2012 (10) TMI 232 - SC - Companies Law

Supreme Court Allows Prosecution for Multiple Cheque Dishonours under Section 138

MSR LEATHERS Versus S PALANIAPPAN & ANR

The Supreme Court held that prosecution based on a second or successive dishonour of a cheque is permissible under Section 138 of the Negotiable ... Dishonour of a cheque - Whether payee or holder of cheque can initiate proceeding of prosecution under Section 138 of Negotiable Instrument Act, 1881 for the second time if he has not initiated any action on earlier cause of action? - Held that:- The holder of a cheque can present it before a bank any number of times within the period of six months or during the period of its validity, whichever is earlier. This right of the holder to present the cheque for encashment carries with it a corresponding obligation on the part of the drawer to ensure that the cheque drawn by him is honoured by the bank who stands in the capacity of an agent of the drawer vis-a-vis the holder of the cheque. If the holder of the cheque has a right, as indeed is in the unanimous opinion expressed in the decisions on the subject, there is no reason why the corresponding obligation of the drawer should also not continue every time the cheque is presented for encashment if it satisfies the requirements stipulated in that clause (a) to the proviso to Section 138. There is nothing in that proviso to even remotely suggest that clause (a) would have no application to a cheque presented for the second time if the same has already been dishonoured once. Nothing either 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 - a prosecution based on a second or successive default in payment of the cheque amount should not be impermissible simply because no prosecution based on the first default which was followed by a statutory notice and a failure to pay had not been launched. If the entire purpose underlying Section 138 of the Negotiable Instruments Act is to compel the drawers to honour their commitments made in the course of their business or other affairs, there is no reason why a person who has issued a cheque which is dishonoured and who fails to make payment despite statutory notice served upon him should be immune to prosecution simply because the holder of the cheque has not rushed to the court with a complaint based on such default or simply because the drawer has made the holder defer prosecution promising to make arrangements for funds or for any other similar reason. Thus overruling the decision in Sadanandan Bhadran’s case (1998 (8) TMI 541 - SUPREME COURT) and hold that prosecution based upon second or successive dishonour of the cheque is also permissible so long as the same satisfies the requirements stipulated in the proviso to Section 138 of the Negotiable Instruments Act. 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.