Section 138 of the Negotiable Instruments Act, 1881: A Complainant’s Legal Arsenal Against Cheque Dishonour.

By: Samadrita Debbarma

Abstract

The Indian financial system rests on the credibility of negotiable instruments, especially cheques. Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), introduced by the 1988 amendment, serves as a penal provision to reinforce this trust. Despite being quasi-criminal in nature, its ultimate objective is compensatory justice for the aggrieved complainant. This article examines Section 138 from the vantage point of the complainant exploring its applicability, strategic responses to defences, limitations, procedures, and the reliefs available. Drawing upon statutory text and key judgments, the article provides a practical and academic guide for effective legal action under the section.

Introduction

Negotiable instruments, particularly cheques, are essential to modern commerce. The dishonour of such instruments disrupts financial trust, undermines business integrity, and delays justice. Recognizing this, the legislature criminalized cheque dishonour by enacting Section 138 through the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988[1]. Section 138 NI Act punishes the drawer of a dishonored cheque with imprisonment and/or fine, transforming a civil wrong into a penal offence to ensure repayment and uphold the sanctity of financial instruments. The section reflects legislative intent to prioritize speedy and summary justice. It aims to balance the punitive with the compensatory, offering complainants a dual track of criminal prosecution and monetary recovery. Moreover, by criminalizing the dishonour of cheques, the law seeks to enhance the reliability of these instruments and foster greater accountability in commercial dealings. This provision has played a pivotal role in bolstering the credibility of financial transactions in India, allowing businesses and individuals to engage in commerce with greater confidence. It ensures that drawers of cheques are not allowed to escape liability lightly and that payees have a credible mechanism to enforce their claims in the event of default.

Section 138 is thus not merely a legal mechanism to penalize the drawer but a broader instrument of public economic policy designed to ensure the security and continuity of commercial transactions. Its deterrent effect serves not only the direct parties to a transaction but also strengthens systemic trust in financial instruments as a whole. In today’s highly digitized and interconnected economic environment, the ability to enforce cheque-based obligations swiftly and decisively contributes directly to market efficiency, business discipline, and investor confidence. Consequently, Section 138 stands as a pillar in the legislative architecture that governs transnational justice and business ethics in India.

Applicability of Section 138: Preconditions for Invoking the Provision

Section 138 of the NI Act is a quasi-criminal provision, meaning it carries both penal consequences and compensatory aims. The nature of the offence is bailable, non-cognizable, and compoundable. It is tried summarily by a Magistrate of the First Class and aims to provide a swift legal remedy for aggrieved complainants. Though criminal in appearance, the primary objective of the provision is to uphold financial credibility and ensure repayment through penal deterrence, rather than punishment for its own sake.

To successfully invoke Section 138, the complainant must establish the following:

3.1 Essential Ingredients:

• Cheque must be drawn for discharge of debt or liability
• Cheque must be presented within 3 months (from the date of its issue) or within its validity period.
• Dishonour by bank:
• Demand notice within 30 days: The payee/complainant must issue a written demand notice to the drawer within 30 days of receiving information from the bank regarding dishonour. This notice must clearly state the cheque number, date, amount, and the reason for dishonour, and must demand payment within the prescribed time.

15-day grace period: The drawer is afforded a statutory opportunity to make good on the payment within 15 days of receiving the notice. If the drawer complies within this period, no offence is deemed to have been committed under Section 138.

Complaint within 30 days: If payment is not made within the 15-day window, the complainant must file a criminal complaint before the Magistrate within one month from the date the cause of action arises (i.e., the expiry of the 15-day period). This complaint must be accompanied by necessary documents such as the dishonoured cheque, return memo, notice, and proof of service.[1]

Failure to comply with any of the above conditions is fatal to the prosecution. However, courts may condone delay under Section 142(b) of the Act for sufficient cause, provided the complainant offers a reasonable explanation supported by evidence or affidavits to justify the delay. This provision ensures that minor procedural lapses do not defeat substantial justice in meritorious cases.

Presumptions in Favour of Complainant

4.1 Section 139: Presumption of Legally Enforceable Debt

The NI Act provides a legal presumption in favour of the complainant under Section 139:

“It shall be presumed, unless the contrary is proved, that the holder of a cheque received it… for the discharge, in whole or in part, of any debt or other liability.”

This presumption is rebuttable, but it shifts the initial burden to the accused. The Supreme Court in Rangappa v. Sri Mohan[1] affirmed that the presumption extends to both issuance and existence of the liability. The complainant is not required to initially prove the existence of debt beyond doubt; rather, the onus is on the accused to rebut the presumption through cogent evidence. The presumption under Section 139 stands unless it is displaced by preponderance of probabilities as demonstrated by the accused, not mere denial.

4.2 Section 118: Presumption of Consideration

Section 118 adds another layer of support by presuming that every negotiable instrument was drawn for consideration. This means it is presumed that the cheque was issued for a valid, lawful, and valuable consideration. In the absence of evidence to the contrary, courts will accept this presumption, reinforcing the complainant’s claim. It strengthens the position of the holder in due course and supports the statutory intent of easing financial transactions by placing trust in documentary instruments.

Legal Procedure:

❖      Cheque Dishonour

• Cheque is returned unpaid due to insufficient funds/account closed/etc.
• Obtain bank return memo.
• This memo is critical documentary proof that triggers the statutory process under Section 138. It contains reasons for dishonour, date, and relevant transaction details essential for notice drafting.

• Issue Legal Notice
• Send demand notice within 30 days of return memo.
• Demand payment within 15 days of receipt.
• The notice must be sent to the correct address of the drawer and should clearly mention the transaction, cheque details, and legal liability. Proof of dispatch through speed post, registered post, or courier service is necessary.

❖    Wait for 15 Days

• If payment is not made, cause of action arises on the 16th day.
• This statutory waiting period allows the drawer an opportunity to avoid prosecution by fulfilling their obligation.

❖    File Complaint

• File complaint within 30 days before Magistrate.
• Attach cheque, return memo, notice, postal receipt, affidavit.
• The complaint must be filed under Section 223 BNSS and supported by an affidavit under Section 145 of the NI Act. The court may take cognizance if all conditions are fulfilled.

❖    Summoning the Accused

• Magistrate takes cognizance and issues summons.
• If the accused fails to appear, bailable or non-bailable warrants may be issued. Compliance with Section 202 BNSS regarding inquiry before issuance may apply in some jurisdictions.

❖    Trial Procedure

• Summary trial begins under Section 143.
• Complainant files evidence by affidavit.
• Cross-examination by accused.
• The accused is then asked to enter defence and may submit documents and witness testimonies. If needed, the court may convert the case into a regular summons trial.

❖    Final Arguments and Judgment

• Court may convict if defence fails to rebut presumption.
• The court weighs the evidence, documents, and arguments from both parties. If the presumption of liability is not rebutted effectively, conviction is likely.

❖    Sentencing and Relief

• Imprisonment up to 2 years or fine up to twice the cheque amount or both.
• Compensation can be awarded.
• Execution of compensation under BNSS.
• The complainant may apply under Section 431 BNSS for recovery of compensation/fine, including issuance of distress warrant or attachment of property.
• Countering Accused’s Defence:  Complainant’s Strategic Tools
  Despite the presumptions, accused persons typically raise several defences. Below are common strategies and how complainants may overcome them:

Countering Accused’s Defence:  Complainant’s Strategic Tools

Despite the presumptions, accused persons typically raise several defences. Below are common strategies and how complainants may overcome them:

●      6.1 Cheque Issued as Security

• Accused often argue that the cheque was issued as a security instrument, not for debt discharge. In such situations, the drawer may contend that the cheque was merely handed over as a form of security for a loan or arrangement and was not meant to be presented for encashment unless a default occurred.
• Response: If the cheque was handed over after transaction initiation, courts have held it is presumed to be for discharge of liability. The issuance of the cheque post the commencement of the transaction indicates that there existed a legally enforceable

liability at the time of issuance, which triggers the statutory presumptions under Sections 118 and 139 of the Negotiable Instruments Act.

• Key Case: Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd.[1]

6.2 Disputed Signature / Blank Cheque

• Another frequent defence involves disputing the signature on the cheque or asserting that the cheque was signed blank and later filled by the complainant without the drawer’s consent. The accused may claim that they never authorized the amount or payee details mentioned on the cheque.
  • Response: As per Bir Singh v. Mukesh Kumar[2], even a signed blank cheque voluntarily given attracts Section 138 liability. The Supreme Court has clarified that once a signed cheque is voluntarily handed over, the presumption under Section 139 operates, and it is immaterial whether the cheque was blank or filled up later. The burden shifts to the accused to rebut this presumption with credible evidence.

6.2   Time-Barred Debt

• If the accused claims the debt is barred by limitation, they contend that the underlying debt is not legally enforceable because the statutory period of limitation for recovery has lapsed.
  • Response: Acknowledgment in balance sheets, emails, or part-payments revive the debt. If the debtor has, within the limitation period, acknowledged the debt either in writing, through financial statements, correspondence, or by making partial payments, the limitation period is extended, making the debt legally enforceable.
  • Case Law: A.V. Murthy v. B.S. Nagabasavanna[1].

6.2   Stop Payment Instruction

• The accused may defend themselves by stating that they had issued a stop payment instruction to the bank, leading to the dishonour of the cheque, and thus no offence under Section 138 is made out.
  • Response: Dishonour due to stop payment is treated as dishonour under Section 138, provided other ingredients are met. The issuance of a stop payment instruction does not automatically absolve the drawer if there existed a debt or liability at the time of issuance of the cheque.
  • Key Case: Goa Plast (P) Ltd. v. Chico Ursula D’Souza.

6.5 Absence of Liability

• The accused may assert that no legally enforceable liability existed at the time of issuing the cheque, implying that the cheque was not issued towards the discharge of any debt or liability.
  • Response: Oral or documentary evidence, prior payment entries, invoices, and witness examination can substantiate the debt. The complainant may bring forward relevant records such as invoices, account statements, receipts, or testimony from witnesses to establish that the cheque was indeed issued towards a subsisting obligation.

Limitations and Challenges Faced by the Complainant

Despite the legal presumptions, complainants face numerous practical challenges:

7.1 Procedural Rigor

Strict deadlines for notice and complaint under Sections 138(b) and 142(b) of NI Act, can trip up valid claims. Delay beyond 30 days post-default is often fatal unless condonation is sought. Even a seemingly minor procedural lapse like delayed dispatch of notice or incomplete address can invalidate the complaint. Courts have consistently held that statutory timelines under Section 138 are mandatory, thereby compelling the complainant to follow them with precision and diligence.

7.2 Execution of Judgment

Conviction alone does not guarantee recovery. Complainant must move execution petitions under Sections 421 or 431 BNSS for recovery of fines and compensation. The recovery process can be cumbersome, involving issuance of distress warrants, attachment of property, and sometimes arrest. These post-conviction procedures require the complainant to remain vigilant even after securing a favourable judgment.

7.3 Absence of Complainant

If complainant fails to appear, the case may be dismissed for default under Section 279 BNSS, barring revival except through special leave. Courts have little tolerance for repeated non-appearance, and one instance of absence can prove fatal to the prosecution, requiring extraordinary efforts for restoration.

7.4 Frequent Adjournments and Delay

Though cases are to be tried summarily under Section 143, they are often delayed due to procedural laxity and repeated adjournments. Accused persons frequently misuse legal provisions to stall proceedings through stay petitions, transfer applications, and frivolous interlocutory pleas. This undermines the very objective of Section 138, which is to ensure time-bound justice for complainants.

Reliefs and Remedies for the Complainant

8.1 Criminal Sanctions under Section 138 NI Act:

Upon conviction, the accused may face:

• Imprisonment up to 2 years,
• Fine up to twice the cheque amount,
• Or both.

This punishment serves as a deterrent and reaffirms the legal obligation of the drawer. The provision enables the complainant to press for penal action as a means of securing compliance.

Case Law: Suganthi Suresh Kumar v. Jagdeeshan.

8.2 Interim Compensation – Section 143A NI Act:

Introduced via 2018 amendment:

• Enables award of 20% interim compensation during the trial.
• Court discretion, not mandatory.

This provision empowers the court to award a portion of the cheque amount to the complainant even before final adjudication, thereby easing the financial strain suffered due to dishonour.

Case law: G.J. Raja v. Tejraj Surana.[1]

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[1] G.J. Raja v. Tejraj Surana, (2019) 19 SCC 469

8.3 Appellate Compensation – Section 148 NI Act:

Appellate Courts can direct deposit of at least 20% of fine/compensation before hearing the appeal against conviction.

This safeguard prevents frivolous appeals and ensures partial restitution during pendency of appeal.

Case law: V. Narasimha Murthy v. Santhosh J.[1]

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[1] V. Narasimha Murthy v. Santhosh J., 2019 SCC OnLine Kar 2978

8.4 Compensation under Section 395 BNSS:

Court may grant compensation to be recovered as fine under Sections 394(3), 421, and 431 BNSS. This enables monetary relief to the complainant and offers an avenue for recovery via execution proceedings including distress warrants, property attachment, or other coercive measures. Under Section 147 NI Act, offences under Section 138 are compoundable. This means that the parties can mutually agree to settle the matter and request the court to drop proceedings, even after conviction, provided compensation is paid. The object of compounding is to provide an opportunity for amicable resolution and reduce the burden on criminal courts.

Role of Compounding and its Limits

9.1 Judicial Guidelines:

In Damodar S. Prabhu v. Sayed Babalal H.[1]:

• Accused may apply for compounding at various stages.
• Penalty payments are graded:
  • 10% of cheque amount before Magistrate,
  • 15% before Sessions/High Court,
  • 20% before Supreme Court.

The Supreme Court, in this landmark judgment, laid down a graded cost structure to discourage delayed settlements and to promote early resolution. These guidelines aim to strike a balance between the rights of the complainant and the liberty of the accused, while ensuring that public interest in efficient judicial administration is protected.

[1] Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663

9.2 Court’s Power to Close Case Without Complainant’s Consent:

In Meters and Instruments (P) Ltd. v. Kanchan Mehta[1]:

• Court may, in interest of justice, discharge accused even if complainant resists compounding if compensation is paid.

This ruling emphasized that in cheque dishonour cases, the emphasis should be on restitution rather than incarceration. However, such discretion was subject to criticism for undermining complainants’ autonomy and was later restricted.

This decision was partially overruled in Expeditious Trial of Cases under Sec. 138 NI Act, 2021 SCC OnLine SC 325, reasserting limits on such discretion. The Supreme Court clarified that compounding under Section 147 requires voluntary consent of the complainant, and courts cannot compel a settlement merely because compensation has been paid. This ensures that the statutory remedy under Section 138 remains both just and effective.

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

Conclusion

Section 138 is a key instrument for protecting the payee from fraudulent cheque transactions and delayed recoveries. However, the journey from cheque dishonour to judicial remedy is fraught with procedural and practical obstacles. The complainant must proactively safeguard the timelines, document every step, and counter expected defences with credible evidence. This includes maintaining a clear transnational record, ensuring timely issuance of demand notices, and prompt filing of the complaint supported by all requisite documentation. Courts have consistently emphasized the importance of procedural compliance, making diligence at each step a critical component of success.

With the evolving judicial landscape emphasizing compensation over conviction, complainants can secure justice by combining statutory entitlement with procedural diligence. Legislative changes like interim and appellate compensation under Sections 143A and 148 respectively, signal a shift towards restorative justice. This approach ensures financial restitution for the complainant while reducing the burden on the judiciary through potential compounding. Section 138 is not merely punitive; it is a commercial safeguard and in the hands of a skilled advocate, a powerful weapon of recovery. A well-strategized complaint under this provision can lead not just to conviction, but to actual recovery of dues. Thus, Section 138 remains one of the most effective legal tools for enforcing financial discipline in commercial relationships. Section 138 remains a robust tool for financial accountability. Yet, its successful invocation depends on procedural compliance, strategic litigation, and assertive enforcement. For complainants, it offers both punitive and compensatory justice in cases of cheque dishonour.

Bibliography

• Negotiable Instruments Act, No. 26 of 1881, INDIA CODE (1881)
• Negotiable Instruments Act, No. 26 of 1881, §§ 138–142, INDIA CODE (1881)
• Rangappa v. Sri Mohan, (2010) 11 SCC 441
• Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd., (2016) 10 SCC 458
• Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197
• A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642
• Goa Plast (P) Ltd. v. Chico Ursula D’Souza, (2004) 2 SCC 235
• Suganthi Suresh Kumar v. Jagdeeshan, (2002) 2 SCC 420
• G.J. Raja v. Tejraj Surana, (2019) 19 SCC 469
• V. Narasimha Murthy v. Santhosh J., 2019 SCC OnLine Kar 2978
• Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663
• Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560
• Bharatiya Nagarik Suraksha Sanhita (BNSS).