It is common knowledge that cheques are dishonoured mostly for Insufficiency of funds or for the reason that the same exceeds arrangements but there are also several other reasons for dishonour of cheques. The other common reasons are Signature Mismatch, Incomplete Signatures, Signature of only one signatory when two signatories were mandated, Stop Payment by drawer, Different Different signatures, Out dated cheque/ Postdated cheque, Spelling mistake, Mistake in account number, Over writing, Cheque expiration, Closure of Cheque issuer's account, Suspicion of forged Cheque, Absence of company seal on Cheque, Mutilated cheque etc.

Presently, we will limit our deliberation to Dishonor of cheque due to ' Incomplete Signatures'. It would be relevant to reproduce Section 138 of the Negotiable Instruments Act, 1881 which reads as under:

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 be extended to two years, 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—

1. The cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier;
2. 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
3. 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."

From the plain reading of the aforesaid Section 138, it transpires that the section is applicable only if the dishonoured cheque is towards 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. The second requisite is that the cheque has been dishonoured due to insufficient funds or where it exceeds the arrangements with that bank.

The Apex Court in the case of Vinod Tanna And Anr. vs Zaheer Siddiqui And Ors. (2002) 7 SCC 541 dealt with the controversy in hand. It was contended on behalf of the
accused/petitioner that "the grounds on which the cheque had not been honoured, would not constitute offence under Section 138 of the Act, inasmuch as the ingredients that the account-holder had no sufficient funds at the credit of his account or that the amount in the cheque exceeded the amount which the account-holder had at his credit, had not been established in the case. Even there was no direction from the drawer to stop payment and the only ground on which the cheque appears to have not been honoured is that the drawer's signature was incomplete."

The Court, relying on the plain language of Section 138 of the NI Act, made a narrow/hyper technical interpretation and held thus:

"In fact, a plain reading of Section 138 of the Act makes it crystal clear that unless the conditions precedent mentioned therein are satisfied, the said penal provision cannot be attracted.................. We, accordingly, set aside the impugned judgment of the High Court, quash the criminal proceeding and allow the criminal appeal."

Thus, the Apex Court in clear terms held that complaint u/s 138 of the NI Act is not maintainable where the cheque has been dishonoured due to reason of 'Incomplete Signatures' on the cheque. The said 'Declaration of Law' having binding force was blindly followed in hundreds of cases in various High Courts & District Courts, involving the same issue.

With due respect, the Court took a hyper technical view and perhaps did not comprehend the impact of the judgment in the Business World and also did not understand the spirit & purpose of the enactment of Negotiable Instruments Act. The Court did not realise that the said dictum of the Apex Court would help a dishonest person and defeat the very legislative purpose of the Negotiable Instruments Act. A drawer can deliberately put in incomplete signatures to very well avoid/negate the rigours of Section 138 of the NI Act.

It is pertinent that the Interpretation of the Section 138 done by the Hon'ble Apex Court in Vinod Tanna (supra) runs contra to the established tenets of Interpretation of a statute and is not in consonance with the dictum of the Apex Court in K. Bhaskaran Vs. Sankaran Vaidhyan Balan (1999) 2 SCC 510, wherein the Apex Court observed thus:

"It must be born in mind that the court should not adopt an interpretation, which helps a dishonest evader and clips an honest payee, as that would defeat the very legislative measure."

It would be apropos to refer to the much quoted passage from the Seaford Court Estates Ltd. v. Asher (1949 2 All E.R. 155) regarding interpretation of a provision which ought to be in consonance with the legislative intent and not limiting itself to just the plain words & phrases used in the provision of a statute. Lord Denning, L.J. in the aforesaid case observed thus:

"The English language is not an instrument of mathematical precision. Our literature would be much poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticized. A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot simply fold his hands and blame the draftsman.

He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give 'force and life' to the intention of the legislature.

A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out? He must then do so as they would have done. A judge must not alter the material of which the Act is woven, but he can and should iron out the creases."

It is relevant that the provision has been interpreted by the Apex Court in a number of judgments in a manner so as to include within its ambit even the cases where the dishonor of cheque has taken place for the reasons other than the aforesaid two reasons i. e. Insufficiency of funds & exceeds arrangements.

It would be relevant to refer to the Apex Court 3 Judge Larger Bench landmark judgment in the case of Modi Cements Ltd. v. Kuchil Kumar Nandi, AIR 1998 SC 1057 popularly known as the Modi Cements Case, on the law relating to "Stop Payment" under the Negotiable Instruments Act, 1881. The High Court had held that mere endorsement of the Bank "payment stopped" was not sufficient to entertain the complaint as that was not an ingredient of the offence under Section 138 of the Act.

The Apex Court in Modi Cement (supra) categorically laid down that once a cheque is issued by drawer, a presumption under Section 139 of Negotiable Instruments Act, in favour of holder must follow and merely because the drawer issues notice to drawee or to Bank for stoppage of payment, it will not preclude action for dishonour of cheque under Section 138, Negotiable Instruments Act, by drawee or holder of cheque in due course. The Court summed up thus:

"(18) The aforesaid propositions in both these reported judgments, in our considered view, with great respect are contrary to the spirit and object of Sections 138 and 139 of the Act. If we are to accept this proposition it will make Section 138 a dead letter, for, by giving instructions to the Bank to stop payment immediately after issuing a cheque against a debt or liability the drawer can easily get rid of the penal consequences notwithstanding the fact that a deemed offence was committed...."

It would be apposite to refer to NEPC Micon Limited And Others vs. Magma Leasing Limited,( 1999) 4 SCC 253 wherein the Apex Court rejected the contention that Section 138 of the NI Act has to be interpreted strictly or in disregard of the object sought to be achieved by the Statute. Relying upon its earlier judgment in the case of Kanwar Singh vs Delhi Administration, AIR 1965 SC 871 and Swantraj and Others vs. State of Maharashtra 1975(3) SCC322, the Court held that a narrow interpretation of Section 138 would defeat the legislative object underlying the said provision.

The Supreme Court relied upon its own decision in State of Tamil Nadu Vs. M. K. Kandaswami and others 1974(4) S.C.C. 745, and it was observed that while interpreting a penal provision which is also remedial in nature a construction that would defeat its purpose or have the effect of scrapping it from the statute book, should be avoided and that if more than one constructions are possible, the Court should choose to adopt construction that would preserve the workability and efficacy of the Statute and avoid an interpretation that would render the provision sterile.

The Court, accordingly, held that when a cheque is returned by the banker of a drawer with the comments "account closed" the same would constitute an offence under Section 138 of NI Act. The Court categorically held thus:

"Hence, the question is, in a case where cheque is returned by the bank unpaid on the ground that the account is closed, would it mean that 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 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 specie."

Similarly, the Apex Court in M. M. T. C. Ltd. Vs. M/S Medchl Chemicals, (2001) 1 SCC 234 held that 'stop payment instructions' which result in dishonor of a cheque, would amount to an offence under Section 138 of the NIA Act and the same would come within the ambit of definition of offence under Section 138 of the NI Act. The Court held thus:

"19. Just such a contention has been negatived by this Court in the case of Modi Cements Ltd. v. Kuchil Kumar Nandi. It has been held that even though the cheque is dishonoured by reason of "stop-payment" instruction an offence under Section 138 could still be made out. It is held that the presumption under Section 139 is attracted in such a case also.

The authority shows that even when the cheque is dishonoured by reason of stop-payment instructions by virtue of Section 139 the court has to presume that the cheque was received by the holder for the discharge, in whole or in part, of any debt or liability. Of course this is a rebuttable presumption. The accused can thus show that the "stop-payment" instructions were not issued because of insufficiency or paucity of funds.

If the accused shows that in his account there were sufficient funds to clear the amount of the cheque at the time of presentation of the cheque for encashment at the drawer bank and that the stop-payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then offence under Section 138 would not be made out. The important thing is that the burden of so proving would be on the accused. Thus a court cannot quash a complaint on this ground."

The same view was reiterated by the Apex Court in Goaplast (P) Ltd vs. Chico Ursula D'Souza (2003) 3 SCC 232. Thus, not only the cases of dishonour of cheques on account of insufficiency of funds or on account of exceeding of arrangement but the cases involving dishonour of cheques on accounts of "stop payment" and "account closed" have also been brought within the ambit of offence u/s 138 of the NI Act. The Court held thus:

Chapter XVII containing Sections 138 to 142 was introduced in the Act by 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. The said provisions were intended to discourage people from not honouring their commitments by way of payment through cheques. The court should lean in favour of an interpretation which serves the object of the statute. A post-dated cheque will lose its credibility and acceptability if its payment can be stopped routinely.

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.

In view of Section 139, it has to be presumed that a cheque is issued in discharge of any debt or other liability. The presumption can be rebutted by adducing evidence and the burden of proof is on the person who wants to rebut the presumption. This presumption coupled with the object of Chapter XVII of the Act leads to the conclusion that by countermanding payment of post-dated cheque, a party should not be allowed to get away from the penal provision of Section 138 of the Act. A contrary view would render Section 138 a dead letter and will provide a handle to persons trying to avoid payment under legal obligations undertaken by them through their own acts which in other words can be said to be taking advantage of one's own wrong."

In view of the declarations of law by the Apex Court, as aforesaid, the dictum in Vinod Tanna's case (supra), giving a narrow interpretation to Section 138 of the NI Act, with due respect, appears erroneous. The aforesaid decision of Vinod Tanna came up for consideration before the Apex Court in the case of Laxmi Dyechem vs. State of Gujarat and others, (2012) 13 SCC 375. The High Court relying upon the decision of the Apex Court in Vinod Tanna (supra) had taken the view that dishonour of a cheque on the ground that the signatures of the drawer of the cheque do not match the specimen signatures available with the bank, would not attract the penal provisions of Section 138 of the NI Act.

The Apex Court, after noticing its earlier decisions on interpretation of the provisions of Section 138 of the NI Act, did not follow the ratio laid down in Vinod Tanna's case and observed that the ratio laid down in the said case is based upon the ratio laid down by the Apex Court in Electronics Trade & Technology Development Corpn. Ltd. v. Indian Technologists and Engineers (Electronics) (P) Ltd. (1996) 2 SCC 739, which has been overruled by the Apex Court in Modi Cements Ltd (supra). Para 15 & 16 of the judgment of the Apex Court in Laxmi Dyechem (supra) is relevant to the context and the same is reproduced as under:

"15. The above line of decisions leaves no room for holding that the two contingencies envisaged under Section 138 of the Act must be interpreted strictly or literally. We find ourselves in respectful agreement with the decision in NEPC Micon Ltd. (supra) that the expression "amount of money …………. is insufficient" appearing in Section 138 of the Act is a genus and dishonour for reasons such "as account closed", "payment stopped", "referred to the drawer" are only species of that genus.

Just as dishonour of a cheque on the ground that the account has been closed is a dishonour falling in the first contingency referred to in Section 138, so also dishonour on the ground that the "signatures do not match" or that the "image is not found", which too implies that the specimen signatures do not match the signatures on the cheque would constitute a dishonour within the meaning of Section 138 of the Act. This Court has in the decisions referred to above taken note of situations and contingencies arising out of deliberate acts of omission or commission on the part of the drawers of the cheques which would inevitably result in the dishonour of the cheque issued by them.

For instance this Court has held that if after issue of the cheque the drawer closes the account it must be presumed that the amount in the account was nil hence insufficient to meet the demand of the cheque. A similar result can be brought about by the drawer changing his specimen signature given to the bank or in the case of a company by the company changing the mandate of those authorised to sign the cheques on its behalf. Such changes or alteration in the mandate may be dishonest or fraudulent and that would inevitably result in dishonour of all cheques signed by the previously authorised signatories.

There is in our view no qualitative difference between a situation where the dishonour takes place on account of the substitution by a new set of authorised signatories resulting in the dishonour of the cheques already issued and another situation in which the drawer of the cheque changes his own signatures or closes the account or issues instructions to the bank not to make the payment. So long as the change is brought about with a view to preventing the cheque being honoured the dishonour would become an offence under Section 138 subject to other conditions prescribed being satisfied.

There may indeed be situations where a mismatch between the signatories on the cheque drawn by the drawer and the specimen available with the bank may result in dishonour of the cheque even when the drawer never intended to invite such a dishonour. We are also conscious of the fact that an authorised signatory may in the ordinary course of business be replaced by a new signatory ending the earlier mandate to the bank.

Dishonour on account of such changes that may occur in the course of ordinary business of a company, partnership or an individual may not constitute an offence by itself because such a dishonour in order to qualify for prosecution under Section 138 shall have to be preceded by a statutory notice where the drawer is called upon and has the opportunity to arrange the payment of the amount covered by the cheque.

It is only when the drawer despite receipt of such a notice and despite the opportunity to make the payment within the time stipulated under the statute does not pay the amount that the dishonour would be considered a dishonour constituting an offence, hence punishable.

Even in such cases, the question whether or not there was a lawfully recoverable debt or liability for discharge whereof the cheque was issued would be a matter that the trial Court will examine having regard to the evidence adduced before it and keeping in view the statutory presumption that unless rebutted the cheque is presumed to have been issued for a valid consideration.

16. In the case at hand, the High Court relied upon a decision of this Court in Vinod Tanna's case (supra) in support of its view.

We have carefully gone through the said decision which relies upon the decision of this Court in Electronics Trade & Technology Development Corporation Ltd. (supra). The view expressed by this Court in Electronics Trade & Technology Development Corporation Ltd. (supra) that a dishonour of the cheque by the drawer after issue of a notice to the holder asking him not to present a cheque would not attract Section 138 has been specifically overruled in Modi Cements Ltd. case (supra).

The net effect is that dishonour on the ground that the payment has been stopped, regardless whether such stoppage is with or without notice to the drawer, and regardless whether the stoppage of payment is on the ground that the amount lying in the account was not sufficient to meet the requirement of the cheque, would attract the provisions of Section 138."

The Apex Court on the basis of the aforesaid observations and the ratio, while dealing with a case in which the cheques were dishonoured by the bank on the ground that drawer's signatures were incomplete and that no image was found or that the signatures did not match, came to the conclusion that criminal prosecution against the accused in such cases should be allowed to proceed and the judgment and orders passed by the High Court quashing the criminal proceedings were set aside.

Both the said judgments of the Apex Court in Vinod Tanna's case as well as in Laxmi Dyechem's case (supra) have been rendered by the Benches of co-equivalent strength but the judgment rendered in Laxmi Dyechem's case is latest in point of time. Moreover, the ratio laid down in Vinod Tanna's case has been duly discussed in Laxmi Dyechem but the same has been dissented with as it failed to follow the earlier precedents, which has rendered judgment in Vinod Tanna 'per incuriam'. Therefore, as per law of precedents, the ratio laid down in Laxmi Dyechem's has impliedly overruled Vinod Tanna.

It is thus no longer 'Res Integra' that Section 138 of NI Act is applicable with full force in case of dishonour of cheque due to 'Incomplete Signatures' and the same would attract the penal provisions of Section 138 of the Negotiable Instruments Act, provided the other requisites of Section 138 are met out.

Written By: Inder Chand Jain
Email: [email protected], Ph no: 8279945021