Centre Approves New Ordinance Regarding Territorial Jurisdiction in Cheque Bounce Cases

Academia

Centre Approves New Ordinance Regarding Territorial Jurisdiction in Cheque Bounce Cases

Tarang Agarwal | August 2015

On June 10, 2015, the Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, approved the proposal to promulgate the Negotiable Instruments (Amendment) Ordinance, 2015.

The Negotiable Instruments (Amendment) Bill, 2015 had been passed in the Lok Sabha in May, but could not be taken up in the Rajya Sabha. As a result, the government decided to pass an ordinance so that the desired changes in the Negotiable Instruments Act 1881(NI Act) could be implemented as soon as possible.

These proposed amendments to the NI Act seek to clarify the issues pertaining to the jurisdiction regarding the filing of cases for the offence under section 138 of the NI Act. The Ordinance seeks to ensure fair trials in cases of dishonoured cheques and to prevent any further harassment of the aggrieved party.

SECTION 138, NEGOTIABLE INSTRUMENTS ACT

Section 138 of the Negotiable Instruments Act, 1881 [hereinafter “NI Act”] deals with offence relating to the dishonour of cheques for insufficiency of funds in the drawer’s account, provided the cheque is drawn for the discharge of a legally enforceable debt or any other liability.

A strict criminal liability on a drawer of a dishonoured cheque was not always present in Indian laws. It was in 1988 when the liability of a drawer of a dishonoured cheque was brought under prosecutor measures by the insertion of Chapter XVII in the NI Act. This Chapter contained Sections 138 and was inserted by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988.

Prior to this amendment, no criminal charge could be brought against the drawer of a dishonoured cheque unless the element of mens rea was proved as required by Sections 415 and 420 of the Indian Penal Code, 1860 [hereinafter “IPC”]. However, this amendment provides for criminal prosecution for dishonour per se without limiting the aggrieved party’s right to prosecute under the said sections of the IPC.

From a bare reading of Section 138, it is apparent that for constituting the offence under it, the following requirements must be satisfied:

Cheque must have been drawn by the accused on an account maintained by him with a banker for payment of any amount to the complainant.
Cheque should have been issued for discharge of any legally enforceable debt or any other liability.
Cheque must have been returned by the bank unpaid either because of insufficient funds in the account or that the amount on the cheque exceeded the arrangements made with the bank.

Further the proviso to this section also lays down three other conditions that have to be fulfilled in order to constitute the offence under this section. These three conditions are as follows:

The cheque has to be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
The payee or the holder in due course of the cheque must make a demand for the payment of the said amount through a written notice to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;
The drawer fails to make the payment to the payee or the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

TERRITORIAL JURISDICTION FOR COMPLAINTS MADE UNDER SECTION 138

In the recent case of Dashrath Rupsingh Rathod v. State of Maharashtra & Anr., the Hon’ble Supreme Court of India tried to address the issue of territorial jurisdiction with regards to complaints filed under Section 138, NI Act.

The Court held that Section 177 of the Code of Criminal Procedure, 1973 [hereinafter “CrPC”] would apply to cases under Section 138, NI Act. Section 177, CrPC reads as follows:

“Every offence shall ordinary be inquired into and tried by a court within whose local jurisdiction it was committed.”

In order to identify this local jurisdiction, the apex court considered the question of the stage where the offence under Section 138, NI Act becomes complete. To answer this question the Court considered the following two decisions given earlier by it:

K. BHASKARAN V. SANKARAN VAIDHYAN BALAN

In this case the Hon’ble Supreme Court of India interpreted Section 138 of NI Act to indicate that the offence under the section was completed only after all its components were fulfilled. The components defined by the Court were as follows:

Drawing of the cheque,
Presentation of the cheque to the bank,
Returning the cheque unpaid by the drawee bank,
Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount,
Failure of the drawer to make payment within 15 days of the receipt of the notice.

This judgment drew a clear distinction between ‘giving of notice’ and ‘receiving of notice’. Therefore the Court was of the opinion that in case of dishonour of cheque, the cause of action did not rise when the cheque was dishonoured since that was not an offence under Section 138, NI Act. Instead, the Court relied on the proviso to Section 138 and held that the offence was completed only when the drawer failed to pay the amount within 15 days of receiving a notice from the payee.

HARMAN ELECTRONICS PVT. LTD. V. NATIONAL PANASONIC INDIA PVT. LTD.

In this subsequent case, the Apex Court held that what would constitute an offence is stated in the main provision of Section 138, NI Act and the proviso to the section merely imposes certain further conditions which are required to be fulfilled before cognizance of the offence can be taken. Here, the Court was of the view that in criminal jurisprudence there is a clearly demarcated difference between commission of an offence and its cognizance. Thus, the Court held that the offence under Section 138 would be said to be have been committed the moment the cheque was dishonoured by the bank.

After giving due consideration to both these decisions, the Court in the Dashrath Rupsingh Rathod case upheld the Harman judgment, overruling the one in Bhaskaran case. Thus, the final decision was that in case of dishonour of a cheque, the cause of action would lie in the State where the bank that returned the bounced cheque was situated.

Keeping in mind the legal implications of this decision, the Supreme Court directed that all pending cases should be treated as follows:

where the proceedings are at the stage of recording of evidence under Section 145(2) of the NI Act or beyond, the cases shall be deemed to be transferred by the Apex Court from the court which ordinarily possesses territorial jurisdiction in line with Dashrath to court where it is presently pending; and
all other complaints to be returned and accordingly filed/refilled in the appropriate court within 30 days from the date of return of the complaint.

PROBLEMS WITH THE DASHRATH RATHOD JUDGMENT

Following the apex court ruling in the Dashrath Rupsingh Rathod case, representations were made to the government by various stakeholders, including industry associations and financial institutions. They expressed concerns regarding the wide impact of the judgment. They argued that the judgment would have a negative impact on business interests as it will give undue protection to defaulters at the expense of aggrieved complainants. Minister of State for Finance Jayant Sinha told the Lok Sabha during the passage of the bill that the courts were currently dealing with 21 lakh cheque bounce cases with 259 courts hearing them exclusively and the new law would help consolidate the cases and aid the judicial system.

Thus the Amendment Bill proposed to insert a new sub-clause (2) to the existing Section 142. It reads as follows,

“(2) The offence under Section 138 shall be inquired into and tried only by a court within whose local jurisdiction the bank branch of the payee, where the payee presents the cheque for payment, is situated.”