MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177

Section 138 of the Negotiable Instrument Act, 1881 (“Act”) encapsulates the situation of dishonour of a cheque due to insufficiency of funds in the drawer’s account. Subsequent to the dishonour, Section 138 enjoins, that the payee must give a notice to the drawer, in writing, demanding payment of money. More often than not, however, the drawer assures the payee that he shall make arrangements for sufficient funds, very soon. The payee, for whom encashment is by far more important than the prosecution of the drawer, naturally avoids initiating any proceedings under the Act. The cheque, nonetheless, is never honoured (when presented to the bank). The payee again issues notices – but to no avail.

In Sadanandan Bhadran v. Madhavan Sunil Kumar [(1998) 6 SCC 514] (“Sadanandan”) it was held that, “Clause (a) of the proviso to Section 138 does not put any embargo upon the payee to successively present a dishonoured cheque during the period of its validity.” This proposition of law, notably, has been unanimously accepted in a plethora of cases and stands unquestioned. Sadanandan indeed recognized too that it is not “uncommon for a cheque being returned due to insufficient funds or similar such reasons and being presented again by the payee after sometime, on his own volition or at the request of the drawer, in expectation that it would be encashed.

However, even though ‘successive presentation of a dishonoured cheque’ is permitted, Sadanandan raised the important question: “whether dishonour of the cheque on each occasion of its presentation gives rise to a fresh cause of action within the meaning of Section 142(b) of the Act”. It was answered that, “Clause (b) of Section 142 refers to only one fact which will give rise to the cause of action and that is failure to make the payment within 15 days from the date of the receipt of the said notice… Consequent upon the failure of the drawer to pay the money within the period of 15 days as envisaged under Clause (c) of the proviso to Section 138, the liability of the drawer for being prosecuted for the offence he has committed arises, and the period of one month for filing complaint under Section 142 is to be reckoned accordinglyThe combined reading of the above two sections of the Act leaves no room for doubt that cause of action within the meaning of Section 142(b) arises – and can arise – only once.

The implication of the answer has been further explained in Sadanandan. It has been observed that, “for dishonour of one cheque there can only be one offence and such offence is committed by the drawer immediately on his failure to make the payment within fifteen days of the receipt of the said notice served in accordance with clause (b) of the proviso to Section 138. That necessarily means that for similar failure after service of fresh notice on subsequent dishonour the drawer cannot be liable for any offence.” Otherwise, very importantly, “a payee who failed to file his complaint within one month and thereby forfeited his right to prosecute the drawer,” can circumvent the limitation imposed in Section 142,“by filing a complaint on the basis of a fresh presentation of the cheque and its dishonour”. It was thus suggested that if at all the payee had to give the drawer some more time, post the dishonour of the cheque, to arrange for sufficient funds – the payee should avoid issuing a notice under Clause (b) of Section 138 of the Act. But if he does issue a notice and the drawer fails to pay the money within the statutorily mandated time of 15 days  – the cause of action immediately arises. The payee then has to launch his proceedings, against the drawer, within the stipulated one month. If the payee fails to do so – and instead bides time (well beyond a month) and issues a fresh notice, to the drawer, on a subsequent dishonour – no fresh cause of action would arise and no proceedings would lie against the drawer of the dishonoured cheque.

Sadanandan has been subsequently followed in many a Supreme Court decision. MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177 (“MSR Leathers”) has now effectively overruled Sadanandan, though. It has been held that, “Every time a cheque is presented in the manner and within the time stipulated under the proviso to Section 138 followed by a notice within the meaning of clause (b) of proviso to Section 138 and the drawer fails to make the payment of the amount within the stipulated period of 15 days after the date of receipt of such notice, a cause of action accrues to the holder of the cheque to institute proceedings for prosecution of the drawer.” However, there is no obligation on the payee/holder to necessarily file a complaint when he has acquired the indefeasible right to do so. “A decision to defer prosecution may be impelled by several considerations but more importantly it may be induced by an assurance which the drawer extends to the holder of the cheque that given some time the payment covered by the cheques would be arranged, in the process rendering a time consuming and generally expensive legal recourse unnecessary. It is true that a dishonour of the cheque can be made a basis for prosecution of the offender but once, but that is far from saying that the holder of the cheque does not have the discretion to choose out of several such defaults, one default, on which to launch such a prosecution... So long as the cheque remains unpaid, it is the continuing obligation of the drawer to make good the same [by either arranging for funds in the account on which the cheque is drawn or liquidating the liability otherwise]… The omission or the failure of the holder to institute prosecution does not, therefore, give any immunity to the drawer so long as the cheque is dishonoured within its validity period and the conditions precedent for prosecution in terms of the proviso to Section 138 are satisfied.”

In contrast to Sadanandan, in MSR it has been considered, therefore, that if at all the payee has to give the drawer some more time, post the dishonour of the cheque, to arrange for sufficient funds – the payee NEED NOT avoid issuing a notice under Clause (b) of Section 138 of the Act. If he does issue a notice and the drawer fails to pay the money within the statutorily mandated time of 15 days – the cause of action OF COURSE arises. But then the payee, NEED NOT, launch proceedings, based on this first default. If the payee bides time (well beyond a month), for reasons of having received an assurance etc., and issues a fresh notice, to the drawer, on a subsequent dishonour – A FRESH CAUSE OF ACTION would arise and proceedings would lie against the drawer of the dishonoured cheque, if the payee chooses to initiate it.

Of course, during Sadanandan, the proviso to Section 142 (b) of the Act was not added yet. It was added by Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002. The proviso, reads “the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.” If the proviso were to be there in the year 1998, Sadanandan would have been decided differently. The Hon’ble Judges would not have laid so much importance to the limitation prescribed in Section 142(b) of the Act.

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