Cheque Bounce Case- A Legal Analysis of Section 138 and Section 141 of the Negotiable Instruments Act, 1881
The Negotiable Instruments Act, 1881 (“NI Act”), provides a statutory framework for the regulation of negotiable instruments such as cheques, bills of exchange, and promissory notes.
Sections 138 and 141 of the Act address offences related to dishonoured cheques, prescribing both the conditions for liability and the scope of responsibility for individuals associated with corporate entities.
Section 138: Dishonour of Cheque
Section 138 of the NI Act outlines the offence of cheque dishonour due to insufficiency of funds or exceeding the arrangement with the bank. The essential ingredients for the offence under this section are:
1. Drawing of a Cheque: The cheque must be drawn by a person on an account maintained by them.
2. Purpose: The cheque must be issued for the discharge, in whole or in part, of a legally enforceable debt or liability.
3. Presentation: The cheque must be presented to the bank within six months of its issue or within its validity period, whichever is earlier.
4. Dishonour: The cheque must be returned unpaid by the bank due to insufficiency of funds or because it exceeds the arrangement.
5. Notice: The payee or holder must send a written notice to the drawer demanding payment within thirty days of being informed about the dishonour.
6. Non-Payment: The drawer fails to make payment within fifteen days of receiving the notice.
Upon fulfilling these conditions, the offence is deemed committed, and the drawee may file a complaint before the Court against the drawer who is liable for punishment, which may include imprisonment for up to two years, a fine twice the cheque amount, or both.
Section 141: Offences by Companies
Section 141 extends the liability under Section 138 to companies and individuals responsible for the conduct of the company’s business. The provision operates in two parts:
1. Subsection (1): If the offence is committed by a company, every person who was in charge of and responsible for the conduct of the company’s business at the time of the offence shall also be deemed guilty.
The proviso to this subsection offers a defence: a person will not be liable if they prove that the offence was committed without their knowledge or despite exercising due diligence to prevent it.
2. Subsection (2): This applies to cases where the offence is committed with the consent, connivance, or due to the neglect of a director, manager, secretary, or other officer.
Such individuals are also deemed guilty, irrespective of whether they were responsible for the day-to-day affairs of the company.
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Judicial Interpretation: S.P. Mani and Mohan Diary Vs. Snehalatha Elangovan
The Hon’ble Supreme Court, in S.P. Mani and Mohan Diary Vs. Snehalatha Elangovan, 2022 SCC OnLine SC 1238, elaborated on the provisions of Sections 138 and 141, emphasizing the principles governing corporate liability. The Court observed:
“While the essential element for implicating a person under subsection (1) is his or her being in charge of and responsible to the company in the conduct of its business at the time of commission of the offence, the emphasis in subsection (2) is upon the holding of an office and consent, connivance or negligence of such officer irrespective of his or her being or not being actually in charge of and responsible to the company in the conduct of its business”
The Court further noted that individuals charged under Section 141(1) could escape liability if they prove the absence of knowledge or that they exercised due diligence to prevent the commission of the offence.
This principle underscores the importance of proactive governance and compliance measures within companies.
Key Extract from the Judgment
The judgment provides a detailed analysis of Sections 138 and 141. The relevant extract is reproduced below:
“Thus, the important and distinguishing feature in subsection (1) is the control of a responsible person over the affairs of the company rather than his holding of an office or his designation, while the liability under subsection (2) arises out of holding an office and consent, connivance or neglect. While all the persons covered by subsection
(1) and sub section (2) are liable to be proceeded against and also punished upon the proof of their being either in charge of and responsible to the company in the conduct of its business or of their holding of the office and having been guilty of consent, connivance or neglect in the matter of commission of the offence by the company, the person covered by subsection (1) may, by virtue of the first proviso, escape only punishment if he proves that the offence was committed without his knowledge or despite his due diligence.”
Implications of the Judgment
The decision in S.P. Mani and Mohan Diary reinforces the dual objectives of the NI Act:
• Ensuring Accountability: It holds individuals and companies accountable for cheque dishonour while allowing a fair opportunity to prove due diligence.
• Balancing Interests: By allowing defences under the proviso to Section 141, it ensures that liability is not imposed on individuals who had no knowledge or role in the offence or exercised due diligence to prevent it.
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Conclusion
Sections 138 and 141 of the NI Act represent a robust mechanism to address dishonoured cheques while balancing individual and corporate accountability.
The interpretation by the Hon’ble Supreme Court in S.P. Mani and Mohan Diary underscores the necessity of due diligence and proper governance in corporate operations.
This judgment serves as a crucial reminder for companies and their officers to adopt proactive measures to prevent offences under the NI Act.
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