What is Section 138 Negotiable Instrument Act of 1881?

Do you want to know what is Section 138 Negotiable Instrument Act of 1881? If yes, then read this article to know about Section 138

Section 138 Negotiable Instrument Act of 1881
Section 138 Negotiable Instrument Act of 1881

What is Section 138 Negotiable Instrument Act of 1881?

The Negotiable Instrument Act went into effect on March 1, 1882, to create a unified law for controlling different financial instruments used to maintain cash for convenience. Due to numerous types of fraud and illegal conduct in the commercial community, Section 4 of the Banking, Public Financial Organizations, and Negotiable Instruments Laws Act incorporated a new Chapter XVII into the Act on April 1, 1989. The adjustment was introduced to maintain the integrity of cheques as a substitute transaction mechanism. The Honorable Supreme Court’s division bench made an observation of Krishna vs. Dattatraya (2008) that the goal of the modification was to regulate business, trade, commerce, and manufacturing operations in the nation and to impose full responsibility on the drawers of cheques, to impose more caution in financial issues, and to safeguard the interests of lenders by regaining their confidence in the instrument of cheque, which is essential to the economic life of a bank.

It is also important to note that, similar to checks, electronic fund transfers have gained prominence as a form of payment in recent years. In addition, forgetting digital money transfers is subject to regulations under Chapter XVII of the NI Act of 1881, as stated in Section 25(5) of the Payment and Settlement System Act of 2007. For this reason, it is even more crucial to comprehend the various legal ramifications associated with Section 138 of the Act.

What does section 138 act imply?

Section 138 allows for prosecution when a cheque is discredited. The word “cheque” is described in Section 6 of the Act as an instrument of trade in which the one who draws it is the individual who is distributing the cheque, and the one who receives it is the banking organization of the person who distributes it, and the recipient is the individual to whom the value of the payment instrument is to be sent by the financial institution. The law further states that it is usually paid on the payee’s demand and not otherwise. The term cheque refers to both a picture of a shortened cheque and an electronic cheque.

A detailed reading of the Section leads to the conclusion that simple cheque dishonor is not punished, but it becomes an offense if the following conditions are met:

Cheques must be submitted to the respective bank within three months of the day they were drawn. According to the RBI’s announcement, the validity term is three months.

Following the recipient’s presentation of the cheque, the bank should return the cheque unpaid due to insufficient funds in the bank to honor the payment or because the bank cannot pay the specified amount due to an arrangement established between the bank and the person who wrote the check.
After the check is dishonored, the bank will issue a message to the recipient alerting him/her of the dishonor and the reasons for such dishonor. The recipient is required to submit a notice to the drawer requesting payment within 30 days of receiving the memo.
If the person who wrote the cheque declines to submit the payment 15 days after receiving such notification, a violation under Section 138 would be committed.

To commence Section 138, all of the prerequisites mentioned above must be fulfilled. If proven guilty under Section 138 of this Act, the penalty could be double the amount of the claimed check, up to two years in prison, or both. As established under Section 142, there is a time limit of one month from the day on which the reason for action began, and the exception to the stated regulation additionally provides an acceptance of delay in circumstances where there is a valid basis for delay.

Is Section 138 NI Act considered a criminal offense?

Section 138 of this Act states that it is illegal to dishonor a check for not enough money or if it is for exceeding what is expected to be transferred into the drawer’s bank account. If a person writes a cheque that is later dishonored and the requirements specified in the component are satisfied, it is a criminal crime under this section of the law. The primary standards are that the cheque be presented within six months after the day it was drawn, a demand for payment be made within thirty days of dishonor, and the drawer be given 15 days to complete the payment from the date that they receive the demand.

In the same section, the effects of the crime are detailed. The drawer may be sentenced to jail for a term of up to two years, a fine of up to double the value of the cheque, or both. This criminal responsibility is intended to discourage persons from issuing checks without confirming that sufficient funds exist to cover them. Section 138 makes the drawer personally liable. The recipient of the payment has the authority to launch a civil lawsuit to collect the amount of the cheque, plus tax and legal costs. The rule also establishes an assumption that the bearer of the check received it in payment of an obligation or other responsibility, transferring the task of providing proof to the writer to demonstrate differently.

The basis of the violation under Section 138 of the Act

The Supreme Court observed in Kaushalya Devi Massand v. Roopkishore Khore (2011) that a crime under Section 138 of the Negotiable Instrument Act could not be compared to any crime under the Indian Penal Code, because Section 138 linked responsibility to a civil violation that has been given an illegal tone. The plaintiff in the provided case was an elderly and widowed woman who had been fighting a lawsuit against the defendant for the previous 14 years.

The plaintiff was to get Rs. 4 Lakhs as payment in replacement of an asset. The respondent’s cheques were disregarded because of a lack of funds, and the plaintiff argued that incarceration in such a case is necessary to restore public trust in the court system and to serve as an obstacle to others who draw cheques with fraudulent intent to steal from the recipients. The fact that the victim was an elderly woman was the only distinctive component of the case that both the High Court and the Supreme Court of India acknowledged must have been present for the accused to be convicted to prison. As a result, The Supreme Court of India increased the reimbursement price from Rs. 6 Lakhs to Rs. 8 Lakhs after the High Court raised it from Rs. 4 Lakhs to Rs. 6 Lakhs, ruling that in certain situations, monetary damages may be sufficient for compensating the victim while a jail sentence may not be essential.

We may conclude from the provided example that Section 138 is a civil violation and is regarded as such and that it will result in an incarceration term only in the presence of some unique conditions, and not otherwise because it is compensating in nature.

This legal proposition was reaffirmed and explained in the matter of Meters and Instruments v. Kanchan Mehta (2017), which ruled that a violation under Section 138 is compensatory in definition, and the severe element in the provision is present to make the compensatory system more efficient. The Supreme Court further noted that the trial was conducted in line with Sections 262 to 265 of the Code of Criminal Method, 1973, which is the brief method that is normally used in criminal cases.

Furthermore, the Supreme Court stated in the instance of Rangappa v. Sri Mohan, that a violation punishable under Section 138 is regulatory because it deals with a civil error that impacts only the individuals who are involved in the lawsuit. It is worth noting that Section 139 of the Act allows for the transfer of the charge of evidence on the accused since the prosecution’s duty of proof is discharged by the presumption of innocence under Section 139. So, considering the specifics of the offense, the court went forward deciding that the defendant cannot be relied upon to release an excessive burden of evidence, thus settling that Section 139 places an obligation on the accused to prove “the overwhelming majority of the probabilities” rather than above any reasonable doubt as in other criminal cases.

Penalties under Section 138 of the Negotiable Instrument Act

Section 138 provides for punishment of imprisonment for a maximum of two years or a penalty of up to double the sum of the fine or both. As previously discussed in Section 138, the financial purpose of the provision takes priority over the severe nature of the clause, which implies that even if the law provides for incarceration in such cases, the court’s initial reaction will be to seek suitable remedies to compensate the person who filed the complaint. The question then becomes why we have the choice of jail. This subject has been explained in the judicial community in the provided methods:

1. Legislators’ suggestions

The Law Commission, in its 213th Report, presented in 2008, highlights the difficulties that the recipient of the cheque is experiencing as a result of the illegal act of generating cheques by drawers with no plan of paying. The study also noted how the time-consuming procedure of such lengthy trials adds to the burden of such recipients while undermining the credibility of the checks and financial institutions. To address the issue, the commission proposed the establishment of quicker courts at the cabinet level, with the justification being that more facilities, combined with concentrated desire and determination by magistrates with specific expertise on the topic, will make case situations easier and more effective, as well as aid in restoring public trust in the judiciary.

The jury that ruled the proceeding of In Re: Swift Trial of Cases Under Section 139 of the Negotiable Instrument Act of 1881 also took note of the subsequent commission suggestion and the operation of several special courts established in the provinces of Rajasthan, Allahabad, and Gujarat for such cases. The Supreme Court additionally gave expression to such ideas by issuing rules on magistrate and staff training, study duration, compensation and service tenure of authorities, and so on. The study proposes to create stronger penal laws to prevent the guilty under Section 138, as well as more effective methods for hearing complaints.

After a decade, the Department of Finance issued a notice in 2020, stating that the legalization of minor crimes when there is no need for criminal penalties will be in line with the government’s initiatives started during the global epidemic to attract foreign investors while simultaneously encouraging the Indian business community through improving the convenience of conducting business in India. The notification also named Section 138 as one of these clauses, in which the government requested feedback from stakeholders on its proposal for abolishing the following offense.

It is also worth noting that India is an observer of the worldwide Convention on Political and Civil Rights, which is a part of the United Nations’ worldwide bill of human rights. According to Article 11 of the signed agreement, nobody should go to jail only for failing to comply with the rules and regulations, and in the matter of Bank of Cochin v. Jolly George Verghese and Anr., Honorable Justice V.R. Krishna Iyer declared that the document’s subsequent article corresponds with the 21st article of The Indian Constitution. The decision attempts to highlight the need to abolish civil wrongs in India, and by the same comparison, a strong and convincing argument may be made against criminal liability associated with Section 138. It is also worth noting that the UK passed the Debtors Act in 1869 to remove the penalty for such failure to fulfill contractual agreements along similar paths, and the USA decriminalized debtors’ imprisonment for failing to repay their debts in 1833.

2. The Negative Effects of Legalization of Section 138

Most of the time, there is a component of fraud in such crimes that would go undetected if Section 138 is decriminalized, and legalization could encourage certain unethical persons. It has been common among merchants, especially since new regulations under the provisions of Chapter XVII of this act were introduced, to accept cheques with expired dates as a guarantee for increasing commerce money and enhancing the availability and dependability of financial transactions. These types of transactions, in which preventing cheques is crucial, are going to be impacted negatively.

The most crucial thing to remember is that, according to the provisions of section 420 of the IPC, which prohibits cheating by deceiving someone into giving their property, the party making the complaint will always be able to submit a First Information Report and start prosecuting the accused party. This will add to the court’s burden, and the purpose of decriminalizing cheques could be defeated. As a result of the Legalization Act, the government will move farther away from its aim of creating an economy without cash, and the distribution of black money throughout the economy will expand.

3. Decisions of the courts

The debate over decriminalization of Section 138 began in the proceeding of Makwana Mangaldas Tulsidas v. State of Gujarat, in which a divisional court made up of the Hon’ble Chief Justice S.A. Bobde and Hon’ble Judge L. Nageswara Rao noted that Section 138 deals with civil violations that were justified in 1989, but the crimes specified can be legalized simultaneously. The following decision by the Supreme Court in the case of Ors. v. Ruia & Ruia Pvt. Ltd v. Karmayogi Shankarraoji Patil was examined by the Bombay High Court. In the matter of Gimpex Pvt. Ltd. v. Manoj Goel, a division panel of the Supreme Court of India consisting of Honorable Justice B.V. Nagarathna and Honorable Justice D.Y. Chandrachud shared a statement released by the Department of Finance on June 8, 2021. It was mentioned that Section 138, which is illegal in India, has had a big influence on how easy it is to do commerce there.

4. Alternate solutions to Section 138 Legalization

The legislature can set a financial limit beyond which there will be no criminal consequences. Nevertheless, if the cheque exceeds the financial limit, criminal consequences will arise. The Credit Information Bureau gives the CIBIL rating of the drawer whose issued check fails. To prevent the person who draws from dishonoring his cheques, it might also be reduced. To address the issue of case delay, alternative conflict resolution methods like negotiation and mediation might be suggested.

In the courts of Scotland, a unique option has been proposed, which is to connect the funds in the bank account of the drawer of the disregarded cheques until the bank acquires the remaining funds from the drawer to fulfill the cheque or a letter from the recipient of the payment that shows the court that the individual has no more interest in the cheque. Another intriguing answer may be found in Japan, where dishonoring a cheque twice in six months can result in the suspension of a bank account for a total of two years.


The implementation of The Negotiable Instruments Act of 1881 has significantly helped to boost the originality of signed cheques. Nonetheless, the efficiency of the legislation is dependent on its execution, and there have been different arguments over how the rules regarding cheque dishonoring are being applied. The first main point of disagreement is the huge number of cases of cheque dishonoring that may be managed by the establishment of fast-track courts, as executed and discussed in the matter of In Re: Expeditious Trial of Cases Under Section 139 of the NI Act, 1881.

Furthermore, the second disagreement is about the criminal shades given to the civil disagreement, making it critical to recognize that the criminal method offers a faster solution than civil lawsuits and that there already exists a valid right to bring a lawsuit for recovery of funds according to Order XXXVII of the Code of Civil Procedure of 1908, which in itself offers for an overview method, thereby eliminating the criminal shades given to the dispute.

The third contention is about the criminal responsibility of jail time, which can be granted under Section 138, which may not be appropriate because incarceration is only given in cases where the party complaining has proven unique facts, as demonstrated in the case of Kaushalya Devi Massand v. Roopkishore Khore. In such situations, the best approach may be to develop suitable and clear rules to assist in determining what specific circumstances make the defendant liable for prison. Section 138 of the Negotiable Instruments Act, combines both criminal and civil components to handle check dishonor, highlighting the significance of the violation and giving legal options for choices and reimbursement of the inconvenienced party.

Section 138 of the Negotiable Instruments Act of 188 is a critical section that deals with the crime of dishonoring a cheque due to a shortage of money or because it exceeds the amount scheduled to be paid by the drawer’s account. This seeks to inspire trust in the effectiveness of negotiable instruments such as cheques and ensure that they get fulfilled quickly, thus sustaining the financial system’s credibility. The circumstances given below are the important regulations of this Act:

1. Dishonoring the cheque: This section applies when a cheque is not honored because of insufficient cash or when the amount to be paid is above the quantity available in the drawer’s bank account.

2. Circumstances of offense: For an offense under Section 138 to be established, the cheque must be presented within six months of the day it is drawn or during the period of its reliability. The individual who accepted it is responsible for failing to make payment 15 days after getting the demand, and the individual who obtained it must demand payment within a month of the dishonor happening.

3. Legal consequences: The drawer may be sentenced to a period of two years in jail, a fine equal to double the amount of the cheque, or both.

4. Civil responsibility: In addition to criminal responsibility, the drawer faces civil liability. The recipient of the check has the authority to sue for the whole amount of the cheque, plus interest and legal fees.

5. Presumption of Crime: The law presumes that the owner of the check got it to pay off a debt or other responsibility. The duty of evidence changes on the drawer to prove that the cheque was not issued to pay an obligation or liability.

6. Notice Demand: The person receiving the money is required to issue a legal notice seeking payment to the drawer within thirty days of receiving it after the dishonor. From the day of the notice receipt, the person who receives it has a period of fifteen days to complete the payment in full.

7. Authority: Only a magistrate of the First Class or the Metropolitan Magistrate may prosecute an offense under Section 138.
8. Offense Compounding: With the cooperation of the drawer and the recipient of the payment, the crime under Section 138 can be combined, which means that the parties can settle the case by reaching an agreement.

9. Amendment: The Negotiable Instruments Act of 2018 modified Section 138 to allow the owner of the cheque to file an action in a court having authority where the recipient of the payment has an account, as well as in a court having authority where the cheque was dishonored.

Frequently Asked Questions (FAQ)

1. What are the implications of submitting two notices under the Section 138 notice duration?

In such cases, the argument is made that delivering multiple notices during the grace period of thirty days will jeopardize the proceedings, or that sending a second notice will result in an additional deadline of 15 days to make payment to the drawer, thus extending the period for filing the suit. However, in the case of G. Kannan v. N. Parameswaran Unni, it was decided that even if the payee or holder sent two notices in the correct sequence, the trial would not be compromised and the second notice would be considered a simple reminder, with all relevant stated periods being calculated as per the first notice.

2. Can a cheque that was previously returned be presented again?

In the matter of Madhavan Sunil Kumar v. Sadanandan Bhadran, the Supreme Court implemented that a single cheque can give effect to just one cause of action and that presenting a disregarded cheque again won’t give rise to a second cause of action. It is significant to remember that an additional ruling in the case of S. Palaniappan v. MSR Leathers, rejected this legal recommendation, which stated that a dishonored cheque may be provided a variety of times during its validity period, which is three months from the date on the cheque, and every subsequent dishonor will give rise to an additional basis of action. It is worth noting that both of the court’s decisions were issued by a division bench, therefore the explanation on this point of law is missing. The most recent court decision is more in accord with the intent and scope of the Act, and it must be followed for the time being.

3. Does Section 138 apply to post-dated and empty cheques?

In the matter of Indian Renewable Energy Development v. Sampelly Satyanarayana Rao, the Honorable Supreme Court ruled that post-dated cheques are frequently offered as security, as the obligation still exists on the day the check is disregarded, Section 138 may be constituted upon their dishonored condition. It is important to note that in the matter of Surendra Nighojkar v. Ashok Yeshwant Badave, it was found that although a post-dated cheque may first appear to be a document of exchange, it becomes a cheque after the time of submission is established, so dishonored cheques are equally subject to Section 138 penalties.

4. Should insufficient money be the only basis for a cheque to be dishonored to activate Section 138?

The main reason for not being able to use Section 138 of this Act is insufficient funds. As the Supreme Court decided, it can also be applied in cases when a cheque has been fraudulent because of mismatched signatures like in the case of Laxmi Dyechem v. State of Gujarat. Furthermore, the Supreme Court has found that Section 138 might be enforced even when a cheque has been drawn from an inactive account.

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