LIABILITY OF A PERSON DRAWING CHEQUE UNDER NEGOTIABLE INSTRUMENTS ACT, 1881

Section 138 of the Negotiable Instruments Act, 1881 provides for the consequences of dishonor of cheque for insufficiency etc., of funds in the account.  The said section provides  that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless-

• the cheque has been 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, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, 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; and
• the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

The Explanation to this section provides that “debt or other liability” means a legally enforceable debt or other liability.

The main ingredient to attract Section 138 of the Act is that a cheque which is dishonored will have to be drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person from out of that account for the discharge in whole or in part of any debt or other liability.

In ‘P.J. Agro Tech Limited V. Water Base Limited’ – 2010 (7) TMI 280 - SUPREME COURT OF INDIAthe Supreme Court held that about the liability under Section 138 of the Act, where the cheque drawn by the employee of the appellant company on his person account, even if it be for discharging dues of the appellant company and directors, the appellant company and its directors cannot be made liable under Section 138.  The personal liability was upheld in this case.

In Mainuddin Abdul Sattar Shaik V. Vijay D. Salvi’ – 2015 (8) TMI 907 - SUPREME COURT the Supreme Court again confirmed the personal liability of the drawer of the cheque. In this case the appellant had booked a flat at Khargar Project to be developed by Salvi Infrastructure (P) Limited, through the accused respondent by paying him ₹ 74,200/- during the year 1999. The respondent issued two receipts for the said amount one for a sum of ₹ 59,000/- and the second for the remaining amount. In the year 2003 the said project has not been started the appellant sought for refund of the advance booked by him.   The respondent drew cheque for ₹ 74,200/- in favor of the appellant of an account maintained by him with his banker towards refund of the aforesaid booking amount.  The cheque was drawn by the respondent in his individual capacity and not in the capacity as a Director of Salvi Infrastructure P Limited or as proprietor of Salvi Builders & Developers.

The appellants presented the above cheque on 01.08.2003 to his bank for realization.  The same was retuned unpaid. The appellant issued a notice through his Advocate on 25.08.2003 under Section 138(b) of the Act to the respondent. Since the respondent failed to pay the said amount the appellant filed a complaint under Section 138 of the Act before the Metropolitan Magistrate. The Metropolitan Magistrate acquitted the respondent on the ground that the Company Salvi Infrastructure (P) Limited was not made the accused and instead the respondent was made accused in this case. The cheque could not be said to have been issued for the discharge of whole or part of the liability because it exceeded the liability. It had not been provide that the respondent was a person liable to make the payment for Salvi Infrastructure (P) Limited.

The appellant approached the Bombay High Court against the order of Metropolitan Magistrate. The High Court dismissed the application filed by the appellant upholding the views of Metropolitan Magistrate. Therefore he came before the Supreme Court. He submitted the following before the Supreme Court:

• The Courts below failed to appreciate that under Section138 of the Act it is the drawer of the cheque who is punishable for offender under Section 138 of the Act;
• The cheque in question was drawn by the respondent and not by the company of which the respondent is the Managing Director;
• The cheque was drawn by the respondent in his personal capacity on account maintained by him with the banker;
• The Courts below have wrongly concluded that notice under Section 138(b) of the Act was sent to all the directors of the company. Such a conclusion was not supported by any evidence inasmuch as there was only one acknowledgement card on record, showing receipt of notice under Section 138(b) of the Act;
• The respondent in his statement under Section 313 Cr. PC had admitted that he was paid ₹ 74,200/- as earnest money and he had issued receipt for the same.  As such there is no substance in the argument that the cheque cannot be said to have been issued for discharge of whole or part of liability, because it exceeded the liability;

The respondent submitted the following:

• The company had not been made an accused in this case;
• If the person committing an offence under Section 138 is a company, every person who, at the time of the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company as well as the company shall be liable;
• There was no averment that the accused was the person in charge of, and responsible for the affairs of the company;
• In this case the respondent was made accused in his personal capacity.

The Supreme Court after hearing both sides analyzed the provisions of Section 138 of the Act. It held that from a bare reading of Section 138 of the Act it is clear that the essential requirement to be met to attract the liability under Section 138 is that the person who is to be made liable should be the drawer of the cheque and should have drawn the cheque on an account maintained by him with a Banker for payment of any amount of money to another person from out of that account for discharge in whole or part, of any debt or other liability.  Thus the person who draws a cheque on an account maintained by him, for paying the payee, alone attracts liability.

The Supreme Court found that in the present case the drawer of the cheque was the respondent, who had drawn the cheque on a bank account maintained by him towards the refund of the booking amount.  Therefore he was the drawer of the cheque. The Supreme Court relied on the judgment in another case ‘National Small Industries Corporation Limited v. Hameet Singh Paintal’ – 2010 (2) TMI 590 - SUPREME COURT OF INDIA in which the Supreme Court held that if the accused is managing director or a joint managing director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with.  In the light of the above said decision the Supreme Court held that the respondent be made liable under Section138 of the Act even though the company had not been named to the notice or the complaint.  There was no necessity for the appellant to prove that the said respondent was in charge of the affairs of the company by the virtue of the position he held.  The respondent is liable for the offence under Section 138 of the Act. The Supreme Court sentenced the respondent to undergo simple imprisonment for a period of five months for the offence under Section 138 of the Act. The Supreme Court also directed the respondent to pay ₹ 14,8,400/- as compensation with interest with simple interest thereon @ 9% per annum, to the appellant.  In default of payment of compensation, the respondent will have to undergo simple imprisonment for a further period of six months.