Section 138 of the Negotiable Instruments Act, 1881: A Comprehensive Legal Commentary

By: Ashish Kumar Singh

Introduction

In modern financial and commercial transactions, cheques are a vital instrument for secure and formalized payments, particularly in high-value commercial transactions. However, increasing misuse of cheques has led to a substantial number of cheque dishonour cases in India. To curb this trend and to instil greater trust in cheque-based payments, the Indian Parliament introduced Section 138 through the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988[1]. This provision marked a significant shift by criminalizing the dishonour of cheques under specific conditions, thereby creating a powerful deterrent against deliberate defaults.

Section 138 imposes penal consequences on the drawer of the cheque when the instrument is returned unpaid due to insufficiency of funds or when it exceeds the sanctioned arrangement with the drawee bank. Since its enactment, Section 138 has been subject to extensive judicial scrutiny and interpretation. The Supreme Court and various High Courts have played an instrumental role in evolving its scope and clarifying issues like presumption of liability, burden of proof, mens rea, service of notice, limitation periods, and even the compounding of offences. This provision now forms the bedrock of India’s cheque bounce jurisprudence and is frequently invoked in commercial disputes. Section 138 has emerged as one of the most invoked legal provisions in the country. It is estimated that nearly 20% of all criminal cases pending in magistrate courts relate to cheque bounce matters, a statistic highlighted by the Supreme Court in Meters and Instruments Pvt. Ltd. v. Kanchan Mehta[2], indicating both its significance and the urgent need for procedural efficiency.

[1] Negotiable Instruments Act, 1881, No. 26, Acts of Parliament, 1881, § 138

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

“As per 213th Report of the Law Commission and earlier judgments of this Court, more than 20% of the pending criminal cases relate to Section 138 of the Act.”

This article aims to provide a comprehensive overview of Section 138, examining its statutory framework, judicial developments, defences available to the accused, limitations, and remedies.

Statutory Framework of Section 138

Ingredients of the Offence

The following essentials must be cumulatively satisfied:

1. Cheque drawn on a valid account: The cheque must be drawn by a person on a bank account maintained by him. The drawer must have signing authorityand control over the account.
2. Cheque issued in discharge of a legally enforceable debt or liability: It is essential that the cheque was issued towards a legally enforceable liability, whether in part or full. Cheques issued as gifts, donations, or for unlawful considerations do not qualify under this provision[1].
3. Dishonour of the cheque due to insufficiency of funds or exceeding the arrangement: The cheque must be returned by the drawee bank with the endorsement of either “insufficient funds” or “exceeds arrangement.” Dishonour for other technical reasons may not attract Section 138 liability[2].
4. Issuance of a written demand notice by the payee within 30 days: Upon dishonour, the payee must issue a written demand notice to the drawer within 30 days of receiving information from the bank regarding the dishonour. The notice must specifically demand payment of the cheque amount and state the fact of dishonour.
5. Failure to make payment within 15 days of receipt of notice: The drawer is allowed a statutory period of 15 days from the date of receipt of the notice to make the payment. If the drawer pays within this period, no offence is deemed to have been committed.

[1] Kumar Exports v. Sharma Carpets, (2009) 2 SCC 513

[2] NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) 4 SCC 253

1. Filing of complaint within one month after cause of action arises: If the drawer fails to make the payment within 15 days, the cause of action arises on the 16th day. The complainant must file the criminal complaint within one month from the date of accrual of such cause of action.

Nature of the Offence

The offence under Section 138 is widely recognized as quasi-criminal in nature, signifying that while it originates from a civil liability arising out of a financial transaction, it carries with it criminal consequences to ensure the enforceability of such obligations. Unlike purely criminal offences that involve moral culpability or mens rea, Section 138 targets economic wrongs where the drawer of a cheque fails to honour a debt, thereby undermining the reliability of financial instruments. The rationale behind criminalizing such conduct lies in the legislative intent to deter wilful defaults and to instil confidence in the commercial community that negotiable instruments, particularly cheques, will be honoured when presented. By attaching penal consequences, the law introduces a coercive deterrent against casual or dishonest issuance of cheques, while still allowing remedial mechanisms like notice and payment windows to protect honest drawers. As emphasized by the Supreme Court in Vinay Devanna Nayak v. Ryot Seva Sahakari Bank Ltd.

“The object of bringing Section 138 on the statute is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments.”[1].

Presumption and Burden of Proof

Section 139 of the Negotiable Instruments Act, 1881 provides for a statutory presumption in favour of the holder of the cheque, thereby placing an initial burden upon the accused to rebut the presumption. This presumption extends not just to the execution of the cheque, but also to the existence of the underlying liability[2]. Importantly, the presumption under Section 139 is rebuttable, which differentiates it from conclusive presumptions under the Evidence Act.

[1] Vinay Devanna Nayak v. Ryot Seva Sahakari Bank Ltd., AIR 2008 SC 716

[2] Negotiable Instruments Act, 1881, § 139

While the initial presumption favours the complainant, the accused is entitled to rebut the same by raising a probable defence. This can be achieved by:

• Cross-examining the complainant to extract admissions or contradictions that cast doubt on the existence of the debt.
• Producing documentary or oral evidence to show that the cheque was issued for a collateral purpose, such as security, or that the amount stated was incorrect or already repaid.
• Demonstrating that there was no legally enforceable debt on the date of issuance, for instance, if the debt was time-barred or the transaction itself was void or unlawful.

Unlike in standard criminal trials where guilt must be established beyond reasonable doubt, the burden upon the accused under Section 139 is comparatively lower. The Supreme Court, in Rangappa v. Mohan, clarified that the standard of rebuttal is by a preponderance of probabilities, not proof beyond a reasonable doubt. “The presumption mandated by Section 139 includes a presumption that there exists a legally enforceable debt or liability. It is a rebuttable presumption and it is open to the accused to raise a defence wherein the existence of a legally enforceable debt or liability can be contested. However, the burden of proof on the accused is not of the same degree as that of the prosecution. It is sufficient if the accused is able to raise a probable defence which creates doubts about the existence of a legally enforceable debt or liability.”[1]This means the accused does not have to conclusively prove innocence but only needs to create a plausible defence that displaces the presumption.

Once the presumption is rebutted successfully, the burden shifts back to the complainant to establish the liability independently of the presumption.

Defences Available to the Accused An accused in a Section 138 proceeding is not without recourse. Various factual and technical defencescan be raised to rebut the presumption under Section 139 and to demonstrate that the statutory requirements under Section 138 have not been satisfied. The following are commonly relied upon defences:

Cheque Presented Beyond Validity Period: If the complainant presented the cheque for encashment after the expiry of its validity periodi.e. three months from the date of issuance, the complaint is liable to be dismissed. The cheque must be presented within the legally permissible time to constitute an offence under Section 138.

No Legally Enforceable Debt Existed: The accused may argue that the cheque was not issued in discharge of any legally enforceable debt or liability.

Cheque Issued as Security, not for Repayment: If the cheque was issued as a security deposit or as part of a conditional arrangement, and not in discharge of an existing debt, it does not attract liability under Section 138.

Cheque Was Forged or Altered: The accused may take the defence that the cheque was either forgedor materially altered without his consent. In such cases, expert evidence such as handwriting analysis can be sought, and a criminal complaint for fraud or forgery may also be filed.

Stop Payment Instructions Were Issued for Valid Reasons: While issuing stop payment instructions alone does not absolve the accused, if it is shown that such instructions were given for genuine, bonafide reasons, such as a dispute over the quality of goods or services, it may be a valid defence. The courts examine whether the drawer had sufficient funds and whether there was any dishonest intent.

Time-Barred Debt (Beyond 3 Years): A cheque issued for a debt that is no longer legally recoverable, due to the lapse of the three-year limitation period under the Limitation Act, cannot form the basis of criminal liability. Such debts are considered unenforceable in law, and therefore the cheque, even if dishonoured, does not attract Section 138.

No Notice Received under Section 138: One of the statutory conditions under Section 138 is the service of a legal demand notice within 30 days of dishonour. If the accused can prove that he did not receive the notice, or that it was never properly sent or served, the complaint becomes non-maintainable. Proof of service is essential, and courts have held that mere dispatch is not sufficient unless receipt is established or can be presumed.

Limitations and Procedural Requirements

The effectiveness of Section 138 prosecutions hinges not just on the existence of a dishonoured cheque, but also on strict compliance with the procedural requirements and limitation periods prescribed under the Act. These procedural safeguards are designed to balance the rights of the drawer and the payee, ensuring that the drawer is not subjected to criminal prosecution arbitrarily or without due process. The following are the key procedural timelines and limitations that must be adhered to:

• Cheque Presentation: The cheque must be presented to the drawee bank within three monthsfrom the date of issuance, or within the period of its validity, whichever is earlier. Presentation beyond this period renders the cheque legally stale and incapable of forming the basis of prosecution under Section 138.
• Issuance of Legal Notice: Upon receiving information from the bank that the cheque has been dishonoured, the payee must issue a written demand notice to the drawer within 30 days. The notice must explicitly demand payment of the cheque amount and reference the fact of dishonour. Failure to issue such a notice within the prescribed period is fatal to the complaint, as it is a mandatory condition precedent under Section 138(b).
• Waiting Period Post Notice: After service of the notice, the drawer is granted a statutory 15-day period to make the payment of the dishonoured cheque amount. This grace period provides the drawer with a final opportunity to honour the obligation and avoid criminal liability. If payment is made within these 15 days, no offence is deemed to have been committed under Section 138(c).[1]
• Filing of Complaint: If the drawer fails to make the payment within 15 days, the cause of action arises on the 16th day, and the complainant must file the complaint within one month from this date. The limitation is strictly construed. Filing the complaint even a day late without seeking condonation can render it non-maintainable.

[1] Negotiable Instruments Act, 1881, § 138(c)

While these procedural requirements are mandatory, Section 142(b) of the NI Act provides a safeguard in cases where the complaint is not filed within the prescribed one-month period[1]. The court is empowered to condone the delay if the complainant satisfies the court that there was sufficient cause preventing the timely filing of the complaint.

Remedies Available For the Accused

The key remedies include:

• Application for Discharge or Quashment: At the pre-trial stage, the accused may file an application for discharge under Section 251 BNSS, 2023, particularly in summary trials. Alternatively, the accused may approach the High Court under Section 482 BNSS,2023 for quashing of proceedings if the complaint is frivolous, vexatious, or if it does not disclose any offence. The High Court can quash proceedings if continuing them would amount to an abuse of the process of law.
• Challenge to Maintainability: Before entering trial, the accused may raise preliminary objections challenging the maintainability of the complaint on technical or jurisdictional grounds. These include non-compliance with statutory requirements such as delay in issuing notice, premature filing of the complaint, lack of territorial jurisdiction, or the absence of a legally enforceable debt. If successful, these objections can lead to dismissal of the complaint at the threshold.
• Rebutting the Presumption through Evidence: Once the initial burden is discharged by the complainant and the statutory presumption under Section 139 arises, the accused has the opportunity to rebut the presumption by leading evidence. This may include cross-examining the complainant, producing documentary evidence, or even examining defence witnesses to demonstrate that the cheque was not issued in discharge of any enforceable liability. The standard of proof required is the preponderance of probabilities, not beyond reasonable doubt.

Filing Revision or Appeal Against Conviction: If the trial court convicts the accused under Section 138, the remedy lies in filing an appeal before the Sessions Court under Section 374 BNSS. The accused may also seek suspension of sentence and bailunder Section 389 BNSS pending the outcome of the appeal. In cases where no appeal is available, or where the accused seeks to challenge interlocutory orders, a criminal revision petition may be filed before the appropriate forum.

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Compounding of Offence

Under Section 147, the offence is compoundable. Courts have discretion to allow compounding at any stage. The Supreme Court in Damodar S. Prabhu v. Sayed Babalal H., laid guidelines for graded costs for delayed compounding.[1]

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Corporate Liability under Section 141

Section 141 of the Negotiable Instruments Act, 1881, addresses situations where the offence under Section 138 is committed by a company or corporate entity. In such cases, vicarious liabilityis attributed not only to the company as the principal offender but also to the individuals who were in charge of and responsible for the conduct of its business at the time the offence was committed.

The section enables such persons to be prosecuted and punished jointly with the company, thereby ensuring accountability at both institutional and individual levels.

However, the imposition of vicarious liability is not automatic. The Supreme Court, in the landmark case of Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd., clarified that:

“The prosecution against directors or other officers is maintainable only if the company is also arraigned as an accused in the complaint.”[2] Moreover, the complaint must contain specific averments stating that the accused individuals were, at the relevant time, in charge of and responsible for the conduct of the business of the company. Mere designation or holding a corporate title is not sufficient to attract liability. In

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

[2] Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd., (2012) 5 SCC 661

the absence of such specific allegations, the prosecution against individual directors may be quashed.

This principle has since been consistently reaffirmed in multiple judgments, emphasizing that vicarious liability under criminal law must be strictly construed and cannot be presumed solely on the basis of official position.

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Challenges in Enforcement

Despite its utility in upholding financial discipline, the implementation of Section 138 of the Negotiable Instruments Act faces several practical and systemic challenges, which have raised concerns about its efficacy as a legal remedy. These challenges have prompted calls for procedural reform, judicial innovation, and alternative dispute resolution mechanisms.

• High Pendency of Section 138 Cases: One of the most pressing issues is the enormous volume of pending cheque bounce cases across magistrate courts in India. Statistics cited by the Supreme Court indicate that more than 20% of all criminal cases pending in lower courts pertain to Section 138 offences. This has significantly burdened the judicial system and contributed to systemic delays in the disposal of even routine matters.
• Misuse by Complainants for Recovery: There are increasing instances where Section 138 is used not as a penal measure but as a tool for coercive debt recovery. In many cases, complainants invoke the provision prematurely or without fulfilling statutory conditions, merely to pressure the drawer into settlement, thereby criminalizing what are essentially civil disputes.
• Burden on the Judiciary: The quasi-criminal nature of the offence requires adherence to criminal trial procedures, including the recording of evidence, framing of substance of accusation, and examination of witnesses. This has placed an immense procedural load on magistrates, contributing to inefficiencies and resource strain in the lower judiciary.

• Delay in Trial and Execution: Even when a conviction is secured, the execution of sentence or compensation can take months or even years, reducing the deterrent value of the provision. Appeals, revisions, and interim applications further protract the litigation, often rendering the process expensive and ineffective for both parties.

Recognizing these challenges, the Supreme Court in Meters and Instruments Pvt. Ltd. v. Kanchan Mehta[1], emphasized the need to explore mediation, compounding, and summary disposalof cases under Section 138. The Court advocated for procedural flexibility, enabling magistrates to dispose of cases swiftly where the factual foundation is uncontested and settlement is possible.

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Conclusion

Section 138 of the Negotiable Instruments Act, 1881, has emerged as a cornerstone of India’s financial jurisprudence, bridging the gap between civil liability and criminal accountability in commercial dealings. By criminalizing the dishonour of cheques issued towards legally enforceable debts, the legislature intended to safeguard the sanctity of negotiable instruments and promote confidence in monetary transactions.

Over the years, courts have played a pivotal role in shaping the procedural and substantive contours of this provision, ensuring that it aligns with both the letter of the law and the spirit of justice. From recognizing the quasi-criminal nature of the offence to evolving standards for presumption and rebuttal under Section 139, the judiciary has ensured that Section 138 remains a robust mechanism for redressal without undermining the principles of due process.

At the same time, the rise in pendency and misuse of Section 138 has exposed systemic challenges that require thoughtful reform. Judicial pronouncements advocating mediation, summary trials, and compounding reflect a shift toward resolving such cases efficiently, without diluting their deterrent effect. Ultimately, the effectiveness of Section 138 lies in its balanced implementation of where procedural rigour ensures fairness, judicial discretion promotes equity, and penal consequences

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

deter abuse. Its continued relevance depends on all stakeholders, the legislators, courts, and practitioners, working together to preserve the integrity of cheque-based transactions while upholding constitutional values of justice and proportionality.

References

1. Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd., (2012) 5 SCC 661.
2. Damodar S. Prabhu v. Sayed Babalal H., (2010) 5 SCC 663.
3. Kumar Exports v. Sharma Carpets, (2009) 2 SCC 513.
4. Meters and Instruments Pvt. Ltd. v. Kanchan Mehta, (2018) 1 SCC 560.
5. NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) 4 SCC 253.
6. Negotiable Instruments Act, 1881, No. 26, Acts of Parliament, 1881, §§ 138, 139, 142(b).
7. Rangappa v. Mohan, (2010) 11 SCC 441.
8. Vinay Devanna Nayak v. Ryot Seva Sahakari Bank Ltd., AIR 2008 SC 716.