Courts change approach to technical flaws against prosecution for bounced cheques

Jayant M Thakur

Readers of this column may recollect that earlier we have pointed out repeatedly how a person tries to use technical defences when faced with prosecution for allowing his cheques to bounce. This prosecution he faces under section 138 and related provisions of the Negotiable Instruments Act.

A person, carelessly or often maliciously, issues cheques that are not finally honoured. The creditor, in the meantime, has given him money, goods or services and then he is left with the rubber cheque. Earlier, he could do nothing except trying to use the often expensive and ineffective remedy of pursuing a civil claim.

Now, while the law has not given him a direct remedy, it has given him a weapon to threaten the debtor that either you pay up within the specified time or face prosecution. It is at this stage that the debtor starts using defences that have no substance but are loopholes by making strained interpretation of the law.

At times, the poorly drafted law saves him and thus he is free technically though he has actually allowed his cheque to be bounced. At other times, the courts disallow such interpretation and allow the prosecution to proceed. However, an interesting aspect was that till now, mostly, courts have tried to take a strict interpretation of this section for the reason that this is a section that results in prosecution and hence all the strict elements should be satisfied.

A recent case, however, expresses quite eloquently the concerns of this author and hopefully would lead to a reversal of approach by courts of how such defences would be viewed in the future. The following words at the very start of the case of the highest court of the land, the Supreme Court in Uniplas India Ltd And Others V State and Another (2001 106 Comp Cas 669 SC) make a very interesting reading and hence are reproduced, before the case is discussed:-
“The drawer of a cheque clutches at a straw for wriggling out of the clutches of a criminal prosecution he is caught in, but the straw is too fragile to be of any help to him. He thought that a previous notice sent by the payee of the cheque, after it once bounced, was enough to knock off the prosecution based on a second presentation and second bouncing of the cheque. But neither the trial court nor the high court favoured the accused in his endeavour to secure a discharge from the case on the said ground. Thus he has come up with this appeal.”

Let us now consider the facts of the case and what was the technical defence attempted under this case and how the Supreme Court dealt with it.

The matter here was quite usual. A cheque was issued by the drawer and it was returned unpaid. The drawee presented the cheque once again and it was again dishonoured and then the drawee initiated prosecution proceedings.

However, something also took place during the intermediary period which, the drawer felt, would help him repel the prosecution. After the first dishonour, the drawee issued a notice under sections 433/434 of the Companies Act, 1956, threatening winding up. The drawer said that this was also to be treated as a notice for the purposes of section 138 of this Act.

If that were so, it means that a cause for action for the drawer arose with reference to this notice. What is meant is that once this notice was issued, it set forth irreversibly a sequence whereby either the drawee had to file prosecution proceedings within the time prescribed from the date of the notice or the whole case fails. Since the drawee had filed a case with reference to the second dishonour and not the first, the drawer said that he cannot have two causes of action and hence the prosecution should fail.

The issue arose therefore was whether the original notice was to be treated as a notice under section 138 also. However, before deciding the case under question, the court laid down the principle in law as follows:-

“One of the indispensable factors to form the cause of action envisaged in section 138 of the Negotiable Instruments Act is contained in clause (b) of the proviso to that section. It involves the making of a demand by giving a notice in writing to the drawer of the cheque “within fifteen days of receipt of information by him from the bank regarding the return of the cheque as unpaid”.

If no such notice is given within the said period of 15 days no cause of action could have been created at all. “ It also said, “Thus, it is well nigh settled that if dishonour of a cheque has once snowballed into a cause of action it is not permissible for a payee to create another cause of action with the same cheque.”

Of course, in the present case, the court had a quick answer to the problem since there was also a fact that did not quite fit the technical defence put forth by the drawer. The notice demanding payment and threatening winding up was issued much after fifteen days of the date of receipt of information of dishonour of the cheque from the bank.

That being so, it was not a notice under section 138 and hence pursuant to that notice, a cause for action did not arise at all. Hence, that being so, the question of the drawee claiming two causes for action did not arise at all and the cause of action arose only after the second dishonour. Hence the present prosecution, initiated after the second dishonour, was much valid and hence had to be upheld.
To summarise, the drawee of a cheque that is dishonoured has only one life, ie, only one cause for action that he has to use within the prescribed time and file the case. Else, this will become a technical defence that the court will have to uphold.

To also conclude, it appears that courts are expressing their consciousness as to how technical defences are raised thought in essence the spirit of the section has been violated. It is to be seen how this consciousness is used in favour of the aggrieved creditor.