What is Negotiable Instrument?
A negotiable instrument is a document based on a contract, guaranteeing a promise of payment of a specific amount of money on a certain date or on demand, by the payee whose name is stated in the document. Negotiable Instruments are cash equivalents which can be converted to liquid cash subjected to certain agreements. Negotiable instruments are also transferable from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument. Bills of Exchange, Promissory Note or Cheque are some examples of Negotiable Instruments. Main types of negotiable instruments are Inland instruments, foreign instruments and Bank drafts.
A little history behind Negotiable Instruments Act
The Negotiable Instruments act of our country governs the law of transactions involving negotiable instruments and the framework of the statute involving these regulations of negotiable instruments is known as Negotiable Instruments Act,1881. It mainly deals with Bills of Exchange, Promissory notes and Cheques. These are the three most common types of negotiable instruments. This act applies to the whole of India and to all persons residing in India, whether Indians or foreigners. The provisions of this Act are also applicable to Hundis unless there is a local usage to the contrary. Other native instruments like Treasury bills, Bearer debentures etc are also considered as negotiable instruments either by mercantile customs or under other enactments.
The Negotiable Instruments act was framed in the year 1881 when the British ruled our country. Prior to 1881, the transactions relating to negotiable instruments were governed by the Indian Contract Act 1872. This act has been amended more than 24 times to meet the needs of the time. The last amendment was made in 2015.
Holder in due course
As per S 9 of Negotiable Instruments Act, Holder in due course means a holder who takes the instrument bona fide for value before it is overdue, and without any notice of defects in the title of the person, who transferred it to him/her. Thus a person who claims to be a ‘holder in due course’ is required to prove that:
- on paying a valuable consideration, he/she became the possessor of such instrument, thus being a bearer or an endorser.
- he/she had come into possession of instrument before the amount due became actually payable.
- he/she acted in good faith.
- he/she came into possession of that instrument without having any reason to believe if any defect existed in the title of the transferor from whom he/she derived his/her title.
Bouncing of cheque or dishonour of cheque
Bouncing of the cheque is a slang word when the cheque gets dishonoured. A cheque gets dishonoured or bounced when it is insufficient of funds in the account of the person who issued this cheque. Here the person who issues the cheque is known as ‘drawer’, the person in whose favour the cheque is drawn is called ‘payee’, and the bank who is directed to pay the amount is known as ‘drawee’.
The main grounds for dishonour of cheque are:
- Insufficient of funds
- The account remains closed when the cheque is presented. (NEPS MICON LTD AND OTHERS VS. MAGMA LEASING LTD. 1999 AIR (SCW) 1637)
- After the cheque is issued, the drawer makes a stop payment instruction to the bank. (MAHENDRA S. DADIA VS. The STATE OF MAHARASHTRA. 1(1999) BANKING CASES (BC) 133 (17/03/1998).
- Signature is not matching
- There is overwriting in the cheque
- The cheque was presented after the lapse of three months, i.e. after the cheque has expired.
- Opening balance insufficient
- Disparity in the words and figures mentioned on the cheque
- In case the cheque is issued by a company, the same does not bear the seal of the company
- Mismatch in account number
- In case of joint account where both signatures are required, only one sign is there
- Death of the customer
- Insolvency of the customer
- Insanity of the customer
- On the order of the garnishee
- Crossed cheque
- When a cheque is issued against the rules of trust
- Alteration in cheque
- Doubt in genuineness of the cheque
- Presented at the wrong branch
- Crossing limit of overdraft (OD)
When a cheque is dishonoured, the drawee bank immediately issues a ‘Cheque Return Memo’ to the banker of the payee stating the reason for non-payment. The payee’s banker then gives the dishonoured cheque and the memo to the payee. The holder or payee can resubmit the cheque within three months of the date on it if he/she believes it will be honoured the second time. However, if the drawer fails to make the payment, then the payee has the right to prosecute the drawer legally.
S 138 of Negotiable Instruments Act, 1881
According to Section 138 of the Act, the dishonour of cheque is a criminal offence and is punishable by imprisonment up to two years or with a monetary penalty or with both. Thus, the main ingredients involving in S 138 are:
- The cheque should have been issued for discharge of any debt or liability
- The cheque should have been presented within its validity period or 6 months.
- The payee or holder of the cheque should have issued a notice to the drawer within 30 days period regarding return of the unpaid cheque
- And after receiving the said notice, the drawer fails to pay within the period of 15 days.
So, if a cheque gets bounced, the payee can file a complaint along with an affidavit and relevant papers. The court will issue summons and hear the matter and upon found guilty, the defaulter will be punished with a monetary penalty which may be twice the amount issued in the cheque or punishment for a term of 2 years or both as per S 138 of the Negotiable Instruments Act.
How to send legal notice for cheque bounce case
Once the cheque has bounced, the payee is supposed to send a legal notice within 30 days of the dishonouring of the cheque to the drawer of the cheque, threatening to initiate legal proceedings under the negotiable instruments act in case the amount is not paid within the stipulated time period of 15 days. As there is no prescribed format for this notice, it could be sent by the complainant himself/herself. However, following information should be mentioned unambiguously in the legal notice.
- A statement that the cheque was presented within its period of validity.
- Statement of debt or legally enforceable liability.
- Information regarding dishonour of cheque as given by the bank.
- Demanding the issuer to pay the amount due within 15 days of receiving such notice.
Service of notice on the person issuing the Cheque is mandatory; the mode of service of notice can be any recorded delivery which is admitted as evidence under the Indian Evidence Act. The notice should be sent by Registered AD., Speed Post only. The purpose of making such provision is to make the person issuing the Cheque aware about the fact that the Cheque issued by him has been returned by his bankers due to insufficiency of funds in the account and he has to make arrangement for the amount within the stipulated period and intimate the banker as well as the person to whom the Cheque has been given by him.
Jurisdictions for cheque bounce case
The landmark judgment, DASHRATH RUPSINGH RATHOD vs. STATE OF MAHARASHTRA, ((2014) 9 SCC 129 ), The Supreme Court has changed the criteria under S 138 of N.I. Act which is to prosecute a person who failed to pay the cheque amount due to the insufficiency of funds or the actual amount exceeds the cheque amount.
A bench of justices T.S. Thakur, Vikramjit Sen and C. Nagappan ruled that the case has to be initiated at the place where the branch of the bank on which the cheque was drawn is located. Earlier, a case under S 138 could be initiated by the holder of the cheque at his residence or place of business. This landmark decision would apply retrospectively. The reason for such judgment was that the payers were recklessly using extensive credit, thus misusing the place of the institution. To curb this practice, the judgment aims to get the root of the issue and resolve by a strict approach so as to discourage the payer from misusing or carelessly issuing cheques.
Eg:- Mr.X who resides in Kochin issues a cheque to Mr. Z. who resides in Bangalore. The cheque bounces in a bank in Chennai due to an insufficiency of funds. Then the place of the institution would be Chennai.
As a result of this landmark judgment, the negotiable instruments act was subjected to the amendment in 2015.
Offence under S 138 by company
When a company issued a cheque and it is dishonoured by the drawee bank it is said that offence under section 138 of the negotiable instrument act, is committed by the company. But the company cannot be prosecuted for the offence because it is a legal entity and no physical punishment can be imposed upon a company.
When such offence has been committed by a company its director will be punished for the offence under section 138. A company performs all acts through its directors so vicarious liability shall be imposed upon its directors.
In N. K. Wahi vs Shekher Singh (2007) 9 SCC; the supreme court has held that under section 141, N I Act, if any offence has committed by a company then every person who is a director or employee is not liable, only that person is liable who was in-charge for the conduct of the business of the company at the time when cheque was issued.
Hence, if the offence has committed by a company the person responsible for the affairs of the company at that particular time when the cheque was issued, shall be liable and punishable under section 138. Section 141 does not postulate that all the directors are liable; this section envisages constructive or vicarious liability upon the directors for the offence punishable under section 138.
It infers from a co-joint reading of section 138 and 141, that only those persons or directors will be liable for the offence who, at the time of issuance of the cheque, in-charge of the affairs of the company. In N.K. Wahi v. Shekhar Singh, (2007) 9 SCC 481; the Supreme Court has held that “to launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the company.”
In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla [(2005) 8 SCC 89; a clear case should be spelt out in the complaint against the person sought to be made liable. Therefore, the complaint must clearly show who the responsible person for the affair of the business of the company at the particular time when the alleged cheque was issued.