Maintainability of Complaints under Section 138 of NI ACT in Case of Account Freeze

Introduction

In the recent judgment, Jammu & Kashmir and Ladakh High Court held that a complaint under Section 138 of the Negotiable Instrument Act (NI Act) is maintainable even if cheque is dishonored with a reason “Account Frozen”. This is a significant enlargement in Section 138 to prevent people from escaping their liability by freezing accounts. The decision is based upon the established previous developments of the Supreme Court that has expanded the usage of Section 138 beyond a lack of money and arrangements being made. 

Background of the Case 

This is so following from the judgment given in the case where the petitioner brought a complaint under Section 138 of the NI Act as the cheque issued by the respondent was dishonoured with the reason ‘Account Frozen'. The cheque was to be tendered to the petitioner to clear a liability. The petitioner urged the court with the foregoing allegation, that the respondent froze the account with the intent of avoiding to pay knowing well that the account has insufficient funds. In response, the respondent asserted that the freezing of the account was not something that he could have prevented since it was an investigation carried out by external agents. 

Firstly, the lower court granted a process under Section 138 of the Indian Penal Code in order to continue the hearing of the case. Despite this, the respondent appealed the above decision to the revisional court which set aside the trial court orders and dismissed the complaint. Being dissatisfied with this, the petitioner filed an application before the Jammu & Kashmir and Ladakh High Court to reopen the petitioner’s trial court order. 

Understanding  Section 138 of Negotiable Instruments Act 

In general, a legal remedy is provided under Section 138 of the Negotiable Instruments Act when a cheque is returned due to insufficiency of funds or otherwise in case, the amount of the cheque is more than what has been arranged by the drawer with the bank returning the cheque. This section is aimed at eliminating any doubt on the authenticity of cheque payments in business transactions by making the drawer liable for criminal prosecution whenever he fails to honor the cheque to discharge a legally enforceable liability. 

To initiate a complaint under Section 138, the following conditions must be met :

• The cheque must have been issued in relation to a legally enforceable obligation or claim. 

• The cheque is negotiated within the validity period – up to three months. 

• A cheque may be dishonoured for such reasons as lack of sufficient funds or going beyond the agreed arrangement with the bank. 

• The payee is also required to give a notice of demand within thirty days of being informed of the dishonour. 

• Where the drawer has not made the payment within 15 days after the notice, then a complaint may be lodged within one month of the notice. 
  
  

Cases Where Section 138 of NI Act does not Apply 

Section 138 specifically notes that the dishonour is because of insufficient funds or exceeding the amounts agreed upon; however, through progressive judgements the meaning of the section has broadened. The following have also been considered by the courts as falling under Section 138: 

• Account Closure: If the account is closed after the cheque is issued, it can be said that the drawer has intentionally dishonoured it in order not to make the payment and hence the liability under Section 138 can be determined. 

• Payment Stopped by Drawer: When a drawer issues a cheque to the payee and later informs the bank not to honour the cheque, such action taken in the knowledge that a liability exists, attracts prosecution under Section 138. 

• Signature Mismatch: In case where the cheque has been dishonoured because of lack of conformity in the signature of the drawer, then this also comes under the purview of reason for action under Section 138. 

• Image Not Found: The situations where the cheque is bounced back due to the inability of the image processing tool to identify the image of the cheque also come under Section 138 if all other requisites are present. 

These judicial interpretations make sure that fraudulent conduct intended for evasion of payment responsibilities are sanctioned under the NI Act. 

The Present Case

In the present case, the dishonour of the cheque occurred with the bank stating that the respondent’s account was ‘frozen’. According to the petitioner, the respondent had full knowledge of the fact that the account was frozen when he issued the cheque with a view of fraudulent evasion of payment. The respondent however noted that the account was frozen by investigative agencies, and that the situation could not be controlled. 

Basically, the trial court opened the case for trial by granting a process in terms of Section 138. However, the revisional court has set aside the order passed by the trial court and dismissed the complaint and the above petitioner has filed an appeal before this court of Jammu & Kashmir and Ladakh High Court. 

Facts of the Case 

• Cheque Issuance: The cheque was issued by the respondent to the petitioner in order to clear a claim owed by the latter to the former. 

• Dishonour Due to Frozen Account: The cheque was bounced back with the remark in the bank as ‘Account Frozen’. 

• Petitioner’s Allegation: The petitioner accused the respondent of having frozen the account in an attempt to avoid any payment which is a wrongful loss to the petitioner. 

• Respondent’s Defense: The respondent defended that the account was frozen because of actions taken by the investigative agencies and that he cannot do anything about it. 
  
  

Issues 

The legal position in question was as to whether a complaint under section 138 of the NI Act can be filed when the reason for bounce of cheque was ‘Account Frozen’. 

Findings 

When passing the judgment, Justice Rajnesh Oswal drew the attention to Section 138 of the NI Act, pointing out that the dishonour of a cheque due to a frozen account does not free the drawer of the cheque. The expression “amount of money…is insufficient” being a clear term under Section 138, as said by Justice Oswal to include many occurrences of dishonor such as account being closed, payment stopped or the account being frozen.

The court also pointed out that over the years the case laws have extended the purview of Section 138 even beyond the reasons stated in the statute. The dishonour of a cheque due to account closure or payment being stopped also falls under the first scenario of lack of sufficient funds and the same applies to instances where the account is frozen. 

Judgment 

Jammu & Kashmir and Ladakh High Court thus upheld the order of trial court and it was held that even in case of dishonour of cheque due to frozen account complaint under Section 138 of NI Act is maintainable. Hence, the case was sent back to the trial court for the continuation of the process. 

The High Court has relied on the Supreme Court judgment in Laxmi Dyechem v. State of Gujarat which stated that the phrase ‘no sufficient fund’ is a general term and reasons such as account closed, payment stopped, account frozen are specific examples of why there might be insufficient funds.. The Court has also upheld that once a magistrate has taken cognizance and issued proceedings, the proceedings cannot be quashed at the instance of the accused as there is no provision in the Code of Criminal Procedure (CrPC) that empowers the magistrate to recall the order. 

Critical Analysis 

The legal proposition arising out of the judgment of J&K High Court is important because the court has held that the drawer cannot avoid the liability arising under Section 138 by freezing the account, whether it is done deliberately or otherwse. This ruling safeguards the cheques transaction and guarantees that the people or companies, which deal with cheque payments, will not turn into a weakened party when encountering unfair actions. The courts’ reference to the Laxmi Dyechem case strengthens the fact that there has also been a shift in the judicial perspective of Section 138, which now encompasses more cheque dishonor scenarios. 

It also reassures the payee Interest’s rights under the NI Act and acts as a deterrence to anyone who would wish to fraudulently use the banking system to evade the legal obligation of honoring a cheque. 

Conclusion

The judgment of the Jammu & Kashmir and Ladakh High Court in the case of Sheikh Owais Tariq vs. Satvir Singh enriches the understanding of Section 138 of the NI Act in an additional manner. It maintains that a frozen account does not relieve the drawer of the responsibility for dishonouring a cheque to make sure that the aims of the NI Act, which is to encourage the utilization of cheques, are met. Hence the High Court order of sending back the case to the trial court means that the matter is now going to be heard and dealt with in accordance with the legal procedures thus affording relief to the petitioner. 
It is advisable to consult a lawyer in the cases of dishonor of cheques. A well versed lawyer can help you and address your issues regarding the same.

FAQs 

Can a cheque bounce and this be due to a frozen account and lead to a complaint under Section 138 of the NI Act? 

Yes, in fact, it has been clearly explained by the J&K High Court that the dishonour of cheque due to a frozen account could also lead to a complaint under Section 138. 

What are likely causes defined under Section 138, that a cheque will be dishonoured? 

Some of them are; inadequate funds, accounts have been closed, arrangements with the bank have been surpassed, payment has been stopped, and finally, frozen accounts. 

Is it possible for the drawer to use the defense of ignorance if the account is frozen by investigating bodies? 

The drawer may come up with excuses such as the account was frozen due to other factors which puts them in a position where they cannot be held legally liable for failure to meet the Section 138 standards as provided by the case laws. 

Is it possible for a Magistrate to recall the order once the process has been issued under Section 138? 

Once the magistrate has taken cognizance of the case and issued the process, it cannot be withdrawn at the instance of the accused. 

What is the position of the payee if a cheque is bounced? 

After the payee has given the drawer a demand notice, the payee can proceed to the court and lay a complaint under Section 138 of the NI Act.