Source: Allahabad High Court

Why in News?

Recently a bench of Justice Arun Kumar Singh Deshwal held that, even if a cheque is conditional requiring prior notice before presentation, its dishonor will attract Section 138 Negotiable Instruments Act, 1881(NI Act) liability if no notice was given before presentation.

• The Allahabad High Court gave this observation in the case of Rajiv Malhotra v. State of U P.

What was the Background of Rajiv Malhotra v. State of U P Case?

• This was an application filed under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) to quash the summoning order of 16^th August 2023 and the entire proceedings of Rahul Chauhan v. Rajiv Malhotra under Section 138 of the NI Act relating to dishonor of a cheque.
• The main issues were:
  • Whether the court can recall its earlier order dismissing the complaint for non-prosecution?
  • Whether a conditional cheque which was presented without prior notice attracts Section 138 liability?
  • Whether notice through courier service is valid notice under Section 138?
  • Whether notice through WhatsApp is valid without specific rules for electronic service?

What were the Court’s Observations?

• Quasi Civil Nature:
  • The court can recall its earlier order dismissing the complaint for non-prosecution at the initial stage, as the NI Act proceedings are quasi-civil in nature.
• Demand Notice:
  • Notice through courier service is a valid written notice under Section 138, but the presumption of service under Section 27 of the General Clauses Act, 1897 cannot be invoked unless courier is included along with registered post.
  • Notice through WhatsApp is valid service under Section 13 of the Information Technology Act, 2000 (IT Act) and no separate rules prescribing the procedure are required.
• Conclusion:
  • The application was dismissed, and the court directed all district courts to ensure order sheets are written in neat and legible handwriting or typed.

What is Dishonor of Cheque under NI Act?

• About:
  • Dishonor of Cheques is dealt under Section 138, covered under Chapter 17 of the NI Act inserted in 1988.
  • Section 138 of NI Act specifically deals with the offence related to dishonor of a cheque for insufficiency of funds or if it exceeds the amount arranged to be paid by the drawer's account.
  • It relates to the procedure where a cheque is drawn by drawer to discharge a debt, wholly or in part, and the cheque is returned to the Bank.
• Key Elements:
  • Liability of Drawer:
    • The drawer becomes criminally liable if the cheque bounces.
    • Criminal liability is established irrespective of the nature of the underlying transaction.
  • Conditions for Offense:
    • Essential conditions include the existence of a debt or other liability, issuance of a cheque, and subsequent dishonor.
    • The offense is not applicable if the drawer had sufficient funds, but the cheque was dishonored due to some other reason.

• Procedure for Prosecution:
  • Notice to Drawer: -
    • The payee must issue a notice within 30 days of the dishonor, demanding payment.
    • The drawer has 15 days of receipt of notice to remedy the situation, failing which legal action can be initiated.
  • Time Limit for Filing Complaint:
    • The complaint under Section 138 must be filed within one month of the expiry of the 15-day notice period.
  • Jurisdiction for Filing Complaint:
    • The complaint can be filed in a court within whose local jurisdiction the payee's bank is situated.
• Punishment:
  • Imprisonment:
    • Conviction under Section 138 can result in imprisonment for a term that may extend to two years.
  • Fine:
    • The drawer may be liable to pay a fine that may extend to twice the amount of the cheque or the debt.
• Landmark Case:
  • Dalmia Cement (Bharat) Ltd. v. Galaxy Traders and Agencies Ltd (2001):
    • SC held that on the date when the notice sent by fax reached the drawer of the cheque the period of 15 days (within which he has to make the payment) has started running and on the expiry of the period the offence is completed unless the amount has been paid in the meanwhile.
  • Sunil Todi and others v. State of Gujarat and another (2021):
    • SC held that even if there is a condition that a cheque is for security deposit and was to be deposited after confirmation, its dishonor will attract Section 138 if the amount is not paid within 15 days of notice