THE SADANANDAN PRECEDENT AND RESTRICTIVE INTERPRETATION

Summary: The judicial interpretation of Section 138 of the Negotiable Instruments Act has evolved significantly. Initially, the 1999 Sadanandan Bhadran v. Madhavan Sunil Kumar¹ ruling restricted prosecution to the first dishonour of a cheque, creating a loophole for repeated dishonours. Over time, courts, including the Supreme Court, expressed unease with this approach. The three-judge bench in MSR Leathers v. S. Palaniappan⁵ overruled the Sadanandan precedent, affirming that each dishonour constitutes a new offence with a fresh cause of action. This decision restored the original purpose of Section 138, ensuring effective enforcement and confidence in banking transactions.

The judicial ruling in Sadanandan Bhadran v. Madhavan Sunil Kumar¹ was a turning point in the interpretation of Section 138 of the Negotiable Instruments Act, 1881. The two-judge bench, in an attempt to reconcile the seemingly contradictory provisions of Sections 138 and 142(b), took a restrictive approach that would later throw a taxing shadow over the enforcement of cheque dishonour provisions. The Court in Sadanandan, confronted with the issue of whether second or successive dishonour of cheques could be a ground for prosecution. The ratio of this ruling was based on three main grounds. First, the court noted that the term ‘cause of action’ in Section 142(b) of the Act had been employed restrictively and must thus be held to mean that cause of action under Section 142(b) can come into existence only once. Secondly, the court held that dishonour of a cheque would constitute one offence only and once the drawer is unable to make payment of the cheque amount within fifteen days from the receipt of notice, no sooner the drawer is unable to make payment, the prosecution would be initiated, resulting in ‘absolution’ of the drawer from the offence that he has committed. Third, and most importantly, the court ruled that successive causes of action would be against the spirit of Section 142(b) and make the said provision useless. The ruling in Sadanandan substantially changed the landscape of law on cheque dishonour by instituting an artificial bar to prosecution on the basis of future presentations of the same cheque. The interpretation by the court amounted to a position whereby, once a cheque had been dishonoured and statutory notice given, the right of the payee to prosecute was limited to that single occasion of dishonour, as opposed to the cheque being presented again and dishonoured anew. This interpretation, while seemingly geared towards avoiding harassment of drawers by successive prosecutions, in effect created a legal anomaly. It gave immunity to drawers who, having performed successive acts of dishonour, might avoid prosecution simply because they had once been served notice. The operative effect was to instigate dilatory practices and defeat the very purpose of Section 138, which was to ensure confidence in the effectiveness of banking operations and increase the acceptability of cheques in business transactions.

I. JUDICIAL DOUBTS AND THE QUESTION OF CORRECTNESS
In the post-Sadanandan years, some judgments started to voice doubts about the correctness of the ratio enunciated therein. The restrictive approach followed in Sadanandan started coming to be seen with growing scepticism by courts all over the country, as it seemed to go against the very object for which Section 138 was passed. The Hon’ble Supreme Court itself, in later rulings, started moving away from the Sadanandan ratio. In judgments like SIL Import, USA v. Exim Aides Silk Exporters², Uniplas India Ltd. v. State (Govt. of NCT of Delhi)³, Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd.⁴, and a few more, the Court adhered to the Sadanandan precedent without adding anything to or unsettling the reasoning behind it, but there was a clear-seen aura of judicial unease with its consequences. The courts came to accept that the interpretation of Sadanandan provided an unintended safe harbour for fraudulent drawers. Where a cheque was deposited several times within the specified time period and dishonoured each time, the limiting interpretation resulted in only the first dishonour being able to serve as the basis for prosecution, although each later dishonour was a new criminal offence. This construction was especially troubling in commercial cases where cheques were routinely re-presented as a banking practice, and where drawers could take advantage of this statutory gap to escape criminal liability. Further, the Sadanandan interpretation was contrary to the basic tenet that every criminal offense must be met with commensurate consequences. The idea that a drawer could gain ‘absolution’ simply by the fact of having once been prosecuted regardless of his future conduct was contrary to established criminal jurisprudence principles. The increasing judicial discomfort with Sadanandan mirrored a wider acceptance that the judgment, as well meaning, had raised more issues than it settled. Courts started to recognize that restrictive interpretation was hindering the effective enforcement of Section 138 and the legislative intent of the provision.

II. REFERENCE TO A LARGER BENCH AND JUDICIAL RECONSIDERATION
Seeing the necessity of authoritative interpretation on this contentious point, the Hon’ble Supreme Court referred the case to a larger bench for reconsideration. The reference was necessary because of the growing criticism of the Sadanandan ratio and an appreciation that the interpretation followed therein was frustrating the very purpose of the Negotiable Instruments Act. The bench that referred accepted that while Sadanandan had always been adhered to in later rulings, there had not been any meaningful addition to the rationale that justified the conclusion arrived at in that case. The court added that a perusal of the subsequent rulings demonstrated that they had only followed Sadanandan without independently questioning the validity of its reasoning. The invocation of the larger bench was motivated by a number of considerations. Firstly, there was a necessity to review whether the interpretation in Sadanandan was in accordance with the object and purpose of Section 138. Secondly, one had to review whether the restrictive interpretation was justified by the wording of the legislation. Thirdly, the court had to consider whether the Sadanandan ratio operated with unforeseen consequences that harmed enforcement of cheque dishonour provisions. The larger bench was particularly asked to consider whether the payee or the holder of a cheque could move for prosecution for an offence under Section 138 for dishonour of the cheque for a second time, in case he had not pursued any action on the previous cause of action. Such a framing of the question itself indicated that the Court was willing to re-examine the very basic assumptions that went behind the Sadanandan decision.

III. THE THREE-JUDGE BENCH RULING IN MSR LEATHERS
The three-judge bench in MSR Leathers v. S. Palaniappan⁵, on due consideration of the questions at hand, authoritatively overruled the Sadanandan precedent. The reasoning of the Court was both exhaustive and convincing, dealing with every one of the grounds invoked in Sadanandan and showing their intrinsic fallacies. The Court started with stressing the value of purposive construction in construction of statutes. Referring to well-established precedents such as New India Sugar Mills Ltd. v. CST⁶ and Nathi Devi v. Radha Devi Gupta⁷, the bench reiterated that where a statutory provision is amenable of two meanings, preference must be given to that interpretation which advances the object and purpose of the Act. The Court noted that the purposive construction doctrine was to be followed wherever there is uncertainty in language or where the latter is susceptible to two constructions. Applying this rule to Section 138, the Court held that the restrictive approach taken in Sadanandan thwarted the very purpose sought to be attained by legislation. The Court observed that Section 138 was enacted to encourage and instil confidence in the efficacy of banking transactions, lending sanctity to negotiable instruments in business transactions and instilling an environment of trust and reliance by discouraging individuals from dishonouring their promises. The provision aimed at increasing the acceptability of cheques in discharge of liabilities by holding the drawer responsible for fines in the event the cheque is dishonoured. The bench held that prosecution for second or successive dishonour of cheques was valid if the same met the conditions laid down in Section 138. The Court further observed that there was no qualitative or real distinction between a case where default was made and prosecution was initiated forthwith and another where prosecution was postponed until the cheque drawn subsequently was dishonoured for the second or successive time. In arriving at this determination, the Court examined all of the grounds used in Sadanandan. Under the issue of ‘cause of action,’ the Court explained that the term, as employed under Section 142(b), could not possibly be interpreted to be confined to any one requirement among the three requirements that were prerequisite for initiating prosecution on account of a dishonoured cheque. The Court held that each time a cheque was presented in the form prescribed under Section 138 accompanied by a notice and non-payment, a new cause of action arose in favour of the cheque holder to file proceedings for prosecution of the drawer. It also dismissed the idea of ‘absolution,’ noting that this was a theological term and had no place in criminal jurisprudence. The Court explained that the term ‘absolution’ had been utilised in certain court pronouncements, but the same could not be identified as a juristic term in criminal law. Most importantly, the Court held that the Sadanandan construction would render Section 142(b)’s invalidity period otiose. If not for successive causes of action, a payee who missed the limitation period of one month and lost the right to prosecute could avoid the limitation by presenting a complaint on the basis of a new presentation of the cheque and its dishonour thereafter.

IV. THE CURRENT POSITION
The MSR Leathers ruling thereby provided much-needed clarity to the law of cheque dishonour. By reversing Sadanandan, the Court eliminated an artificial roadblock to the enforcement of Section 138 and brought the provision back to what it was originally meant for. The ruling acknowledged that every dishonour of a cheque by way of proper notice and non-payment amounted to a separate offence which could independently serve as the basis for prosecution. The three-judge bench’s method was marked by a judicious balance between avoiding harassment of drawers and making enforcement of cheque dishonour provisions effective. The Court recognized that even as the law must not promote frivolous or vexatious prosecutions, it must also not place artificial hurdles which would subvert the legislative purpose of Section 138. Finally, the transition. from Sadanandan to MSR Leathers is an important development in the jurisprudence of negotiable instruments. The decision by. the three-judge bench brought the law back to its rightful place and made. it possible for the provisions of Section 138 to be enforced according to. their real purpose and intent.

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References:
¹ Sadanandan Bhadran v. Madhavan Sunil Kumar (1998) 6 SCC 514
² SIL Import, USA v. Exim Aides Silk Exporters 1999 4 SCC 567
³ Uniplas India Ltd. v. State (Govt. of NCT of Delhi) 2002 62 DRJ 669
⁴ Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd. 2001 6 SCC 463
⁵ MSR Leathers v. S. Palaniappan (2013) 1 SCC 177
⁶ New India Sugar Mills Ltd. v. CST AIR 1963 SC 1207
⁷ Nathi Devi v. Radha Devi Gupta (2005) 2 SCC 271 at p. 277, para 17