Section 138 of the negotiable instruments act

1. Section 138 of the Negotiable Instruments
Act, 1881
Arun Mahadevan

2. Basics of the Act
The Negotiable Instruments Act 1881, came
into force on 1
st
March, 1882
The said act was enacted to define and to
provide the law relating to:
Promissory Notes
Bills of Exchange
Cheques

3. Section 138
This section defines the dishonor of cheque is an
offence. The same also defines the main
ingredients which have to be fulfilled to make it,
an offence.

4. 1988 Amendment to Section 138
If a person issues a cheque and it got dishonored
the person is said to have done an Criminal
offence.
Whatever be the reason for the dishonor weather
for insufficiency of funds or whatever, the same
does not matter.

5. Purpose of Amendment
These provisions were incorporated with a view
to encourage the culture of use of cheques and
enhancing the credibility of the instrument.
The larger objective is to protect the interest of
honest people dealing in cheques.
DRAWER BEWARE
Because, by the said amendment the
DISHONOURED CHEQUE is being TREATED as a
CRIMINAL OFFENCE.

6. Basic Presumption of Section 138
Dishonor of Cheque is an
Criminal Offence

7. Five basic ingredients of section 138 which shall have to be
fulfilled for creating an offence for dishonor of a cheque
Should be towards legal liability (existing debt) Exclusions: Gift
Validity period.
Return memo by the drawer bank.
Notice to the drawer - within fifteen days (amended to 30 days by the 2002
amendment)
The drawer of the cheque fails to make the payment of the said amount of
money to the payee or to the holder in due course within 30 days of the receipt
of the said notice.

8. Supreme Court also held in K. Bhaskaran Vs.
Sankaran Vaidyan Balan
It’s not necessary that all the five acts should have been
perpetrated at the same locality. It is possible that each of
those five acts could be done at five different areas.
In this context a reference to section 178 (d) of the Cr. P. C.
is useful:
Where the offence consists of several acts done in different local
areas, it may be inquired into of tried by a court having jurisdiction
over any of such local areas.

9. Punishment
Section 138 provides for the punishment for
dishonor of cheque:
imprisonment for a term which may extend to one year, or with
fine which may extend to twice the amount of the cheque, or with
both.
Note: the term of punishment was extended to two years
vide 2002 amendment .

10. FAQ – Section 138
1.The offence is Bailable.
Madras High Court Observed: A Non-Bailable
warrant shall not be issued under section 138
cases unless it is absolutely necessary.

11. Contd……
2. Can second notice of demand from drawer
gave a new cause to the Drawee?
The answer is NO.
the Drawee, of a cheque that is dishonored, has
only one life i.e. only one cause for action that
he has to use within the prescribed time and
file the case. Else, this will become a technical
defense that the court will have to uphold.
It’s a technical defense for the accused.

12. Contd…..
3. Post-Dated Cheque (PDC) is a Valid
Instrument?
The answer is Yes.
A PDC is a cheque that bears a date that is
after the date when the cheque is made out,
signed and delivered and is given to the
creditor well in advance so that he can
present it on such due date.

13. Contd…………
4. Who can take cognizance of the offence
under section 138?
As per the Section 142 (c) of the Act.
No court inferior to a Metropolitan Magistrate
or a Judicial Magistrate can try the offence.

14. Goaplast V/s Shri Chico Ursula D’
Souza
Stop Payment Instructions will not take a
case out of the purview of Section 138, it
has elaborated on the reasons why this
should be so. More importantly, it would
follow from the judgments affirming this
position that the court will give great
credence to the presumption that cheques
have been issued in discharge of a debt or
liability and will not accept any argument to
the contrary.

15. Important points in dishonor of
cheques
Cheque should be presented for payment within 6
months from its date or within its validity period.
within thirty days of the receipt of information by
him (Drawee) from the bank regarding the return of
the cheque as unpaid, a demand notice should be
given in writing by the payee or holder in due
course to the drawer of the cheque.
Within 30 days of receipt of above notice, if the
drawer fails to make payment, then the holder or
holder in due course has right to file a criminal
complaint for the offence within 30 days from the
date of cause of action.

16. Thank You