Eight Important cases on Dishonor of Cheque

Ronita Biswas | National Law University, Orissa | 31st January 2020

THE STANDARD OF PROOF FOR REBUTTING THE PRESUMPTION UNDER S.139 OF THE NI ACT IS THAT OF PREPONDERANCE OF PROBABILITIES.

Harendra Ramchandra Pathak v. Rajendra Ratan Mhatre Adult (2020 SCC OnLine Bom 57)

The appellant and respondent had business relations. Complainant stated that the accused was liable to pay him some money on account of several transactions. The accused agreed to pay a sum of Rs. 32 lakhs. The accused issued a cheque of the required sum; however the cheque came to be dishonoured with the endorsement ‘refer to drawer’. Appellant issued a notice through his advocate as per s. 138 of NI Act. However, the amount was not paid and the suit was filed. Respondent denied liability and claimed to be tried. He alleged that the cheque did not bear his signature and he did not issue the same. Hence, nothing was payable to the appellant. In the cross-examination, it was found out that accused used to leave blank cheques with the complainant signed by him for business purposes.

Section 139 provides for presumption in favour of the holder, and this presumption is rebuttable and the onus is on the accused to raise the probable defence. Reliance was placed on Basalingappa v. Mudibasappa (1 2019 5 SCC 418), wherein the SC laid down some important principles.

 (i) Once the execution of cheque is admitted, s. 139 of the Act mandates a presumption that the cheque was for the discharge of any debt or other liability.

(ii) The presumption under s. 139 is a rebuttable presumption and the onus is on the accused to raise the probable defence. The standard of proof for rebutting the presumption is that of preponderance of probabilities.

(iii) To rebut the presumption, it is open for the accused to rely on evidence led by him or accused can also rely on the materials submitted by the complainant in order to raise a probable defence. Inference of preponderance of probabilities can be drawn not only from the materials brought on record by the parties but also by reference to the circumstances upon which they rely.

(iv)That it is not necessary for the accused to come in the witness box in support of his defence, s.139 imposed an evidentiary burden and not a persuasive burden.

(v) It is not necessary for the accused to come in the witness box to support his defence.

In the cross examination, complainant stated that the name, amount and date mentioned in the cheque were not in the hand writing of accused. The defence argued that complainant misused one of the cheques and filled up the details. When we correlate both these statements, the Court found that the accused had proved his claim by preponderance of evidence.

THE FACT THAT THE ACCUSED FAILED TO REPLY TO THE STATUTORY NOTICE UNDER S.138  LEADS TO THE INFERENCE THAT THERE IS MERIT IN THE COMPLAINANT’S VERSION

Sreejith Pulikkodan v. Rama and Another (2020 SCC OnLine Ker 116)

The complainant and the accused were acquainted with each other. The accused had borrowed a total amount of Rs. 7,00,000/- from the complainant. When the complainant demanded the accused to repay the amount, the accused issued three cheques to her, one cheque for Rs. 2,00,000/-, another cheque for Rs. 3,00,000/- and yet another cheque for Rs. 2,00,000/-, in discharge of the liability. The said cheques were dishonoured since there was insufficient balance amount in the account of the accused. When the complainant sent a lawyer’s notice for demanding payment, the accused did not pay the same.

The plea of the accused was that the complainant and he were living together and that the complainant had clandestinely and fraudulently taken the signed blank cheques which were kept by him in the house and misused them. No evidence was adduced by the accused to prove the plea. The plea raised by the accused was not at all probable. The petitioner mainly raised three contentions before the Court:-

1. The complainant had not proved execution of cheques by the accused.

2. The complaint does not contain details of the transactions between the petitioner and the complainant.

The Court rejected the first contention. The accused had pleaded that the signed blank cheques kept by him at the house were taken by the complainant already contains the implied admission that the cheques bear his signature. He did not adduce any evidence to prove the aforesaid plea raised by him.

The fact that the notice of demand, though duly received and acknowledged by the accused, did not evoke any response from him is a crucial circumstance against him. The very fact that the accused failed to reply to the statutory notice under s.138 of the Act leads to the inference that there is merit in the complainant’s version ( See Rangappa v. Mohan: (2010) 11 SCC 441 : AIR 2010 SC 1898).

Another contention raised by the accused is that the complaint does not contain the details of the transactions between the complainant and the accused. There is no invariable rule that absence of details regarding the original transaction in the complaint would make the evidence given by the complainant unreliable or the case set up by him improbable.  Since the accused did not challenge how his cheque, which bears his signature, happened to be in the possession of the complainant, absence of details regarding the original transaction in the complaint will not affect the credibility of the evidence given by the complainant in that regard.

The HC found the accused guilty. It was to be noted that the gravity of an offence under s.138 of the Act cannot be equated with an offence under the IPC or other criminal offences. An offence under s.138 of the Act is almost in the nature of a civil wrong which has been given criminal overtones (See Kaushalya Devi Massand v. Roopkishore: (2011) 4 SCC 593 : AIR 2011 SC 2566).

THE COURT WITHIN WHOSE LIMITS THE BANK ON WHICH THE CHEQUE IS DRAWN IS SITUATED WOULD HAVE THE JURISDICTION TO ADJUDICATE THE COMPLAINT.

Apparel Export Promotion Council v. Collage Culture & Ors. (2020 SCC OnLine Del 94)

The appellant was a company incorporated under s. 25 of Companies Act, 1956, sponsored by the GOI. It was formed with the object of promoting exports of readymade garments from India to various parts of the world. As a part of its mandate, all persons exporting garments from India to the rest of the world were required to be registered with the appellant. The respondent was a partnership firm registered with the appellant. The respondent issued seven cheques for revalidation of its Past Performance Entitlement (PPE). When the said cheques were presented for encashment, they were dishonoured indicating insufficient funds.

The appellant filed a complaint under s.138 of the NI Act. Thereafter, bailable warrants were issued against the accused persons, as they failed to appear. The respondent filed a petition, praying that the subject summoning order be recalled and the complaint under s. 138 of the NI Act be dismissed. The petition was allowed. Aggrieved by this, the appellant filed a SLP under Article 136 of the Constitution of India before SC. The SC allowed the same and directed the Trial Court to proceed with the trial, but not pass the final judgment without the leave of the SC. On the basis of this order, the appellant filed an application to revive its complaint.

The SC, in the matter of Dashrath Rupsingh Rathod v. State of Maharashtra: (2014) 9 SCC 129, held that s.177 of the Cr.P.C. was required to be complied with and only the court exercising territorial jurisdiction where the offence was committed – i.e., where the cheque was dishonoured-could entertain a complaint under s.138 of the NI Act. Thus, the Court of the Metropolitan Magistrate (‘MM’), within whose limits the bank on which the cheque is drawn is situated, would have the jurisdiction to adjudicate the complaint.

Thereafter, the appellant re-filed the complaint before the court having jurisdiction. The MM dismissed the complaint on the ground that it was barred by limitation. The impugned order indicated three reasons for the same-

1. In terms of the directions issued in Dashrath Rupsingh Rathod (supra), the complaint was to be returned and could be re-filed within thirty days. That is, thirty days from the date of the order, returning the complaint. The present case was after expiry of approximately one year and two months of the order returning the compliant.

2. In view of s.142A (1) and (2) of the NI Act, as inserted by the Negotiable Instruments (Amendment) Ordinance, 2015 all pending cases were to be transferred to the court having competent jurisdiction. However, the present case was not pending before any court of MM and there was no provision in the Ordinance to restore the case.

3. That the SC had not stayed the proceedings before the Trial Court. Therefore, the contention that the appellant was awaiting the final decision in its appeal pending before the SC, could not be accepted as a ground for not refiling the complaint within the stipulated period.

The appellant challenged this order before the HC.

The Court clarified the application of the amended NI Act. In terms of s. 142(A) (1) of the NI Act (which was enacted with retrospective effect from 15.06.2015), all cases arising out of s.138 of the NI Act that were pending in any Court were directed to be transferred to court having jurisdiction under s. 142(2) of the NI Act, as if the said provision was in force at all material times. Thus, if a complaint under s. 138 of the NI Act was pending in a Court that otherwise did not have jurisdiction it would be transferred to the Court having jurisdiction in terms of s. 142(2) of the NI Act. However, in the present case, the appellant’s complaint was dismissed by the order of the MM and was not pending.

The SC in order to obviate and avoid any legal complications, directed that all complaint cases where proceedings had reached the stage of Section 145(2) of the NI Act or beyond –i.e., cases where persons giving evidence had been summoned and examined – would be deemed to be transferred from the court ordinarily possessing territorial jurisdiction to the court where the complaint had been filed. In the present case, the complaint had not reached the stage of Section 145(2) of the NI Act and thus the M.M. did not have the jurisdiction to try the said complaint.

The appellant was thereafter required to re-file the complaint within the period of thirty days. The appellant chose not to re-file the complaint within the prescribed period and contended that it was waiting for the decision of the SC. The Court held that once the proceedings before the Trial Court stood revived, the appellant was bound to follow the orders passed in those proceedings, unless the same were stayed. The Court clarified that the thirty days time-period began from the date on which the decision was passed. The fact that the appellant had not physically collected the said complaint would not extend the period, during which it was required to re-file the same.

COGNIZANCE OF COMPLAINT MAY BE TAKEN BY THE COURT AFTER THE PRESCRIBED PERIOD IF THE COMPLAINANT PROVIDES SUFFICIENT CAUSE FOR THE DELAY

Birendra Prasad Sah v. State of Bihar and Anr. (2019 7 SCC 273)

The instant appeal challenged the order of a Single Bench of the HC, by which an order taking cognizance of an offence under s.138 of the NI Act had been quashed.

The dispute arose over two cheques drawn on SBI in the amt. of Rs. 36, 00,000 and Rs. 13, 00,000 which were returned unpaid. A legal notice was issued by the appellant intimating the dishonour of cheque. However, the Postal Dept. could not provide any proof of service. Consequently, a second legal notice was issued. This was replied by the 2^nd respondent. Eventually, a complaint was instituted under s. 138 of the NI Act.

The Chief Judicial Magistrate (CJM) issued summons to the 2^nd respondent, who in turn instituted a revisional proceedings before the Sessions Judge, which were rejected. In a further recourse to HC under s. 482 CrPC, the court held that the complaint under s. 138 was not filed within the statutory period of 30 days. The proceedings were quashed. The counsel for the appellant argued that in MSR Leathers v. S. Palaniappan (2013 1 SCC 177), the Court had taken the view that issuance of successive notices is permissible under s. 138 having regard to the object of the legislation. Moreover, since the delay in the institution of the complaint was condoned by the CJM, there was an error on the part of the HC in quashing the proceedings. The counsel of the respondents submitted that the complaint lodged by the appellant was beyond the stipulated period from the date of issuance of the first notice.

Held- The appellant issued a legal notice, which was within 30 days period of the receipt of the memo of dishonour. Hence, the requirement stipulated in proviso (b) to s. 139 was fulfilled.  The respondent submitted that the legal notice was not served upon him. The appellant in the complaint specifically stated the circumstances, that despite repeated requests to the Postal Dept., no acknowledgement of notice was furnished. Hence, the appellant was compelled to issue a second notice. Since the notice must be issued within the stipulated period, the Court held that it was the first notice which constituted the cause of action for complaint under s.138.

Under s. 142(1), a complaint had to be instituted within one month of the date on which the cause of action had arisen under clause (c) of the proviso to s.138. The provision however stipulates that cognizance of the complaint may be taken by the court after the prescribed period if the complainant satisfies the court that he had sufficient cause for the delay. The appellant in his complaint had provided sufficient reasons for not being able to institute the complaint within the stipulated period.

MERE DENIAL WOULD NOT FULFIL THE REQUIREMENTS OF REBUTTAL AS ENVISAGED UNDER S. 118 AND 139 OF THE NI ACT

Rohitbhai Jivanlal Patel v. State of Gujarat and Anr. (2019 SCC OnLine SC 389)

The complainant alleged that he had given a loan to the accused of Rs. 22, 50,000/- by collecting money in piecemeal from his business group. Upon demanding for re-payment, the accused gave him cheques of different dates. The complainant alleged that the cheques so issued by the accused, were returned unpaid either for the reason that the “opening balance was insufficient” or for the reason that the “account was closed”. The complainant alleged that the accused had intention of breach of trust and cheating, and pointed out that despite serving repeated notices on the accused for repayment, the complainant did not receive the requisite payment. In some cases, the appellant denied the alleged transactions. Thereafter, the complainant filed 7 cases against the accused.

The Trial Court concluded that accused was successful in bringing rebuttal evidence to the requisite level of preponderance of probabilities; and observed that the complainant had failed to prove, beyond all reasonable doubt, that the cheques were issued of Rs. 22,50,000/-. Hence, all the 7 complaint cases were dismissed.

The complainant appealed before the HC. The High Court observed that the presumption under s. 118 and 139 of the NI Act was required to be drawn. The cheques were issued for consideration and until contrary was proved, such presumption would hold good. Except bare denial, nothing was brought on record by the accused to dislodge the proof adduced by the complainant. The HC had disapproved the acquittal of the accused-appellant and held him guilty under s. 138 of the NI Act.

This judgement was challenged before the SC. The Court addressed the matter in two-fold: as to whether the complainant-respondent had established the ingredients of s. 118 and 139 of the NI Act, so as to justify drawing of the presumption envisaged therein; and if so, as to whether the accused-appellant had been able to displace such presumption and to establish a probable defence whereby, the onus would again shift to the complainant?

The Court observed the accused-appellant could not deny his signature on the cheques that had been drawn in favour of the complainant on a bank account maintained by the accused. The said cheques were presented to the Bank concerned within the period of their validity and were returned unpaid for the reason of either the balance being insufficient or the account being closed. All the basic ingredients of s.138 as also of s. 118 and 139 were apparent on the face of the record. Therefore, it is required to be presumed that the cheques in question were drawn for consideration and the holder of the cheques i.e., the complainant received the same in discharge of an existing debt. The onus, therefore, shifts on the accused-appellant to establish a probable defence so as to rebut such a presumption.

On preponderance of probabilities, the accused had to adduce such evidence which may lead the Court to conclude either that the consideration did not exist or that its nonexistence was so probable that a prudent man would act upon the plea that the consideration did not exist. When such a presumption is drawn, the factors relating to the want of documentary evidence as regards source of funds were not of relevant consideration while examining if the accused has been able to rebut the presumption or not. This Court had emphasized mere denial would not fulfil the requirements of rebuttal as envisaged under s. 118 and 139 of the NI Act. 

The Trial Court proceeded to pass the order of acquittal on the mere ground of ‘creation of doubt’. The Court opined that the Trial Court appeared to have proceeded on a misplaced assumption that by mere denial or mere creation of doubt, the appellant had successfully rebutted the presumption as envisaged by s. 139 of the NI Act. The Court upheld the judgement of the HC.

WHEN THERE IS DISPUTE ABOUT MANNER OF RECEIPT OF CHEQUE BY THE COMPLAINANT, INITIAL PRESUMPTION UNDER SECTION 118(G) WILL NOT BE USEFUL.

Girdharilal v. State of Maharashtra Through 4th Jt. Civil Judge, Jr. Division & J.M.F.C. and Others (2019 SCC OnLine Bom 5986)

In this case, the accused-respondent had taken a special defence about issuing the cheque voluntarily. The accused had pleaded that accused no. 3 (director of accused no. 1-company) was taken to the factory of Milkiyatsingh Saggu and his signature on the cheque in issue was taken by applying force. The accused was having some financial dispute with one Milkiyatsingh Saggu. Under the guise of settling that dispute, the complainant took accused No. 3 to the factory of Milkiyatsingh. At that place, by threatening the accused No. 3 with the help of Pistol, he was forced to sign on certain documents including a blank cheque.

Complainant-company and respondent no. 1 company both were involved in similar types of business. The complainant was a trader while accused was a manufacturer of steel. The issuance of a cheque had arisen out of the transaction of sale of the steel material by the complainant to respondent No. 1-company. On one hand, complainant contended about dishonour of cheque due to insufficient funds, issuance of a demand notice and consequent failure to repay the amount, whereas, the accused contended about lodging of a complaint with the police.

The Trial Court found favour with the accused. It found shortcomings in the evidence of the complainant and it concluded that the accused had rebutted the presumption required to be drawn under s. 139 of the NI Act.

The HC explained relevant portions of the NI Act and upheld the decision of the Trial Court.

1. Section 118 lays down various presumptions. They are also rebuttable presumptions. Clause (g) says that holder of a negotiable instrument is always a holder in due course. There is a difference in between the holder as defined under s. 8 and holder in due course as defined in s. 5 of the said Act. All holders need not always be holder in due course but every holder in due course is always a holder. If the cheque is payable to bearer and if the cheque is payable to order, who are holders in due course is laid down in s. 9 of the said Act. In case the cheque was crossed and account payee cheque it meant, it was payable to order. In that contingency, two persons are described as the holders in due course, one category is payee and another category is indorsee.

So the payee is the holder in due course. In the cheque, if name of the person is mentioned, who is entitled to recover the amount is called as a payee under s. 7 of the N.I. Act. The HC found that the name of the complainant was stated in the cheque. Hence, he became the payee and holder in due course.

• The next issue was at what point of time the drawer can deny the holder from claiming the benefit of initial presumption as per clause (g) of s.118 of the N.I. Act. The Court found that the complainant cannot take the benefit of initial presumption under s. 118(g) of the N.I. Act. The reason was- there was a dispute between the parties about voluntary or involuntary issuance of the cheque. There are two ingredients for a person to become holder under Section 8 of the N.I. Act. Entitlement in his own name to possess and entitlement to recover are the two ingredients. So, entitlement is important. It means receipt of cheque. A person may receive the cheque in two ways, lawfully as well as unlawfully. So when there is dispute about manner of receipt of cheque by the complainant, initial presumption under Section 118(g) will not be useful.

EXISTENCE OF A LEGALLY ENFOREABLE DEBT OR LIABILITY IS ESSENTIAL UNDER S.138 OF THE NI ACT

Vishnu S/O Amthalal Patel v. State of Maharashtra & Anr. (2019 SCC OnLine Bom 106)

The complainant and the accused were dealing in the same business. At the request of the accused, complainant had advanced a hand loan of Rs 50,000/- for expansion of his business and the amount was to be repaid within a month. Thus, for repayment of the said amount, the applicant/accused had issued a cheque. The said cheque was dishonoured for insufficiency of funds. When the complainant issued a notice, the accused assured to make arrangement of the funds and accordingly, the complainant had presented the same cheque again. The cheque was dishonoured for the second time for insufficient funds. Lastly, the complainant issued a legal notice to the accused for repayment. The notice was not complied with and therefore, the complaint came to be filed.

Before the District Court, the accused contended that he had not taken any loan from the complainant. The applicant/accused is a Director of Shyona Pulp Mills Pvt Ltd, and the said company was to pay some amount to the complainant. The complainant was insisting for the payment. Therefore, accused had issued a cheque in question in favour of the complainant for Rs 50,000/- and later on the company had paid Rs 50,000/- to the complainant by demand draft, but the cheque had remained with the complainant, who had misused the same for filing the present case against the accused. The accused argued that since the complainant had insisted for his payment in respect of the transaction he entered for his company, the applicant/accused has given said cheque of his personal account till the official payment by the company in respect of the said transaction of supply of scrap paper to the complainant. The complainant has also admitted in his cross-examination, a DD of Rs 50,000/- was given to him by the company under the signature of Managing Director. The District court convicted the accused under s. 138 of the NI Act.

Held- The HC found the said cheque issued by the accused cannot be considered a legally enforceable debt or liability. The evidence was short of proving that there exists a legally enforceable debt or liability for which the applicant/accused has given the said cheque. Hence, the applicant/accused has discharged the said burden and rebutted the presumption drawn under the aforesaid provisions of the Act.

SECTION 148 OF THE NI ACT HAS RETROSPECTIVE APPICATION: SC

Surinder Singh Deswal @ Col. S.S. Deswal & Ors. v. Virendrer Gandhi & Anr. (Criminal Appeal- 1936-1963 of 2019)

The Appellants were partners of a firm. Respondent, Virendra Gandhi, was also a partner of the firm, who had recently retired. Total of 63 cheques were issued by the appellant to the respondent against the part payment of the retirement dues. All the cheques were dishonoured due to insufficient funds.

A statutory demand notice was issued under s.138 of the NI Act and complaints were also filed before the Judicial Magistrate, 1st class. The Court held the appellant guilty for offences punishable under s.138 of the NI Act and they were accordingly convicted. The appellants filed an application under s.389 of CrPC for suspension of sentence. The Appellate Court entertained the appeal and suspended the sentence during the pendency of the appeal (subject to deposit of 25% of the amount of compensation awarded by the Trial court in favour of the complainant). The appellants preferred an application seeking extension of time to deposit the amount of 25% of the compensation amount. The Sessions Judge allowed the application.

The appellants filed an application under s.482 CrPC seeking quashing of the order passed by the Appellate Court, whereby the condition to deposit 25% of the amount of compensation was imposed on the appellant. The HC dismissed the petition of the appellant and other connected petitions. Thereafter, the appellant filed a SLP before the SC challenging the order of the HC. The SC dismissed the criminal appeals arising out of the SLPs. Aggrieved by the decision of the HC, the petitioner appealed before the SC.

Meanwhile, the Appellate Court, in view of non-compliance of the order directed the appellants to surrender in the Trial Court within 4 days. The appellants were not present when the case was taken up by the Appellate Court. So, a petition was filed under s. 482 of the CrPC challenging the order of the Appellate Court.

The appellant argued that the Trial Court’s direction to deposit 25% of the compensation could not have been made under s. 148 of the NI Act. The said section could not be relied on since it came into force on 01.09.2018 and the complaint was filed in the year 2015- which was much before the enforcement of s.148 of the NI Act.

Further, the appellant submitted that s.143A and s. 148 inserted in NI Act by amendment of 2018. Hence s. 148 was not attracted in the present case which was only prospective and could have been utilised in offences which were committed after 01.09.2018.

Held- The SC while hearing the SLP filed by the appellant held that considering the Statement of Objects and Reasons of the amendment in s. 148 of the N.I. Act, interpreted the amended s.148 of the Act as applicable in respect of the  appeals against the order of conviction and sentence for the offence under Section 138 of the N.I. Act, (even in a case where the criminal complaints for the offence under Section 138 of the N.I. Act were filed prior to amendment Act No.20/2018 i.e. prior to 01.09.2018).