The Negotiable Instrument Act, of 1881 came into force on 1st March of 1882 to provide a uniform law for governing different instruments used in place of fiat money as a matter of convenience. On 1st April 1989, a new Chapter XVII was inserted into the Act. The amendment was made to preserve the sanctity of cheques’ instrumentality as an alternative payment mode.

Section 138 Negotiable Instrument

Section 138 provides for prosecution in instances of dishonoring a “cheque”. The term “cheque” has been defined in Section 6 of the Act as a bill of exchange wherein the drawer is the person who is making the cheque, the drawee is the bank of the drawer, and the payee or holder in due course is the person to whom the amount of the cheque is to be paid by the bank. The provision also provides that it is always payable on the demand of the payee and not otherwise. The term “cheque” will include an electronic image of a truncated cheque and a cheque in electronic form

dishonor of a cheque will not be punishable however, it becomes an offence if the following essentials are fulfilled:

  • The Cheque should be presented to the bank within 3 months from the date it was drawn. 3 months is the period of validity
  • After the presentation of the cheque by the payee, the cheque should be returned unpaid by the bank due to insufficiency of funds in the bank to honor the payment or due to an arrangement made between the bank and the drawer the bank is unable to pay the said amount. 
  • After the cheque is dishonored the bank will send a bank memo to the payee informing him about the dishonor of the cheque and the reason for such dishonor, the payee is to send a notice within 30 days from the date of receiving the memo to the drawer demanding him to pay the amount.  
  • If the drawer of the cheque fails to make the payment within 15 days from receipt of such notice, the offence will be made out under Section 138. 

All the above-mentioned essentials are mandatory to be fulfilled to invoke Section 138. A person culpable under Section 138 of the Act can be made liable for a punishment that may extend up to 2 years of imprisonment or a fine that may extend up to twice the amount of the cheque in dispute, or both. 


Punishment under Section 138 NI Act 

Punishment under Section 138 has been provided for imprisonment up to a term of 2 years or a fine, which may extend up to twice the amount of the fine or both. As has been discussed earlier in Section 138, the compensatory nature of the provision is paramount to the punitive nature of the provision, which means that even if the statute provides for imprisonment in such cases, the first instinct of the court will be to look for appropriate measures to compensate the complainant in such a case.

This discussion has been made in various ways in the legal fraternity which are as follows

The discussion on decriminalization of Section 138 first took place in the case of Makwana Mangaldas Tulsidas v. State of Gujarat (2020), wherein a division bench comprising the then Hon’ble Chief Justice S.A. Bobde and Hon’ble Justice L. Nageswara Rao observed that Section 138 deals with civil wrong which were justified in 1989 but contemporaneously the offence enumerated can be decriminalized. The following judgment of the Supreme Court has also been considered by the Bombay High Court in the case of Karmayogi Shankarraoji Patil and Ors. v. Ruia & Ruia Pvt. Ltd. and Ors. (2022).

Further, in the case of Gimpex Private Ltd. v. Manoj Goel (2021) a division bench of the Supreme Court comprising Hon’ble Justice D.Y. Chandrachud and Hon’ble Justice B.V. Nagarathna while relying on a notice issued by the Ministry of Finance on 8th June 2021, observed that Section 138 being a criminal offence in India has severely affected the ease of doing business in India and has disincentive the investors from making investments in India, by observing the following issue the court has made its propensity towards decriminalizing of Section 138 more apparent.

Is Section 138 applicable to post-dated cheques and blank cheques?

The Hon’ble Supreme Court held in the case of Sampelly Satya Narayan Rao v. Indian Renewable Energy Development (2016) that post-dated cheques are commonly given as security and that Section 138 can be made out on the dishonoring of such cheques given that the liability should be outstanding on the date of the dishonoring of the cheque.

It is pertinent to note that in the case of Ashok Yeshwant Badave v. Surendra Nighojkar (2001), it was held that a post-dated cheque may have the title of a bill of exchange in the beginning, but whenever the date of presentment reckons, it becomes a cheque, and from that date onwards dishonoring of such a cheque will also be covered under Section 138.

In cases of blank cheques, the Supreme Court held in the case of M/s Kalamani Tex v. P. Balasubramaniam (2021) that Section 138 can be invoked and even the presumption of Section 139 will be attracted given that it should be voluntarily signed and handed over to the payee; the same proposition of law was also reiterated in the case of Raj Singh v. Yashpal Singh Parmar (2022).

Should insufficiency of funds be the only reason for dishonoring cheques to invoke Section 138?

Insufficiency of funds can not be the only reason for invoking Section 138 of the Negotiable Instrument Act, 1881 rather, it can also be invoked in cases where dishonor of cheque is due to a mismatch of signatures, as was held by the Supreme Court in the case of Laxmi Dyechem v. State of Gujarat (2012). Further, in the case of NEPC MICON Ltd. and Ors. v. Magma Leasing (1999) it was held by the Supreme Court that Section 138 can be invoked even in  cases where a cheque has been drawn from an account that is closed.

However, Section 138 will not apply to lost cheques as per the judgement in the case of Rajkumar Khurana v. State of NCT of Delhi (2009) and also will not apply to time-barred debts as per the judgement in the case of Sasseriyil Joseph v. Devassia (2001).


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