Module 3: Negotiable Instruments Act, 1881: Certificate Course On Enforcement of Fundamental Rights

CERTIFICATE COURSE ON ENFORCEMENT OF
FUNDAMENTAL RIGHTS
Module 3: Negotiable Instruments Act,

1881
DISHONOUR OF CHEQUE : SECTION 138
1. HISTORY
Cheque dishonour has always been a very concerning issue. However, the issue was highly
concerning the nation due to the time taking procedure. This was finally looked into by the
Parliament in 1988 by legislating the Banking, Public Financial Institutions and
Negotiable Instruments Laws (Amendment) Act, 1988.
The amendment Act inserted Chapter XVII to the Negotiable Instruments Act 1881. Chapter
XVII which consists of Sections 138 to 148 deals with Dishonour of Cheque. The provisions
sought to provide for considerable safeguards to ensure that genuine customers of a bank
were not harassed.
Negotiable Instruments Act (Module 3)

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The landmark attempt was to convert civil liability into criminal liability. A few significant
points to consider were:-
 No court shall take cognizance of such an offence except on a complaint received in

writing to the payee or the holder in due course of the cheque.
 Such a complaint was made within one month of the date on which the cause of action
arises.
 No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the
first class shall try any such offence.
The object of the Landmark provisions were well propounded by the Apex Court in Dalmia
Cement Ltd. v. Galaxy Traders and Agencies Ltd.1 ,
‘The Act was enacted and section 138 thereof incorporated with a specified object of making
a special provision by incorporating a strict liability so far as the cheque, a negotiable
instrument, is concerned.’
The offence of dishonour of cheque has been transformed from a civil liability to a criminal
liability to provide for speedier and adequate safeguards.
2. SECTION 138
138. Dishonour of cheque for insufficiency, etc., of funds in the account—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
1
(2001) 6 SCC 463
may be extended to two years, or with fine which may extend to twice the amount of the
cheque, or with both: Provided that nothing contained in this section shall apply unless—
(a) the cheque has been presented to the tank within a period of six months from the date on
which it is drawn or within the period of its validity, whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand
for the payment of the said amount of money by giving a notice; in writing, to the drawer of
the cheque, 9 [within thirty days] of the receipt of information by him from the bank
regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of
the receipt of the said notice.
2.1. The essentials to attract Section 138 of NI Act
The ingredients are:
 A cheque was drawn on an account maintained by the person with the banker;
 The cheque when presented to the bank was returned by the bank unpaid;
 The cheque was presented to the bank within a period of 3 months [ As per RBI,
w.e.f April 2012 a cheque is only valid for a limited period of 3 months ]
 The payee demanded in writing from the drawer of the cheque the payment of the
amount of money due under the cheque to payee; and
 The notice of payment is made within a period of 30 days from the date of the
receipt of the information by the payee from the bank regarding the return of the
cheque as unpaid.
 The complaint should have been made within 1 month of the cause of action being
arisen. [ Section 142B ]

Grounds of dishonour may include inter alia :-
 Insufficient Funds
 Stale Cheque
 Incorrect Signature
 Alterations in the cheque
 Post dated cheque
 Frozen account
 Stop payment instructions
As according to Section 139 and 140 read together, the presumption shall rest in favour of the
cheque holder and there shall be no defence for the accused that he had no reasons to believe
for reasons stated under Section 138.
Further, Section 141 specifies that if such an offence has been committed by a company then
the person who was in charge of conducting the business of the company shall be held liable.
However, if he proves that he had no knowledge of the same and he had tried his level best to
prevent the commission of the offence, he would not be held liable.
3. 2018 AMENDMENT
The significant Amendment made to the provisions relating to Dishonour of Cheque is as

follows:-
1. Section 143A provides for Interim Compensation to be payable to the

Complainant by the drawer of the cheque in a summary trial if he pleads non
guilty or in any other case when the charge is framed. The interim
compensation shall be well within 20 percent and to has to be paid within 60
days or 30 days if the Court so directs.
2. Section 148 provides that in an appeal by drawer against his conviction, the
appellate court my order to deposit a minimum of 20 percent of the
compensation awarded by trial court, to be deposited within 60 days of the
Court’s order.

4. CASES
Jurisdictional issue which was solved by 2015 Amendment was explained well by the Gujarat
High Court in Brijendra Enterprise v. State of Gujarat 2 :-
1. It was held that when a cheque is delivered for collection of money through an
account, the complaint should be filed in that court within whose jurisdiction the
branch of the bank is located where the payee or holder maintains his account and
secondly when the cheque is presented for payment over the counter, the
complaint has to be filed before the court within whose jurisdiction the branch of
the bank is located where the drawer maintains his account.
2. There should be inquiry and trial shall be done only in that court within whose
jurisdiction the branch of the bank is located.
3. If there is any cheque bouncing case pending in any court before the inception of
the proposed legislation then it should be transferred to a court which comes under
the new system of jurisdiction.
4. If more than one case is filed by the same payee against the same drawer which is
pending then all subsequent complaints have to be filed in the court which comes
under the proposed legislation [Section 142(2)].
5. If a complaint filed in a court which has jurisdiction under the proposed
legislation, all the upcoming complaints under Section 138 have to be filed in the
same court notwithstanding of the fact that those cheques were presented within
the jurisdiction of the court.
In the landmark ruling of Indus Airways Pvt. Ltd v. Magnum Aviation3, it was held that
post dated cheques issued for advance payment is not considered to be a discharge of legally
2
2016 (4) TMI 2
3
2014 (12) SCC 539

enforceable debt or liability and thus does not come within the purview of Section 138 of the
NI Act 1881.
There exists no dearth of landmark rulings on Section 138 of Negotiable Instruments Act
1881, however they shall not be discussed here due to the basic structure of the Course.


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CERTIFICATE COURSE ON ENFORCEMENT OF

Module 3: Negotiable Instruments Act,

Negotiable Instruments Act (Module 3)

 No court shall take cognizance of such an offence except on a complaint received in

2.1. The essentials to attract Section 138 of NI Act

The ingredients are:

Negotiable Instruments Act (Module 3)

The significant Amendment made to the provisions relating to Dishonour of Cheque is as

1. Section 143A provides for Interim Compensation to be payable to the

Negotiable Instruments Act (Module 3)

Negotiable Instruments Act (Module 3)

Negotiable Instruments Act (Module 3)

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