Negotiable Instruments Act

NEGOTIABLE INSTRUMENTS ACT
Liability of drawee of cheque—The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.
It is the contractual obligation of the banker to honour his customer’s cheque as long as he has sufficient balance to his credit applicable to the payment of the cheque. “The relation between banker and the customer is that of debtor and creditor, with a superadded obligation on the part of the banker to honour the customer’s cheques when the account is in credit.” An unjustified dishonour is not merely a breach of contract, but also a tort as it damages the customer’s reputation. Marzetti v Williams is an illustration in point.
M kept his account with Williams Bank. One day in the morning the balance in their hands due to M was f69. About one o’clock the same day, a f40 Bank of England note was paid into his account; a little later at 3 pm a cheque drawn by M for f87 was presented. The f40 deposit having not yet been credited to the customer’s account, the payment was refused.
The refusal was held to be unjustified. Two hours’ time was held sufficient to enable the banker to calculate the customer’s account. “It is discredit to a person,” said Lord Tenterden, and, therefore, injurious in fact, to have payment refused of a draft for so small a sum…. It is an act particularly calculated to be injurious to a person in trade.
Similarly, where a banker has agreed to provide credit or overdraft facility to a customer and forgetting that agreement refuses the customer’s cheque, the banker is liable in damages.
Further, the banker has to be careful in the choice of words that he uses in returning the customer’s cheques. The words “not sufficient” have been held to be defamatory. The banker’s remark must be consistent with the truth and yet expressed in least defamatory words. Accordingly, “refer to the drawer” or “reasons assigned, not stated” have been held to be not defamatory.
When justified in refusing
In the following circumstances, however, the banker is justified in refusing the payment of a cheque:
1. Where cheque post-dated—A cheque should not be paid if its date does not correspond to or falls after the date of presentment. If a banker pays a post-dated cheque he cannot debit the customer’s account until the stated date. Further, the banker will have to pay damages to the customer if by reason of the premature payment of a post-dated cheque, he is not able to meet the customer’s other cheques presented within date.
2. Where cheque outdated—It is a custom of the bankers in India not to pay a cheque if it is presented after six months from the date of its issue. The chque is then known as a stale cheque.
3. When funds insufficient—The banker is justified in refusing the payment of a cheque when the balance in the customer’s account is not sufficient to meet it.
4. When customer countermands Payment—Where the customer requests the banker by a notice not to pay a particular cheque, that is known as “countermand”. The banker’s authority to pay the cheque is determined by the countermand of payment. A countermand to be effective must reach the banker before he has paid the cheque in the ordinary course, though the payment be made shortly after the closing hours but before the bank was actually closed. The notice must be by means of a letter signed by the customer and must give correct particulars of the cheque. A telephonic or telegraphic message is not sufficient, because in that case the banker has to ascertain the authenticity of the message. If a banker happens to pay by mistake a cheque of which a proper stop notice has been received, he cannot debit the account of his customer, but he can recover back the money from the party who has received the payment as money paid under a mistake of fact.
5. Where cheque mutilated
6. Where cheque of doubtful validity—The validity of a cheque may be in doubt where it is not properly drawn. It may, for example, not be dated, or the amount in words and figures is different, or its indorsements are not proper or regular or there is some other confusion about the cheque. The mandate in the cheque is not clear.
7. Where customer’s signature does not agree—In addition to the above, in the following circumstances the banker is not merely justified but is also bound to refuse the payment of a cheque.
8. Where customer has countermanded payment
9. Where customer has died—The authority of a banker to pay cheques is determined when he receives notice of the customer’s death. Payments made before the banker has notice of death are justified.
10. Where customer has become insolvent—The banker’s authority is also determined when he has received notice of the customer’s insolvency or of presentation of an insolvency petition against him.
11. Where customer has become a person of unsound mind—A person of unsound mind is not competent to contract. A cheque, being a contract of payment, is suspended during the period of the customer’s insanity provided that the banker has notice of the fact.
12. Where garnishee order has been issued—The banker’s authority to pay ceases when he has received a court order (garnishee) attaching the customer’s balance. The whole balance stands attached even if it is in excess of what is due to the judgment-creditor. But if the garnishee order is for a stated amount, the banker may retain only that and pay away the surplus. A garnishee order is effective even as against the customer’s express instruction to instruction to transfer the proceeds of the account to another person provided that the other person has not been informed. An account held in trust cannot be attached for the personal debts of the trustee. Thus, where a husband paid money into an account in his wife’s name so that the latter was a trustee for the amount for her husband, it could not be attached for the wife’s personal debts. Similarly, a joint account can be attached only for joint debts.
Criminal liability of drawer for issuing cheques without fund
Pre-requisites of liability
The amendment of 1988 added a new chapter to the Act containing a set of provisions imposing punishment for issuing cheques with knowledge that they would not be paid. The object of bringing Section 138 on the statute book is to inculcate faith in the efficacy of banking operations and credibility in transacting business on the basis of negotiable instruments. The ingredients which are to be satisfied for making out a case under Section 138 of the Negotiable Instruments Act are:
(i) a person must have drawn a cheque on an account maintained by him in a bank for payment of a certain sum of money to another person from out of that account for the discharge of any debt or other liability;
(ii) the cheque has been presented to the bank within a period of six months from the date appearing on its face or within the period of its validity, whichever is earlier;
(iii) the cheque is returned by the bank unpaid, either because the amount of money standing to the credit of the 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 the bank;
(iv) the payee or the holder in due course of the cheque 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 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
(v) the drawer of such cheque fails to make payment to the payee or the holder in due course of the cheque within 15 days of the receipt of the notice.
If the aforementioned ingredients are satisfied then the person who has drawn the cheque shall be deemed to have committed an offence. In the present case the ingredients of Section 138, Negotiable Instruments Act were prima facie established from the complaint and the documents filed with it. Therefore, no exception could be taken against the order of the Magistrate taking cognizance of the offence under Section 138 against the appellants.
Insufficiency of funds
The liability arises when a cheque is not paid on account of insufficiency of funds standing to the credit of the drawer’s account or the amount of the cheque exceeds the amount of credit facility allowed to the customer. It is for the drawee bank to make a statement in dishonouring the cheque that it is due to insufficiency of funds. The payee cannot make a declaration of this kind on his own. He is not supposed to know the state of any person’s bank account. The banks are under a duty of confidentiality as to customer’s state of account. He is punishable with imprisonment extending up to one year or with fine extending up to twice the amount of the cheque or with both. It is necessary that the cheque should have been presented for payment within its validity period which is generally six months or in special cases it may be reduced to a shorter period by a notice on the face of the cheque. The cheque must reach the drawee bank’s branch within that period directly or indirectly or through collection process.
Period for presentment and notice of dishonour
In the case of a post-dated cheque six months started running from the date that appears on the face of the cheque and not from the date of its issue. When the holder of the cheque receives information from the bank that the cheque has been dishonoured, he should within fifteen days (now 30 days) make a demand to the drawer for payment. If the drawer does not make payment within the next 15 days after receiving such demand, the offence becomes complete and the cause of action starts from the 16th day onwards. The period of limitation for filing the complaint is to be reckoned by excluding the day on which the cause of action had accrued. The cause of action for prosecution arises when the drawer fails to make payment within 15 days of receipt of the notice. It has been held by the Supreme Court that when a cheque is returned with the remark “account closed”, it is also a dishonour within the meaning of Section 138 and, therefore, the offence would be constituted. A drawer who has insufficient fund to meet the cheque cannot escape liability by resorting to the “stop payment” device. This decision was followed by the Supreme Court with this modification that where the payee of the cheque had come to know that the payment had been stopped, he would not be able to charge the drawer with liability by presenting the cheque knowing it in full well that it would not be paid. The last line of the notice which was issued in the case of Central Bank of Indian v Saxons Farms stated, “Kindly arrange to make the payment to avoid the unpleasant action of my client.” It was held that the High Court erred in overlooking this clear demand for payment of the amount of the cheque in quashing the criminal proceedings under Section 482 CrPC. Certain cheques were issued to a bank in a repayment of the loan amount. They were dishonoured. The cheques were presented again and dishonoured. The fresh notice and the earlier notice both reserved the right to launch criminal proceedings. The Supreme Court explained the effect of statutory provisions in these words:
The object of notice is to give a chance to the drawer of the cheque to rectify his omission and also to protect an honest drawer. Service of notice of demand in clause (b) of the proviso to Section 138 is a condition precedent for filing a complaint under Section 138. Though no form of notice is prescribed in clause (b) of the proviso to Section 138, the requirement is that the notice shall be given in writing within fifteen days (now 30) of the receipt of information from the bank regarding return of the cheque as unpaid and in the notice a demand for payment of the amount of the cheque has to be made.
Regarding demand for payment, the High Court was of the opinion that, “the intention in the notice was that cheque was being presented again and the applicant/petitioner should arrange the payment on representation of the cheque”. But a cheque can be presented any number of times to the bank within the period of its validity. The appellant bank had a legal right to re-present the cheques as indicated in the notice and, therefore, the respondents could have arranged payment either through the bank or directly to the appellant bank. By not doing so the provision of Section 138 was clearly attracted. In the facts of the present case, the following last line of the notice reading, “Kindly arrange toe make the payment to avoid the unpleasant action of my client” was a clear demand required by clause (b) of Section 138 proviso. The High Court erred in overlooking this line in the notice and in holding that there was no demand for payment.
A mere intimation that a cheque had been dishonoured for want of sufficient funds is not to be regarded as a notice requiring payment to be made. A mere information about bouncing of the cheque alone is not sufficient to give rise to a cause of action.
The words “the said amount of money” in Section 138, proviso (b) refer to the cheque amount. Hence, the notice has to demand payment of only the cheque amount. Where, after mentioning the cheque amount, other incidental expenses are separately enumerated, the notice is valid but not where a lump sum amount including the principal amount and expenses is mentioned.
Where evidence was produced to show that the accused had made certain payments and yet the notice did not make any such deductions and demanded payment of the full amount of the cheque, the notice was held to be defective the complaint was filed by the President of the society without any authorization by the society. The court said that a complaint under Section 200 CrPC for an offence under Section 138, NI Act cannot be presented by anyone for setting the law in motion. The complaint was not maintainable. The accused was to be acquitted.
No format for demand notice has been prescribed. Accordingly, the email communication sent by the complaint informing the drawer of the dishonour of his cheque and requesting him for payment, qualified as notice of dishonour and demand for payment within the meaning of Section 138.
Liability of guarantor
The key expressions “any cheque” and “other liability” in Section 138 clarify the legislative intent. The issue regarding co-extensive liability of guarantor and principal debtor, is totally out of the purview of Section 138. a cheque was issued by the guarantor for payment of the creditor in the event of default by the principal debtor. The court observed that it could not be said that the cheque was not issued for discharge of a debt or other liability. A complaint against the dishonour of the cheque was maintainable.
Repeated presentments of cheque and notice
If the period of instituting a proceeding is lost, the cheque can be presented again within its validity period of six months to create a fresh period for launching a proceeding. This was the situation before the Supreme Court in Dalmia Cement (Bharat) Ltd v Galaxy Traders and Agencies Ltd. The notice demanding payment after dishonour was issued by the payee within time. The postal acknowledgement of the service of the notice was also received. But the drawer disowned the contents of the envelope. The payee presented the cheque again. On receiving it back as dishonoured, he served upon the drawer the second notice for payment. A complaint was filed within one month of the service of the second notice. The complaint was held to be not barred by limitation. The period begins from the date of receipt of notice by the drawer. Receipt of notice includes refusal to receive, or the postal remark “unclaimed.” Within the meaning of Section 27 of the General Clauses Act a service by post becomes effective at the time at which the letter would be delivered in the ordinary course of post. The Act does not prescribe any mode of service. “Nowhere it is said that such notice must be sent by registered post or that it should be dispatched through a messenger.” In the case before the Supreme Court, time started running when the notice sent by fax reached the drawer of the cheque. The party had sent the notice by post also. The court said that the date of receipt of fax could not be ignored for the purposes of accrual of cause of action on the ground that the sender of the notice must know that the notice was received by the drawer.
The main object of the Negotiable Instrument Act is to legalise the system by which instruments contemplated by it would pass from hand to hand by negotiation like any other goods. The purpose of the Act was to present an orderly and authoritative statement of the leading rules of law relating to the negotiable instruments. To achieve the objective of the Act, the legislature thought it proper to make provision in the Act for conferring certain privileges to the mercantile instruments contemplated under it and provide special procedure in case the obligation under the instrument was not discharged. Section 138 of the Act creates an offence and the law relating to the penal provisions has to be interpreted strictly.
There was endorsement of the post master which showed that the telegraphic notice and registered notice were sent to the correct address of the accused. The date of telegram showed that the notice was served within 15 days. The court said that the issuance of telegraphic notice would be sufficient compliance with the mandate of Section 138. The accused failed to pay. He was accordingly convicted.
Where on dishonour after first presentment, a demand notice which was duly received by the drawer but no complaint was filed and the cheque was presented again and again the notice of dishonour was served and complaint filed, it was held that filing of such a complaint without even referring to the earlier dishonour and consequent notice was not permissible. The order issuing process was liable to be quashed.
Where two cheques were issued and the drawee submitted only one for collection which came back dishonoured and subsequently both the cheques were presented and they bounced back, and on notice of demand the first cheque was paid but not the second, it was held that the criminal liability in respect of the first cheque was extinguished but the accused could be convicted for default in respect of the second cheque.
He cause of action for filing a complaint does not arise on issuance of notice. It arises from the date of service of such notice on the drawer of the cheque. If no notice is served, the cheque can be presented again to create a new period of limitation.
The notice sent to the managing partner of the partnership firm was held to be a sufficient compliance of the statutory requirement of notice for proceeding under Section 138. It amounted to notice to all the partners. Individual notices to partners are not required. The contents of the complaint indicated that the partners proceeded against were acting partners. The complaint could not be quashed.
Cause of action arises only once
A cheque can be presented any number of times within six months from its date. Once the statutory notice is issued calling upon the drawer to make payment, the period of limitation is to be reckoned from the date of receipt of such notice. Any complaint filed on a subsequent notice is not maintainable.
Where the cheque was presented again on the asking of the accused that it would be honoured this time, it was held that the cause of action on first notice was not destroyed.
In a case before the Supreme Court, cheque was presented three times, dishonoured every time, and notices of dishonour were issued thrice. The first two notices were issued to wrong address. The first notice was also not received by the drawer. The second notice was withdrawn by the complainant on an objection raised by the drawer itself. The third notice was addressed properly to the drawer and received by him but no payment was made within 15 days. It was held that the cause of action had arisen with reference to the third notice. The complaint was filed within a month of it. The conditions precedent for launching the prosecution having been satisfied, there could be no question of quashing the complaint.
Renewal of cheque
An expired cheque can be revalidated voluntarily by altering the dates so as to give it a fresh lease of life for another period of six months. Unless the drawer proves that he did not do so voluntarily, his prosecution cannot be quashed.
Blank cheque
The cheque issued by the drawer was in the state of being a blank cheque. It only carried his signature. The holder had made all the entries at a later stage. This fact was not disputed. The court said that such blank cheque was not a valid cheque in the eyes of law. The order acquitting the accused was proper. The complainant had not narrated the circumstances in which he obtained a blank cheque.
Under the requirements of Section 6, it is necessary for the cheque to contain an order in writing and signature of drawer. The cheque leaf in this case contained no signature. A blank cheque of this kind is only loosely referred to as a cheque. The cheque stated only the amount and date. The payee’s name was not entered when the cheque was handed over to the complainant. The cheque was not as complete as is contemplated by Section 6. The contention of the accused that he had entrusted a blank cheque was plausible in the circumstances. The mere act of producing such a cheque before the court did not show that it was prepared by the accused or that it was his cheque. The presumption under Section 139 can be drawn only in favour of the holder in due cheque. Without first considering whether the complainant is the holder, no presumption can be drawn in his favour even if the execution of the instrument is proved.
It has been held that putting signature upon a blank cheque is not equivalent to the drawing of a cheque which should meet the requirements of Section 138. Nor it meets the requirements of its definition under Section 6. The word “drawn” as used in Section 138 has to be taken to be equivalent to the execution of a cheque.
Where the contents of the cheque were filled in by the complainant himself and the drawer had only signed the cheque, the court did not regard the cheque to be a blank one.
Complaint before expiry of period
A complaint may be filed before the expiry of the period of limitation but not afterwards. A complaint filed before the expiry of the notice period contemplated by Section 138(c) cannot be dismissed as premature. Taking the cognizance of an offence and filing of a complaint are two distinct things.
Discharge of debt or liability, presumption
It is one of the conditions of liability that the cheque should have been given for the discharge in whole or in part of any debt or other liability of a legally enforceable nature. The accused was trading in shares and securities through the complainant, a registered broker and became liable to him for an amount of seven lakh rupees. The accused examined the accounts, acknowledged his liability and issued seven cheques. He also addressed a letter to the complainant stating that he had verified the accounts, found them to be true and pleaded that he should bear with him for delay in payment. He was not allowed to defend himself by saying that there was no debt or liability.
Where the defence of the accused was that he had issued the cheque in question by way of security in share dealing and not for any amount due under share transactions. The Supreme Court said that on facts such defence was acceptable as probable, the court took note of the practice prevailing in the business. The cheque having not been issued for discharge of any debt or liability, it did not fall within the purview of Section 138.
Where the second cheque was issued in terms of the compromise for the earlier dishonoured cheque, it was held that it did not create a new liability. As the compromise did not fructify, the cheque could not be said to have been issued in payment of a debt.
Section 139, however, helps the holder by drawing a presumption that the cheque was issued to him in discharge of a debt or liability. The burden of proving that this was not so is put on the drawer. Where the amount advanced by the complainant to the drawer was a large sum of money which could not have been repayable within a few months and the complainant had not disclosed it in his books of account or income tax return, this was held to be sufficient to rebut the presumption. The court said that the liability to pay an unaccounted cash amount could not be regarded as a legally enforceable debt or liability.
The Supreme Court has held that the presumption does not absolve the complainant of the burden of proving the details of the existing debt or liability. What was the background transaction, what amount of debt or liability it created, what was the due date for payment, etc. All such essential details cannot be left to the care of the presumption. There was a concurrent finding in this case of the fact of grant of loan and also a concurrent finding that the requisite notice as served on the drawer. The court said that such findings could not be interfered with in appeal unless a proper background is built for the purpose.
In the context of rebuttal of presumption, the Supreme Court has held that the court can take notice of the parties conduct. It was alleged in this case that the respondent had borrowed huge sums of money from the appellant-complainant despite suits filed against for recovery in respect of previous defaults. No document was executed. The amount advanced carried no interest. The finding of the High Court was that the respondent proved that he had not issued any cheque in discharge of any debt or liability. The finding being not perverse on facts, the Supreme Court refused to interfere in writ jurisdiction under Article 136 of the Constitution.
The complainant testified that he had lent one lack rupees as a hand loan to the accused and for repayment he issued the cheque in question. He did deny that he had issued the cheque. The benefit of presumption became available to the complainant, one that the cheque was issued for valid consideration and second that I was towards discharge of the debt. The accused placed no evidence on record to dispel the presumption. He was accordingly convicted. The High Court set aside the sentence of fine and allowed only the compensation amount of one lakh rupees.
The matter of interpretation of the words “other liability” as they occur in Section 138 was there before the court in a case in which the contract was between the builder and the owner of land for construction of multistoreyed residential building. The owner agreed to block his assets till completion of construction. It was held that such an act of the owner amounted to consideration within the meaning of Section 2(d) of the Contract Act. The builder had undertaken to pay the sum of money to the owner by means of 30 cheques. Discharge of such liability was to be of the essence of the contract. It was held that such cheques formed part of the consideration and they could be said to be issued for discharge of not debt, but a liability under the contract. The liability had already arisen when the cheques were issued. The rule of ejusdem generis is not to be applied in interpreting the words “other liability” of Section 138. The general expression in the Section “other liability” follows only one single expression “debt” which is not a distinct genus. The rule of ejusdem generis is not applicable in the absence of a distinct genus. Hence the expression “other liability” cannot be interpreted in the light of the preceding word “debt” and must be given the ordinary and grammatical meaning, so as to include any liability to pay. Thus, the complaint under Section 138 was maintainable.
Where the accused raised the defence of having issued blank cheques as a security for sale and purchase transactions, it was held that the burden was on him to prove that on the day of dishonour of cheques no amount was due from him to the complainant. He failed to rebut the presumption and therefore became guilty of the offence.
In a case before the Supreme Court the defence was misuse of the incomplete cheque by the complainant. He sought opportunity to call for expert opinion. The lower courts rejected it in view of the presumption under Section 20 of the Negotiable Instruments Act. The Supreme Court held this to be improper. An opportunity must be granted to the accused for adducing evidence.
It is not necessary for demolishing the presumption that the accused should lead separate evidence or enter the witness box for deposing. It can be shown that a look at the evidence and other material produced by the complainant itself shows that the fact of debt or liability is not established.
Only when the drawal of the cheque, execution and handing over are proved, the complainant can say that the recipient had been constituted into a holder in due course. It is not necessary that the accused should produce evidence to rebut the presumption. Cross-examination of the complainant or by bringing in probabilities in his favour and improbabilities against the complainant is sufficient for the accused to discharge the burden of rebutting the presumption.
Stepping of the accused into the witness box is not imperative for rebutting the presumption. The fact of rebuttal can also be determined by other evidence on record. Where chances of false implication cannot be ruled out, the background fact and the conduct of the parties are required to be taken into consideration. The courts should not be taken away by the mere fact of presumption because that may lead to mistaken conviction or injustice. Other principles of jurisprudence, namely, presumption of innocence as a human right and the doctrine of reverse burden introduced by Section 139 should be delicately balanced. Such a balancing exercise would largely depend upon the factual matrix of each case and the material brought on record. Acting on these principles the Supreme Court said that the resumption in this case was wrongly raised because a sum of Rs. 1.5 lakh was said to have been advanced on a mere asking without any documentation or witnesses between people who were not friends otherwise also. This was held to be highly improbable. Section 140 helps the holder further still by providing that the drawer will not be allowed this defence that he had no reason to believe when he issued the cheque that it would be dishonoured.
The court has first to consider on the basis of evidence all the materials placed before it whether the prosecution has proved that the cheque was drawn by the accused. The court has then to go further to consider such drawing was for the purpose of discharge of any debt or liability. These two ingredients of the offence under Section 138 are inevitable factors to be considered. The drawer of a cheque is the person who makes the cheque. There must be evidence to show that the accused made or created or prepared the cheque. The cheque should be under the drawer’s (accused) signature.
There was a complaint against the drawer of the cheque and his wife. Both of them had borrowed the money for business and executed a promissory note. The wife was not the signatory to the cheque. The only allegation against her was that she was a consenting party. It was held that criminal liability under Section 138 could not be fastened on her.
Where the cheque was signed by the mandate holder but the was not the account holder, it was held that he alone could not be prosecuted. No case was filed against the account holder on whose account the cheque was drawn. The case was bad for non-joinder.
Joint account holders
Where the dishonoured cheque was signed by both the joint account holders, it was held that the payee could, at his choice, proceed against both of them or any one of them. He is not compellable for proceeding against both of them. The fact of signature showed that both of them were active partners.
Company or firm, drawer
According to Section 141, when the drawer of a dishonoured cheque is a company, the company will, of course, be liable to be proceeded against, but liability will also be incurred by every person who at the time was in charge of and responsible to the company for the conduct of its business, though such a person can defend himself by showing that the offence was committed without his knowledge or that he had exercised due diligence to prevent the offence from being committed. Even when a person is not incharge of a company’s affairs but is occupying the position of a director, manager, secretary or other officer, he would also be liable if it can be shown that the offence was committed with his consent or connivance or is attributable to him. The drawer of a cheque whether he is a human being or a body corporate or even a firm, can be prosecuted under Section 138. The court said.
If the drawer of a cheque happens to be a juristic person like a body corporate I can be prosecuted for the offence under Section 138 of the Act. There is no scope for doubt regarding that aspect in view of the clear language employed in Section 141 of the Act. In the expanded ambit of the word “company” even firms or any other associations of person are included and as a necessary adjunct thereof a partner of the fir is treated as director of that company.
The offence takes place on the date of dishonour. This date is particularly crucial because all persons who were directors on such date would be liable to be proceeded against. It was shown about them that they were occupying positions of responsibility and were carrying on the business. The averment was that they were seen participating in the day-to-day activities of the company. No further details of such activities have to be pleaded. The averment of participation in the day-to-day working of the company is sufficient to satisfy the legal requirement. It is then for the director to show that although he was a director, he was not an acting director and as such had no role to play in the management of the company.
If there is averment against a director, the complaint against him is not to be quashed. His position and role in the episode can be examined at the trial. The co-accused, the Hindu Undivided Family, could not be liable merely because it was the family concern of the accused company.
Where the accused was shown to be the promoter and controller of the company but it was not averred how and in what manner he was responsible for the conduct of the company’s business or otherwise responsible to it for its functioning and he had not issued the cheque in question, it was held that the order summoning him as an accused person was improper.
The appellant was the general manager of the company. Another person was working as the finance manager. Both of them were working under the managing director. Two other which included finance manager (but not the appellant) placed order with a coal corporation. The material was transported by a carrier to whom cheques were given which were dishonoured. Even after notice, the company did not pay. The appellant, general manager, was included in the prosecution. He was convicted and fought up to the Supreme Court. He submitted that there was no evidence that he was responsible for the conduct of the company’s business, that no notice was given to him and no specific role was attributed to him in the complaint petition. His conviction was held to be not sustainable. The court said that when the factual back-ground of the case was considered in the light of the principles stated in Neetu Bhalla and N K Wahi cases, the inevitable conclusion was that the appeal was bound to succeed. The conviction of the appellant could not be sustained.
The managing director and joint managing director were taken to be admittedly incharge of and responsible for the conduct of business. This is so by virtue of the position they occupy. When a director is also an executive, he becomes an officer with executive powers charged with administrative work and with senior managerial responsibility in business. It is not necessary that such position should be stated in the complaint by quoting the words of Section 141.
It is sufficient to implead persons who are responsible for and incharge of the day-to-day affairs of the company. Non-impleadment of the company on whose behalf the accused signed the cheque causes no prejudice to the accused.
The Supreme Court stated the requirement of the Section as follows:
There is almost unanimous judicial opinion that necessary averments ought to be contained in the complaint before a person can be subjected to criminal process. The liability under Section 141 is sought to be fastened vicariously on a person connected with a company, the principal accused being the company itself. It is a departure from the rule in criminal law against vicarious liability. A clear case should be spelled out in the complaint against the person sought to be made liable….. That the respondent falls within the parameters of Section 141 has to be spelled out. A complaint has to be examined by the Magistrate in the first instance on the basis of averments contained in it. If the Magistrate is satisfied that there are averments which bring the case within S.141, he would issue the process. Merely being describe as a director in the company is not sufficient. Even a non-director can be made liable. The averments in the complaint would also serve the purpose that the person sought to be made liable would know what is the case which is alleged against him. This would enable him to meet the case at the trial.
Where cheques of huge amount were issued by a company in favour of another company and there were categorical allegations in the complaint that payments were made after meetings of representatives of both the companies including the chairman and managing director of the drawer company, the court said that the respondent company could not plead ignorance of the entire transaction. The allegations in the complaint satisfied the requirements of Section 141. Process could be issued against the drawer company and persons incharge. Where there was no allegation that the director in question was incharge of and responsible to the company for the conduct of its business, it was held that the mere fact that he had participated in negotiations for obtaining financial assistance for the company was not sufficient to show his state of responsibility in the administration of the company.
Where it was not shown about two of the directors of the company that they were persons incharge for conduct of the business, the complaint against them was quashed, but the director who was the authorized signatory and had signed the cheque could not be discharged.
Sick industrial company
The company had full knowledge of the fact that it had been declared company under the Sick Industrial Company (Special Provisions) Act, 1986. Even so it placed orders for purchase of goods, and it issued cheques in payment and represented that they would be honoured. But that was not to be the case. In reply to the notice for payment, the company contended for the first time that it was not liable being declared sick. Those working in the company had fraud in mind from the inception of the transactions. Neither the company nor those working for it could shield themselves from criminal prosecution for dishonour of cheques.
The word “company” for the purposes of this section would include a partnership firm and the word “director” in that case would mean a partner of that firm. Where all the partners of the firm were arrayed but the trial court recorded a finding that only the acting partner was responsible for the commission of the offence. The High Court upheld the conviction.
Every partner cannot be roped in. only those partners can be arrayed as accused who come within the purview of Section 141 i.e. those who at the time of the offence were incharge of and responsible for conduct of the business.
A hypertechnical approach for the purpose of rejecting a complaint should not be adopted. If the substance of the allegations made in the complaint fulfils the requirements of Section 141,it should be entertained. The complainant in this case alleged that the firm was the accused and the third and fourth accused were its partners. The cheque showed that it was signed by one person as a managing partner and the other as a partner. The accused persons could not refuse their being partners. The pleadings were held to be sufficient to attract Section 141.
The partner who signed the cheque, being a drawer, could be independently prosecuted without holding his co-partner vicariously liable.
Retirement of partner
One of the accused partners raised the plea that she had retired from the partnership. But no public notice of her retirement was given as required by Section 72 of the Partnership Act to get rid of liability under Section 45. Thus, she could be held liable for the acts of the reconstituted firm because of her failure in making public announcement. But that was not to be done in this case because of the statutory requirement of participation in the management of affairs. She was a sleeping partner even before her retirement and after retirement would not have participated in management. Public notice is also not necessary in the case of a sleeping partner.
Where the notice of retirement was not published in the Official Gazette nor filed with the Registrar of Firms, it was held that a mere publication of the notice in a local newspaper was not sufficient to absolve the retired partner from liability to third parties. The averments in the complaint attributing knowledge and connivance n the commission of the offence made the complaint maintainable because these things could not be examined at the initial stage. Proceedings were not to be quashed.
The fact of the firm being not registered does not affect the validity of the criminal complaint because neither it is a suit nor it is for the enforcement of a contract.
A proprietary concern is not a company. The cheques in this case were drawn by the proprietor. A person was sought to be prosecuted on the ground that he was actively involved in the transactions of the proprietary concern. He was not signatory to the cheques. It was held that cognizance of the complaint could not be taken against him.
There has to be an averment in the complaint that the accused officer was at the relevant time incharge of and responsible to the fir for the conduct of its business. An officer against whom such averment is not made cannot be proceeded against.
The prosecution of the drawer company is not a pre-requisite for the prosecution of the company officers.
Where the notice was served on the director who had signed the company’s cheque, it was held to be a good notice for prosecuting the company as well. The Supreme Court said that notice cannot be construed in a narrow technical way. Technicalities of law and procedural wrangles should not erode the faith of the business community dealing in trade and mercantile matters. Similarly, the notice sent to the managing director of the company who was also the signatory of the cheque was held to be sufficient. The complaint was not liable to be quashed on the ground that no notice was sent to the company itself. The quashing of a complaint was held to be not proper where only the partner was made an accused person and not the firm on whose behalf the cheque had been issued.
Where the director had resigned before the cheque was issued, the court said he could not be made liable because the resignation of a director becomes effective on the date on which he submits. It has nothing to do with the duty of the company to file necessary forms with the Registrar of Companies. Where the managing director signed post-dated cheque, he became liable though he had subsequently relinquished the post. The proceedings against him could not be quashed. Every director is not necessarily incharge of the company’s affairs and responsible for the conduct of its business. Every person connected with a company does not fall within the ambit of the provisions. Liability depends on the role that one plays in the affairs of the company and not the designation or status granted to him. A complaint against a director was not allowed by reason merely of the fact that he was a director.
Nominee director
A director was nominated by IDBI to oversee the affairs of the company. Such director is not directly concerned with the financial affairs of the company. He could not be held vicariously liable.
Deemed service of notice
Although in an appropriate case a deemed service is to be accepted by the court, but such presumption of deemed service is not a matter of course in all cases. Deemed service is to be accepted on the facts of each case. Considering the facts of the resent case, the appellant was entitled to benefit of doubt as to whether such service, in fact, had been effected on the appellant. The appellant stated in his pleadings that he had not received the notice.
Where the notice was dispatched by the sender by post with correct address, the court said it could be deemed served unless the addressee proved that it was not really served. The court further said that a complaint could not be dismissed at the threshold on the ground that there was no proper service of notice. This question has to be decided at the trial. In another case before the Supreme Court, the notice was sent through registered post and also under certificated of posting on correct address. The court said that is must be presumed that effective service had been rendered. The mere fact of endorsement by postal peon could not make the service to be ineffective, particularly when the postal peon was not examined. Quashing of the complaint was set aside.
Demand notice under certificate of posting was sent by the complainant at the last known office address of the company and at the residential address of the Chief Executive Officer (CEO). The notice was not received by the company and the CEO. The complainant had no knowledge of shifting of office. The CEO produced no evidence to show that she was not residing at the address where the notice was sent. The court said that the presumption of service of notice arose.
A notice which has been refused by the accused is deemed to have been served. The accused cannot escape liability on the ground in such case that he did not receive the notice. A notice sent by courier was returned with the endorsement refused. The complainant produced courier post return cover and also courier receipts. The accused did not dispute the address on the cover. The court said that the notice could be presumed to have been served.
A deemed service was not accepted where the accused did not accept the fact of service to him, also he did not own the signature on the receipt slip, nor it bore any date of service, the alleged signature was not submitted to expert examination. The court said that these circumstances made improbable the delivery of notice. The on us was on the complainant to prove service but he could not do so.
Where no notice was returned as “unclaimed”, it was held that a presumption of due service arose. Where the notice reached its correct address, but the accused put wrong stamp on AD, the court said that it showed his mala fide intention. The notice could be said to have been duly served.
Where the notice was returned with the endorsement “Addressee left India”, and because the notice was sent at correct address, it was deemed to have been served. The court said that production of a copy of the passport by the accused showing that he was not available in India during the relevant period could not be taken as proof of the fact that there was not service.
In a case before the Supreme Court, the notice came back with the endorsement “Party not in station, arrival not known.” The complaint filed on the basis of deemed service was taken cognizance of by the Magistrate and the process was issued. A petition filed under Section 482 CrPC for quashing of complaint was held to be premature. The complainant should have the opportunity at the trial that the endorsement was fraudulently managed.
The drawer who says that he did not receive the notice but has received a copy of the complaint can make payment within 15 days and on that basis can make a prayer that the complaint be not proceeded with. Thereafter, he would not be able to say that he did not receive notice.
For raising the presumption of deemed service of notice, it has been held that thirty days time should ordinarily be considered sufficient and reasonable.
Effect of deposit of money in court
The deposit by the accused of the entire amount in the court during the trial does not absolve the accused of his liability for the offence. It can, however, be taken into account in awarding the sentence. Where the drawer paid the cheque amount with interest, the sentence of imprisonment was substituted with sentence of fine only. Where the money dispute was settled during the pendency of the complaint and the accused deposited the cheque amount, it was held that the complainant could be permitted to withdraw the amount and in view of the subsequents events, the conviction could be set aside, unless the court was inclined to convict.
Effect of payment within 15 days of notice
Where the demand in the notice is met to the extent of the cheque amount within 15 days of the receipt of the notice, it would absolve the drawer of liability under Section 138. For other claims like compensation, costs, interest, etc., a civil suit has to be filed.
Effect of part-payment
The cheque which bounced was for Rs. 5 crores. Another cheque was issued in its place but it was for Rs. 1.25 crores only. It could not be said to have been accepted in place of cheque for the huge amount of Rs. 5 crores. At best it could be regarded as part-payment. It could not be said to be an abandonment of the original claim or an automatic extension of time fixed for adjustment or overdraft facility extended by the complainant bank.
Genuineness of signature
Where the drawer denied his signature on the cheque and pleaded that he could not be held liable unless the opinion of a handwriting expert was taken, it was held that in the facts and circumstances of the case, the cheque bounced for want of funds and, therefore, the plea of forged signature could not be acceptable.
Complaint to be by holder
A complaint can be made only by the holder of the cheque and only then cognizance will be taken of the offence. Where the cheque in question was not endorsed by the payee at all, it was held that the payee alone could file a complaint, whether corporeal or incorporeal person. In the case of a company, a complaint can be presented by an authorized person whether an employee or not. In the case of a Government company a complaint presented by an employee would not require examination of the complainant or witnesses. The employee representing the company would be in the category of a public servant. To this extent Section 200 CrPC, which prescribes mandatory examination of the complainant is not to apply when a public servant appears on behalf of a Government company as complainant.
Where the notice of dishonoured was issued on behalf of the complainant’s wife, the complaint filed by her husband who was neither the holder of the cheque nor the holder of power of attorney was held to be not maintainable. A complaint should be made within one month of the cause of action and before a Metropolitan Magistrate or a Judicial Magistrate of the First Class.
A person becomes the holder of a cheque if he takes an order cheque by an endorsement to him or a bearer cheque by delivery. In order, however, to become a holder in due course, he has to satisfy the requirement of acting in good faith, which means that there should be no sufficient cause to believe that any defect existed in the title of the person from whom the instrument was taken. In this case, two cheques of substantial amounts were issued by two members of a family in favour of two other members of the same family. This fact was held to be sufficient in itself to create the suspicion about the entitlement of the payees to the huge amount. The cheques were discounted with the bank. The bank manager did not take any precaution to ascertain why such huge payment became necessary between family members. The court said that the manager was subjected to an enquiry. Not to have done so showed that he was guilty of negligence. He was demoted. The bank was not a holder in due course. It could not file a complaint.
Complaint on behalf of firm, company
The complaint was filed by the manager of the complainant firm. He was neither the payee nor the holder in due course. He was merely an employee of the firm. The court held that it could not be said that the complaint was filed by an authorized person. The cognizance taken was illegal. The accused was entitled to be acquitted.
Where an authority letter was executed in favour of the manager, the court said that such letter is not required to be on a stamp paper. It is not to be drawn like a power of attorney.
When it is a complaint by a corporeal person, it is necessary that some natural person should represent it in the court. The board of directors in this case had passed a resolution authorizing its general manager to appoint an agent for representing the company. A complaint filed by such agent was held to be maintainable.
Where the cheque was issued in favour of a partnership firm, a complaint filed by the managing partner, being an agent of the firm, was held to be maintainable.
The articles of a company empowered its board of directors to delegate their powers for performance of any acts. They appointed the regional manager for filing the complaint. He further delegated this power to the assistant area manager. The complaint filed by such person was held to be not competent.
It is permissible to lodge a complaint in the name of the payee itself which was a proprietary concern. It is immaterial for this purpose that the proprietary concern is not a legal entity.
Complaint by legal representative
A complaint filed by the wife who was the natural legal representative of the deceased payee was held to be maintainable.
Continuation of complaint by legal heir
Where the original complainant died after filing of the complaint, his son was allowed to be added as a complaint subsequent to taking cognizance of the complaint. Proceedings did not abate. The son could come on the record and continue.
Multiple cheques and complaints
More than one cheques were issued by the same person in favour of the payee. Such person can elect to prosecute the drawer in one and the same complaint for the dishonour of all the cheques if they were issued in the course of ne and the same transaction. He can also elect to prosecute him separately for each and every cheque. He preferred a complaint for only one particular cheque. The fact of no mention of other cheques was held to be not an error apparent on the face of the record. It could not lead to quashing.
Where four different cheques were dishonoured, it was held that each cheque constituted a different cause of action for the individual offences. The mere fact that a common notice was issued in respect of all of them could not lead to the conclusion that there was only one offence and one cause of action. All the four cheques could not be consolidated, nor the trial in respect of them could be held jointly.
Dishonour of each cheque constitutes a separate offence giving rise to a separate cause of action subject to the condition that separate notices have been issued in respect of each cheque. All the transactions cannot be held to be a single transaction attracting provisions of Section 219 CrPC. Separate trials are permissible. It is not obligatory on the court to order that a subsequent sentence of imprisonment is to run concurrently with the earlier sentence. Inherent powers cannot be used for this purpose.
Stop payment
It has been held that a “stop payment” instruction cannot obviate the offence under Section 138 if it is otherwise made out. The case before the Supreme Court was that of Modi Cements Ltd v Kuchil Kumar Nandi. The court explained the effect of the provisions as follows:
Even if a cheque is dishonoured because of ‘stop payment’ instruction to the bank Section 138 would get attracted. The position will not be different even if the drawer had instructed the bank to stop the payment prior to the presentment of the cheques for encashment as in the present case. The observations of the Supreme Court in Electronics Trade & Technology Development Corpn Ltd to the effect. ‘Suppose after the cheque is issued to the payee or to the holder in due course and before it is presented for encashment, notice is issued to him not to present the same for encashment and yet the payee or holder in due course presents the cheque to the bank for payment and when it is returned on instructions, Section 138 does not get attracted’, does not fit in with the object and purpose of the provision which is to promote the efficacy of banking operations and to ensure credibility n transacting business through cheques. Acceptance of this proposition will make Section 138 a dead letter, for, by giving instructions to the bank to stop payment immediately after issuing a cheque against a debt or liability the drawer can easily get rid of the penal consequences notwithstanding the fact that a deemed offence was committed. Once the cheque is issued by the drawer a presumption under Section 139 must follow and merely because the drawer issues a notice to the drawee or to the bank for stoppage of the payment will not preclude an action under Section 138 of the Act by the drawee or the holder of a cheque in due course.
Where “stop payment” notice became necessary because of the exemption of the drawer by the Government from such payment, it was held that no offence under Section 138 arose. Where stopping of payment became necessary because advance payment was made for supply of paddy and inferior quality paddy was supplied and the complainant offered no proof against the defence or that there was any other debt or liability, no offence was held to have arisen.
Account closed
The Supreme Court in its decision in NEPC Micon Ltd v Magma Leasing Ltd, explained as follows effect of the remark “account closed” on the dishonour slip:
The cheques issued to the respondents by the appellant company in discharge of its liabilities were returned by the bank concerened with the remark “account closed”. The question was whether this situation fell within the purview of Section 138. The appellant contended that it did not and said that Section 138 covered only the two situations mentioned therein and that, being a penal provision, Section 138 should be strictly interpreted and should not be given a wider meaning so as to cover the situation involved herein. Rejecting these contentions and dismissing the appeal, it was held that the return of a cheque by the bank unpaid on the ground that the “account is closed” would mean that the cheque is returned as unpaid on the ground that “the amount of money standing to the credit of that account is insufficient to honour the cheque”. The reason is that the cheque was dishonoured as the amount of money standing to the credit of “that account” was “nil” at the relevant time apart from it being closed. The closure of the account would be an eventuality after the entire amount in the account is withdrawn. It means that there was no amount in the credit of “that account” on the relevant date when the cheque was presented for honouring the same. The expression “the amount of money…. Is insufficient to honour the cheque” is a genus of which the expression “that account being closed” is a specie. After issuing the cheque drawn on an account maintained, if the drawer closed “that account” apart from the fact that it may amount to another offence, it would certainly be an offence under Section 138. Further, in view of provisos (a),(b) and (c) to Section 138, the cheque is to be drawn by a person for payment of any amount of money due to him “on an account maintained by him” with a banker and only on “that account” the cheque should be drawn.
The dishonouring of the cheque on the ground that the account is closed is the consequence of the act of the drawer rendering his account to a cipher. Hence, reading Sections 138 and 140 together, it would be clear that dishonour of the cheque by a bank on the ground that the account is closed would be covered by the phrase “the amount of money standing to the credit of that account is insufficient to honour the cheque.
Even with regard to a penal provision, any interpretation which withdraws the life and blood of the provision and makes it ineffective and a dead letter should be averted. If the interpretation which is sought for were given, then it would only encourage dishonest person to issue cheques and before presentation of the cheque close “that account” and thereby escape from the penal consequences of Section 138. Therefore, even though Section 138 is a penal statute, it is the duty of the court to interpret it consistent with the legislative intent and purpose so as to suppress the mischief and advance the remedy. Section 138 of the Act has created a contractual breach as an offence and the legislative purpose is to promote efficacy of banking and of ensuring that in commercial or contractual transactions cheques are not dishonoured and credibility in transacting business through cheques is maintained.
Hence, when the cheque is returned by a bank with an endorsement “account closed”, it would amount to returning the cheque unpaid because “the amount of money standing to the credit of that account is insufficient to honour the cheque” as envisaged in Section 138 of the Act.
Alteration of amount or other contents
The accused alleged interpolation in the amount specified in figures. The fact of interpolation was corroborated by expert evidence. The conviction was recorded without giving satisfactory reasons for disbelieving the fact of interpolation and also without considering the legal plea. The Supreme Court held that the conviction was liable to be set aside.
Where there was overwriting in the year specified on the cheque and the drawer (accused) had not consented to such an alteration in his cheque, the cheque was held to have been avoided entitling the drawer to acquittal.
Cheque reported as lost
The dishonoured cheque was reported to have been lost. The question was whether this constituted an offence under Section 138. The Supreme Court said that Section 138 creates a legal fiction of deemed commission of offence when a cheque is dishonoured either due to insufficiency of funds or the cheque amount exceeded the amount of arrangement under an agreement with the bank. The fiction does not apply to the case of a lost cheque. Hence the dishonour of a cheque on this ground does not constitute an offence under Section 138. Penal status creating a legal fiction must be strictly construed. Such fiction has to be given full effect but it cannot be extended to a purpose not specifically provided in the Act. It must be given strict construction especially when it is created through a penal provision.
Jurisdiction (cognizance of offences)
In K. Bhaskaran v Sankaran Vaidhyan Balan the Supreme Court stated the legal position as follows: it is clear from Section 178(d) CrPC that complainant can choose any one of those courts having jurisdiction over any one of the local areas within the territorial limits of which any one of the following five acts, the components of the offence, took place: (i) drawing of the cheque; (ii) presentation of the cheque to the bank; (iii) returning of the cheque unpaid by the drawee bank; (iv) giving of notice in writing to the drawer of the cheque demanding payment of the cheque amount; (v) failure of the drawer to make payment within 15 days of the receipt of the notice. The High Court in appeal rightly set aside the finding of the trial court that it had no territorial jurisdiction because the cheque had been dishonoured in a different district, outside its jurisdiction. Further on facts the High Court rightly held that the trial court had jurisdiction as the cheque had been issued at a shop within its jurisdiction.
The court explained the interplay of facts and statutory provisions as follows:
Under Section 177 of the Criminal Procedure Code, “every offence shall ordinarily be enquired into and tried in a court within whose jurisdiction it was committed”. The locality where the bank (which dishonoured the cheque) is situated cannot be regarded as the sole criterion to determine e the place of offence. It must be remembered that offence under Section 138 would not be completed with the dishonour of the cheque. If attains completion only with the failure of the drawer of the cheque to pay the cheque amount within the expiry of 15 days mentioned in clause (c) of the proviso to Section 138 of the Act. It is normally difficult to fix up a particular locality as the place of failure to pay the amount covered by the cheque. A place, for that purpose, would depend upon a variety of factors. It can either be at the place where the drawer resides or at the place where the payee resides or at the place where either of them carries on business. The issuance f notice does not by itself give rise to a cause of action, but communication of notice does. The High Court at the place from where notice was given has no jurisdiction to try the complaint. The principle that the debtor must seek his creditor cannot be applied in criminal cases. The jurisdiction of the court to try a criminal case is governed by the provisions of the Criminal Procedure Code and not by the application of common law principles. A different opinion was expressed in a case where the notice of dishonour demanding payment was sent from Mangalore and it was held that the court at that place had jurisdiction to try the case.
The court within whose territorial jurisdiction the collecting bank was situated does not for that reason have jurisdictional competence to entertain the complaint. The place where the cheque is resented for payment attracts territorial jurisdiction. The bank for presentment is the drawee bank and it is something different from the collecting bank.
Where most of the acts relating to the cheque, such as drawing of the cheque, presentment to bank, return of the cheque after dishonour happened at Jhansi, only the cheque was drawn at Lucknow Branch of the Corporation Bank, it was held that the complaint at Jhansi could not be said to be not maintainable.
The offence under Section 138 is constituted by several acts. It is not necessary that all such acts must have occurred in the same locality or within the local area of one given court. The combination of all those act is a sine qua non of the offence and therefore jurisdiction can be exercised in any one of those local areas, the court in that area can be the place of trial.
Where the cheque was drawn on a bank at Murshidabad and service of notice was also at Murshidabad, and, except that the statutory notice was dispatched from Delhi, none of the events showed that the offence was committed at Delhi. The complaint filed at Delhi was quashed because the court there had no jurisdiction.
A cheque as a negotiable instrument is required to be discharged at the place specified in it. Jurisdiction has to be gathered from the place at which payment was intended to be made. The court of the place where the cheque was presented for collection could not be said to have jurisdiction to entertain the complaint.
Section 178 of the Criminal Procedure Code suggests that if there is uncertainty as to where, among different localities, the offence would have been committed, the trial can be had in a court having jurisdiction over any of those localities. The provision has further widened the scope by stating that in case where the offence was committed partly n one local area and partly in another local area, the court in either of the localities can exercise jurisdiction to try the case. Further again, Section 179 of the Code stretches its scope to a still wider horizon.
The offence under Section 138 can be completed only with the concatenation of a number of acts. The following are the acts which are components of the said offence: (1) drawing of the cheque, (2) presentation of the cheque to the bank, (3) returning the cheque unpaid by the drawee bank, (4) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount, (5) failure of the drawer to make payment within 15 days of the receipt of the notice. It is not necessary that all the above five acts should have been perpetrated at the same locality. It is possible that each of those five acts could be done at five different localities. But a concatenation of all the above five is a sine qua non for the completion of offence under Section 138 of the Code.
It the five different acts were done in five different localities any one of the courts exercising jurisdiction in one of the five local areas can become the place of trial for the offence under Section 138. In other words, the complainant can choose any one of those courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done. As the amplitude stands so widened and so expansive it is an idle exercise to raise jurisdictional question regarding the offence under Section 138.
Taking cognizance of offence
The Supreme Court has laid down in the context of relevant aspects to be considered in taking cognizance that the court is required to consider only the allegations in the complaint and the evidence on record.
Condonation of delay
The delay of three days in filing the complaint was condoned without affording opportunity of hearing to the accused. No reason was assigned for the condonation. The right of the accused to oppose the condonation was defeated. If the accused had successfully opposed the condonation he could have avoided the ordeal of prosecution. But even so the court said that the defect was curable. The complaint had not become liable to be quashed.
Where the Magistrate received the complaint along with an application for condonation of delay and straightaway recorded sworn statements and proceeded further by issuing summons. He did not apply his mind to the application for condonation and did not observe the procedure prescribed for this purpose. The whole approach was erroneous. The cognizance was illegal and liable to be quashed.
Quashing of complaint
Quashing of proceedings in the exercise of power under Section 482 of the Criminal Procedure Code would be justified only if the High Court comes to the conclusion that the statement made in the complaint, even when taken at their face value, do not make out any offence.
Dismissal because of absence of complainant
A complaint was dismissed because of absence of the complainant. It was held that the trial court had not applied its mind to the provisions of Section 256 CrPC that it would be fair and proper in such a situation to adjourn the hearing. The order of dismissal was set aside.
Summary trial
All offences under the Act are to be tried by a Judicial Magistrate of the First Class or by a Metropolitan Magistrate. Even if there is a summary trial, it will 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. Where in the course of the trial, the have to be inflicted and, therefore, summary trial would be undesirable, he may order full trial and examine witnesses again. The trial has to be conducted on a day-to-day basis unless the Magistrate considers an adjournment to be necessary for reasons to be recorded in writing. Every trial under the section has to be conducted as expeditiously as possible. The Magistrate is under duty to make an endeavour to conclude the trial within six months from the date of complaint.
Mode of service of summons—(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973(2 of 1974), and for the urposes of this chapter, a Magistsrate issuing a summons to an accused or a witness may direcft a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session.
(2) Where an acknowledgment purporting to be singed by the accused or the witness or an endorsement purported to be made by any person authorized by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the court issuing the summons may declare that the summons has been duly served.
Service of summons
The Magistrate may order service of a copy of summons on the accused person or witnesses by speed post or by such courier services as are approved by a Court of Session. The service has to be addressed to the place where the person in question ordinarily resides or carries on business or personally works for gain. Where the post office or courier agency certifies that the person in question refused to take summons, the Magistrate may declare that summons has been duly served.
Evidence of affidavit—(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavit and may, subject to al just exception be read in evidence in any enquiry, trial or other proceedings under the said Code.
(2) The court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein.
Evidence on affidavits
The complainant may give his evidence on affidavits. But on the application of the prosecution or the accused person the court may order examination of the person who has deposed on affidavit.
Because of this statutory provision no one can insist that the complainant must appear in person to present the complaint and testify.
Bank’s slip prima facie evidence of certain facts—The court shall, in respect of every proceeding under this chapter, on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved.
The complainant has to enter the witness box and formally depose as to the contents of his affidavit. Only the affidavit can be taken as an examination-in-chief
Evidentiary value of bank’s slip
The statement in the bank’s slip or memo declaring that the cheque has been dishonoured can be taken as the basis for existence of the fact of dishonour unless and until such fact has been disproved.
Offences to be compoundable—Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), every offence punishable under this Act shall be compoundable.
Compounding of offences
This section declares that all the offences under the Act are compoundable. In a case before the Supreme Court there was conviction and sentence for the offence under Section 138. The Supreme Court set it aside in view of the fact that the dispute was settled and the amount due to the complainant had been paid.
This section was inserted by the Amendment of 2002. Earlier to this Amendment, the Supreme Court had deprecated the suggestion that the offence under Section 138 could be treated as a compoundable offence. The court, however, reduced the sentence to the period already undergone because payment had already been made to the satisfaction of the complainant. Considering that the object of Section 138 is to induce faith in the efficacy of banking operations and credibility in transacting business, the compounding of the offence should not normally be denied.
A complaint could not be compounded because the complainant was not willing to compromise. The ground on which the compounding was sought was that the amount due had been deposited in the court.
Where there was no consensus between the parties as regards the amount to be paid by way of compromise and it was neither recorded by the court, nor reduced to writing, it was held that the trial court dismissing the complaint because of the compromise was unfounded.
Amendment not retrospective
The amendment for compounding of offence was introduced in 2002. The prior offences would not be compoundable so far as concluded matters are concerned.
Application of Criminal Procedure Code
The provision in Section 147 relating to compounding of offence opens with the non obstante clause. But this completely exclude the application of the Criminal Procedure Code to offence under the Negotiable Instrument Act. The procedure of Section 320 CrPC has to be followed while compounding the offence under Negotiable Instruments Act. By virtue of this provision the permission of the court is not necessary when the trial is pending. Also by virtue of Table 1 of Section 320 CrPC compounding is permissible even before the Magistrate has taken cognizance of the offence. But there is no provision for compounding after conviction without permission without permission or intervention of the court.
By reason of the provisions in Section 362 and 482 CrPC subsequent events cannot be taken note of after a conviction has become final in exercising the inherent power under Section 482 CrPC. There can be no compounding after a conviction has been confirmed in revision by the High Court.
It has also been held that the table appended to Section 320 CrPC is not attracted as its provisions refer only to the provisions of IPC and none other. A settlement could be arrived at between the complainant and the accused. It is not necessary to affirm an affidavit and file it. A settlement can be arrived through a party’s advocate.
Effect of compounding
The effect of compounding is that of acquittal of the accused. It would be illegal to invoke Section 482 for the purpose of imposing fine or ordering imprisonment in default of payment of fine. The accused becomes entitled to acquittal after compounding.
The offence is compoundable at any stage be it revision or final stage. NI Act being special law prevails over the provisions of CrPC which is a general law. Plenary powers under Article 226 of the Constitution and Section 482 CrPC can be exercised by the court to relieve the accused of the sentence by compounding the offence.
Civil suit
A civil suit instituted on the same cause of action is not to be stayed. Where the amount of the dishonoured cheque was not paid even during pendency of appeal and revision, it was held that the punishment of imprisonment till rising of the court and a fine of Rs 5000 was a flea-bite sentence. The fact that the complainant had subsequently filed a civil suit and attached all the properties of the accused was not a ground to impose a minor sentence. The case was remitted back for awarding appropriate sentence.
Whatever amount of compensation has been recovered in the criminal proceedings has to be adjusted against the amount to be awarded in the civil suit. It is the duty of the court to do so.
The pendency of a civil suit is not a good ground for quashing the complaint. This is so because a criminal complaint is not a recovery proceeding.
Sentencing (punishment)
Where the dishonoured cheque was for the amount of Rs 1,50,000, and the court imposed fine only of Rs 5000 and awarded no imprisonment, it was held to be nothing but a flea-bite sentence. This was particularly so when the accused was the owner of a theatre. The enhancement of sentence was permissible. The petitioner was entitled to compensation.
The accused was 77 years old and also not keeping good health. It was held that sentence till rising of the court as well as payment of reasonable compensation to the complainant would serve the ends of justice. He was the owner of property worth a crore of rupees. Payment of the cheque amount of Rs 21,00,000 was awarded as compensation to be paid to the complainant.
It is not mandatory in every case of the offence under Section 138 that double the cheque amount should be imposed as fine. The complainant has no absolute right to insist that double cheque amount should be imposed as fine. The accused had issued a cheque for Rs 5,00,000. The First Appellate Court considerably enhanced the fine amount from Rs 6,00,000 to Rs 7,00,000 and also awarded compensation of Rs 6,55,000. This was held to be proper and also sufficient.
The court considered the fact that the cheque was for Rs 2,00,000 and since Section 138 enables the court to impose fine the accused was sentenced to fine of Rs 4,00,000 out of which a sum of Rs 3,00,000 was directed to be paid to the complainant as compensation.
Where the acquittal of the accused was set aside on appeal, the fine may extend to double the amount of cheque. The compensation that may be awarded to the complainant has to carry interest on the cheque amount and also the costs incurred by him. The notice for such consolidated amounts was held to be not bad. The accused could not prove that the cheque was issued without consideration.
The direction that if the accused failed to pay any of the fines, he would undergo simple imprisonment for a period of the three months on each count, was held to be proper. The court said that there was nothing to show that why a distinction should be made between non-payment of fine for an offence under the IPC and that under Section 138, Negotiable Instruments Act.
When leniency is to be shown—The transaction in this case had taken place 15 to 16 years ago. The accused had suffered heavy business losses. The court felt that no useful purpose would be served by imposing sentence of imprisonment. The court accordingly confined the imprisonment till the rising of the court but directed payment of six lakh rupees. That, the court said, would serve the ends of justice.
The cheque was issued by the managing director of the company to its employee under an industrial settlement. The employee had been fighting for his right since long. He had been compelled to initiate criminal action. Such a situation could not be taken lightly. The cheque was issued subsequently to the offence. The accused was directed to pay Rs 20,000 to the complainant by way of compensation.
Where the offence was completed by reason of non-payment, a subsequent letter by the complainant to the accused requesting him to make certan payments towards sales tax, etc. and adjust the same against the amount payable under the cheque was held not to have vitiated the statutory notice. Such a fact as also the fact of full payment of the cheque amount during pendency of proceedings could at the most be taken as mitigating circumstances for purposes of sentencing and nothing more.
After conviction, the accused was brought before the court where the complainant was also present. A joint memorandum of compromise was filed which stated that the entire cheques amount had been paid. The court said that since the liability under the cheque had been discharged, it was a mitigating circumstance in the matter of awarding punishment. The accused was set at liberty.
Two cheques of the total value of Rs 55,500 bounced but the accused was sentenced to a meager fine of Rs 2500 without direction for payment of the bounced cheques. No reasons were recorded for showing leniency in punishment. The order of sentence was set aside. The case was remitted for imposing appropriate sentence.
A partner was alleged to have withdrawn money from the partnership after a dispute with another partner. He issued a cheque under a compromise but the same was dishonoured. He admitted his liability to the extent of seven lakh rupees. A cheque was issued for discharge under this Act. The drawer was not allowed to say that he signed the cheque under duress or threats. No fraud was alleged against him. He also had probable defence because accounts between the partners were yet to be settled. The grant of compensation of seven lakh rupees instead of fine of Rs 5000 was held to be proper.
Death of accused during appeal
In place of fine, the court awarded compensation equivalent to the amount covered by the cheque. During pendency of appeal against conviction, the accused (appellant) died. The appeal abates in view of Section 394(2) CrPC, since it was not against the sentence of fine. But the court proceeded to decide the appeal on merits in spite of the fact that no near representative was brought on record. The approach of the court was held to be illegal.
Legal proceedings under the section cannot be initiated against legal heirs of the person who had issued the cheque.
Remand for sentence of imprisonment
Where a case was remitted to the trial court for considering, if proper, to impose sentence of imprisonment, it was held that the appellate court itself being empowered under Section 386(a) CrPC, to impose sentence of imprisonment once it came to the conclusion that the offence under Section 138 had been committed, the appellate court was not supposed to remit the case to the trial court for that purpose.
Raising of amount
Where the customer has drawn his cheque with reasonable precautions but even so some dishonest person by using some technique has altered and raised the amount, so that the banker, not knowing the forgery, has paid the increased amount, the banker must bear the loss. He cannot charge the customer with the excess amount. This is an ordinary risk of the banking profession and the banker must put up with it.
But where the customer has been negligent in drawing his cheque and has left unusual spaces which facilitate interpolation of words and figures and that becomes the cause of forgery, the loss falls on the customer. This was recognized as early as 1827 in Young v Grote.
A businessman while going abroad left a number of cheque forms with his wife all signed by himself. She was to have them filed up according to the needs of his business. She gave a cheqeue form to one of her husband’s clerks and requested him to complete it for f50. He did that and after showing the cheque to the woman proceeded to encash it. He raised the amount to f350 for which he had left enough spaces. The banker paid the amount.
It was held that the customer must bear this loss for it was due to his gross negligence that the banker was misled.
But in a similar case before the Privy Council the judgment went against the banker. The decision in Young v Grote, therefore, remained a doubtful authority until its affirmation by the House of Lords in London Joint Stock Ltd v Macmillan and Arthur.
When a partner of a firm was leaving office in haste, a clerk presented a cheque for his signature. The cheque contained absolutely no writing except the Figure 2 in the column for amount in figures. The partner signed the cheque and left, paying no attention to the sway it was written. The clerk then completed it for f120 and absconded with the proceeds.
The banker was held entitled to debit the customer’s account with the whole of the amount. Approving the principle in Young v Grote, and describing it as “sound in principle”, Lord Finlay, LC said:
As the customer and the banker are under a contractual relation in this matter, it is obvious that in drawing a cheque, the customer is bound to take usual and reasonable precautions to prevent forgery…. If the cheque is drawn in such a way as to facilitate or almost invite an increase in the amount by forgery if the cheque should get into the hands of a dishonest person, forgery is not a remote, but a very natural consequence of neglect of this description.
Forgery of signature
It is the duty of the banker to be acquainted with the customer’s handwriting and the banker must suffer if payment is made of a cheque on which the customer’s signature is forged. Forgery is nullity. A forged cheque is a nullity. The decision of the Allahabad High Court in Prabhu Dayal v Jwala Bank is an illustration in point.
One of the bank rules provided that “the customer should keep cheque books under lock and key, otherwise the bank is not liable for any loss in this connection”. The customer, however, left his cheque book in an unlocked box. A leaf was stolen, the customer’s signatures forged and the cheque was presented and duly paid by the bank.
The banker was held liable for the loss. The customer was no doubt negligent, but his negligence was not the proximate cause of the loss. Similarly, in Brewer v Westminster Bank Ltd.
The managing clerk forged the signatures of the beneficiary to a series of cheques and over a period of years drew f3,000 from the account, and used it for his own purposes. The forgeries were so skilful that no negligence could be imputed to the bank officials in not detecting them.
It was held “that the bank did not obtain a good discharge by paying the forged cheques. Undoubtedly, a banker who pays a forged cheque is bound to pay the amount again to his customer, because, in the first instance, he pays without authority.
Estoppel against forgery
However, the banker has a remedy against the forger. He can recover the whole of the amount from the forger as money paid under a mistake of fact. It is, therefore, the duty of the customer, when he learns of the forgery of his signature, to inform the banker so that the banker may take action against the forger. If the customer withholds this information and in consequence the banker loses his remedy against the forger, the customer will be estopped from relying upon the forgery of his signature. The decision of the House of Lords in Greenwood v Martins Bank is a clear illustration of the operation of this principle.
The plaintiff’s wife repeatedly forged her husband’s signature to cheques and drew out money which she applied to hr own uses. The husband became aware of the forgeries, but being persuaded by his wife to say nothing about them, he kept silent for eight months. When he finally decided to disclose the forgeries to the bank, the wife shot herself dead. The plaintiff claimed that the banker should not be allowed to debit his account.
Rejecting this contention Lord Tomlin said:
The plaintiff owned a duty to the bank to disclose the forgeries when he became aware of them and so enable the defendants to take steps towards recovering the money wrongfully paid on the forged cheques; that through his failure to fulfil his duty they were prevented from bringing an action against the wife for the tort of forgery; and, therefore, the plaintiff was estopped from asserting that signatures to the cheques were forgeries.
It should be borne in mind that what raises an estoppel is not the fact that the information was withheld, but the fact that in consequence of the failure or delay in reporting, the banker suffered a detriment in that he was prevented from exercising his rights against the forger. There is no estoppel where the information, even when given promptly, would have been too late to help the banker. Similarly, there is no estoppel are still intact, though they may be infructuous otherwise. Further, no estoppel arises from the fact that the customer, being a company, its directors have been leaving the cheque book in the custody of the company’s secretary who had previously been convicted of forgery, or that the directors had not examined the company’s passbook for two months and, therefore forgeries committed by the company’s secretary during the period remained undetected.
Forgery in indorsement
The consequences of forgery in indorsement are, however not so fatal. This is so by virtue of the special protection in Section 85(1) which says that “where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course”. A banker can hardly be called upon to acquaint himself with the handwriting of several persons who may indorse a cheque. The banker may have no means to find out whether a particular indorsement is genuine or forged. All that the banker can be called upon to assure is that the cheque should appear to be properly indorsed and that the payment is made in good faith and without negligence. If this is done the banker is discharged even if by reason of forgery in indorsement, the payment has been received by a person who is not entitled to it. But the banker will not be protected if there is an apparent irregularity in indorsement. Section 85-A extends this protection to payment of drafts also.
Travellers’ cheques
There is no provision in the Act about travellers’ cheques, they being of recent origin. The position and liability of the parties will depend upon the terms and conditions on which they are issued. In one of the cases the court held that on a proper construction of the contract, the bank was bound to replace stolen travellers’ cheques even though they were stolen due to the negligence of the purchaser. In another case, the facts were.
B collected f50,000 worth of travellers’ cheques and then being very tired, and having drunk more than was good for him, fell asleep on a train with the cheques in his lap. He awoke and left the train a hurry, leaving the cheques behind. He claimed to be entitled to a refund of the value of the cheques. The cheques were sold on the condition that the issuer would replace or refund the value of the cheques which were lost or stolen provided inter alia the purchaser had properly safeguarded each cheque against loss or theft.
It was held that the onus was on B to show that he had properly safeguarded the cheques against loss or theft. This he had not done. As there was a clear link between the failure to take care and the loss of the cheques, he had no claim in contract against the bank and was not entitled to refund.
Liability of transferor by delivery
A bearer instrument can be transferred by simple delivery. A person who so transfers it is known as “transferor by delivery”. The Act provides nothing about the position or liability of such a transferor. But the English code lays down the following three principles concerning his liability.
(1) Where the holder of a bill payable to bearer negotiates it by delivery without indorsing it, he is called a “transferor by delivery.”
(2) A transferor by delivery is not liable on the instrument.
(3) A transferor by delivery who negotiates a bill thereby warrants to his immediate transferee being a holder for value that the bill is what it purports to be, that he has a right to transfer it, and that at the time of transfer he is not aware of nay fact which renders it valueless.
The reason why he incurs no liability is that his name does not appear on the instrument in any capacity. If he transfers the instrument for ready cash or consideration, that is even called a sale of the instrument. The purchaser takes it subject to all risks. Thus, where a person discounted certain bills with a banker and took in return other bearer bills which proved to be bad, Lord Kenyon said, “Having taken them without indorsement he hath taken the risk on himself. They (the bankers) were the holders of the bill, and by not indorsing them, have refused to pledge their credit to their validity.” Similarly, where a person received by delivery a bill for cash from a person who after wards became bankrupt, he was not allowed to prove his claim in the bankruptcy as it was a sale of the bill. The bill may turn out to be of no value yet the transferor by delivery is not bound to refund the consideration which he received for it. He does not even guarantee the solvency of the prior parties provided that he is not aware of the insolvency of any party.
Where a cheque was not endorsed by the payee and he only delivered it to the bank and got it discounted, the court held that on the non-payment of the cheque by the drawee bank the payee was not liable to the bank as he had not endorsed the cheque. The court followed in this respect the principle of law stated in the early case of Fenn v Harrison, and said, “Section 35 of the Negotiable Instruments Act embodies the principle of the law merchant to the extent that any person endorsing a negotiable instrument is liable thereon.” However, Section 35 as well as other provisions of the Act are silent about the liability of a party to the negotiable instrument which he does not endorse. Therefore, the principle of law merchant enunciated in the above-referred case still holds good. A Division Bench of the Madras High Court in Valjee Kanjee & Co v Horsookdas, while interpreting Section 35 said:
Further, the defendants were not endorsers of the bills. They were transferors by delivery and a transferor by delivery is no liable on the instrument; [vide Section 58(2) Bills of Exchange Act (English)]. It is true that there is no provision in the Indian Negotiable Instruments Act corresponding to Section 58(2). But this section simply embodies the Law Merchant which was explained by Abbott, CJ in Van Ward v Wooley as follows; ‘if a person delivers a bill to another without endorsing his own name upon it, he does not subject himself to the obligation of the law merchant, he cannot be sued on the bill either by the person to whom he delivers it or by any other person.’
The cheque in the case before the Madras High Court was a bearer instrument. He discounted it with the bank without putting his signature and handed it over just by mere delivery. The court cited the meaning of “discounting” as explained in Paget’s Law of Banking, “To discount a bill is to buy it to become the transferee of it by having it endorsed or transferred by delivery by the holder giving him a price settled either by agreement or by current rate in the money market and based on the time the bill has to render.” This definition was quoted with approval by the Division Bench of the Madhya Pradesh High Court in Dena Bank v M.P.N.T. Corpn Ltd, where the court said that discounting is nothing but purchasing.
Where, however, the bill is not sold, but is given for an antecedent debt, then if the bill proves to be useless, the debt revives. The transferor without indorsement may also be made liable by express contract.
He is also bound by the following warranties:
1. Warranty of genuineness—He gives a warranty but only to his transferee that the bill is what it purports to be, that is to say, that the bill is genuine and not false or forged. Even where one of the signatures to the bill or note is forged, the note is not genuine and the transferee may recover from the transferor the consideration he gave for it. The claim should, however, be made within reasonable time.
2. Right to transfer—Secondly, the transferor warrants to his transferee that he has the right to transfer the bill. If he is a chief or a finder or otherwise has no right to transfer, this warranty is broken and the transferee may recover his consideration if the instrument turns out to be useless.
3. Not to be valueless within knowledge of transferor—Thirdly, the transferor warrants that he is not aware of any fact that renders the instrument valueless. If, for example, he is aware of the insolvency of the prior parties he should disclose that fact. If he does not do so, that is fraud and that entitles the transferee to rescind the transfer and recover his consideration.
Position of transferee by delivery
The transferee by delivery is a holder in due course if he has taken the instrument in good faith and for consideration. He is not affected by any defect in the title of the previous parties and is entitled to recover on it from the parties, that is, from the acceptor, drawer or payee.
Liability of indorser
Every indorser incurs liability to the parties that are subsequent to him. By indorsing the instrument he gives a guarantee to the subsequent parties that the instrument shall be paid on maturity and that if it is dishonoured he shall be liable to any subsequent party for the loss caused to him provided that he received the notice of dishonour. Thus, the indorser stands in the position of a surety to the prior parties. His liability arises only if there is a default by the party who is primarily liable to pay the instrument on its maturity. The indorser can exclude his liability by express words in the indorsement or can make it conditional. The indorser is not permitted to dny, against the subsequent parties, the genuineness of the instrument and regularity of the previous indorsements. For instance, he cannot avoid liability by showing that the instrument had been altered before he received it.
Liability under accommodation bills
Instrument without consideration
An accommodation instrument means an instrument which has been accepted, made or indorsed without consideration and for the help of a party. For example A is in need of money. He draws a bill on B which B accepts to help A and without any consideration to B. A can get the bill discounted and thus raise a sum of money to tide over his difficulties. Section 43 accordingly provides that if there was no consideration or the consideration has failed, as between the parties to the transaction, no obligation as to payment will arise. But if such instrument has been transferred by the holder to any person for consideration, he or any transferee from him can recover from all the prior parties. But the ultimate liability should be of the party for whose accommodation the instrument was made or indorsed. He should pay it and relive the party who helped him in his difficulty. When he pays it, he himself cannot recover from any party.
Where an instrument has been given to a person for a consideration which he failed to perform in full, he cannot recover beyond the value of the consideration given by him.
Partial absence or failure of consideration
Where a person has signed an instrument for a money consideration which was partly either originally absent or has subsequently failed, his liability to the party immediate to him is proportionately reduced. The explanation to the section says that the drawer of a bill stands in immediate relation with the acceptor, the maker with the payee and the indorser with the indorsee. Other signers may by agreement stand in immediate relation with the holder. The section has the following illustration:
A draws a bill on B for Rs 500 payable to the order of A. B accepts the bill, but subsequently dishonours it by non-payment. A sues B on the bill. B proves that it was accepted for value as to Rs 400, and as an accommodation to the plaintiff as to the residue. A can only recover Rs 400.
Section 45 extends the principle of Section 44 to cases in which the consideration which has failed consisted of something other than money.
Ordinarily a person who receives an overdue instrument gets only the right of his transferor. But where a person takes an overdue bill for the accommodation of a party, he can recover from the party accommodated. This is the effect of the proviso to Section 59 which says that any person who, in good faith and for consideration becomes the holder, after maturity, of an accommodation instrument, may recover the amount of the instrument from any party.
Holder’s right to duplicate
Where the holder has lost the bill before its maturity, he may ask the drawer to give him a duplicate copy of it. The holder will have to give security against the consequences if the original bill is found. If the drawer refuses to oblige he can be compelled to do so.
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