1999 (4) TMI 581 - SC - Indian Laws

Penal consequences of Section 138 - Held that - Section 138 of the Act gets attracted only when the cheque is dishonoured. In view of the aforesaid discussion we are of the opinion that even though Section 138 is a penal statute it is the duty of the Court to interpret it consistent with the legislative intent and purpose so as to suppress the mischief and advance the remedy. As stated above Section 138 of the Act has created a contractual breach as an offence and the legislative purpose is to promote efficacy of banking and of ensuring that in commercial or contractual transactions cheques are not dishonoured and credibility in transacting business through cheques is maintained. The above interpretation would be in accordance with the principle of interpretation quoted above brush away the cobweb varnish and show the transactions in their true light (Wilmot C. J.) or (by Maxwell) to carry out effectively the breach of the statute it must be so construed as to defeat all attempts to do or avoid doing to an indirect or circuitous manner that it has prohibited. Hence when the cheque is returned by a bank with an endorsement account closed it would amount to returning the cheque unpaid because the amount of money standing to the credit of that account is insufficient to honour the cheque as envisaged in Section 138 of the Act. Appeal dismissed.

Issues Involved:
1. Whether the return of a cheque due to the account being closed falls under Section 138 of the Negotiable Instruments Act, 1881.
2. Interpretation of Section 138 and Section 140 of the Negotiable Instruments Act, 1881.
3. Judicial precedents and conflicting views on the interpretation of Section 138.

Issue-wise Detailed Analysis:

1. Whether the return of a cheque due to the account being closed falls under Section 138 of the Negotiable Instruments Act, 1881:

The appellants argued that the return of cheques with the endorsement "account closed" does not fall within the purview of Section 138 of the Negotiable Instruments Act, 1881, which envisages dishonour of cheques only in two specific situations: (i) insufficient funds in the account, or (ii) the amount exceeds the arrangement made with the bank. The Court, however, held that the closure of an account is a situation where the amount of money standing to the credit of that account is nil, thereby falling within the ambit of "insufficient funds." The Court stated, "Closure of the account would be an eventuality after the entire amount in the account is withdrawn," thus interpreting "account closed" as a species of the genus "insufficient funds."

2. Interpretation of Section 138 and Section 140 of the Negotiable Instruments Act, 1881:

The Court emphasized that Section 138 should be interpreted to advance the remedy and suppress the mischief. The legislative intent behind Section 138 is to ensure the credibility of cheques in commercial transactions. The Court noted, "Dishonouring the cheque on the ground that account is closed is the consequence of the act of the drawer rendering his account to a cipher." Additionally, Section 140, which states that the drawer's lack of knowledge of potential dishonour is not a valid defense, further supports the interpretation that "account closed" falls under Section 138. The Court concluded that interpreting Section 138 strictly to exclude "account closed" would defeat the legislative intent and allow dishonest drawers to escape penal consequences.

3. Judicial precedents and conflicting views on the interpretation of Section 138:

The Court acknowledged the conflicting views of various High Courts on whether "account closed" falls under Section 138. Some High Courts had held that Section 138 does not cover cheques returned due to account closure, while others had taken a contrary view. The Supreme Court referred to several precedents, including Modi Cements Ltd. Vs. Kuchil Kumar Nandi, where it was held that instructions to stop payment or return of cheques with endorsements like "account closed" would attract Section 138. The Court reaffirmed that the purpose of Section 138 is to promote the efficacy of banking operations and maintain the credibility of cheques in commercial transactions. The Court stated, "It would certainly be an offence under Section 138 as there was insufficient or no fund to honour the cheque in that account."

Conclusion:

The Supreme Court dismissed the appeal, holding that the return of a cheque with the endorsement "account closed" falls within the scope of Section 138 of the Negotiable Instruments Act, 1881. The Court emphasized the legislative intent to ensure the credibility of cheques and prevent dishonest practices in commercial transactions. The interpretation of Section 138 should be consistent with its purpose to suppress mischief and advance the remedy. The appeal was dismissed with no order as to costs.

← Previous Next →