Second or successive statutory notice can also form basis of proceedings under S138 Supreme Court overturns Sadanandan Bhadran

On September 26, 2012 a Bench of Justices RM Lodha, TS Thakur and Anil Dave pronounced its judgment in MSR Leathers v S. Palaniappan & Anr, marking a crucial change in the jurisprudence of proceedings under Section 138 of the Negotiable Instruments Act, 1881 (the Act). The judgment also overturns the Court’s earlier decision in Sadanandan Bhadran v. Madhavan Sunil Kumara [(1998) 6 SCC 514]..As per the judgment in MSR Leathers, a payee or holder of a cheque can now issue a statutory notice to the drawer each time the cheque is dishonoured and institute proceedings on the basis of a second or successive statutory notice as well..In Sadanandan, the Supreme Court had to consider whether a holder of a cheque can initiate proceedings under Section 138 of the Act for the second time if he has not initiated any action on an earlier cause of action? Answering in the negative, the Court went on to hold that , “[A] combined reading of Sections 138 and 142 of the Act left no room for doubt that cause of action under Section 142(b) can arise only once.”.As discussed in MSR Leathers, the Apex Court in Sadanandan’s case held that:.“While a second or successive presentation of the cheque is legally permissible so long as such presentation is within the period of six months or the validity of the cheque whichever is earlier, the second or subsequent dishonour of the cheque would not entitle the holder/payee to issue a statutory notice to the drawer nor would it entitle him to institute legal proceedings against the drawer in the event he fails to arrange the payment.”.The correctness of this decision was first questioned by a Bench of Justices Markandey Katju and B.Sudershan Reddy, which subsequently referred the matter to a larger Bench for reconsideration. It is this judgment that was pronounced in MSR Leathers..After analyzing the concerned provisions of law as well as the reasons adopted by the Court in Sadananda, the Bench went on to hold that:.“[A] prosecution based on a second or successive default in payment of the cheque amount should not be impermissible simply because no prosecution based on the first default which was followed by a statutory notice and a failure to pay had not been launched. If the entire purpose underlying Section 138 of the Negotiable Instruments Act is to compel the drawers to honour their commitments made in the course of their business or other affairs, there is no reason why a person who has issued a cheque which is dishonoured and who fails to make payment despite statutory notice served upon him should be immune to prosecution simply because the holder of the cheque has not rushed to the court with a complaint based on such default or simply because the drawer has made the holder defer prosecution promising to make arrangements for funds or for any other similar reason. There is in our opinion no real or qualitative difference between a case where default is committed and prosecution immediately launched and another where the prosecution is deferred till the cheque presented again gets dishonoured for the second or successive time”. .Explains Krishnayan Sen, Partner at Verus, “Earlier, the drawer of the cheque would often contend, at trial, that they did not have knowledge of the dishonour until receipt of the statutory notice – and would seek some indulgence to make payment. This resulted in the Courts being flooded with Section 138 proceedings which would eventually be settled.” In fact, due to the earlier interpretation of Section 138, “the payee / holder was compelled to initiate proceedings once the statutory notice was issued and payment was not realized”, irrespective of the relationship shared by the parties, says Krishnayan..However, by the time a settlement had been reached says Krishnayan, “the payee / holder would have expended substantial amounts towards court fees and lawyers charges.”.Looking ahead, Krishnayan observes that “The ruling is significant as the payee / holder would now be at liberty to pursue payment even after the issuance of the statutory notice – without the obligation to necessarily rush to Court. Permitting issuance of multiple notices would not only preclude such frivolous arguments (of want of knowledge) but would assist in deciding whether the matter was one of ‘inability to pay’ or a downright ‘refusal to make payment’.”