Welcome to the official blog of the Law Offices of Kr. Vivek Tanwar Advocate and Associates, where we are dedicated to providing litigation support services for matters related to Dishonored Cheques. In today’s blog post, we aim to shed light on the prevailing issues surrounding Dishonored Cheques, the legal framework in place for their protection, and the steps we can take as a society to combat these acts. Join us as we explore this critical subject and empower you with the knowledge to protect your rights and safety.

The Negotiable Instrument Act, of 1881 came into force on 1st March 1882 to govern different instruments used in place of fiat money. A new Chapter XVII was added on 1st April 1989 to prevent fraud in the mercantile community, particularly concerning cheques. This amendment aimed to preserve the importance of cheques as an alternative payment mode and ensure greater vigilance in financial matters. It is noteworthy that electronic fund transfers are also governed by the provisions of Chapter XVII, making it crucial to understand Section 138, which criminalizes dishonouring such instruments.

What Is The Negotiable Instruments Act, of 1881?

The Negotiable Instruments Act, of 1881, is a crucial piece of legislation that governs various financial instruments like cheques, promissory notes, and bills of exchange. Among its provisions, Section 138 stands out as a significant deterrent against dishonouring cheques. The section aims to maintain trust in the financial system by imposing penalties on those who default on their obligations. It will delve into the nuances of Section 138 and the consequences it entails for offenders.

Understanding Section 138:

Section 138 of the Negotiable Instruments Act deals specifically with the dishonour of cheques. According to this provision, if a cheque issued by a person for the discharge of any debt or liability is dishonoured due to insufficient funds or if it exceeds the amount available in the drawer’s account, the drawer becomes liable for prosecution. The payee of the dishonoured cheque has the right to demand payment by issuing a notice within 30 days of the dishonour.

Punishment under Section 138:

The punishment for an offence under Section 138 is stringent to ensure that offenders take the law seriously. If found guilty, the accused may face both imprisonment and a monetary fine.

  1. Imprisonment: The drawer can be imprisoned for a term that may extend up to two years. This provision is aimed at acting as a deterrent against fraudulent practices involving dishonoured cheques.
  2. Monetary Fine: In addition to imprisonment, the accused may also be liable to pay a fine. The amount of the fine can be up to twice the value of the dishonoured cheque.

Compounding the Offense:

In certain cases, the offence under Section 138 can be compounded, subject to the permission of the court. Compounding involves the withdrawal of the case by mutual consent, typically in exchange for the payment of a certain sum agreed upon by the parties involved.

Significance of Section 138:

Section 138 plays a crucial role in promoting financial discipline and safeguarding the sanctity of negotiable instruments. It upholds the credibility of the banking system, ensures that transactions are conducted smoothly, and encourages people to honour their financial commitments.

Issues and Challenges:

Despite its significance, the implementation of Section 138 has faced some challenges:

  1. Pendency of Cases: The high number of pending cases has been a concern, leading to delays in justice. To address this, the establishment of fast-track courts and the introduction of alternative dispute resolution mechanisms have been proposed.
  2. Criminal Overtone: Some experts argue that imposing criminal liability for civil disputes may be harsh and could be detrimental to the ease of doing business. However, proponents argue that the criminal aspect provides a swifter remedy, unlike civil proceedings which can take longer.

Why Does Section 138 NI Act Say

Section 138 of the NI Act deals with the prosecution for dishonouring a “cheque.” A “cheque” is defined in Section 6 as a bill of exchange, payable on demand, with specific parties involved. Mere dishonour of a cheque is not punishable, but it becomes an offence if certain conditions are met:

  1. The cheque must be presented to the bank within three months of its issuance.
  2. The bank must return the cheque unpaid due to insufficient funds or a mutual arrangement with the drawer.
  3. The payee must send a notice to the drawer within 30 days of receiving the bank’s memo of dishonour.
  4. If the drawer fails to pay within 15 days of receiving the notice, the offence is established.

All of these conditions are mandatory to invoke Section 138. Offenders can face imprisonment for up to 2 years, a fine up to twice the amount of the disputed cheque, or both. It’s important to note that there is a one-month time limit from the date of the cause of action, as stated in Section 142(1)(b). However, the proviso allows for the extension of the deadline in cases where there is a valid reason for the delay.

Nature of offence under Section 138 NI Act

In the case of Kaushalya Devi Massand v. Roopkishore Khore (2011), the Supreme Court made a significant observation regarding Section 138 of the Negotiable Instrument Act, of 1881. It stated that this particular offence should not be equated with any offence under the Indian Penal Code, 1860. The reason is, Section 138 establishes liability for a civil wrong but with criminal implications.

In this case, the appellant was an elderly widow who had been tirelessly fighting against the respondent for 14 long years. The dispute arose when the appellant was supposed to receive Rs. 3,00,000 as payment for a property. However, the cheques issued by the respondent were dishonoured due to insufficient funds. The appellant argued that imprisonment of the offender was necessary to restore people’s faith in the judicial system and to act as a deterrent against those who misuse cheques with malicious intentions to defraud payees.

Both the High Court and the Supreme Court, however, opined that there should be specific circumstances in a case to justify the imposition of imprisonment on the accused. In this instance, there were no such special circumstances, apart from the fact that the victim was an elderly widow. Consequently, the High Court increased the compensation from Rs. 4,00,000 to Rs. 6,00,000, and the Supreme Court further raised it to Rs. 8,00,000. The courts held that in such cases, monetary compensation can sufficiently compensate the victim, eliminating the need for an additional sentence of imprisonment.

The cases of Kaushalya Devi Massand v. Roopkishore Khore (2011) and M/s Meters and Instruments v. Kanchan Mehta (2017) established that Section 138 offences are treated as civil wrongs and only lead to imprisonment in special circumstances. The trial follows a summary procedure, providing a robust remedy. Courts prioritize compensating the victim over penalizing the accused, as seen in P. Mohan Raj v. M/s Shah Brothers Ispat Pvt. Ltd. (2021).

In Rangappa v. Sri Mohan (2010) and Indian Bank Association and Ors. v. Union of India (2013), the Supreme Court observed that Section 138 offences are regulatory, involving civil wrongs affecting private parties. Section 139 reverses the burden of proof on the accused, requiring them to prove “preponderance of probabilities” instead of “beyond a reasonable doubt” as in other criminal offences.

Judicial pronouncements on decriminalizing Section 138 NI Act:

 In Makwana Mangaldas Tulsidas v. State of Gujarat (2020), the court observed that Section 138, originally justified as a civil wrong in 1989, could now be decriminalized. The Bombay High Court also considered this perspective in Karmayogi Shankarraoji Patil and Ors. v. Ruia & Ruia Pvt. Ltd. and Ors. (2022). In Gimpex Private Ltd. v. Manoj Goel (2021), the Supreme Court, relying on a notice from the Ministry of Finance, highlighted that Section 138’s criminal offence status has negatively impacted the ease of doing business and investment in India, reinforcing the potential for decriminalization.

Suggestions by the legislature:

In its 213th Report in 2008, the Law Commission addressed the hardships faced by cheque payees due to dishonest issuers. To resolve this, they proposed forming fast-track courts at the ministerial level, aiming to expedite cases and restore public trust in the judiciary. The court also acknowledged and implemented these recommendations in cases like In Re: Expeditious Trial of Cases Under Section 139 of the NI Act, 1881. Additionally, a notice issued in June 2020 by the Ministry of Finance discussed the decriminalization of minor offences, including Section 138, to attract foreign investors and improve the ease of doing business in India.

India’s commitment to the International Covenant on Civil and Political Rights (ICCPR) also supports the argument against criminal liability for civil wrongs. The need to decriminalize such offences has been emphasized in various judgments, such as Jolly George Verghese and Anr. v. Bank of Cochin (1980). The United Kingdom and the United States have also taken steps to decriminalize imprisonment for debtors unable to repay their debts.

Negative Impact of Decriminalization of Section 138:

If Section 138 is decriminalized, there might be no punishment for fraudulent acts, providing an incentive for dishonest individuals. Accepting Post Dated Cheques (PDCs) as security in the mercantile community, relying on the deterrence of dishonouring cheques, will be affected. While complainants can still file FIRs under Section 420 of the Indian Penal Code for cheating, this will burden the courts, defeating the purpose of decriminalizing cheques. Decriminalization may encourage cash transactions, hindering the goal of becoming a cashless economy and increasing the circulation of black money.

Alternatives to Decriminalization of Section 138:

The legislature can set a limit on the sum for which there are no criminal consequences, but beyond that limit, criminal consequences can apply. The drawer’s CIBIL score, reflecting their financial reliability, can be lowered if their cheques bounce, deterring them from dishonouring cheques. Promoting alternative dispute resolution methods like mediation and conciliation can help reduce case pendency.

Scotland’s approach involves attaching funds to the drawer’s bank account until the cheque is honoured or the payee provides a letter stating they have no further interest in the cheque. In Japan, dishonouring a cheque twice in six months can result in a two-year suspension of the bank account. It’s worth noting that in countries like England, Australia, Singapore, Malaysia, France, and the United Arab Emirates, dishonouring cheques leads to civil remedies for the payee, rather than criminal consequences.

Is insufficiency of funds the sole reason to invoke Section 138 for dishonouring a cheque?

Section 138 of the Negotiable Instrument Act, of 1881 can be invoked not only for dishonouring due to insufficient funds but also for cases like signature mismatches, as held in Laxmi Dyechem v. State of Gujarat (2012). The Supreme Court ruled that dishonouring due to a closed account is also covered under Section 138, as seen in NEPC MICON Ltd. and Ors. v. Magma Leasing (1999). However, lost cheques and time-barred debts are exceptions and do not fall under Section 138, based on the judgments in Rajkumar Khurana v. State of NCT of Delhi (2009) and Sasseriyil Joseph v. Devassia (2001) respectively.

Does Section 138 apply to post-dated cheques and blank cheques?

The Supreme Court ruled that dishonouring post-dated cheques falls under Section 138 if the liability exists on the dishonour date (Sampelly Satya Narayan Rao v. Indian Renewable Energy Development, 2016). Additionally, in cases of blank cheques voluntarily signed and given to the payee, Section 138 and the presumption of Section 139 apply (M/s Kalamani Tex v. P. Balasubramaniam, 2021; Raj Singh v. Yashpal Singh Parmar, 2022).

Is it possible to represent a dishonoured cheque?

In Sadanandan Bhadran v. Madhavan Sunil Kumar (1998), the Supreme Court held that only one cause of action arises from a cheque, and re-presenting a dishonoured cheque won’t create a new one. However, MSR Leathers v. S. Palaniappan (2013) contradicted this, stating that a dishonoured cheque can be represented multiple times during its 3-month validity, creating new causes of action. As both judgments are from division benches, the clarity is not definitive, but the latest judgment aligns better with the Act’s nature and should be followed for now.

What happens if two notices are sent during the notice period under Section 138?

In N. Parameswaran Unni v. G Kannan (2017), it was ruled that sending two notices during the notice period of 30 days will not invalidate the proceedings, and the second notice will be considered a reminder without affecting the prescribed periods.


Chapter XVII of the Negotiable Instrument Act, of 1881 has improved cheque credibility, but its effectiveness relies on implementation. Major contentions include high case pendency, addressed by forming fast-track courts (In Re: Expeditious Trial of Cases Under Section 139 of the Negotiable Instrument Act, 2022). There’s debate over giving a criminal overtone to civil disputes, but abolishing it won’t hasten the process due to existing remedies under Order XXXVII of the Code of Civil Procedure, 1908. Regarding imprisonment under Section 138, clear guidelines for special circumstances can be devised. Adding a pecuniary limit and freezing drawers’ accounts like in Scotland and Japan may help. Decriminalization may encourage fraud, impacting the economy.

We are a law firm in the name and style of Law Offices of Kr. Vivek Tanwar Advocate and Associates at Gurugram and Rewari. We are providing litigation support services for matters related to the Negotiable Instrument Act, of 1881.

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