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Section 138 of Negotiable Instrument Act

Section 138 of Negotiable Instrument Act

Nitya Khare, a 2nd -Year of LNCT University, Student has written this Article”Section 138 of Negotiable Instrument Act”

INTRODUCTION

The Negotiable Instrument Act was first drafted in 1866 and came into force in 1881. It is originally a colonial law, still widely in practice. After a century, Chapter XVII, Sections 138 to 142 was inserted in the Act vide Section 4 of the Banking, Public Financial Institutions and Negotiable Instruments Laws [1]. Section 138 of the Act deals with the punishment for the dishonour of the cheque. The cheque is a negotiable instrument drawn on a specified banker and not expressed to be payable otherwise on demand. Section 6 of the NI Act makes it clear that this definition of a cheque includes an electronic image of a truncated cheque and a cheque in electronic form.

Concerning the dishonour of the cheque, the criminal proceedings against the accused are a recent addition. Before this, there was only civil and alternate dispute resolution available to the drawee. There are still both remedies available to the drawee. The civil remedy is the filing of a civil suit for the recovery of damages. Whereas, the criminal remedy available under Section 138 of the NI Act does not preclude the institution of a civil suit. Also, incorporate the aim of your article.

MEANING AND DEFINITION OF NEGOTIABLE INSTRUMENT

The word ‘Negotiable’ means transferable from one person to another, and the term ‘instrument’ means a document of title of money(as described by Prof. Goode).

A negotiable Instrument was required to avoid high cash transactions and give legal effect to such an instrument; to provide this legal effect, in India Negotiable Instrument Act, of 1881 was enacted.

The negotiable Instrument Act, of 1881 does not properly define the Negotiable instrument. Still, Section 13 of the NI act defines a Negotiable Instrument as “a promissory note, bill of exchange, or cheque payable either to order or the bearer.”

FEATURES OF NEGOTIABLE INSTRUMENTS

  1. Easily transferable: Negotiable Instruments are freely and easily transferable without any formalities by delivery or by endorsement.
  2. Must be in writing: Negotiable Instruments cannot be oral; they must be in writing, handwritten, printed, and engraved.
  3. Time of payment: The date of payment of the amount should be specific; it cannot get paid as per the buyer’s willingness.
  4. The payee should be certain: The person to whom the payment is to be made. There can be any number of people or corporations, but they should be certain.

 DISHONOR OF CHEQUE

According to Section 6. of the Negotiable Instruments Act, the check is defined as the bill of exchange issued on a particular banker & expressed to be payable other than on demand. Includes the electronic image of the truncated check & a check in the electronic form. [2]

In the banking scenario, the honoured cheque indicates the successful transaction of the amt. cited on the check to the beneficiary concerned i.e. payee. Conversely, if the Bank refuses to dispense the cheque sum to the beneficiary, it will be treated as a dishonoured cheque so, it refers to a scenario where the Bank refuses to dispense the check amount to the payee.

Reference to the term ‘dishonour’ made in Sections 91& 92 of the Negotiable Instruments Act, 1881.

S. 91. Dishonour by non-acceptance- A bill of exchange is stated or deemed to be dishonoured, only if the drawee or one of the multiple drawees not being the partners refuses to accept it, defaults on an acceptance after being duly obliged to accept the bill, or when presentment is excused & bill isn’t accepted.

So in other words it can be said that the bill can be said to be considered dishonoured If the drawee is unable to contract or when the acceptance is qualified.

CHEQUE

A cheque, a bill of exchange drawn on a specified banker, is always payable on demand as defined under Section 6 of the Negotiable Instrument act, of 1881.

Parties to Cheque

Drawer: The one who draws the cheque, i.e., who signs the cheque, is a drawer.

Drawee: In the cheque case, the drawee is always a bank.

Payee: The payee is the person who receives the payment of the cheque.

SECTION 138 OF NEGOTIABLE INSTRUMENT ACT, 1881

A Cheque is an instrument that is used regularly for business transactions and to make payments. Certainly, cheques get dishonoured due to various reasons like stale cheques, insufficiency of funds, alteration, distinctive signature, etc., and such dishonour of cheques gets dealt with under Section 138 of the Negotiable Instrument Act, 1881.

The objective behind the incorporation of Section 138 was to promote the banking sector’s efficiency and ensure the credibility of cheques used in banking transactions.[3]

Section 138 creates, dishonour of cheques on the ground of insufficiency of funds, a statutory offence. There can be many reasons for the dishonour of a cheque. But a cheque for discharge of legal liability gets dishonoured despite legal notice. If payment is not made, then it is considered a criminal offence.

Even if a dishonour of a cheque is a criminal offence, it is not required to prove the men’s rea [4] as any other criminal offence.

Here, in this section, dishonour of cheques creates a strict liability and effectively prevents the usual carelessness of drawers.

Essentials under Section 138 N.I Act,1881

Section 138 of the NI Act, of 1881 explains the essentials, exceptions, and punishment in the dishonour of a cheque.

Dishonour of a cheque is not an offence in itself but to become an offence, the following ingredients should be there:

1) There should be a drawer that draws the cheque.

2) The cheque drawn should be in discharge of some liability.

3) Presentation of the cheque to the drawee bank.

4) The cheque returned by the bank is unpaid on account of insufficient funds.

5) The cheque should be presented within six months from the date on which it was drawn or within the period of its validity, whichever is earlier.

6) Within thirty days of receiving a memo of return from the bank, a notice should be served to demand the payment of the said money.

7) The drawer fails to pay the said money within 15 days of the receipt of the said notice.

In addition, it is important to highlight that under Section 138 of the NI Act, an offence is only considered to have been committed if the drawer fails to pay the debt within a period of 15 days. Therefore, if the drawer pays the debt within the specified timeframe, no offence would be committed. However, if the debt remains unpaid beyond the 15-day period, the person in question shall be subject to punishment, including imprisonment for a term of up to two years, a fine of up to twice the amount of the cheque, or both. It is crucial to note that these consequences are severe and may have a significant impact on the financial and legal status of the person involved.

Vishnu S/O Amthalal Patel v. State of Maharashtra & Anr.

The High Court of Maharashtra held in Vishnu S/O Amthalal Patel v. State of Maharashtra & Anr. [5] that the accused’s cheque could not be regarded as a legally enforceable debt or liability.

Furthermore, it should be noted that the evidence presented in this case has been insufficient to establish that the applicant/accused is liable for any legally enforceable debt or obligation for which the cheque in question was given. Therefore, based on the aforementioned provisions of the Act, the applicant/accused has successfully met their burden and refuted the presumption. Without convincing evidence of a debt or liability, the presumption of liability cannot be upheld.

EXCEPTION OF SECTION 138 Negotiable Instrument Act

The provision of Section 138 provides with the exception where section 138 is not applicable if:

1. The cheque is not presented in the bank within three months or its validity period, whichever is earlier.

2.  In due course of the cheque, the payee or holder has not demanded the payment by giving notice within thirty days of receipt of information from the bank regarding the return of the cheque unpaid.

3. The drawer has paid the amount within fifteen days of receipt of the legal notice of dishonour of the cheque.

Reasons for Dishonour of Cheque

Stop payment:

In the case of Electronics Trade and Technology Development Corporation India Vs Indian Technologies and Engineers (Electronics) Pvt. Ltd. [6] It was held by the hon’ble court that if the drawer issues a notice to the payee or holder in due course not to present the cheque for payment, and the cheque is still presented and dishonoured on the drawer’s instructions, Section 138 ii applies. However, in another case, Modi Cement Ltd. vs Kuchil Kumar Nandi, [7] the Supreme Court reversed its earlier findings and stated that section 138 would apply even if a cheque was dishonoured due to a “Stop Payment” instruction to the bank.

Bank account closed:
  • The dishonour of a cheque on the grounds that the drawer of the cheque has closed the account is a violation of S.138. Account Closed means that :
  • Despite the fact that the account was active at the time the cheque was issued, the account has since been closed.
  • It indicates that the drawer has no intention of paying.

Closing an account is one of the ways a drawer can make his account insufficient to honour a cheque he has issued; thus, closing an account would not allow the accused to avoid his liability under section 138 of the Act[8].’ In N. A. Issac vs. Jeeman P. Abraham & Anrol [9], it was held by the hon’ble court that if a cheque is issued after an account has been closed, Section 138 will apply.

Refer to the drawer:

In the usual sense, “refer to drawer” refers to a bank statement. As in we are not paying, go back to the drawer and ask why, or go back to the drawer and ask him to pay. The words imply that the cheque has been returned due to a lack of funds in the drawer’s account, as is ‘customary in banking’. Bank’s politely indicating its inability to honour a cheque due to insufficient funds is considered appropriate.[10]

In the case of M/s Electronic Trade & Technology Development Corporation Ltd. v. M/s Indian Technologist & Engineer (Electronic) Pvt. Ltd.[11] it was held by the hon’ble court that if a cheque is returned with the endorsement “Refer to drawer” or “Instructions for stoppage of payment” or exceeds the arrangement, it constitutes cheque dishonour.

Post-dated cheque:

A post-dated cheque is a bill of exchange, when it’s written or drawn, it becomes a cheque when it is payable on demand[12]. Because a post-dated cheque cannot be presented to the bank, the issue of its return does not arise. S.138 of the NI Act applies only to post-dated cheques upon becoming effective.

Notice

Before taking any action, a legal notice for check dishonour is required. This Act stipulates that, if a cheque has been dishonoured, the drawer must be notified (by registered A.D.) within 30 days of receipt of the memo from the drawee bank that the cheque has been dishonoured.[13]

The following points should be included in the legal notice for cheque dishonour:

  • The issued check was presented to the bank for payment;
  • The check was then dishonoured for the reason stated by the drawee bank.
  • Requesting payment of a sum written on a cheque within 15 days of receipt of the notice.
  • The next action should be conducted after sending the legal notice for cheque dishonour.

OFFENCES UNDER THE SECTION 138 OF THE NI ACT, 1881

Under Section 138, an offence is primarily a civil wrong where the burden of proof is on the accused.

Section 138 of the NI Act considers the following as an offence in case of dishonour of cheque:

  • The cheque gets dishonored due to insufficient funds in the account. The cheque gets dishonoured due to fewer funds than mentioned in the cheque in the account of the cheque drawer.

Insufficiency of funds includes “account closed” and “payment stopped”, as held in the case of Laxmi Dyechem vs. the State of Gujarat.

  • The cheque gets dishonored because the amount exceeds the amount agreed with the bank. The Dishonour of the Cheque is due to the amount mentioned in the cheque being more than the amount agreed with the bank by the account holder.

UNDER SECTION 138 of NI Act PUNISHMENT

Section 138 provides both civil and criminal liability for the dishonour of cheques.

Civil Liability:

Section 138 provides civil liability by imposing a fine twice the dishonoured cheques.

Criminal Liability:

Section 138 provides criminal liability by providing a punishment of imprisonment of two years or a fine or both. The drawer for criminal liability is prosecuted under section 138 of the Indian Penal Code, 1860.

THE TIME FRAME OF OFFENCE UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENT ACT, 1881

  • Cheque presented within three months of the validity period whichever is earlier
  • Notice for payment due within 30 days of receiving the bank memo.
  • Payment of debt, by the drawer, within fifteen days from receipt of notice
  •  Filing a complaint within thirty days from the expiry of the fifteenth-day notice period

COMPENSATION TO BE RECOVERABLE UNDER SECTION 138 of Negotiable Instrument Act, 1881

Under Section 138 of the Negotiable Instrument Act, in case of dishonour of the cheque, the court can direct the cheque drawer to pay the amount twice the amount mentioned in the cheque to the payee.

Compensation awarded under section 138 of the Negotiable Instrument Act by the court is recoverable as a fine. And in case of default in payment of compensation, the amount can be recovered as the procedure provided under section 421 of the Code of Criminal Procedure.

In case of non-payment of compensation, the court can also include a default sentence while making an order for the compensation payment.

For a detailed Article on Types of Contracts: Click here


1. Amendment act 1988 (act 66 of 1988)

2. Critical analysis of section-138 of the negotiable instruments act, Legal Service India – Law, Lawyers and Legal Resources,

3. Sec 138 of NI act

4.” Guilty mind”

5. (2019 SCC Online Bom 106)

6. AIR 1996 SC 2339 (SC)

7. AIR 1998 SC 1057

8. 1999 CILJ. 2883.

9. Civil Court Cases. 2005: (1):690(SC)

10. Voltas Ltd Vs Hiralal Agarwalla (1991) 71 Comp as 273 (Cal).

11. AIR 1996 SC 2339

12. Anil Kumar Sawhney Vs Gulshan Rai (1993): See also Ashok Yashwant Badava Vs Surendra Madhar Rao Nighojabar AIR. 2001 SC 1315

13. Balasubramaniyam, A., 2017. Dishonour of Cheque: Section 138 of the Negotiable Instruments Act, 1881.

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    • 11 months ago (Edit)

    […] of Cheque is maintained u/s 138 of Negotiable Instrument Act while the offence of Cheating is mentioned u/s 420 of Indian Penal Code. But in some cases Dishonor […]

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