Vathsan vs Japahari

K.A. Abdul Gafoor, J.—These cases come up before us on a reference by a learned Single Judge. The question referred is whether Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as ''the Act'') is attracted in respect of a cheque dishonoured on account of the closure of the account on which it was drawn, even prior to its drawal. The decisions of this Court reported in Joseph v. Philip Joseph 2000 (2) KLJ 679 and Japahari v. Priya 1993 (2) KLT 141 indicate that the account on which the cheque was drawn shall be maintained by the drawer at the time of drawal of the cheque to attract the said provision. It has been further held that Section 138 of the Act will not be attracted if the cheque has been drawn after the closure of the account. But, when the matter came up before the learned Single Judge, a decision by the Bombay High Court reported in Shivendra Sansguiri Vs. M/s. Adineo and another, was pointed out. In that decision it was held that it was immaterial whether the account had been closed prior to or after the drawal of the cheque. That decision was rendered taking support from another Division Bench decision of that Court.

To answer the question, it is profitable to refer to the decisions reported in NEPC Micon Limited and Others Vs. Magma Leasing Limited, and Goaplast Pvt. Ltd. Vs. Shri Chico Ursula D''Souza and Another, . In the former, after analysing the ingredients of Section 138, it was held as follows:

"6. From S, 138, it is apparent that

(i) The cheque should be drawn by a person oh an account maintained by him with a banker for payment of any amount of money to another person from out of "that account".

(ii) The cheque should be returned by the Bank unpaid either because:

(a) the amount of money standing to the credit of that account is insufficient to honour the cheque; or

(b) it exceeds the amount arranged to be paid from that account by a person with the bank.

(iii) In such a situation, such person (drawer of cheque) shall be deemed to have committed an offence.

Further, the offence will be complete only when the conditions in provisos (a), (b) and (c) are complied with. Hence, the question is, in a case where a cheque is returned by the bank unpaid on the ground that the ''account is closed'', would it mean that the cheque is returned as unpaid on the ground that ''the amount of money standing to the credit of that account is insufficient to honour the cheque'' ? In our view, the answer would obviously be in the affirmative because the cheque is dishonoured as the amount of money standing to the credit of ''that account'' was ''nil'' at the relevant time apart from it being closed. Closure of the account would be an eventuality after the entire amount in the account is withdrawn. It means that there was no amount in the credit of ''that account'' on the relevant date when the cheque was presented for honouring the same. The expression ''the amount of money standing to the credit of that account is insufficient to honour the cheque'' is a genus of which the expression ''that account being closed'' is a specie. After issuing the cheque drawn on an account maintained, a person, if he closes ''that account'' apart from the fact that it may amount to another offence, it would certainly be an offence u/s 138 as there was insufficient or no fund to honour the cheque in ''that account''. Further, the cheque is to be drawn by a person for payment of any amount of money due to him ''on an account maintained by him'' with a banker and only on ''that account'' the cheque should be drawn. This would be clear by reading the section along with provisos (a),(b) and (c).

Secondly, proviso (c) gives an opportunity to the drawer of the cheque to pay the amount within 15 days of receipt of the notice as contemplated in proviso (b). Further, Section 140 provides that it shall not be a defence in prosecution for an offence u/s 138 that the drawer has no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. Dishonouring the cheque on the ground that the account is closed is the consequence of the act of the drawer rendering his account to a cipher. Hence, reading Sections 138 and 140 together it would be clear that dishonour of the cheque by a bank on the ground that the account is closed would be covered by the phrase ''the, amount of money standing to the credit of that account is insufficient to honour the cheque".

Eventhough the facts of that case related to closure of the account after the drawal of the cheque, the dictum laid down is equally applicable to a case of closure of account even prior to the drawal of the cheque, since the requirement of Section 138 is drawal of a cheque in respect of an account maintained, whether in past or in present with reference to the time of drawal of the cheque.

It is, worthwhile to quote from Geoplast Private Ltd. ''s case (supra), being contextually apt for this case, as follows:

"For appreciating the issue involved in the present case, it is necessary to refer to the object behind introduction of Chapter XVII containing Sections 138 to 142. This Chapter was introduced in the Act by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (Act 66 of 1988) with the object of inculcating faith in the efficacy of banking operations and giving credibility to negotiable instruments in business transactions and in order to promote efficiency of banking operations. With the policy of liberalisation adopted by the country which brought about increase in international trade and commerce, it became necessary to inculcate faith in banking. World trade is carried through banking operations rather than cash transactions. The amendment was intended to create an atmosphere of faith and reliance on banking system. Therefore, while considering the question of applicability of Section 138 of the Act to a situation presented by the facts of the present case, it is necessary to keep the objects of the legislation in mind. If a party is allowed to use a cheque as a mode of deferred payment and the payee of the cheque on the faith that he will get his payment on the due date accepts such deferred payment by way of cheque, he should not normally suffer on account of non-payment. The faith, which the legislature has desired that such instruments should inspire in commercial transactions would be completely lost if parties are as a matter of routine allowed to interdict payment by issuing instruction to banks to stop payment of cheques. In today'' s world where use of cash in day-to-day life is almost getting extinct and people are using negotiable instruments in commercial transactions and plastic money for their daily needs as consumers, it is all the more necessary that people''s faith in such instruments should be strengthened rather than weakened. Provisions contained in Sections 138 to 142 of the Act are intended to discourage people from not honouring their commitments by way of payment through cheques. It is desirable that the court should ban in favour of an interpretation which serves the object of the statute. The penal provisions contained in Sections 138 to 142 of the Act are intended to ensure that obligations undertaken by issuing cheques as a mode of payment are honoured. A post-dated cheque will lose its credibility and acceptability if its payment can be stopped routinely. A cheque is a well-recognized mode of payment and post-dated cheques are often used in various transactions in daily life. The purpose of a post-dated cheque is to provide some accommodation to the drawer of the cheque. Therefore, it is all the more necessary that the drawer of the cheque should not be allowed to abuse the accommodation given to him by a creditor by way of acceptance of a post-dated cheque. If stoppage of payment of a post-dated cheque is permitted to take the case out of the purview of Section 138 of the Act, it will amount to allowing the party to take advantage of his own wrong".

Therefore, it is discernible from the above decisions that in order to maintain commercial transactions with fidelity, it is always proper to rope within Section 138 instances like the ones arising in these cases.

Section 140 reads as follows:

"140. Defence which may not be allowed in any prosecution u/s 138.- It shall not be a defence in a prosecution for an offence u/s 138 that the drawer had no reason to believe when he is issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section".

This makes it clear that when a person draws a cheque, he will believe that the cheque will, in no case, be dishonoured. Therefore, such a defence is not allowed as per Section 140 of the Act. Therefore, we are of the view that once a person had issued a cheque drawn on an account, which he was holding in the bank, necessarily, he cannot take up a defence that he did not have a subsisting account on the date of drawal of the cheque. It will, if permitted, undoubtedly, defeat the intent behind Section 140 of the Act.

So, we are of the view that situations where cheques have been issued against the an account, which has been closed prior to the date of drawal of the cheques, shall also come within the fold of Section 138 of the Act to attract criminal liability. The reference is answered accordingly. Parties are free to agitate their case based on the respective contentions available to them, subject to the law laid down as above.