INTRODUCTION

The term "Negotiation" does not necessarily imply anything more than the assertion that the paper
possesses the negotiable quality. Generally speaking, it applies to any written statement given as
security, usually for the payment of money, which may be transferred by endorsement or delivery,
vesting in the party to whom it is transferred a legal title on which he can support a suit in his
name. The term signifies that the note or paper writing to which it is applied, possesses the
requisites of negotiability.

In India, Negotiable Instruments Act, 1881 codifies the law governing transactions involving
negotiable instruments. As can be seen, this is a law passed during the British Era which continues
till date to govern economical transactions. There are various negotiable instruments; such as
cheques, promissory notes, bills of exchange, bank notes, etc. However, for day to day
transactions, cheque is the most widely used negotiable instrument in businesses today.

A cheque is an acknowledged bill of exchange that is readily accepted in lieu of payment of money
and it is negotiable. However, by the fall of moral standards, even these Negotiable Instruments
like cheques issued, started losing their credibility by not being honoured on presentment.

Section 6 of the Negotiable Instruments Act, 1881 defines cheque :

‘Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque
in electronic form.’1

PARTIES TO A ‘CHEQUE’

Drawer is the maker of the cheque. Drawee is the person thereby directed to pay. Payee is the
person named in the instrument, to whom or to whose order the money is by the instrument directed
to be paid. Holder of the cheque means any person entitled in his own name to the possession
thereof and to receive or recover the amount due thereon from the parties thereto.

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DISHONOUR OF CHEQUE

A person suffers a lot if a cheque issued in his favour is dishonoured due to the insufficiency of
funds in the account of the drawer of the cheque. To discourage such dishonour, it has been made
an offence by an amendment of the Negotiable Instrument Act by the Banking, Public Financial
Institution and Negotiable Instrument Laws (Amendment ) Act, 1988.

A new Chapter VII consisting of Sections 138 to 142 has been inserted in the Negotiable
Instrument Act.

Section 138 makes the dishonour of cheque an offence. The payee or holder in due course can
have recourse against the drawer, who may be held liable for the offence.

SECTION 138 NEGOTIABLE INSTRUMENTS ACT 1881

Section 138 Negotiable Instruments Act as it is at present after coming into force of the Negotiable
Instruments (Amendment And Miscellaneous Provisions) Act, 2002:

“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.”2

Section 138 was inserted into the Act vide amendment of 1988. This section covers the provision
for dishonour of cheques for insufficiency of funds in the account of drawer. The drawer pays off
his lability to the payee through cheque and when bank returns the cheque unpaid due to
insufficient balance on the account held by the drawer, the liability/debt remains due to the drawer
and the amount remains unpaid. The return of cheque can be because of insufficient funds in the
account or due to exceeding the limit of the amount which was agreed to be paid by the bank. Such
a default by any person, creates a liability under the said provision. Section 142 of the Act deals
with the cognizance of offences in compliance with the provision of Code of Criminal Procedure,
1973.

Prior to 1988, in case a cheque was not honoured on presentment, the only remedy available under
the Act was to file a civil suit in the court against the offender. However, this remedy did not have
a desired deterrent effect on offenders and cheques started losing their credibility. Hence, the Act
was amended several times to incorporate more stringent provisions to deal with dishonour.

The Banking, Public Financial Institutions and Negotiable Instruments Laws Act, 1988 amended
the Act to make dishonour of cheques a criminal liability and offenders were liable to be punished
by 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 Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002 further extended the term of imprisonment to up to two years.

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ESSENTIAL FOR AN ACTION UNDER SECTION 138

I. There should be dishonour of cheque

Section 138 makes dishonour of cheque in certain cases an offence. Cheque is the most
common mode of making the payment. In order to duly protect the interest of its payee,
holder in due course, there is an attempt to discourage dishonour of a cheque by making it
an offence. These provisions do not cover the dishonour of other negotiable instruments.

II. Payment in discharge of debtor liability

The cheque should have been drawn by a person on an account with a banker for payment
of money to another person for the discharge, in whole or part, of any debt or other liability.
The debt or other liability in such a case means a legally enforceable debt or other liability.
If the payment by way of cheque is made as gift or charity, it is not the payment for legally
enforceable debt or liability. The dishonour of such cheque does not attract the provisions
of Section 138 of the Negotiable Instrument Act.

III. Presentment of the cheque within the period of its validity

It is further necessary that the cheque has been presented before it became stale and invalid.
It means that the cheque has been presented within a period of 6 months from the date on
which it is drawn or within the period of validity, whichever is earlier.

IV. Dishonour due to insufficient fund

It is also necessary that the cheque should be returned by the bank unpaid.
Dishonour may be because of 2 reasons:
1. Either the amount of money present in the account is insufficient
2. Or the amount to be paid has exceeded the amount to be paid from that account as
in the agreement made with that bank.
It has been generally held in various cases that dishonour due to the insufficiency of funds
has to be interpreted liberally. Dishonour due to the remarks like “Account closed”, “Refer
to the drawer” or “Stop payment” of the cheque may be deemed to be covered by the
provision contained in Section 138 of the Act.
 V. Notice and demand from the drawer and drawer’s failure to pay
Within 15 days of receipt of information from the bank about the dishonour of the cheque,
the payee or holder in due course of the negotiable instrument, as the case may be, must
make a demand of the said amount from the drawer by giving a notice in writing. Inspite
of such a notice the drawer of the cheque should fail to make the payment of the said
amount of money to the payee or the holder in due course of the cheque, within 15 days of
the receipt of the said notice.
In the case of Tomy Jacob Kattikaran v. Thomas Manjaly3 A.I.R 1998 S.C. 366
The Supreme Court has held that if it was established that the appellant did not serve a
notice on the drawer within the period prescribed under Section 138 of the Act, the acquittal
of the drawer is justified.

CONSTITUTIONAL VALIDITY OF THE PROVISIONS

In B. Mohana Krishna v. Union of India, the question came up for consideration that whether the
presumption raised in section 139 that the holder of the cheque received the cheque of the nature
referred to in section 138, unless the contrary is established is violative of Article 20 (3) of the
Constitution of India.

The Court while answering negative held that:

"Unless a person is compelled to be a witness against himself Article 20 (3) has no application.
The person charged under section 138 is not compelled to be a witness against himself. The
presumption of the nature incorporated in section 139 is a common feature in criminal statutes for
example section 12 of the Protection of Civil rights Act. The presumption under section 139 in
favour of holder of cheque would not, therefore be violative of Article 20 (3)."

Further such imposition of strict liability was put to judicial scrutiny on grounds of
unreasonableness and arbitrariness in Mayuri Pulse Mills v. Union of India where the Bombay
High Court held that:

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Normally in Criminal law existence of a guilty intent is an essential ingredient of a crime and the
principle is expressed in the maxim ;actus non facit rum nisi mens sit rea;. This is a general
principle. However the legislature can always create an offence of absolute liability or strict
liability are justified and cannot be said to be unreasonable.

Section 138 was also put to test in Ramawati Sharma v. Union of India in light of Article 21 of
the Constitution of India where the court held that;

Mere taking of loan is not, thus, made punishable under certain circumstances and after following
certain conditions. It may not, therefore, be stated that the liberty of a person was being curtailed
by an arbitrary procedure or that such a provision is violative of Article 21 of the Constitution

In K.S. Anto v. Union of India the question of double jeopardy as enshrined in Article 20 (2) in
light of section 138 and section 420 of the Indian Penal Code where the court held that:

Offences under section 138 of the Negotiable Instruments Act and section 420 of the Penal Code
are different and the ingredients are different and the ingredients are also different. Convictions
for different offences separately is not barred under article 20 (2). In spite of prosecutions and
convictions under section 138, there will be no constitutional bar in prosecution for an offence
punishable under section 420 of the Penal Code and a prosecution will be if such an offence is
made out.

K. Bhaskaran v. Sankaran Vaidhyan Balan4, (1999) 7 SCC 510: In this case it was noted that,
the offence under Section 138 of the Negotiable Instruments Act, 1881 can be completed only with
the concatenation of a number of acts. The acts which are components are as follows:

Drawing of the cheque; Presentation of the cheque to the bank; Returning of the cheque unpaid
by the drawee bank; Giving notice in writing to the drawer of the cheque demanding payment of
the cheque amount; Failure of the drawer to make payment within 15 days of the receipt of the
notice.

Further, it was observed that, it is not necessary that all the above 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 localities. But, a concatenation of all the above mentioned five acts is sine qua non for

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the completion of the offence under Section 138 of the Negotiable Instruments Act, 1881. In this
context regard may be had to Section 178 (d) of the Code of Criminal Procedure, 1973, which
states as follows: Where the offence consists of several acts done in different local areas, it may
be enquired into or tried by a court having jurisdiction over any of such local areas. Thus, the court
held that, if the five different acts were done in five different locations, then, any one of the courts
exercising jurisdiction in one of the five local areas can become the place of trial for the offence
under Section 138 of the Negotiable Instruments Act, 1881. In other words, the complainant can
choose any one of those courts having jurisdiction over any one of the local areas within the
territorial limits of which any one of those five acts was done. There by the court stated that, as
the amplitude as regards the cases concerning the dishonour of cheques stands so widened and so
expansive it is an idle (redundant) exercise to raise jurisdictional questions regarding the offence
under Section 138 of the Negotiable Instruments Act, 1881.

SCENARIO AFTER 2015 AMENDMENT ACT

Jurisdiction to file cases of cheque bouncing has now been changed by Negotiable Instruments
(Amendment) Act, 2015 (“Amendment Act”) which came into effect on 15th June, 2015. As per
this Amendment Act, a cheque dishonour case under Section 138 needs to be filed in the court as
per provisions of Section 141(1) and 142(2), and even all pending cheque bouncing cases shall
also get transferred to the courts as per this Amendment Act. The Amendment Act states that if
the cheque is delivered through an account then the court having local jurisdiction over the branch
where the payee or the holder maintains the account would try the case. If the transfer is made
otherwise, the court having jurisdiction over the drawee bank would entertain the case. The
Amendment Act further requires all the subsequent complaints arising out of Section 138 against
the same drawer to be filed in the same court as the first complain, if it is still pending in the court,
irrespective of whether those cheques were delivered for collection or presented for payment
within the territorial jurisdiction of that court

This Amendment Act superseded the judgement of Supreme court in the matter of Dashrath
Rupsingh Rathod v. State of Maharashtra. In this case, a 3-Judge bench of the Supreme Court had
held that a cheque bouncing case can be filed only in a court which has the territorial jurisdiction
over the place where the cheque is dishonoured by the bank on which it is drawn.
Several people raised difficulties over this because the payee of the cheque had to file a case at the
place where drawer of the cheque has a bank account. However, now the legal position has
completely changed which can be well understood from the following case;

Bridgestone India Pvt. Ltd. Vs. Inderpal Singh;

In the following case, Bridgestone India Pvt. Ltd. (“Petitioner”) had filed a case against Inderpal
Singh (“Respondent”) for dishonour of Cheque drawn on a bank at Chandigarh. The cheque was
presented at a bank of Indore where Petitioner resides and was subsequently dishonoured. A
petition was filed against the Respondent. The Respondent prayed to the court that Indore court
had no jurisdiction to entertain this aforesaid proceeding, which was eventually accepted by court
applying the Dashrath Rupsingh Rathod case which stated that jurisdiction lays only before the
court in whose jurisdiction original drawee bank was located, which is Chandigarh in the present
case.

An appeal was filed in the Supreme court by the Petitioner challenging the order. The court held
that, the new Ordinance vests jurisdiction for initiating proceedings under Section 138, inter alia,
in territorial jurisdiction of court where cheque is delivered for collection (through an account of
branch of bank where payee or holder in due course maintains an account). Therefore, in the
following case, Section 142(1)(a) gives jurisdiction to Indore court to entertain the aforesaid
proceedings and the judgement rendered in the Dashrath Rupsingh Rathod case shall not stand in
any way of Petitioner insofar as territorial jurisdiction for initiating a proceeding emerging from
dishonour is Cheque is concerned.