding and a notice shall be issued in local newspaper in respect of the same. Properties of the Accused will be attached and will be sold by public auction. Complainant can recover his dues out of the sale proceeds. - Orders:
Upon hearing the parties, the court may pass any of the following orders;- The Accused may be acquitted of all the charges; or
- The Accused may be held guilty of the offence of Dishonor of cheque punishable Under Section 138 of the Act and shall be penalized as follows;
- imprisonment up to two years; or
- monetary fine which may extend to twice the amount of cheque; or
- both imprisonment and fine; or
- paying off the dishonored cheque amount to the complainant.
Conclusion
Section 138 of the Act protects the payee from any illegal act on the part of the drawer. As cheques are commonly used instruments in the business world, banking sector needs to be protected. It not only aims at speedy disposal of cases but also to bring a sanctity to the system by seeking to clamp down on defaults in payments and has empowered the payee against drawer to bring higher virtuousness to cheque transactions.
The law of negotiable instruments is very comprehensive and includes penal provisions. It might land you in trouble if you fail to take appropriate action at the right time. Hence, the best idea would be to seek help from knowledgeable professionals without any delay, in case you are facing issues related to the NI Act.
Article is very informative
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