N I ACT :

Overview of the NI Act, 1881: The Negotiable Instruments Act, 1881

governs the negotiable instruments, which are pieces of paper that
reflects a sum of money owed to one person and can be transferred to
another by delivery. A negotiable instrument, as per Section 13 of this
Act, is a promissory note, a bill of exchange, or a cheque payable to
the bearer. Promissory notes are described in Section 4 of NI, Act
as a written instrument containing an unconditional undertaking signed
by the creator to pay a sum of money to a specific individual or the
bearer of the instrument. This isn’t a banknote or a currency note,
either. The drawee may or may not be a real person. A bill of
exchange, also known as a draught, is a written document that
contains an unconditional order, signed by the maker, and orders a
specific individual to pay a specific sum of money to a specific person
or the bearer of the instrument, as specified in Section 5 of this Act. A
drawer, a drawee, and a payee are the parties to a bill of exchange. In
the case of a bill of exchange, the drawee may be an individual or a
bank. This is a representation of a debtor’s debt to a creditor. A
cheque is described in Section 6 of this Act as a bill of exchange
drawn on a specific banker that is not payable otherwise on demand.
It’s an order from a drawer or depositor on the bank. A drawee and a
payee are the parties to a cheque. Only one bank can be the drawee.
The penal provisions of this Act start from Section 138 to Section 142
and make a cheque bounce or dishonor of a cheque illegal

In all kinds of commercial transactions, cheques have always been the

most convenient and valued form of payment. If these cheques did not
exist or were not accepted as a legitimate means of payment in
business transactions, businesses would have come to a halt.
Similarly, if a cheque that was accepted in good faith is bounced, the
payee will suffer because the cheque will lose its authenticity and
confidence. In situations where there is a scarcity or inadequate funds
in a drawer’s account, the provisions under Section 138-142 of the
Negotiable Instruments (NI) Act, 1881, which deals with an element of
dishonor of cheques, are attracted. According to the 213th Law
Commission Report and numerous newspaper reports, India has
approximately 38 to 40 lakh cases of bounced cheques, which is
causing the Indian justice system to stagnate. Chapter XVII, which
contains Sections 138 to 142, was to instil trust in the effectiveness of
banking operations and to lend legitimacy to negotiable instruments
used in business transactions. If a party issues a cheque as a form of
deferred payment and the payee accepts the cheque with the
expectation of receiving payment on the due date, the payee does not
suffer as a result of non-payment. The penal provisions of Sections
138 to 142 of the Act were enacted to ensure that liabilities incurred by
the use of cheques as a form of deferred payment are met. Section
138 of the Act specifies the situations in which a case/petition for
cheque dishonor can be filed in a court of law .
The following are the ingredients required to comply with the
provisions of Section 138:
A person must have drawn a cheque for payment of money to
another for the discharge of any debt or other liability;
That cheque has been presented to the bank within a period of three
months;
That cheque is returned by the bank unpaid, either because of
insufficient of funds or that it exceeds the amount arranged to be paid
from that account by the bank;
 The payee makes a demand for the payment of the money by giving
a notice in writing to the drawer of the cheque within 30 days of the
receipt of information by him from the bank regarding the return of the
cheque as unpaid;
The drawer fails to make payment to the payee within 15 days of the
receipt of the notice.

Penalty:
There are two remedies as penalty for dishonor of a cheque:

In civil- Payee/Drawee may initiate recovery procedure under Order

37 of the Code of Civil Procedure,1908 in a jurisdictional court apart
from criminal proceedings. The payee/drawer recovers the amount by
the court order.

In criminal- Dishonor of Cheque attracts section 138 of Negotiable

Instruments Act,1881 which provides imprisonment which may extend
up to two (2) years or fine which may extend up to twice of the cheque
amount or both. This offence is bailable, compoundable and non-
cognizable offence (a case in which a police officer cannot arrest the
accused without an arrest warrant).
The courts can take cognizance of the offence only when:

1. The cheque is presented to the bank within 3 months from

the date on which it is drawn;
2. Notice has been issued to the drawer demanding the
defaulted payment within 30 days from the date of
dishonour by the bank;

3.The drawer fails to pay the defaulted payment within 15 days

from the receipt of the notice.
Judgement would apply retrospective effect. The Supreme Court had
directed that only in those cases where post the summoning and
appearance of the alleged accused, the recording of evidence has
commenced as envisaged in section 145(2) of the Negotiable
Instruments Act, 1881, proceeding will continue at that place. All other
complaints (including those where the accused / respondent has not
been properly served) shall be returned to the complainant for filing in
the proper court, in consonance with exposition of the law, as
determined by the Supreme Court.

After the amendment in 2015, The Gujarat High Court in its judgment
in Brijendra Enterprise v. State of Gujarat and Another[9] has
explained the law relating to territorial jurisdiction for filing a complaint
for dishonor of cheques.

As per the Negotiable Instruments (Amendment) Act, 2015 a

complaint can be filed under Section 138 for dishonor of cheque
at a court within whose local jurisdiction:

 The branch of the bank is located.

 The payee or the holder maintains an account.

Limitation:

According to sec 138 and 142 of NI act, the drawee has to send a
legal notice within 30 days from the date of return (dishonor) of
cheque and asking the amount mentioned in the cheque to pay within
the 15 days. On expiry of fifteen days from the service of notice, you
have to file a complaint before the First Class Judicial Magistrate
within 1 month of the said expiry. Once a cause of action has arisen,
the limitation will begin to run and it could not be stopped by
presenting the cheque again so as to have a fresh cause of action and
fresh limitation.

Compoundable offence:
It is a compoundable as per section 147 of the NI ACT and the
procedure followed as per the conditions mentioned case
law Damodar S Prabhu Vs Sayed Babalal H[10] The court observed
that Section 147 does not carry any guidance as to how to proceed
with compounding of offences. Further provisions of Section 320 of
Cr.P.C also cannot be applied.

The Hon’ble Apex Court by exercising its power under Article 142 of
the constitution laid down guidelines for encouraging compounding at
the earliest stage. As per these guidelines, payment of costs as per
laid down scale has been made a pre-condition for allowing
compounding of the offence.

The scale laid down is as follows:

1. If application is made before the Magistrate at the first or second

hearing of the case, compounding may be allowed without fine.
But if application is made at a later stage, compounding may be
permitted by imposing costs up to 10% of the cheque amount.

2. 15% of cheque amount if compounding is preferred in appeal

either before sessions court or high court.

3. 20% of the cheque amount if compounding is sought before the

Supreme court for wasting the precious time of the courts.

It has been clarified by the Hon’ble Supreme court in this case that the
above scale is indicative and discretion is vested in the court dealing
with the matter. In other words, the court dealing with the matter has
to take into account facts of each case before it, for imposing costs
which will be deposited with appropriate Legal services authority.

Then the compounding requires the consent of both parties, even in

absence of such consent, the court, in the interests of justice, on being
satisfied that the complainant has been duly compensated, can in its
discretion close the proceedings and discharge the accused is
mentioned in the case M/s Meters and Instruments Private Limited
& Another. v. Kanchan Mehta.

After conviction also, parties can make a compromise and that one is
a valid and the accused is ready to pay the amount as per the
settlement then the compounding of offence is allowed and accused
will be acquitted. It was mentioned in the case law Vinay Devanna
Nayak v. Ryot Seva Sahakari Bank Ltd..

The object of section 320 of the Cr.P.C would not strictly apply
because NI Act being a special statute, provisions of section 147 of NI
Act will have an overriding effect over provisions of Cr.P.C relating to
compounding of offences. Before the judgement court allows the
person to compound a case under section 147 of NI act, then the
court pronounced the judgement as a conviction along with fine, then
also accused can settle the dispute as per section 147, if the parties
ready to settle the dispute as per section 147 then the section 138
should be set aside.

And the accused will get the acquittal. It was mentioned in the case
law K.M.Ibrahim v. K.P.Mohammed and Another.

Section 138 of the Negotiable Instruments Act, 1881:

OBJECT:
The objective of sec 138 of NI Act is To promote the efficiency of
banking operations and to ensure credibility in transacting
business through cheques is mentioned in the case law Modi
Cements Ltd. v. Kuchil Kumar Nandi[1]. And this Act was enacted
and Section 138 of NI Act thereof incorporated with a specified object
of making a special provision by incorporating a strict liability so far as
the cheque, a negotiable instrument, is concerned. The law relating to
negotiable instrument is the law of commercial world legislated to
simplify the activities in trade and commerce making provision of
giving sanctity to the instruments of credit which could be deemed to
be convertible into money and easily passable from one person to
another.

The negotiable instruments are in fact the instruments of credit being

convertible on account of legality of being negotiated and are easily
transferable from one person to another. To attain the objectives of
the Act, the legislature has, in its wisdom thought it proper to make
such provisions in the Act for conferring such privileges to the
mercantile instruments considered under it and provide special
penalties and procedure in case the obligations under the instruments
are not discharged.

It is mentioned in the case law M/s. Dalmia Cement (Bharat) Ltd. V.

M/s. Galaxy Traders and Agencies Ltd. and Others[2]. Section 138
of the NI Act is not to protect unscrupulous drawers who never
intended to honour the cheques issued by them, it being a part of their
modus operandi to punish the unscrupulous person. It was mentioned
in the case law Vinod Shivappa v. Nanda Belliappa.

Scope of Section 138 of Negotiable Instrument

Act,1881:
Section 138 creates statutory offence in the matter of dishonor of
cheques on the ground of insufficiency of funds in the account
maintained by a person with the banker and exceeds the amount
arranged to be paid from that account by an agreement made with
that bank as mentioned in the act.
But there are many reasons for dishonor of cheque i.e., signature
doesn’t match, Payment stopped by the drawer, Account closed by
the drawer etc., whenever any cheque for discharge of any legally
enforceable debt or other liability is dishonored by the bank for want of
funds and the payment is not made by the drawer in spite of a legal
notice of demand, it shall be considered to be a criminal offence. Act
considers the dishonor of cheque as a criminal offence but it is in a
summary mode of enforcing a civil right.

Generally, in a criminal law mens rea is an essential component of a

crime but dishonor of cheque is a criminal offence but here no need of
proving a mens rea and it is not an essential thing. Construction of the
strict liability in this section is an effective measure to prevent usual
careless or change of attitude of the drawers in discharge of debts.

These ingredients mentioned in the case law Kusum Ignots and Alloys
ltd. V. Pennar Peterson Securities Ltd[4].

Decriminalizing section 138

On 8 June, 2020 the Ministry of Finance proposed decriminalizing
various minor offences “for improving business sentiment and
unclogging court processes”, which also include Section 138 of
Negotiable Instruments Act, 1881.
The main reason for this proposal is to increase the foreign
investment in our country and will help in boosting the economy of
the country during this condition.
The objective of section 138 of negotiable instruments Act is to
promote the efficiency of banking operations and to ensure
credibility in transacting business through cheques1 with the
corona virus outbreak in the country, the economy is going down
and to curb this situation it is proposed to decriminalize section
138 of Negotiable Instruments Act. There are heavy debates and
discussions going on decriminalizing section 138 or not because
this section effects the public at large. There is no doubt that it will
bring an ease to the business but on the other hand it has some
bad impact on the business sector as well for example the
creditors will lose the credibility in transactions through cheques.
The main idea behind the proposal it is the ease of business and
attracting investors. In the report the following principles were
propounded and certain things are to be kept in mind.

 Decriminalizing will decrease the burden on businesses man

and will attract confidence among the investors.
 Increase in the economic growth, public interest and national
security.
 Mens rea plays an important role in attracting criminal
liability. Therefore it is important to evaluate the nature of the
non-compliance.
 The habitual nature of non-compliance has to be kept in
mind. Negligence must be differentiated with the non-
compliance on regular basis.
This decriminalising section 138 will frustrate the main motive
behind enforcement of this act. Thus would be encouraging
perpetrators and more cases of defrauding money.

Conditions for constituting the offense under Section 138:

1. A person (will be drawer of the cheque) should have a legally

enforceable debt or other liability towards another person (will be
payee or holder of the cheque, as the case may be) and a cheque
 is drawn to discharge the debt or liability.

2. Cheque is returned due to insufficient funds or exceeds the

amount agreed upon to be paid by the bank.

3. Cheque is to be presented within six months from date of its drawn

or till its validity, whichever being earlier.
Ø Note:
As per RBI guidelines, with effect from April 1, 2012, the validity
period of Cheques, Demand Drafts, Pay Orders and Banker's
Cheques will be reduced from six (6) months to three (3) months,
from the date of mentioned in the instrument.

4. A written notice within 30 days is sent to the drawer along with the
receipt of information from bank about failure of payment of
cheque.

5. The payee or holder doesn’t receive the payment within 15 days of

the receipt of send written notice to the drawer.

Jurisdiction:
 Section 142(2) (a) states that if a cheque is delivered for
collection by an account, the case for a cheque bounce
will be tried by a court not lower than a Metropolitan
Magistrate or a Judicial Magistrate of the First Class/
Degree, whose local jurisdiction includes the branch of the
bank where the account of the holder is located.
 Section 142(2) (b) states that if the cheque is submitted for
payment to the payee or holder in due course otherwise
via an account, the case will be tried by a court not lower
than a Metropolitan Magistrate or a Judicial Magistrate of
the first class/degree, whose local jurisdiction includes the
branch of the bank where the holder’s account is located.

Section 139 of the Negotiable Instruments Act:. The

payee would be believed to have issued the cheque
referred to in Section 138 for the discharge, in whole or in
part, of any debt or liability until the contrary is shown. This
assumption is undoubtedly rebuttable by the accused on
the basis of the “preponderance of the proof.” The
prosecution will fail if the accused can develop a probable
defense that raises a reasonable doubt about the nature of
a legally enforceable debt or liability and the accused can
do so by relying solely on the prosecution’s materials or
testimony; in many cases, the accused did not need to
provide any additional or personal evidence. Virender
Kumar vs. Sumit 25th April 2018 The accused was
convicted in this case because he was unable to refute the
accusation of legal responsibility. The accused will
discharge his burden of proof and pass it to the
prosecution by showing preponderance of probabilities
and pointing out any flaws in the complainant’s tale or
truth. Other defenses can exist, depending on the
circumstances. However, Section 140 of the Negotiable
Instruments Act clarifies that there is no such protection
and that the drawer had no reason to suspect the cheque
would be bounced at the time it was released.
If a cheque is dishonored when a cheque is returned:
unpaid, the drawee bank sends a ‘Cheque Return Memo’
to the payee’s banker, detailing the explanation for non-
payment. The dishonored cheque and the memo are then
sent to the payee by the payee’s banker. If the holder or
payee assumes the cheque will be honored a second
 time, he or she will resubmit it within three months of the
date on it. If the cheque issuer fails to make payment of
the cheque amount or to make a deposit of the said
amount, the payee has the right to take legal action
against the drawer of the cheque. Only if the sum
mentioned in the cheque is towards the discharge of a
debt or any other obligation of the defaulter towards the
payee, the payee can legally sue the defaulter/drawer for
the cheque dishonored. The drawer cannot be prosecuted
if the cheque was given as a gift, loan, or the cheque
amount was for illegal purposes.
The procedure that is followed in matters with regard
to Section 138 of the Act:
i. A legal notice containing all relevant information must be
sent to the drawer by registered post/email within 30
days of the cheque being dishonored. The drawer has
15 days’ time to make the payment; if the payment is
received, the dispute is resolved. If the payment is not
made, the complainant must file a criminal case against
the drawer under Section 138 of the Act within 30 days
of the expiration of the 15 day period stated in the notice,
with the concerned magistrate court within the
jurisdiction. .
ii. Ii. The defendant or his designated representative must
testify in the witness box and provide pertinent
information for the complaint to be filed. If the court is
convinced that the complainant’s allegations are true,
the accused will be summoned to appear before the
court.
iii. iii. If the accused refuses to appear after being served
with the summons, the court may issue a bailable
 warrant. If the drawer does not appear after this, a non-
bail-able warrant may be issued by the court.
iv. iv. If the drawer/accused appears, he will submit a bail
bond to guarantee his presence at trial. After that, the
accused’s plea is registered. If he enters a guilty plea,
the case will be dealt with by the court for sentencing. If
the accused denies the allegations, a copy of the
complaint will be served on him.
v. v. The Complainant may present his evidence in the
form of an affidavit and produce all documentation in
support of his complaint, including the original
documents. The accused or his attorney will cross-
examine the claimant/ complainant.
vi. vi. The accused will be given the chance to present his
case. The accused would also have the ability to present
evidence in support of his prosecution, as well as
witnesses in his defense. The defendant will cross-
examine the accused and his witnesses.
vii. vii. The arguments are the final stage of the
proceedings, in which the court will render a decision. If
the accused is acquitted, the case is closed; however,
the complainant can appeal to the High Court, as per the
judgment dated 23.8.2019 passed in the case of “kushal
Kawaduji Singanjude vs. Ram Narayan Gurga
Prasad Agarwal, and if the accused is convicted, he
can appeal to the Sessions Court. Moreover, it is
important to remember that the offense under Section
138 of the Act is now compoundable.
viii. Recent Supreme Court rulings for speedy disposal
of cases under Section 138 of the Act: The Supreme
Court, in its judgment dated 1st August 2014, in the case
of Dashrath Rupsingh Rathod versus State of
Maharashtra and another (Criminal Appeal No. 2287 of
2009), Held- that the territorial jurisdiction for the
dishonor of cheques is restricted to the court within
whose local jurisdiction the offense was committed,
which in the present context is where the cheque is
dishonored by the bank on which it is drawn. The
Supreme Court has directed that only those cases where
post the summoning and appearance of the alleged
accused, the recording of evidence has commenced as
envisaged in section 145(2) of the Negotiable
Instruments Act, 1881, will proceeding continue at that
place. All other complaints (including those where the
accused/respondent has not been properly served) shall
be returned to the complainant for filing in the proper
court, in consonance with an exposition of the law, as
determined by the Supreme Court. In the case of
Dayawati v. Yogesh Kumar Gosain, 2017 the Delhi
High Court considered whether a criminally
compoundable offense under Section 138 could be
resolved by mediation. The Court held that the
Legislature had not expressly established an explicit
legislative clause allowing the criminal court to refer the
plaintiff and convicted parties to alternative dispute
resolution mechanisms. The Code of Criminal Procedure
allows and recognizes arbitration without stipulating or
limiting the method used to achieve it. Thus, there is no
bar to using alternative conflict resolution procedures
such as arbitration, mediation, and conciliation
(recognized under Section 89 of the Civil Procedure
Code, 1908) for the purpose of resolving conflicts
involving offenses covered by Section 320 of the Cr.P.C.
It also noted that the proceedings under Section 138 of
 the Act are distinct from other criminal cases and that
they are more similar to a civil wrong with criminal
overtones. After considering the intent of incorporating
Section 138 and other Provision of chapter XVII of the
act, the Honorable Supreme Court made the following
observation in Meter and Instrument (P) Ltd. V.
Kanchan Mehta.
ix. From the above discussion following aspects
emerge: The violation of Section 138 of the Act is mainly
a criminal offense. In light of the presumption under
Section 139, the burden of proof is on the accused, but
the standard of proof is “preponderance of probability.”
The case must be tried summarily in accordance with
the rules of the Cr.P.C. with any modifications necessary
for proceedings under Chapter XVII of the Act. As read,
the theory of Section 258 Cr.P.C. will apply, and the
Court will be able to close the case and discharge the
accused if the amount of the cheque, as well as
calculated costs and interest, has been paid and there is
no need to pursue the punitive element.Compounding at
the outset should be encouraged, but it is not prohibited
at a later stage subject to reasonable compensation as
determined by the parties or the Court. Cases brought
under Chapter XVII of the Act are usually tried in a
summary manner. The Magistrate’s discretion under
Section 143’s second proviso, to hold that it was
undesirable to try the case summarily because a
sentence of more than one year could be imposed, must
be exercised after taking into account the fact that, in
addition to the sentence of imprisonment, the Court has
jurisdiction under Section 357(3) Cr.P.C. to award
suitable compensation under a default sentence In
 certain cases, a jail term of more than one year might
not be necessary with this strategy. It is unnecessary for
the Magistrate to record any further preliminary proof
because evidence of the case may be submitted on
affidavit, subject to the Court summoning and inspecting
the individual giving the affidavit, and the bank’s slip
being prima facie evidence of the dishonor of cheque. At
any point of a trial or other case, such affidavit testimony
may be used as evidence. The person giving the
affidavit may be examined according to Section 264
Cr.P.C. Except where exercising power under Section
143’s second proviso becomes required, the scheme will
follow summary procedure. Where a one-year sentence
may be necessary and compensation under Section
357(3) is deemed insufficient, taking into account the
amount of the cheque, the accused’s financial ability,
and his or her actions, or any other circumstances.”
x. The Negotiable Instruments (Amendment) Act, 2018,
which took effect on September 1, 2018, requires a court
trying a case involving cheque bouncing to order the
drawer to pay interim compensation to the claimant of
not more than 20% of the cheque sum within 60 days of
the trial court’s order. This interim fee can be charged in
a summary trial or a summons case in which the drawer
pleads not guilty to the allegations in the lawsuit, or upon
the framing of a charge in some other case.
Furthermore, the Amendment allows the Appellate Court
to order the claimant to deposit a minimum of 20% of the
fine/compensation awarded, in addition to temporary
compensation, while hearing appeals against convictions
under Sec. 138.
xi. LEGAL ACTION: As per the provision of section 138 of
Negotiable Instrument Act, 1881 Cheque dishonor is a
criminal offense punishable by up to two years in prison,
a monetary penalty, or both, Or If the payee chooses to
act lawfully, the drawer should be given the opportunity
to refund the check balance immediately. This
opportunity can only be granted in the form of a written
notice. The payee has 30 days from the date of receiving
the bank’s “Cheque Return Memo” to deliver the notice
to the drawer. The notice should state that the balance
of the cheque 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 payment under the demand notice within 30 days
of receiving the notice. However, within a month of the
notice period expiring, the case must be filed in a
magistrate’s court. To move further in this situation, it is
important to consult an attorney who is well-versed and
knowledgeable in this field of law.
xii.
xiii. 1. The court will issue summons and hear the case after
receiving the complaint, as well as an affidavit and
related paper trail. If found guilty, the defaulter can be
punished/disciplined with a monetary penalty of twice the
value of the cheque, or imprisonment for a period of up
to two years, or both. For repeated bounced cheque
offenses, the bank has the right to suspend the cheque
book facility and close the account.
2. If the drawer pays an amount of the cheque within 15
days of receiving the notice, the drawer is not guilty of
any offense. Otherwise, the payee has one month from
 the notice’s expiration date to file a lawsuit in the
jurisdictional magistrate’s court.

Conclusion:
Like a coin has its two different sides, decriminalizing
section 138 will also has pros and cons of its own. On one
hand where there is an ease of doing business, on the other
hand creditors will lose confidence in the system.
Decriminalizing is not the only option left for ease of doing
business. Thus it's not a good idea to decriminalize this
section as the main intent of incorporation of this section
was increasing the confidence of the creditors and also to
increase the credibility in the cheque system.

By penalizing the offense of a cheque bounce, the

Negotiable Instruments Act helps to discourage the
abuse of cheques and ensure that transactions go
smoothly. In addition, the accused has defenses
available to prevent fake cases of cheque bounce or
dishonor. However, when dealing with cases of
cheque bounce, one must exercise extreme caution
since they entail several technicalities and
necessitate extremely precise proof of the
transactions. It’s not the same as other criminal
cases.