Section 138 of Negotiabl Instrument Act

Section 138 of Negotiable Instrument Act

Demystifying Section 138 of the Negotiable Instruments Act: The Law on Dishonoured Cheques**

In the intricate web of commercial and personal transactions in India, the cheque remains a cornerstone instrument of payment. It embodies a promise—a promise that the issuer has sufficient funds in their account to honour the commitment written on that small piece of paper. But what happens when that promise is broken? When a cheque, presented in good faith, is returned by the bank, stamped with the dreaded words "Insufficient Funds" or "Account Closed"?

This is where Section 138 of the Negotiable Instruments Act, 1881 steps in as a powerful legal shield for the payee. Enacted to infuse credibility and trust into the banking system, this section criminalizes the act of issuing a dishonoured cheque, transforming a civil liability for debt into a criminal offence. For any business owner, professional, or individual who deals with cheques, a thorough understanding of Section 138 is not just beneficial—it is essential.

This blog post will serve as a detailed guide, dissecting the provision, its essential ingredients, the step-by-step procedure for filing a complaint, and the landmark case laws that have shaped its interpretation over the years.

The Text and The Intent: What Does Section 138 Say?

Let's begin with the actual text of the section. Section 138 reads:

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

In simpler terms, if you issue a cheque to discharge a debt or liability, and it bounces due to insufficient funds, you can be sent to jail for up to two years and/or be fined up to double the cheque amount.

The Supreme Court, in the landmark case of  Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd. (2001), eloquently explained the objective of this provision. The Court stated that Section 138 was incorporated to promote the efficacy of banking operations and to ensure credibility in business transactions. The legislature intended to prevent the malady of dishonoured cheques by providing a strong criminal remedy, thereby ensuring that the commercial and financial instruments are not misused.

The Essential Ingredients of an Offence under Section 138

For an offence to be made out under Section 138, the complainant (the person who received the cheque) must prove the existence of all the following ingredients beyond a reasonable doubt:

1. Drawing of the Cheque: There must be a cheque drawn by a person on an account maintained by them with a banker.

2. For Discharge of a Debt/Liability: The cheque must have been issued for the discharge, in whole or in part, of a legally enforceable debt or other liability. A cheque given as a gift or as a security does not fall under this category.

3. Presentation to the Bank: The cheque must be presented to the bank within its validity period, which is currently three months from the date of issue (as per the amended Act).

4. Dishonour of the Cheque: The cheque must be returned unpaid by the bank. The most common reasons are:

      i.  "Insufficient Funds"

      ii. "Exceeds Arrangement"

      iii. "Account Closed" - This is deemed to be a more serious form of dishonour as it indicates a clear intention to cheat.

5. Demand Notice: After receiving information of the dishonour from the bank, the payee must make a formal demand for the payment by sending a written notice to the drawer within **30 days** of such receipt.

6. Failure to Pay: The drawer of the cheque must fail to make the payment within **15 days** of receiving the said notice.

Only when all these conditions are cumulatively satisfied does the offence under Section 138 become complete.

The Step-by-Step Procedure: From Dishonour to Complaint

The process for initiating legal action under Section 138 is sequential and strict. Missing a deadline can be fatal to your case.

Step 1: Cheque is Dishonoured

The payee presents the cheque to the bank, and it is returned unpaid with a "Return Memo" or a "Cheque Return Memo" citing the reason.

Step 2: Sending the Statutory Demand Notice 

Within 30 days of receiving the cheque return memo from the bank, the payee must issue a formal written notice to the drawer of the cheque. This notice must:

i. Be in writing.

ii. Clearly state that the cheque was dishonoured.

iii. Demand payment of the cheque amount.

iv. Be sent via registered post or speed post to the drawer's correct address.

This 30-day period is crucial. The Supreme Court in Saketh India Ltd. v. India Securities Ltd. (1999) held that the notice must be dispatched within 30 days from the date of cause of action arising (i.e., from the date of receiving the bank memo). The date of receipt by the drawer is not the starting point.

Step 3: Wait for 15 Days

The drawer is given 15 days from the receipt of the notice to make the payment. If the payment is made within this period, the matter ends. If not, the right to file a complaint accrues.

Step 4: Filing the Complaint

If the drawer fails to pay within 15 days of receiving the notice, the payee can file a criminal complaint before a Metropolitan Magistrate or a Judicial Magistrate of the First Class. This complaint must be filed within one month of the expiry of the 15-day notice period.

Jurisdiction: A significant amendment in 2018 clarified the jurisdiction for filing cases. The complaint can be filed in a court within whose local jurisdiction:

*   The bank branch of the payee where the cheque was presented is situated; or

*   The bank branch of the drawer where the cheque is payable is situated; or

*   The place where the demand notice was delivered to the drawer.

This has made it more convenient for the payee to initiate proceedings.

Landmark Case Laws: The Judicial Interpretation

The judiciary has played a pivotal role in clarifying and strengthening Section 138. Let's examine some of the most important judgments.

1. On the Nature of Liability: Civil vs. Criminal

Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd. (2000)

The Supreme Court clarified that the offence under Section 138 is not a substitute for a civil suit for recovery. It is a criminal offence in its own right. The object is to deter dishonesty and uphold the sanctity of negotiable instruments. A civil suit for recovery of the debt can run parallel to the criminal complaint under Section 138.

2. On "Debt or Other Liability"

The cheque must be for a "legally enforceable debt". The burden of proof initially lies on the complainant to show that the cheque was issued for a valid consideration. However, once this is prima facie established, the burden shifts to the accused to prove the contrary.

Rangappa v. Sri Mohan (2010)

This is a landmark judgment where the Supreme Court applied the "reverse onus" clause under Section 139 (which we will discuss next). The Court held that once the signature on the cheque is admitted, it is presumed that the cheque was issued for a valid consideration. The accused must then rebut this presumption with compelling evidence.

3. The Crucial Presumption under Section 139 

Section 139 is the twin provision that strengthens Section 138. It states:

"It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability."

This means the law presumes that every cheque was issued for a valid debt. The accused cannot simply deny liability; they must prove that the cheque was not for a debt, for instance, that it was lost, stolen, or issued as a security.

Kishan Rao v. Shankargouda (2018)

The Supreme Court reiterated that the presumption under Sections 118 and 139 is a mandatory presumption of law. The accused must adduce evidence that creates a probable defence and casts a reasonable doubt on the case of the complainant.

4. On the "Account Closed" Scenario

Is closing an account before the cheque is presented equivalent to "insufficient funds"?

Goaplast Pvt. Ltd. v. Chico Ursula D’Souza (2003)

The Supreme Court held a resounding "yes". It ruled that if a person closes their account after issuing a cheque, knowing fully well that the cheque would be dishonoured upon presentation, it constitutes an offence under Section 138. The act of closing the account is a clear indication of the drawer's intention to not honour the cheque.

5. On Compounding of Offences

The law allows for "compounding" of offences under Section 138, which means the parties can settle the matter mutually. Courts actively encourage this to reduce litigation.

Damodar S. Prabhu v. Sayed Babalal H. (2010)

This is a seminal judgment where the Supreme Court laid down guidelines for compounding. The Court acknowledged that the primary purpose of Section 138 is compensatory, not purely punitive. It encouraged parties to settle and provided a graded structure of costs to be paid to the legal services authority if the case is compounded at different stages (e.g., at the trial stage, appellate stage, etc.). This judgment promoted out-of-court settlements and decongestion of courts.

6. On Vicarious Liability of Partners and Directors

A company or firm is a juristic person. Who is liable when a cheque issued by a company bounces?

Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd. (2012)

The Supreme Court delivered a crucial judgment, holding that for prosecuting a person other than the company (like a Director), the company must first be arraigned as an accused. The vicarious liability of the Directors flows from the liability of the company. However, if the complainant can show that the Director was "in charge of and responsible for the conduct of the business" at the relevant time, they can be prosecuted separately.

7. On the Importance of the Demand Notice

K. Bhaskaran v. Sankaran Vaidhyan Balan (1999)

This case is a cornerstone for procedural clarity. The Supreme Court held that if the sender of the notice dispatches it to the correct address via registered post, it is presumed that the service has been effected. The drawer cannot avoid liability by claiming they did not personally receive the notice. The Court also clarified that the cause of action for filing the complaint arises upon the completion of the following consecutive acts:

a) Drawing of the cheque.

b) Presentation of the cheque to the bank.

c) The returning of the cheque unpaid by the drawee bank.

d) The giving of notice to the drawer of the cheque demanding payment.

e) The failure of the drawer to make payment within 15 days of the receipt of the notice.

Defences Available to the Accused Drawer

The drawer of the cheque is not without defences. They can escape liability by proving:

i. No Legal Enforceable Debt: The cheque was issued as a security, gift, or for a time-barred debt.

ii. Forgery: The signature on the cheque is forged.

iii. Material Alteration: The cheque was materially altered after it was issued (e.g., the amount or date was changed) without the drawer's consent.

iv. Stop Payment Instructions: A "stop payment" instruction to the bank is not a defence in itself. The drawer must prove that it was not issued with a fraudulent or dishonest intention and that there was a legally valid reason for stopping the payment, such as a breach of contract by the payee.

v. Payment Made: The payment was made within 15 days of receiving the notice.

vi. Notice Not Received: The notice was sent to an incorrect address, and it was never delivered.

Conclusion: A Tool for Commercial Good Faith

Section 138 of the Negotiable Instruments Act is a unique and potent legal provision that sits at the intersection of civil and criminal law. It was enacted with a clear socio-economic objective: to uphold the sanctity and reliability of cheques in day-to-day business and to deter people from issuing cheques lightly.

For the payee, it provides a swift and effective remedy that carries the threat of imprisonment, which often acts as a stronger incentive for the drawer to pay than a civil decree. For the drawer, it serves as a stern warning to maintain financial discipline and honour their commitments.

The evolution of case law, from K. Bhaskaran to Rangappa and Damodar Prabhu, has consistently broadened the scope and strengthened the implementation of this provision, while also encouraging amicable settlements. Understanding its nuances—the strict timelines, the essential ingredients, the powerful legal presumptions, and the available defences—is critical for anyone who uses cheques as a mode of payment. In the complex dance of commerce, Section 138 ensures that a bounced cheque is not just a financial inconvenience, but a serious legal misstep.