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(India) Ltd.
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PRESENTATION
ON:

SECTION 138 of the Negotiable

Instruments Act 1881and the

Amendments of the Act

An Overview by:

Vijyant Nigam
Law Officer
Under the thankful
cooperation and guidance of:
Syt. Ashish Babu
Sri. B. Bhushan
Sri. Prem Jha
Sri. Mahesh Pareek
&
Sri. Manoj Sinsinwar
 [Act No. 26 of Year
1881, dated 9-12-1881]

Negotiable
Instruments
Act 1881
Came into force on 1st March, 1882
the said act was
enacted to define and
to provide the law
relating to
promissory notes,
bills of exchange
and cheques !
Promissory Note:

 Section 4 of the Act defines:

 A Promissory Note is an
instrument in writing containing
an unconditional undertaking
signed by the maker to pay a
certain sum of money only to, or
to the order of a certain person,
or to the bearer of the
instrument.
Bill of Exchange:

 Section 5 of the Act defines:

 A bill of exchange is an instrument in
writing containing an unconditional
order, signed by the maker, directing
a certain person to pay a certain sum
of money only to, or to the order of, a
certain person or to the bearer or to
the bearer of the instrument
Cheque:

 Section 6 of the Act defines:

 A cheque is a bill of exchange
drawn on a specified banker and
not expressed to be payable
otherwise than on demand.
 Or we can say a cheque is a bill
of exchange which is payable on
demand and which is drawn on
a specified banker.
But the cheques have assumed
great importance these days due
to rapid industrialisation followed
by the economic liberalisation or
because of the increasing
participation in the international
commercial activities. Increasing
use of the cheque called for
strengthening the reliability of
payment when made through
cheque so that cheques could be
used with more credibility and
better reliance.
Two things were of great concern
viz., such provisions were
required to be made that prove to
be of deterrent effect to the others
and in case of dishonouring of
cheque, the amount is paid to the
payee as early as possible
together with interest and
compensation.
In other words, the emphasis was on
the speedy justice, exemplary and
compensatory justice
 From 1st April 1989
(1988 Amendment)
 If a person issues a cheque and it
got dishonoured the person is said to

have done an offence.

 Whatever be the reason for the
dishonour weather for insufficiency
of funds or whatever, the same does
not matter.
1988 Amendment
towards achieving the goal on the
speedy justice, exemplary and
compensatory justice new
provisions with enlightened
jurisprudential foundation were
engrafted and put on the statute
book in the year 1988 in the form of
institution of
Chapter XVII
to the Negotiable Instruments Act,
1881
 Chapter XVII
The said chapter was incorporated for penalties
in case of dishonour of cheques due to
insufficiency of funds in the account of the
drawer of the cheque or whatsoever (like stop
payment etc.).
Object
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.
1988 Amendment

DRAWER
BEWARE
Because, by the said
amendment the
DISHONOURED CHEQUE
is being TREATED as an
CRIMINAL OFFENCE
Certain new sections included in
the Negotiable Instruments Act
through the Chapter XVII
and are numbered as:

Section 138,
139,
140 and 141
 New sections in the
Chapter XVII
Section 138:
this section defines the
dishonour of cheque is an
offence. The same also
defines the main ingredients
which have to be fulfilled to
made it, an offence.
Basic Presumption of Section
138:

Dishonour
of Cheque
is an
Offence
 ingredients of
Five basic

section 138 which shall have to be

fulfilled for creating an offence for dishonour of a
 cheque should have beencheque
drawn by the drawer in payment of a
legal liability to discharge the existing debt. Cheque given by
way of gift would not come under this provision.

 The cheque should be presented within the validity period i.e.

within six months or three months as the case may be.
Common sense demands that the cheque should reach the
drawer bank within the validity period.

 Return memo by the drawer bank to the drawee bank and

subsequently by the drawee bank to the drawee reporting that
the cheque got unpaid is must. Reasons for dishonour is not
material at this stage.

 Giving notice to the drawer of the cheque by the drawee or the

holder of the cheque in due course is must for making the said
payment within fifteen days. The notice must be sent to drawer
within 15 days (amended to 30 days by the 2002 amendment)
of the receipt of the information from the drawee bank that the
cheque got dishonoured.

 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 15 days of the receipt of the said notice.
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.
Moreover the section 138 also
provides for the punishment for
dishonour of cheque:

viz. 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.
(the term of punishment extended to two years vide 2002
amendment )
New sections in the
Chapter XVII
Section 139:

By this section it shall be

presumed that the holder of
a cheque received the
cheque for the discharge of
some liability or any debt.
New sections in the
Chapter XVII
Section 140:

This section says that defence in

the prosecution under section
138 shall not be available to the
drawer if the ingredients of 138
are completed.
New sections in the
Chapter XVII
Section 141:
This section defines that if an offence
done by any company, the person/s
shall be held liable who were in
charge and responsible to the
company, for the conduct of the
business of the company, at the time
the offence under section138 was
committed.
1988 amendment

The object of the

amendment was, “to
enhance the acceptability
of cheques in settlement
of liabilities by making the
drawer liable for penalties
in case of bouncing of
cheques”.
Supreme Court examined:

The provisions of sections 138

and 141 of the Act and noted
that mere dishonour of a cheque
would not raise a cause of action
unless the payee makes a demand in writing to
the drawer of the cheque for the payment and
drawer fails to make the payment of the said
amount of money to the payee.
Section 141:
The chapter XVII of the Act gained much
importance among companies due to the
section 141 because, this is the section,
through which the persons shall be held
liable for the conduct / offence committed
under the Act by a company.

The section also gave a reason to think twice

to the responsible person/s of a company
who makes commitment for and on behalf
of the company to pay someone through
negotiable instrument/s.
More Over From 06.02.2003
(by the 2002 amendment)

The said offence will be punishable

with imprisonment
for a term up to 2 years or with
fine twice the amount of the
cheque or both
under section 138 of the Act
 2002
Amendment
Another amendment came into force from
06.02.2003 as
Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002
Through the said amendment:
Sections 6, 64, 81 and 89 have been
amended due to entrance of the electronic
technology in the Negotiable Instruments.
Section 138(a) amended regarding the term
of imprisonment increased to Two years
from One year and through 138(b) the
period of giving notice of demand to the
drawer increased from fifteen days to thirty
days.
 2002
Amendment
Section 142(b) amended by the insertion of a
proviso: “Provided that the cognizance of a
complaint may be taken by the court after
the prescribed period, if the complainant
satisfies the court that he had sufficient
cause for not making a complaint within
such period.”

Note: Prior to this amendment there was no

provision in the Act for the condonation of
delay in preferring the complaint under
section 138.
 2002
Amendment
Moreover new sections from 143 to
147 have been inserted for the
speedy disposal of the cases under
section 138.

Note: The aforesaid sections were

inserted to boost up the speed of the
proceedings in courts in the cases
under section 138 of the Act
New sections inserted
through the 2002
amendment:
Section 143:
This section provides the power to
courts to try cases, under section
138, summarily and the trial of the
case, as far as practicable, should
be continued from day to day until its
conclusion and endeavour is to be
made to conclude the trial within six
months.
New sections inserted
through the 2002
amendment:
Section 144:
This section provides that the
copy of summon/s may also be
issued by speed post or by such
courier services as are
approved by a court of session.
New sections inserted
through the 2002
amendment:
Section 145:
This section provides that the evidence
of a complainant may be given by
him in an affidavit and that will be
read in evidence, and the court, if it
thinks fit, shall on application of the
prosecution or the accused, summon
and examine any person who is
giving evidence on affidavit.
New sections inserted
through the 2002
amendment:
Section 146:
This section provides the court
shall presume the fact of
dishonour of a cheque on
production of Bank’s slip or
memo having thereon the official
mark denoting that the cheque
has been dishonoured.
New sections inserted
through the 2002
amendment:
Section 147:
Every offence punishable under
this Act shall be compoundable.
Which means that a compromise
in the matters under section 138
can be made between the
complainant and the accused at
any stage of the case.
Meaning of Compoundable
in 138 N. I. Act:
 The case may be closed and the accused
may be discharged, by the magistrate but
only on his sole discretion, if some
settlement executed between the
complainant and the accused and the
complainant gave his statement before the
magistrate that he want to close the matter
and they (complainant and the accused)
have settled upon a certain conditions and
now the complainant has no more grievance
against the accused.
 Compounding can be done at any stage of
the case whether it is before the original
magistrate or before any appellate authority.
Some frequently asked queries on the chapter of section 138
of the act:

 What is Pay order and Holder in Due Course?

 Supreme court held in the matter of Punjab and Sindh
Bank Vs Vinkar Sahakari Bank Ltd. and ors. (AIR 2001
SC 3641, 2001 AIR SCW 3709)
 Pay order is also a negotiable Instrument.
 21. Section 142 of the Act envisages a complaint to be
made in writing "either by the payee or the holder in due
course of the cheque, as the case may be". Section 8 of
the Act defines "holder" as any person entitled in his
own name to the possession of the cheque and to receive
or recover the amount due thereon from the parties
thereto. We have no doubt that complainant-bank was
well within its right to possess the cheque and to receive
or recover the amount covered by the instrument.
"Holder in due course" means a person who for
consideration became the possessor of a cheque if
payable to bearer before the amount became payable.
(vide S. 9).
 22. In this context reference has to be made to S. 118(g)
of the Act which contains a mandate that until the contrary
is proved the holder of a negotiable instrument shall be
presumed to be a holder in due course.
Some frequently asked queries on the chapter of section 138
of the act:

 Where does the Nominee Director

Stand?
 Supreme Court observed in Punjab National Bank
Vs. Surendra Prasad Sinha (AIR 1992 SC 1815)
 The answer is that a nominee director enjoys full
immunity under the newly enacted provisions of the
Negotiable instruments Act.
 Basically a Nominee Director is a person appointed
in a company for observation by some other
company (mainly financial or governmental) whose
interest involve in the business of the said company
 A nominee director whose position is purely non-
executive in the board of a company fully
protected against prosecution and harassment
under section 141.
 The vicarious liability of a person for being
prosecuted for an offence committed by a company
arises if at the material time he was in charge of
and responsible to the company for the conduct of
its business.
Some frequently asked queries on the chapter of section 138
of the act:

 Weather a Non-Bailable
Warrant Can be issued for the
offence under section 138?
 Madras High Court Observed:
 Personal liberty of a person is protected
under Article 21 of the Constitution Of
India. Therefore a Non-Bailable warrant
shall not be issued under section 138
cases unless it is absolutely necessary.
 Considering that section 138 is a matter of
dispute between two individuals relating to
civil liabilities and the magistrate shall
always use his discretion in favour of the
accused and issue only a Bailable Warant.
 The offence is Bailable.
Some frequently asked queries on the chapter of section 138
of the act:

 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
dishonoured, 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 defence that the court will
have to uphold.
 It’s a technical defence for the
accused.
Some frequently asked queries on the chapter of section 138
of the act:

 Post-Dated Cheque (PDC) is a

Valid Instrument?
 The answer is Yes.
 Supreme Court in Ashok Yashwant
Badve Vs Surendra Madhavrao
Nighojkar and anr. (AIR 2001 SC 1315)
has resolved the issue.
 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.
Some frequently asked queries on the chapter of section 138
of the act:
 Shall Section 138 apply in case of a
Disnonoured Cheque drawn without any liability
to pay?
 Cheque should have been drawn by the
drawer in payment of a legal liability to
discharge the existing debt.
 Supreme Court in C. Anthony Vs K.
Raghavan Nair (2002 SOL Case No.550
supremecourtonline.com) has resolved the issue.
 It is necessary for the drawee/ complainant
to prove before the court that the cheque
was received by him in the discharge of
some liability.
 If complainant could not prove that the
cheque was in the discharge of some
liability, the complaint will be dismissed and
the accused will be acquitted.
Some frequently asked queries on the chapter of section 138
of the act:

 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.
 Supreme Court Case:
K. Bhaskaran
Vs
Sankaran Vaidyan Balan
A case between two brothers for
the offence under section138:
In this case the court held that the
burden is on the accused to rebut the
presumption of section 139 that
holder of a cheque received it for
discharge of any debt or liability .
 Section 29(2) of Cr. P. C.:
Fine can not be more than Rs.5,000/-

In the previous case the Supreme Court also held

that the appellate court shall not inflict greater
punishment for the offence which in its opinion
the accused has committed, then might have
been inflicted for that offence by the court
passing the order or sentence under appeal.
In this context a reference to section 29(2) of the
Cr. P. C. is necessary as it contains a limitation
for the magistrate of first class in the matter of
imposing fine as a sentence or as a part of the
sentence.
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.