Under Section 138 of the Negotiable Instruments Act, 1981 (“NI Act”), if a cheque issued towards payment of a debt or a liability is dishonoured due to lack of funds, then such dishonour will attract punishment including imprisonment extending for a term of two years. Section 138 was introduced under Chapter XVII of the NI Act in 1988 with a view to encourage the culture of using cheques and enhancing the credibility of the instrument.

The Supreme Court of India (“Supreme Court/Apex Court”) had, in its recent decision in Dashrath Rupsingh Rathod v. State of Maharashtra & Anr.1, held that in cases of dishonour of cheque, only those courts within whose territorial limits the drawee bank is situated shall have jurisdiction to try the case. Indisputably, the Apex Court’s judgment had significant and far-reaching consequences. Interestingly, the Supreme Court was not unmindful to the difficulties which banks, financial institutions and NBFCs will face in S.138 proceedings post the judgement, and noted:

“We are quite alive to the magnitude of the impact that the present decision shall have to possibly lakhs of cases pending in various Courts spanning across the country. One approach could be to declare that this judgment will have only prospective pertinence, i.e. applicability to Complaints that may be filed after this pronouncement. However, keeping in perspective the hardship that this will continue to bear on alleged accused/respondents who may have to travel long distances in conducting their defence, and also mindful of the legal implications of proceedings being permitted to continue in a Court devoid of jurisdiction, this recourse in entirety does not commend itself to us.”

Upon substantial consideration the Supreme Court permitted only those cases where, post the summoning and appearance of the alleged accused, the recording of evidence has commenced as envisaged,to continue at the place where such cases were first initiated. Accordingly, all other category of cases/complaints were to be returned for filing in the Court having proper jurisdiction as per the exposition of law in the Supreme Court ruling in Dashrath Rupsingh Rathod(Supra) – i.e the Court where the drawee bank is located.

The Supreme Court’s decision had far reaching impact on the S.138 recovery strategy of banks, financial institutions and NBFCs. The key concern areas included additional delays, inconvenience and hardship on account of:

  lack of efficient State level judicial machinery for dealing with  S.138 cases (it may be noted that in some States, judges are yet to be appointed for hearing
     S.138 matters)

  significant loss of time due to return of complaints  for filing in the proper court, and additional travel by complainant to progress the compliant in a different court

  considerably increase in litigation cost due to complaints being filed afresh, appointment of new counsels and representatives at local level to monitor the complaints

Various stakeholders wrote to the Ministry of Finance and the Ministry of Law and Justice, highlighting the difficulties faced post the Supreme Court judgement, and requesting intervention by either filing a review petition before the Apex Court for reconsideration of the issue, or by amending the statutory provisions contained in the NI Act.

Interestingly, within a month of the Supreme Court’s decision in Dashrath Rupsingh Rathod(Supra), the Bombay High Courtin Ramanbhai Mathurbhai Patel v. State of Maharashtra held that in case of “at par” cheques (i.e cheques payable at “all” branches of the drawee bank) the Court,within whose jurisdiction the bank’s branch that dishonours the cheque is located, will have territorial jurisdiction.

The Bombay High Court’s decision substantially diluted the Supreme Court’s judgement in Dashrath Rupsingh Rathod(Supra), since “at par” cheques can be presented at any branch of the bank on which it has been drawn and can be cleared by that branch without sending them back to the local branch where the drawer of the cheque has his account. The euphoria created by the Bombay High Court decision was however short lived, as it was soon challenged before the Supreme Court vide a Special Leave Petition.

In a promising turn of events, on March 20th, 2015 the Special Leave Petition filed before the Supreme Court has been “dismissed as withdrawn”.Accordingly, as regards multi-city “at par”cheques, as on date the Bombay High Court judgement will prevail and the Courts within whose jurisdiction the cheque has been presented and dishonoured will continue to have  territorial jurisdiction.

The question therefore arises whether the controversy has been finally settled? Arguably not!
While as on date the Bombay High Court judgement in Ramanbhai Mathurbhai Patel (Supra) will be the authority on territorial jurisdiction for dishonour of “at par” cheques, it is to be noted that the Special Leave Petition challenging the Bombay High Court judgement has been withdrawn by the petitioner without detailed arguments. Theoretically therefore, there continues to exist the legal possibility of a further challenge to the Bombay High Court judgement in Ramanbhai Mathurbhai Patel.

This matter therefore continues to be an area to be tracked, although for now withdrawal of the Special Leave Petition challenging the Bombay High Court judgement is a welcome development.

 

Damini Marwah

Damini Marwah is the General Counsel and Legal Head for IL&FS Financial Services (IFIN), based in Mumbai.
She supports IFIN and its subsidiaries for all legal matters, including structured & corporate finance, syndications, corporate advisory, private equity, funds and litigation.




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