2012 (10) TMI 232 - SC - Companies Law

Supreme Court Allows Prosecution for Multiple Cheque Dishonours under Section 138

The Supreme Court held that prosecution based on a second or successive dishonour of a cheque is permissible under Section 138 of the Negotiable ... Prosecution based on second or successive dishonour of cheque - accrual of cause of action under proviso to Section 138 - interaction of proviso to Section 138 and Section 142(b) - limitation and its waiver under proviso to Section 142 - purposive construction in aid of statutory objectProsecution based on second or successive dishonour of cheque - accrual of cause of action under proviso to Section 138 - interaction of proviso to Section 138 and Section 142(b) - Whether a prosecution under Section 138 can be instituted on the basis of a second or successive presentation and dishonour of a cheque provided the conditions of the proviso to Section 138 are satisfied - HELD THAT: - The Court held that each time a cheque is presented within its validity (or six months) and is dishonoured, and thereafter a statutory notice in terms of clause (b) of the proviso to Section 138 is served and the drawer fails to make payment within fifteen days, a fresh cause of action accrues to the holder/payee to institute prosecution. Neither Section 138 nor Section 142 contains any provision denying the holder the right to present a cheque repeatedly or to issue a fresh notice after a subsequent dishonour. The one month limitation for instituting criminal proceedings under Section 142(b) pertains to the particular cause of action so accrued, but expiry of that period in respect of an earlier cause of action does not absolve the drawer of liability should the cheque be dishonoured again and the statutory preconditions be met afresh. The Court rejected the reasoning in Sadanandan Bhadran v. Madhavan Sunil Kumar to the extent it held that only a single cause of action can ever arise in respect of a cheque and that failure to prosecute the first default results in 'absolution' of the drawer; the addition of the proviso to Section 142 permitting condonation of delay reinforces that there is no legislative intent to confer permanent immunity for subsequent dishonours. Applying purposive construction, the Court concluded that permitting prosecution on subsequent dishonours better effectuates the legislative objective of ensuring credibility of negotiable instruments and preventing dishonour impunity. [Paras 21, 22, 23, 31, 33]Prosecution based on second or successive dishonour is permissible where the proviso to Section 138 is satisfied on each occasion; the earlier decision in Sadanandan Bhadran is overruled to that extent.Final Conclusion: The Court answered the reference by overruling Sadanandan Bhadran to the extent it disallowed prosecutions founded on second or subsequent dishonour; prosecutions may be initiated on each occasion a cheque is dishonoured provided the statutory conditions in the proviso to Section 138 are fulfilled. Issues Involved:1. Whether the payee or holder of a cheque can initiate prosecution under Section 138 of the Negotiable Instruments Act, 1881, for the second time if no action was initiated on the earlier cause of action.2. The interpretation of Sections 138 and 142 of the Negotiable Instruments Act regarding multiple causes of action.3. The implications of successive dishonours of a cheque and the legal consequences thereof.4. The relevance and application of the concept of 'cause of action' in the context of Section 138.5. The impact of the legislative intent and purposive interpretation of the statute.Detailed Analysis:1. Whether the payee or holder of a cheque can initiate prosecution under Section 138 of the Negotiable Instruments Act, 1881, for the second time if no action was initiated on the earlier cause of action:The Supreme Court in this judgment overruled the decision in Sadanandan Bhadran v. Madhavan Sunil Kumar (1998) 6 SCC 514, which held that a payee could not initiate prosecution based on a second or successive dishonour of the cheque if no action was taken on the earlier dishonour. The Court held that prosecution based on a second or successive dishonour is permissible as long as it satisfies the requirements stipulated in the proviso to Section 138 of the Negotiable Instruments Act.2. The interpretation of Sections 138 and 142 of the Negotiable Instruments Act regarding multiple causes of action:The Court emphasized that a combined reading of Sections 138 and 142 does not restrict the payee to a single cause of action per cheque. The Court stated, 'The expression 'cause of action' appearing in Section 142 (b) of the Act cannot be understood to be limited to any given requirement out of the three requirements that are mandatory for launching a prosecution on the basis of a dishonoured cheque.' The Court clarified that each presentation of a cheque and its subsequent dishonour, followed by a statutory notice and failure to pay within the stipulated period, constitutes a fresh cause of action.3. The implications of successive dishonours of a cheque and the legal consequences thereof:The judgment clarified that successive presentations of a cheque within its validity period are permissible, and each dishonour followed by a statutory notice and failure to pay gives rise to a new cause of action. The Court stated, 'There is nothing in Section 138 or Section 142 to curtail the said right of the payee, leave alone a forfeiture of the said right for no better reason than the failure of the holder of the cheque to institute prosecution against the drawer when the cause of action to do so had first arisen.'4. The relevance and application of the concept of 'cause of action' in the context of Section 138:The Court analyzed the term 'cause of action' in the context of Section 138 and stated that it includes the presentation of the cheque, its dishonour, issuance of a statutory notice, and failure of the drawer to make the payment within the stipulated period. The Court observed, 'Every time a cheque is presented in the manner and within the time stipulated under the proviso to Section 138 followed by a notice within the meaning of clause (b) of proviso to Section 138 and the drawer fails to make the payment... a cause of action accrues to the holder of the cheque to institute proceedings for prosecution of the drawer.'5. The impact of the legislative intent and purposive interpretation of the statute:The Court underscored the importance of purposive interpretation to advance the object of the statute, which is to ensure the credibility of cheques and the banking system. The Court stated, 'One of the salutary principles of interpretation of statutes is to adopt an interpretation which promotes and advances the object sought to be achieved by the legislation, in preference to an interpretation which defeats such object.' The Court concluded that allowing prosecution based on successive dishonours aligns with the legislative intent of promoting faith in the efficacy of banking operations and discouraging dishonour of cheques.Conclusion:The Supreme Court overruled the decision in Sadanandan Bhadran's case and held that prosecution based on second or successive dishonour of a cheque is permissible, provided the statutory requirements under Section 138 are met. The judgment emphasized the purposive interpretation of the statute to uphold the legislative intent of ensuring the credibility of cheques and the banking system. The appeals were directed to be listed before the regular Bench for hearing and disposal in light of these observations.