DISHONOUR OF CHEQUES UNDER SECTION 138 of the N I Act, 1881

Introduction

The Negotiable Instruments Act of 1881 was enacted to protect the legitimacy of commercial transactions involving cheques. It also includes precautions to protect drawers of such instruments from potential dishonor. There have been several significant changes in the way cheques are issued, bounced, and dealt with throughout the years. 

With the fast growth of business and trade, the use of cheques grew as well, as did the number of cheques bouncing disputes[i]. The purpose of Sections 138-142 of the Negotiable Instruments Act of 1881 is to improve the efficiency of banking operations and maintain the legitimacy of commercial transactions involving cheques[ii]. A person who issues a cheque to satisfy a debt or liability in whole or in part and the cheque is dishonored by the bank on presentation is guilty of a criminal offence punishable by imprisonment, fine, or both[iii]. Section 138 was established to penalize dishonest check draws who, although claiming to be releasing their responsibility by issuing a check, have no intention of really doing so.

However, in order to avoid unnecessarily prosecuting an honest cheque drawer and to allow him a chance to make corrections, the prosecution under Section 138 of the Act has been made subject to specific circumstances.

The proviso to Section 138 specifies these criteria[iv]. The conduct of an offence is one thing, but prosecution is quite another under criminal law.

Section 138 of the Act governs the commission of an offence. Section 142 of the Act governs prosecution. [v]

Section 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 may extend 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 bank 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, 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.

Explanation. – For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

Classification of Offence

The violation under Section 138 is a non-cognizable offence (a case in which a police officer cannot arrest the accused without an arrest warrant). It is also a bailable offence.

Although it was held in Dashrath Rupsingh Rathod v. State of Maharashtra[vi], that an offence under Section 138 is complete with the dishonor of a cheque, taking cognizance of the same by any court is prohibited so long as the complainant does not have a cause of action under clause (c) of the proviso read with Section 142.

If cheque is dishonored

When a cheque is returned unpaid, the drawee bank sends a ‘Cheque Return Memo’ to the payee’s banker, detailing the cause for non-payment. The dishonored cheque and the memo are then given to the payee by the payee’s banker. If the holder or payee feels the cheque will be honored a second time, he or she can resubmit it within three months after the date on it. If the cheque issuer fails to make a payment, the payee has the right to take legal action against the drawer.

Only if the amount indicated in the cheque is for the repayment of a debt or any other duty of the defaulter owed towards the payee may the payee legally sue the defaulter/drawer for dishonour of cheque.

The drawer cannot be charged if the cheque was given as a gift, used to lend money, or was used for illegal purposes.

Legal action

For instances of cheque dishonour, the Negotiable Instruments Act of 1881 applies. Since 1881, this Act has been revised several times.

Dishonoring a cheque, according to Section 138 of the Act, is a criminal offence punishable by up to two years in prison, a monetary penalty, or both.

If the payee chooses to proceed legally, the drawer should be offered the option of promptly returning the cheque amount. An opportunity like this can only be offered in the form of a written notice.

The payee has 30 days from the date of receiving the “Cheque Return Memo” from the bank to send the notice to the drawer. The notification should state that the amount of the check must be paid to the payee within 15 days of the drawer receiving the notice. The payee has the right to file a criminal complaint under Section 138 of the Negotiable Instruments Act if the cheque issuer fails to make a new payment within 30 days of receiving the notification.

However, within a month of the notice period expiring, the complaint must be filed in a magistrate’s court. In this scenario, it is critical to seek the advice of an attorney who is well-versed and skilled in this field of law to proceed further in the matter.

Notice under S. 138

The necessary condition of issue of notice in terms of clause (b) of proviso to Section 138 of the Act is met when the notification is issued by registered mail to the proper addressee of the cheque. It goes without saying that the complaint must include basic information on the method and manner in which the notice to the cheque drawer was sent.[vii]

Punishment & Penalty

The court will issue summons and hear the case after receiving the complaint, as well as an affidavit and related document trail. If proven guilty, the defaulter may be penalised with a monetary penalty of double the amount of the cheque, or imprisonment for a time of up to two years, or both. For repeated bounced cheque offences, the bank has the power to suspend the cheque book facility and cancel the account.

If the drawer pays the amount of the check within 15 days after receiving the notice, the drawer is not guilty of any offence. Otherwise, the payee has one month from the notice’s expiration date to submit a complaint in the jurisdictional magistrate’s court.

Section 138 provides for a penalty of up to two years in prison, a fine of up to double the amount, or both. It is important to remember that the power under Section 357(3) CrPC to order the payment of compensation is in addition to the specified punishment if no fine is imposed. The compensation order can be enforced by a default sentence under Section 64 IPC and a recovery procedure under Section 431 CrPC.[viii]

Fine points: Conditions for prosecution

There are three separate criteria antecedent that must be met before a check dishonor may be considered an offence and punished.

(i) The cheque must have been given to the bank within 6 months [3 months][1] after the date on which it was drawn, or within the validity period, whichever comes first.

(ii) Within 30 days after receiving information from the bank about the return of the cheque as unpaid, the payee or holder in due course of the cheque, as the case may be, should make a demand for payment of the specified amount of money by providing a notice in writing to the drawer of the cheque.

(iii) The drawer of such a cheque should have failed to pay the said sum of money to the payee or, as the case may be, to the holder of the cheque in the proper course of the cheque within 15 days of receiving the said notice.

The Court in MSR Leathers v. S. Palaniappan[ix] held that an offence under Section 138 may only be considered to have been committed by the person issuing the cheque if all three requirements stated under the proviso to Section 138 as clauses (a), (b), and (c) are met.

Dishonour of Cheque issued as a Security can also attract Offences U/Sec 138 NI Act

The Supreme Court recently observed in the judgment of Sripati Singh (D) vs. State of Jharkhand[x] that the dishonour of a security cheque can also be considered a criminal offence under Section 138 of the Negotiable Instruments Act.

There can’t be a clear and fast rule that a cheque issued as security can never be given by the cheque’s drawee. The court went on to say that such a claim would only emerge if the debt had not become collectable and the security cheque had not matured to be submitted for payment of the obligation if the agreed-upon due date had not arrived.

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[1] The period of “six months” mentioned in S. 138 proviso (a) remains unchanged as there has been no amendment in this regard. However, RBI vide Circular RBI/2011-12/251 DBOD AML BC No. 47/14.01.001/2011-12, dated 4-11-2011, has changed the default period within which a cheque may be presented for payment, from a period of six months from the date of the instrument, to a period of only three months from such date, w.e.f. 01-04-2012.

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[i] Law Commission of India, 213th Report, Fast Track Magisterial Courts for Dishonoured Cheque Cases, November 2008.

[ii] Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249.

[iii] SMS Pharmaceuticals Ltd. v. Neeta Bhalla, (2005) 8 SCC 89.

[iv] C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.

[v] William Rosario Fernandes v. Cabral & Co., 2006 SCC OnLine Bom 918.

[vi] Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129.

[vii] C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555.

[viii] Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.

[ix] MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177.

[x] Sripati Singh (D) vs. State of Jharkhand, LL 2021 SC 606.