UNIVERSITY INSTITUTE OF LEGAL

STUDIES

BUSINESS LAW PROJECT REPORT

TOPIC-
SECTION 138 OF NEGOTIABLE INSTRUMENTS ACT,
1881 (AN OVERVIEW)

SUBMITTED TO- SUBMITTED BY-

M/s ATAMBIR KAUR NAVDEEP
UILS 62\17
PANJAB UNIVERSITY 8TH SEMESTER
B.A.LL. B(hons)
UILS
PANJAB UNIVERSITY

1|Page
 ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to M/s ATAMBIR KAUR MA’AM, who
gave me the opportunity to do this project of ‘BUSSINESS LAWS’ on the Topic ‘SECTION 138
OF NEGOTIABLE INSTRUMENTS ACT, 1881 (AN OVERVIEW). I came to know about so
many new things and I am really thankful to her. Secondly, I would like to thank my parents and
friends who helped me a lot in finalizing this project within the limited time frame.
NAVDEEP
B.A., LL. B(hons)

2|Page
 TABLE OF CONTENTS
SR. Topic Pg.

1. Introduction 4
• Types of negotiable instruments

2. Object of amendment Act, 2002 5

3. Ingredients of section 138 NI, Act 5-6

4. Presumptions 6-7

5. Jurisdiction 7

6. Notice 8

7. Who can file a complaint? 8

8. Liability of directors/partners 8

9. Cause of action 9

10. Punishment 9-10

11. Procedure 11

12. Compounding of offence 11

13. Supreme Court rulings for speedy disposal of cases under Section 11-12
138 of the Act

14. Recent Development 12

15. Bibliography 13

3|Page
 INTRODUCTION
Negotiable Instrument is a combination of two words Negotiable and Instrument with subject to
their different meaning as “Negotiable is transferrable” and “Instrument is written document”.
Two modes are being used for the Negotiable Instrument for its transferability either it can be
delivered or by endorsement, passes to the transferee a bona fide title to payment according to its
tenor and irrespective of the title, transferor is bearing, provided that he is a bona fide holder for
Instrument without any of notice of defect attaching to the instrument or in the title of the
transferor, the principle of Nemo dat quod non habit does not apply. Negotiable Instrument
should be of as such nature that it should be in the form of writing, signed by the maker or
drawer, an unconditional promise or order to pay, a fixed amount of money to be stated, freely
transferrable from one person to another person, be payable to order or to bearer, lastly be
payable on demand or at a definite time.

According to Section 13 of the Negotiable Instrument Act, 1881, Negotiable Instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer. A negotiable
instrument may be made payable to two or more payees jointly, or it may be made payable in the
alternative to one of two, or one or some of several payees.

Types of Negotiable Instrument

1. Promissory notes
2. Bills of exchange
3. Cheques

Section 138 of Act deals with dishonor of cheques. It has no concern with dishonor of other
negotiable instruments.

A cheque is a widely used method of payment and post-dated cheques are frequently used in
various transactions in business life. Post-dated cheques are given to provide a certain
accommodation to the drawer of the cheque. Therefore, it becomes necessary to ensure that the
drawer of the cheque does not abuse the accommodation given to him. The Negotiable
Instruments Act, 1881 ("Act") deals with negotiable instruments, such as promissory notes, bills
of exchange, cheques etc. Chapter XVII containing Sections 138 to 142 was introduced with
the aim of inculcating confidence in the efficacy of banking operations and giving credibility
to negotiable instruments employed in business transactions. If a party issues a cheque as a
mode of deferred payment and the payee of the cheque accepts the same on the faith that he will
get his payment on due date, then he should not suffer on account of non-payment.

With this purpose Sec.138 to 142 were inserted by Banking Public Financial Institutions and
Negotiable Instruments clause (Amendment) Act, 1988. This was done by making the drawer

4|Page
liable for punishments in case of bouncing of the cheque due to insufficiency of funds with
adequate safeguards to prevent harassment of an honest drawer.

However, in due course it was observed that the courts were unable to dispose of the cases
expeditiously and in time bound manner. The loop holes were rectified by the amendment of the
year 2002 and hence, the Negotiable Instruments (Amendment and Miscellaneous provisions)
Act, 2002 was passed. The provisions of sec.143 to 147 were newly inserted and provisions of
section 138, 141, 142 were amended.

The object of this amendment Act(2002) was:

1. To regulate the growing business, trade, commerce and Industrial activities.

2. To promote greater vigilance in financial matters.

3. To safeguard the faith of creditors in drawer of cheque.

The Hon'ble Supreme Court in the matter of Modi Cements Ltd. v. Kuchil Kumar
Nandi1, observed that “The object of Chapter XVII, containing Sections 138 to 142, is to promote
the efficacy of banking operations and to ensure credibility in transacting business through
cheques.”

INGREDIENTS OF SECTION 138 NI Act, 1881:

The ingredients of the offence as contemplated under Sec.138 of the Act are as under:

1. The cheque must have been drawn for discharge of existing debt or liability.
(Legally recoverable debt)

In Somnath vs. Mukesh Kumar2, it was held by Hon'ble High Court the complaint under Section
138 is not maintainable when the cheque in question had been issued qua a time barred debt.

Similarly, supari money for commission of crime is not legally recoverable debt and complaint
under Section 138 is not maintainable in such a case.

2. Cheque must be presented within 6 months or within validity period whichever is

earlier.

1
(1998) 3 SCC 249
2
2015(4) Law Herald 3629 (P&H)

5|Page
 As per RBI guidelines, with effect from April 1, 2012, the validity period of Cheques,
Demand Drafts, Pay Orders and Banker's Cheques have been reduced from six months to
three months, from the date of mentioned in the instrument.

3. Cheque must be returned unpaid due to insufficient funds or it exceeds the amount
arranged.

4. The payee or the holder in due course of the cheque 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 30 days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid.

5. The drawer of such cheque fails to make 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.

PRESUMPTIONS:
There are presumptions under Section 118 and 139 of the Negotiable Instruments Act in favour
of holder of the cheque. Until contrary is proved, presumption is in favour of holder of cheque that
it has been drawn for discharge of debt or liabilities.

In case of “Goa Plast Pvt. Ltd. vs. Shri Chico Ursula D' Souza3” relations between accused and
complainant were of employee and employer. No evidence led to show that accused was liable to
pay any due or part thereof and thus liability was not proved. Similarly, it was not proved that the
cheque was given towards those liabilities. Accused much prior to presentation of cheques to the
Bank had appraised the complainant that he was not liable to pay any amount, and therefore,
stopped payment. Bombay High Court had observed that complainant failed to prove that cheque
was issued for discharge of legal liabilities.

Many a times cheques are issued bearing no date or postdated cheques. Holder of cheque
enters the date, and thereafter cheques are presented to banks. Hon'ble Bombay High Court in case
of Purushottamdas Gandhi vs. Manohar Deshmukh4 has observed that inserting such date does
not amount to tampering or alteration but by delivery of such undated cheque drawer authorizes
holder to insert date.

3
1996 (4) All MR 40
4
2007 (1) Mh.L.J. 210

6|Page
Return of cheque is itself an indication that funds are not forthcoming.

The words “refer to drawer” or “account closed” are covered under the term “insufficient
funds”. Thus, liability of drawer cannot be avoided if he closes account and cheque is dishonored.
A safeguard has been made to prevent hasty action is that the payee or holder in due course of
cheque shall make a demand for payment of amount covered by cheque by giving a notice in
writing to drawer within 30 days.

The Supreme Court in a catena of cases has address the issue if the addressee refuses to receive
the notice and has held that when a notice is sent by registered post and is returned with postal
endorsement "refused" or "not available in the house" or "house locked" or "shop closed" or
"addressee not in station" or "intimation served, addressee absent", due service has to be
presumed, N. Parameswaran Unni v. G. Kannan5,

JURISDICTION:
Considering ingredients of sec.138 referred above Hon'ble Apex Court in case of K. Bhaskaran
vs. Shankaran6, had given jurisdiction to initiate the prosecution at any of the following places:

• Where cheque is drawn.

• Where payment had to be made.
• Where cheque is presented for payment
• Where cheque is dishonored.
• Where notice is served up to drawer.

However, in case of Dashrath Rupsingh Rathod vs. State of Maharashtra, the 3-judge bench
of the Supreme Court took a strict approach and held that the territorial jurisdiction under section
138 should be exclusively be determined and considered by place of the offence. The return of the
cheque by the drawer bank only constitutes the commission of offence under section 138.

The legal position regarding territorial jurisdiction of the courts in cases of dishonor of the cheque
has completely changed with the new amendments, the Negotiable Instrument (Amendment) Act,
2015 which has retrospectively came into force from 15th July, 2015. New Clause i.e., section 142
(2) has been added which stipulates provisions for the local jurisdiction of the court where the
offence under Section 138 shall be inquired into and tried and new sub section 142A in inserted in
the Act which stipulates provisions for validation for transfer of pending cases.

5
(2017) 5 SCC 737.
6
AIR 1999, SC 3762

7|Page
 NOTICE:
Notice must be in writing informing that cheque has been returned unpaid also a demand of cheque
amount must be made and it should be within 30 days from receipt of information of dishonor.

When notice by registered post returned unclaimed there is presumption of service.7

WHO CAN FILE A COMPLAINT?

Payee or holder in due course is a competent person to file complaint. Complaint must be by
corporal person capable of making physical appearance in court. In case of company and firm
natural person should represent it. Complaint can be filed by Power of Attorney Holder. It is not
requirement that the person whose statement was taken on oath at the first instance should alone
represent the company till the proceeding have ended.

LIABILITY OF DIRECTORS / PARTNERS:

Section 141 of Negotiable Instruments Act shows that person who is in charge or responsible
to the company is ipso facto liable and deemed to be guilty only if offence is committed with
his consent/connivance or due to any neglect on his part. Similar is the case with any Director,
Manager, Secretary or other officer of company.

If such person shows that offence was committed without his knowledge or that he had exercised
due diligence to prevent commission of such offence, he may be immune from prosecution.
Similarly, Directors nominated by Central Government or State Government by virtue of their
holding any office or employment in such Government or Financial Corporation owned or
controlled by such Government are kept outside the purview of such section.

It is primary duty of the Magistrate to find out whether the complainant has shown that accused
persons falls into one of the categories of persons envisaged in sec. 141. What is required is the
specific accusation against each Director of role played by him. Onus is on complainant to make
out prima facie case i.e., to show that accused, at the time of commission of offence, was in
charge of and responsible to company.

In case of K. Shrikant Singh vs. North East Security Ltd. and others8, Hon'ble Apex court
observed that vicarious liability on the part of a person must be pleaded and proved and not
inferred.

7
Rahul vs. Arihant Fertilizers 2008(4) Mh.L.J. 365 (SC)
8
J.T. 2007 (9) SC 449

8|Page
 CAUSE OF ACTION:
Cause of action arises when notice is served on the drawer and drawer fails to make payment
of the amount of cheque within 15 days. Limitation to file complaint is one month from the date
of cause of action. However, by Amendment Act of 2002 court is empowered to take cognizance
of the offence even if complaint is filed beyond one month by condoning the delay if sufficient
cause is shown.

PUNISHMENT:
After the amendment of 2002 the imprisonment that may be imposed may extend to two years,
while fine may extend to twice the amount of cheque.

However, the trial is conducted in summary way, then Magistrate can pass sentence of
imprisonment not exceeding one year and amount of fine not exceeding Rs.5,000/. There is no
limitation for awarding compensation.

The sentence should be such that it gives proper effect to the object of the legislation. No drawer
can be allowed to take advantage of cheque issued by him lightly. Apex court has cautioned against
imposing flee bite sentences.

In case of,

Sujanti Suresh Kumar vs. Jagdeeshan9, Prior to the amendment of 2002 a sentence of fine in
excess of Rs.5,000/by Judicial Magistrate, First Class or Metropolitan Magistrate was held to be
illegal. However, after the amendment the Magistrate are empowered to impose fine exceeding
Rs.5,000/.

In case of,

Dilip vs. Kotak Mahindra Company Ltd10. it was enunciated that the amount of compensation
sought to be imposed must be reasonable and not arbitrary.

Before issuing a direction to pay compensation the capacity of accused to pay the same must be
judged. An inquiry in this behalf even in summary way may be necessary. Sub section 3 of Sec.
357 does not impose any limitation but the powers thereunder should be exercised only in

9
2002 Cr.L.J. 1003
10
2008 (1) Mh L.J. 22

9|Page
appropriate cases. Ordinarily it should be lesser than the amount which can be granted by Civil
Court upon appreciation of evidence. A criminal case is not a substitution for civil suit.

PROCEDURE:
i. Complaint to be filled in writing.

ii. By the payee or the holder in due course of the cheque.

iii. Complaint to be made within 1 month of the date on which the cause of action arises.

iv. Metropolitan Magistrate or a Judicial Magistrate of the Ist Class shall try any offence
punishable under Section 138 of NIA.

In the case of Indian Bank Association and others v. Union of India & Others 11, general
directions have been given by the Apex Court.

i. Metropolitan Magistrate/ Judicial Magistrate, on the day when the complaint u/s 138 of the
NIA is presented, shall scrutinize the complaint and, if the complaint is accompanied by
the affidavit, and the affidavit and the documents, if any, are found to be in order, take
cognizance and direct issuance of summons.

ii. Metropolitan Magistrate/ Judicial Magistrate should adopt a pragmatic and realistic
approach while issuing summons. Summons must be properly addressed and sent by post
as well as by email address got from the complainant. Court in appropriate cases, may take
the assistance of the police or the nearby court to serve notice to the accused. For notice of
appearance, a short date be fixed. If the summons is received back unserved, immediate
follow action be taken.

iii. Court may indicate in the summons that if the accused makes an application for
compounding of offences at the first hearing of the case and if an application is made, Court
may pass appropriate order at the earliest.

iv. The court should direct the accused when he appears to furnish a bail bond, ensure his
appearance during the trial and ask him to take notice u/s. 251, Cr.P.c. to enable him to
enter his plea of defense and fix the case for defense evidence, unless an application is
made by the accused u/s. 145(2) for recalling a witness for cross-examination.

v. The Court concerned must ensure that the Examination in chief, Cross-Examination, and
re-examination of the complainant must be conducted within three months of assigning the
case. The court has the option of accepting affidavits of the witnesses, instead of examining

11
AIR 2014 SC 2528

10 | P a g e
 them in Court. Witnesses to the Complainant and accused must be available for cross-
examination as and when there is a direction to this effect by the Court.

Compounding of Offence:
Section 147 of the Negotiable Instrument states about the compounding of offence, it says that the
if the appellant or original complainant comes to the Court who has taken the cognizance and says
that he wants to withdraw from the side of the prosecution on account of compromise and he has
compounded the matter, then the sentence and conviction have to be set aside anyhow.

In the case of Meters and Instruments (P) Ltd. v. Kanchan Mehta12, it was held that the though
the compounding requires consent of both parties, even in absence of such consent, the court, in
the interest of justice, on being satisfied that the complainant has been duly compensated, can its
discretion close the proceedings and discharge the accused.

Supreme Court rulings for speedy disposal of cases under Section 138 of the
Act
1. M/s Meters and Instruments Private Ltd and Anr. V. Kanchan Mehta13

The Respondent filed complaint alleging that the appellants were to pay a monthly amount to her
under an agreement. Cheque was given in discharge of legal liability but the same was returned
unpaid for want of sufficient funds. In this case, Two-Judge Bench of Supreme Court made some
key observations regarding dishonor of cheque cases and also issued directions for speedy disposal
of cheque cases under Section 138 of NI Act. The court noted that use of modern technology needs
to be considered not only for paperless Courts but also to reduce overcrowding of Courts and at
least some number of Section 138 cases can be decided online

2. Kishan Rao v. Shankar gouda14

In this case the Apex Court discussed its view on two legal propositions. Firstly, about the
revisional jurisdiction of the High Court where the Apex Court held that High Court in exercise of
revisional jurisdiction shall not interfere with the order of the Magistrate unless it is perverse or
wholly unreasonable or there is non-consideration of any relevant material, the order cannot be set
aside merely on the ground that another view is possible. Secondly, presumption in favour of
holder of cheque under Section 139 of NI Act where court held that the accused may adduce

12
(2018) 1 SCC 560
13
ibid
14
(2018) 8 SCC 165

11 | P a g e
evidence to rebut the presumption, but mere denial regarding existence of debt shall not serve any
purpose.

3. Uttam Ram v. Devinder Singh Hudan15

The respondent had procured packing material on credit from the appellant, Uttam Ram, to carry
apple crop bought from various growers. It was found that the respondent owed money for which
a cheque was issued. The cheque, however, bounced and the appellant filed a complaint. Supreme
Court held that the burden of proving the due amount should not be on the complainant as if he
has to prove a debt before a civil court. Rather, the burden to rebut the presumption of debt in
cheque bounce case under Section 138 of Negotiable Instruments Act is on the accused.

Recent Development
The Central Government through The Negotiable Instrument (Amendment) Act, 2018 has
notified amendments to the NI Act by incorporating several new provisions which came into effect
from September 1, 2018. The provisions now allow the Court trying an offence related to cheque
bouncing, to direct the drawer to pay interim compensation not exceeding 20% of the cheque
amount to the complainant within 60 days of the trial court's order to pay such compensation. This
interim compensation may be paid either in a summary trial or in a summons case where the drawer
pleads 'not guilty' to the accusation made in the complaint; or upon framing of charge in any other
case.

15
(2019) 10 SCC 287

12 | P a g e
 Bibliography
Primary sources

Statutes referred

▪ NEGOTIABLE INSTRUMENTS ACT, 1881

▪ LIMITATION ACT,1963

Secondary sources

Websites referred

• https://www.latestlaws.com/latest-news/the-negotiable-instrument-act-1881-
an-analysis-of-section-138/ visited on 06/06/2021
• https://www.mondaq.com/india/financial-services/957852/an-overview-of-
section-138-of-the-negotiable-instruments-act?login=true visited on
06/06/2021.

13 | P a g e