Case Analysis;
Central Bank of India and Anr. vs. Saxons Farms and Ors.
Citations: 1999 AIR SCW 3621 | (1999) 8 SCC 221 | 1999 CRI. L. J. 4571 | AIR 1999 SC 3607
Court: Supreme Court of India
Bench: Hon’ble Mr. Justice G.T. Nanavati & Hon’ble Mr. Justice S.N. Phukan (Judgment delivered by Phukan, J.)
Date of Judgment: October 7, 1999
Facts;
Loan & Cheque Issuance: Respondent No. 1 (a partnership firm, "Saxons Farms") had taken a loan more than one crore rupees from the appellant, Central Bank of India. For the partial repayment of the loan, the respondents had issued three cheques to the bank dated 29th March, 1994, of Rs. 1 lakh, Rs.2 lakhs and Rs. 39,50,000.
First Presentation & Return: The cheques were presented to the bank by the appellant for collection but bounced on 25th April, 1994 and 19th June, 1994 with the endorsement "funds insufficient".
Issuance of Notices: The appellant bank sent two registered legal notices through its advocate dated 2nd May, 1994 and 27th June, 1994 containing the following text:
"The bouncing of the two cheques is a most serious matter. The said act of issuance of cheques knowing fully well that the same shall not be paid statutes an offence under Section 138 of the Negotiable Instruments Act. As per the provisions of this act my client through this notice informs you that my client shall represent the two cheques again and if the same are returned unpaid, my client shall report the matter to the Police for initiating appropriate criminal action against you all. My client further reserves the right to file criminal case against all of you for the non-payment of the cheques in question and details given above. Kindly arrange to make the payment of the cheques if you intend to avoid the unpleasant action of my client."
Re-presentation & Subsequent Refusal: The cheques were presented again to the bank but bounced for the second time with the same remark, "funds insufficient".
Trial Court Proceedings: The appellant-bank filed two criminal complaints under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) before the Judicial Magistrate, First Class, Gwalior, who took cognizance of the matter.
High Court Order: The respondents approached the High Court of Madhya Pradesh (Gwalior Bench) under Section 482 Cr.P.C. via Misc. Crl. Case Nos. 636 and 637 of 1997. The High Court quashed the criminal proceedings (Case Nos. 172 & 1156 of 1995) on the only ground that the notices served by the bank did not constitute proper demand notices to the drawer(s) as required under Section 138 of the NI Act. The appellant-bank appealed this decision to the Supreme Court.
Issue Involved;
Whether the notices sent by the appellant-bank constituted valid notices to the drawer(s) demanding the payment of the amounts due as specified under Clause (b) of the proviso to Section 138 of the Negotiable Instruments Act, 1881.
Arguments of Both Parties;
Appellants (Central Bank of India & Anr.):
The notices were given in writing, within 15 days of receiving information from the bank about the unsuccessful presentation of the cheques.
The line in the notice that read "Kindly arrange to make the payment of the cheques if you intend to avoid the unpleasant action of my client" clearly, unequivocally constitutes a valid demand for the payment of the amounts due as specified under Clause (b) of the proviso to Section 138.
Respondents (Saxons Farms & Ors.):
Lack of Demand: The High Court rightly concluded that the intention of the notice given by the bank was merely to inform the drawer(s) that the cheques were being presented again, and that payment should be arranged upon presenting the cheques again, rather than constituting a demand for the payment of the amounts due.
Intention for Police Investigation: The notice mentioned reporting the matter to the police for criminal action if the cheques bounced again. This indicated that the bank intended to initiate police investigation rather than filing a statutory complaint under Section 138 of the NI Act.
Court Analysis;
Requirements under Section 138 Proviso (b):
Whereas the Supreme Court reiterated that no particular or specific form, pattern or template of notice is prescribed under Clause (b) of the proviso to Section 138, the basic legal requirements are:
Such notice should be in writing.
Should be issued within 15 days of receiving information from the bank about the return of the cheque as unpaid.
Should contain a demand for the payment of the cheque amount.
Purpose of the Notice:
The object of the notice is to inform the drawer(s) and provide them an opportunity to rectify the omission (dishonour of the cheque) and protect the honest drawers from getting immediately embroiled in criminal liability. Service of a proper and valid demand notice thus becomes a mandatory condition precedent for initiating a prosecution under Section 138.
Assessment of the Demand Clause:
The Supreme Court held that the High Court had erred in overlooking the critical concluding line of the notice: "Kindly arrange to make the payment of the cheques if you intend to avoid the unpleasant action of my client."
The Court observed that the line constituted a direct and clear demand for the payment of the amounts due as specified by virtue of Section 138 Proviso (b).
Re-presentation Rights:
The Court affirmed that the payee has the legal right to present a cheque any number of times within its period of validity. Re-presentation of the cheque while at the same time issuing the notice did not invalidate the demand for the payment.
Reference to Police Complaint:
Addressing the argument of the respondent's regarding the threat to report to the police, the Court observed that as per Section 142 of the NI Act, cognizance of an offence under Section 138 can only be taken upon a written complaint made by the payee (not via a police report).
However, dishonour of a cheque may also expose the drawer(s) to offenses under the Indian Penal Code (IPC), which are cognizable and investigate-able by the police. Mention by the bank of the police reporting meant that it kept its options open for IPC proceedings alongside remedies under the NI Act.
Conclusion;
Held: The notices issued by the Central Bank of India were valid and proper demand notices fulfilling all the requirements of Clause (b) of the proviso to Section 138 of the Negotiable Instruments Act, 1881.
Order: Both appeals were allowed. The judgment and order of the High Court of Madhya Pradesh quashing the criminal proceedings were set aside. The trial court ( Judicial Magistrate, First Class, Gwalior) was directed to proceed with the trial in both complaint petitions in accordance with the law.