Bounced cheques: SC ruling makes prosecution easier
Vrinda Bagaria  and  Sikha Bansal 11 October 2012

The Supreme Court has over-ruled its previous judgements in order provide relief to the holders of bounced cheques under the provisions of the Negotiable Instruments Act

It has been observed lately that the trend of reversing important judicial decisions has been on a rise i.e. a decision is reversed due to a difference in the opinion of the different benches presiding over matters pertaining to the same question of law and sharing the same background as to the facts of the case. Such a practise is being adopted more often by the Supreme Court, which being the highest court of law is regarded as the epitome for all legal issues. The practise of reversing a decision is considered appropriate and necessary only in the wake of adopting a dynamic approach towards law instigated by a constant change in the business dynamics and influenced by external factors.

To cite a recent example of such practise, reference shall be made to the case of Bhatia International Vs Bulk Trading SA1 (Bhatia International), the decision of the Supreme Court by virtue of which it was held that Part I of the Indian Arbitration and Conciliation Act (Arbitration Act), dealing with the power of a court to grant interim relief, could be applied to arbitration disputes with a foreign seat unless the parties specifically opted out of such an arrangement, was overruled by a subsequent decision of the court in Bharat Aluminium Co Vs Kaiser Aluminium Technical Services Inc2. In this landmark judgment, a constitutional bench of the Supreme Court held that Part I of the Arbitration Act will have no effect on international commercial arbitration held outside India unless it has been agreed that such awards shall be enforceable in India in accordance with the provisions contained in Part II of the Arbitration Act. Thus, in case of an international commercial arbitration, no application for interim relief will be maintainable as the application of Part I of the Arbitration Act is limited only to arbitrations taking place within India.

Such inconsistency should be discouraged in the course of imparting justice on substantial matters of law. Moreover, in a country where high reliance is placed on judicial precedents both by the citizens as well as the courts, difference in the opinion will prejudicially affect the rights of the parties directly involved, thus, consequentially acting to the detriment of the society and causing a significant decline in the faith held by the citizens on our judicial system.

SC over-rules prior decision: Assigns true intent to Section 138 of NI Act

The Supreme Court while deciding the scope of Section 138\142 of the Negotiable Instruments Act, 1881 (hereinafter referred to as ‘NI Act’), has over-ruled its previous decision thus importing true character to the intent of the legislature. Section 138 aims to promote better compliances in terms of honouring cheques and discharging liabilities by imposing a penalty for any default committed in this respect. It is a medium of speedy remedy provided for the protection of the holder/payee of the cheque, where the debtor seeks to discharge his obligation through cheque but does not intend to honour it.
However, the current practice adopted by the courts and the time spent to arrive at a final decision has inadvertently failed to meet the intent of the Legislature behind this provision and made it worthless in the statute books. The case to be dealt with subsequently is an apt example depicting the inability of the courts to provide speedy remedy as in this case, the aggrieved party had to strive for a period of ten years (approximately) before they could be accorded relief.

As per the proviso to the Section, there are three essential pre-requisites which are to be fulfilled for the application of this Section:

  1. The cheque is to be presented for payment within six months from the date it is drawn or within its validity period, whichever is earlier;
  2. The payee/holder in due course has to give a written notice to the drawer within 30 days from the intimation of dishonour from the bank, demanding the payment of money.
  3. The drawer fails to make the payment of the money within 15 days from the receipt of the notice.

Further Section 142 of the NI Act requires the complaint to be made within one month of the date on which the “cause of action” arises under clause (c) of the proviso to Section 138 i.e. failure of the drawer to make payment within 15 days of receipt of notice by the holder/payee.

So, an essential question which arose for determination is when does a “cause of action” arise and whether a payee/holder can in due course initiate proceedings under Section 138 after a subsequent dishonour of cheque by the drawer if he has not initiated any action on earlier cause of action?

These questions have been a matter of debate in various rulings. The matter of Sadanandan Bhadran Vs Madhavan Sunil Kumar3(hereinafter referred to as ‘Sadanandan’s case’), decided by the apex court was a landmark judgment  before it was over-ruled in Msr Leathers Vs  Palaniappan and Anr.4(‘Msr Leathers’) by the Supreme Court itself.


The facts of both the cases being essentially the same are that the holder/payee had served notice under clause (b) of proviso to Section 138 on the first default by the drawer, yet did not file a complaint despite failure of the accused to make payment of the amount covered by the cheques, on assurance being given by the drawer that the cheques will be honoured on being presented again. However, even on subsequent presentation of the cheque for encashment by the holder/payee, the cheques were dishonoured again for want of insufficient funds. Notice was served by the payee and on failure of the drawer to pay the money; complaint was filed under Section 138.

In Sadanandan’s case5, the scope of Section 138\142 of the NI Act was given a limited meaning wherein the Supreme Court held that the “cause of action” under clause (c) of the proviso to Section 138 can arise only once and failure of the aggrieved holder/payee of the dishonoured cheque to file a complaint within 30 days of the first cause of action shall be treated as an absolution of his right. The apex court in this case adjudged that the subsequent presentation of cheques and the default committed thereby shall hold no relevance despite the fulfilment of all the preconditions stipulated for an offence to take place under Section 138 of the NI Act.

However, the recent judgment of the Supreme Court in Msr Leathers6 has brought out the essence of Section 138 of the NI Act, totally in sync with the intent of the legislature and the very object of Section 138, i.e. to impart credibility to negotiable instruments in business transactions and uphold the efficacy of and faith in the banking system. In the instant case, the question before the Supreme Court was similar to that in Sadanandan’s case (supra). The court negated its earlier ruling, observing the following:

  1. Sections 138 and 142 do not in any manner restrict the right of the holder/payee to present the cheque for encashment several times within a period of six months of it issue or the validity period whichever is earlier.
  1. There is nothing in the Act that prohibits the payee/holder in due course to demand the money by serving a fresh notice in case there is second/successive default by the drawer of the cheques. Taking a practical approach, the court commented that it is the right of the payee and not the obligation to initiate the prosecution proceedings; the payee may defer prosecution on bona fide grounds i.e. either on his own volition with an intent to avoid proceedings or on an assurance by the drawer of the cheque that the same will be encashed if given some time. It also opined that:

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.” (emphasis supplied)

  1. Coming to the expression “cause of action”, the Supreme Court remarked that the cause of action under Section 142 will arise no sooner than when the drawer of the cheque fails to discharge its obligation by making payment to the payee/holder of the cheque within 15 days of the receipt of the notice required to be sent in terms of clause (b) of proviso to Section 138 of the Act. For the dishonour to culminate into the commission of an offence, all the three requirements stated under the proviso to Section 138 are to be met. Further the apex court refused to accept that the cause of action can arise only once and observed that a fresh cause of action may arise on every subsequent dishonour of cheque provided other requirements as mentioned earlier are duly complied with.
  1. Nothing in Section 142 suggests that expiry of the limitation would absolve the drawer of the criminal liability if the cheques continues to get dishonoured by the bank on subsequent presentations.

Therefore, based on the above observations, the Supreme Court upheld that the 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.


The landmark judgments of the Supreme Court over-ruling its previous decisions are inevitable in as much they have given effect to the true intention of the legislature by adopting a fair and just approach and fulfilling the purpose for which the statutes have been enacted that is to protect the interests of different classes of people. However, the frequent negation of earlier judgments is not a healthy approach and should be discouraged unless a substantial question of law is involved or it is mandatory to do so in the interests of promoting justice and equity.

(The writers can be reached at [email protected] and [email protected], respectively.)


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