Section 138 of Negotiable Instruments Act, 1881

The Negotiable Instruments Act, 1881, is a cornerstone of Indian financial legislation, governing negotiable instruments such as cheques, promissory notes, and bills of exchange. Among its various provisions, Section 138 stands out as a critical legal tool to address the dishonour of cheques. This section is pivotal in maintaining trust and accountability in cheque-based financial transactions. Let us delve into the intricacies of Section 138, examining its provisions, essential requirements, legal interpretations, and implications.

Provisions of Section 138 of Negotiable Instruments Act, 1881

Section 138 of the Negotiable Instruments Act provides for penal consequences in cases where a cheque is dishonoured due to insufficient funds or when the amount exceeds the arrangement with the bank. The key highlights of this provision include:

1. Offence: When a cheque issued by a person is dishonoured for insufficient funds or exceeds the agreed limit, the drawer is deemed to have committed an offence.
2. Punishment: The offender may face imprisonment for up to two years, a fine that may extend to twice the cheque amount, or both.
3. Cause of Action: The offence is considered complete when the drawer fails to pay the cheque amount within 15 days of receiving a legal notice.

Essentials to Prove an Offence Under Section 138

To establish an offence under Section 138, certain prerequisites must be fulfilled:

Legally Enforceable Debt or Liability

The cheque must have been issued to discharge an existing and legally enforceable debt or liability. Cheques issued as gifts, donations, or for illegal considerations do not fall under the ambit of this section.

Relevant Case Law: Somnath vs. Mukesh Kumar (2015) clarified that a cheque issued for a time-barred debt is not enforceable under Section 138.

Insufficient Funds

The cheque must be dishonoured due to insufficient funds in the account or because the amount exceeds the arrangement with the bank. Technical reasons, such as mismatched signatures, are also covered if they result in non-payment.

Relevant Case Law: Lakshmi Dyechem vs. State of Gujarat (2012) held that dishonour due to signature mismatch is covered under this section.

Presentation Within Three Months

The cheque must be presented to the bank within three months from the date of issue or within its validity period, whichever is earlier. This timeline was shortened from six months to three months by an RBI notification on November 4, 2011.

Legal Notice

The payee must issue a written demand notice to the drawer within 30 days of receiving information about the dishonour. The notice should demand payment within 15 days of receipt.

Modes of Notice:

• Registered Post: If unclaimed or refused, it is presumed to be delivered (K. Bhaskaran vs. Sankaran Vaidhyan Balan, 1999).
• Electronic Communication: Notices sent via email or WhatsApp are valid, as ruled in Rajendra vs. State of U.P. (2024).

Non-Payment

If the drawer fails to make the payment within 15 days of receiving the notice, the payee can initiate legal proceedings. The cause of action arises on the 16th day after serving the notice.

Grounds for Dishonour of Cheque

Section 138 primarily addresses two grounds for dishonour:

1. Insufficient Funds: The most common cause.
2. Exceeding Arrangement: When the cheque amount exceeds the account limit.

Other grounds include:

• Account Closed: Covered under Nepc Micon Ltd. vs. Magma Leasing Ltd. (1999).
• Signature Mismatch: Addressed in Lakshmi Dyechem vs. State of Gujarat (2012).
• Security Cheques: In Sampelly Satyanarayan Rao vs. Indian Renewable Energy Development (2016), it was held that dishonour of a security cheque can invoke Section 138 if the liability remains unpaid.

Nature of the Offence under Section 138 of Negotiable Instruments Act, 1881

The offence under Section 138 is quasi-criminal in nature, blending civil and criminal remedies. It is:

1. Bailable: The accused can seek bail.
2. Compoundable: Parties can settle the matter mutually.
3. Non-Cognizable: Police cannot arrest without a warrant.

The primary aim is compensatory rather than punitive, as noted in Damodar S. Prabhu vs. Sayed Babalal H. (2010). The courts focus on ensuring monetary compensation for the payee.

Presumptions Under Sections 118 and 139

Sections 118 and 139 of the Act presume that:

1. The cheque was issued for a valid debt or liability.
2. The drawer intended to discharge the liability.

These presumptions are rebuttable. The burden of proof lies on the accused to disprove these presumptions.

Jurisdictional Challenges and Amendments to Seciton 138

Jurisdiction for filing cases under Section 138 has evolved over time:

1. K. Bhaskaran Case (1999): Jurisdiction lies in any location where the cheque was issued, dishonoured, or where notice was served. This allowed for forum shopping.
2. Dashrath Rupsingh Rathod Case (2014): Restricted jurisdiction to the drawer’s bank location, causing practical difficulties for payees.
3. 2015 Amendment: Jurisdiction lies where the payee presents the cheque for encashment, simplifying the process.

Trial Procedure

Complaints under Section 138 are governed by the Code of Criminal Procedure, 1973, and follow a summary trial:

1. Pre-Summoning: Magistrate examines the complainant and evidence.
2. Summons Issuance: If sufficient grounds exist, summons are issued.
3. Post-Summoning: Accused furnishes a bail bond and presents a defence.
4. Examination of Witnesses: The court completes this within three months as per Indian Bank Association vs. Union of India (2014).

Punishment and Compensation under Section 138

The offender may face:

1. Imprisonment of up to two years.
2. Fine up to twice the cheque amount.
3. Compensation to the payee under Section 357(3) of the CrPC.

The Supreme Court in M/S Meters and Instruments vs. Kanchan Mehta (2017) emphasised the compensatory nature of Section 138, prioritising monetary recovery.

Landmark Judgements Related to Section 138 of Negotiable Instruments Act, 1881

Harpal Singh vs. State of Haryana

The Supreme Court in Harpal Singh vs. State of Haryana ruled that funds available in other accounts cannot be considered to cover a dishonoured cheque tied to a specific account. This judgement emphasised that the liability under Section 138 pertains strictly to the account linked to the cheque, rejecting arguments suggesting the sufficiency of funds elsewhere.

Upasana Mishra vs. Trek Technology India Pvt. Ltd. 

In Upasana Mishra vs. Trek Technology India Pvt. Ltd., the Court held that omnibus demand notices, which include claims beyond the cheque amount (e.g., interest, damages, or legal fees), are invalid under Section 138. The judgement reiterated that the demand notice must clearly specify the cheque amount to maintain its validity.

Ghanshyam Gautam vs. Usha Rani

The Supreme Court in Ghanshyam Gautam vs. Usha Rani quashed criminal proceedings under Section 138 after an amicable settlement was reached between the parties. This judgement highlighted that when disputes are resolved through mutual agreement, further prosecution under Section 138 becomes unnecessary, promoting the compensatory spirit of the law.

Ajitsinh Chehuji Rathod vs. State of Gujarat 

Ajitsinh Chehuji Rathod vs. State of Gujarat ruling clarified the role of certified bank signatures in cheque dishonour cases. The Court emphasised that certified specimen signatures from banks can be used to validate cheque authenticity. It also upheld the presumption of genuineness for endorsements on cheques unless rebutted with evidence.

Raj Reddy Kallem vs. State of Haryana 

In Raj Reddy Kallem vs. State of Haryana judgement, the Court confirmed that even if the accused compensates the payee for the dishonoured cheque, the criminal liability under Section 138 remains intact. Additionally, it ruled that the complainant cannot be compelled to agree to compounding the offence, reinforcing the independent penal aspect of the provision.

Latest RBI Guidelines

From April 1, 2012, the validity of cheques, drafts, and pay orders was reduced to three months to:

• Prevent misuse.
• Align with evolving banking practices.

Conclusion

Section 138 of the Negotiable Instruments Act, 1881, plays a vital role in ensuring the integrity and reliability of cheque transactions in India. By combining penal and compensatory measures, it strikes a balance between protecting creditors and deterring fraudulent practices. While proposals for its decriminalisation aim to ease business operations, the provision’s deterrent effect remains indispensable in safeguarding financial discipline. As the legal framework continues to evolve, Section 138 ensures that cheque-based transactions remain a cornerstone of trust in commercial dealings.