Overview

CAUSE OF ACTION UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881

Bhag bhag DK Bose DK Bhaag

(Lyrics of the theme song from Indian comedy film Delhi Belly)

The lyrics of this song may not add up to much for their lyrical value. However, if Ranchhoddas “Rancho” Shamaldas Chhanchad had been a student of Imperial College of Law, instead of Imperial College Engineering (ICE) and was asked to define the legal terminology – ‘cause of action’ (in realm of the provisions contained under Section 138 read with Section 142 of the Negotiable Instruments Act, 1881)[hereinafter referred to as “the N I Act”] in aasan basha (simple language) by his Professor, he would have definitely sung the lyrics as mentioned hereinabove. This is because if a dishonor of cheque has once snowballed into a cause of action, it is not permissible for the payee or holder in due course to create another or successive cause of action based on the same dishonored cheque. Further, the cause of action in a Complaint under Section 138 of Negotiable Instruments Act, 1881 till the passing of recent judgment in MSR Leathers v. S Palaniappan by the Hon’ble Supreme Court arose only once i.e. when the drawer of cheque fails to make payment of the amount to the payee or as the case may be to the holder in due course of the cheque within 15 (Fifteen) days of being served with a demand notice.

Before going deep into this aspect, it will be prudent to note Sections 138 and 142 of the N I Act to get an insight as to how the phrase “cause of action” has been dealt with and explained under the statute :

“138. Dishonour of cheque for insufficiency, etc., of funds in the account –   

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 honour 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 extend to two year”], 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-

 (a) 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; 

(b) 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 

(c) 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. 

 Explanation – For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.”

“142. Cognizance of offences –  Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974) –

(a) no court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque;

(b) such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to section 138:

 [Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.]

(c) no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138].”

The Hon’ble Supreme Court has recently pronounced its ruling in MSR Leathers v. S Palaniappan, which marks a sea change in the law governing disputes relating to dishonour of cheques.

In a 1996 ruling in Sadanandan Bhadran v. Madhavan Sunil Kumar, the Supreme Court considered whether a payee or holder of a cheque can initiate proceedings under Section 138 of the N I Act for the second time if he has not initiated any action on an earlier cause of action? The cause of action to institute proceedings under Section 138 of the Act accrues when the drawer of the cheque fails to make payment within 15 days of the receipt of a written notice from the payee/holder in due course. The Court in Sadanandan Bhadran’s case held that a combined reading of Sections 138 and 142 of the Act left no room for doubt that cause of action under Section 142(b) can arise only once. In view of the ruling, once a statutory notice under the Act had been issued, the complainant was compelled to initiate proceedings within the prescribed period of 30 days even if payment was assured by the defaulter and/or the cheque was still within the period of its validity.

The said decision was followed in several subsequent decisions of the Supreme Court over the years such as in Sil Import, USA v. Exim Aides Silk Exporters, Bangalore, (1999) 4 SCC 567, Uniplas India Ltd. and Ors. v. State (Govt. of NCT Delhi) and S.L. Constructions and Anr. v. Alapati Srinivasa Rao and Anr., (2009) 1 SCC 500, Tameshwar Vaishnav v. Ramvishal Gupta, (2010) 2 SCC 329.

As the correctness of the ruling in Sadanandan Bhadran’s case was recently doubted by a Bench comprising Katju and Reddy JJ., the above question was referred to a larger Bench for reconsideration.

After analyzing the provisions of law and the ruling in Sadanandan Bhadran’s case, the Full Bench in MSR Leathers held “we have no hesitation in holding that 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. There is in our opinion no real or qualitative difference between a case where default is committed and prosecution immediately launched and another where the prosecution is deferred till the cheque presented again gets dishonoured for the second or successive time”. The ruling in Sadanandan Bhadran v. Madhavan Sunil Kumar has, thus, been overruled and is no longer good law.

To summarise, in view of the above legal position, a payee or holder of a cheque can now issue a statutory notice to the drawer each time the cheque is dishonoured and institute proceedings on the basis of a second or successive statutory notice as well.