Analysis of Section 138, Negotiable Instruments Act, 1881

Section 138 of the Negotiable Instruments Act, 1881: A Comprehensive Analysis of Judicial Pronouncements and Procedural Nuances in India

Introduction

Section 138 of the Negotiable Instruments Act, 1881 (hereinafter "NI Act"), introduced by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, represents a significant legislative intervention aimed at enhancing the credibility of cheques and fostering trust in banking operations and commercial transactions.[16], [18] The primary object of this provision is to inculcate faith in the efficacy of banking operations and to promote the use of negotiable instruments, particularly cheques, by making the dishonour of cheques for certain reasons a punishable offence.[14], [15], [17] Despite the existence of civil remedies, Section 138 intends to prevent dishonesty on the part of the drawer of a cheque who issues it without sufficient funds or an arrangement with the bank, thereby inducing the payee or holder in due course to act upon it.[14], [18] This article seeks to provide a comprehensive analysis of Section 138, delving into its essential ingredients, key judicial interpretations by the Supreme Court of India and various High Courts, procedural aspects, and its overall impact on commercial dealings in India.

Legislative Framework and Object of Section 138

Chapter XVII of the NI Act, comprising Sections 138 to 142, was inserted by the Amendment Act 66 of 1988, with effect from April 1, 1989.[16], [17] The Statement of Objects and Reasons for this amendment highlighted the need to encourage the culture of using cheques and enhance the credibility of the instrument.[16] Section 138 criminalizes the dishonour of a cheque under specific circumstances, transforming what was primarily a civil liability into a criminal offence. The Supreme Court in Ashok Yeshwant Badave v. Surendra Madhavrao Nighojakar[14], [18] noted that these new sections were altogether different from the old Sections 138 and 139 (which dealt with other aspects of negotiable instruments prior to the amendment). The legislative intent is to act as a deterrent to the callous issuance of cheques without a serious intention to honour the implicit promise of payment.[15]

A 'cheque' is defined under Section 6 of the NI Act as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.[14], [18] Section 5 defines a 'bill of exchange' as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.[14], [18]

Essential Ingredients of an Offence under Section 138

For an act to constitute an offence under Section 138 of the NI Act, several conditions must be fulfilled. These are often referred to as the components of the offence and are meticulously laid down in the main provision and its proviso. As articulated in various judicial pronouncements, including Dr. Geetha v. Vasanthi S. Shetty[19] and Anchor Capitals Of India Ltd. v. State Of Gujarat & Anr.,[21] these ingredients are:

  1. Drawing of the Cheque: The cheque must be drawn by a person on an account maintained by him with a banker.[8], [19]
  2. Purpose of the Cheque: The cheque must be issued for the payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any "debt or other liability."[14], [19] The Explanation to Section 138 clarifies that "debt or other liability" means a legally enforceable debt or other liability.[14], [15], [21]
  3. Presentation of the Cheque: The cheque must be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier (Proviso (a)).[14], [19]
  4. Dishonour of the Cheque: The cheque must be returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque, or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank.[19], [20]
  5. Issuance of Demand Notice: The payee or the holder in due course of the cheque, as the case may be, must make a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days (originally fifteen days, amended by Act 55 of 2002) of the receipt of information by him from the bank regarding the return of the cheque as unpaid (Proviso (b)).[15], [19]
  6. Failure to Make Payment: The drawer of such cheque must fail to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque within fifteen days of the receipt of the said notice (Proviso (c)).[14], [19]

Only upon the cumulative satisfaction of these conditions does the drawer "shall be deemed to have committed an offence."[20]

Key Judicial Interpretations and Doctrines

The application and interpretation of Section 138 have been extensively deliberated upon by the Indian judiciary, leading to the evolution of several important legal principles.

The Concept of "Drawer" and Liability in Joint Accounts

Section 7 of the NI Act defines the "drawer" as the maker of a bill of exchange or cheque.[23] A crucial question arises concerning liability when a cheque is drawn on a joint account. The Supreme Court in Aparna A. Shah v. Sheth Developers Private Limited And Another[3] clarified this position. The Court held that under Section 138, criminal liability can only be fastened on the person who has drawn the cheque, i.e., the signatory of the cheque. In the context of a joint account, if only one account holder signs the cheque, the other joint account holder(s) who did not sign the cheque cannot be prosecuted under Section 138, even if the cheque is drawn on the joint account. The Court emphasized that vicarious liability is not to be imported into criminal law unless explicitly provided by statute, and Section 141 (dealing with offences by companies) could not be invoked to make a non-signatory joint account holder liable merely as part of an "association of individuals." This principle was also echoed in cases like R. Priyadharshini v. Lic Housing Finance Ltd.[23] and Sureshbhai Narsinhbhai Patel v. State of Gujarat,[28] where courts held that a person who is not a signatory to the cheque cannot be made liable under Section 138.

Presumption under Section 139 and Burden of Proof

Section 139 of the NI Act introduces a statutory presumption in favour of the holder of the cheque. It states: "It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability."[14], [15]

The scope and nature of this presumption have been a subject of considerable judicial scrutiny. In Rangappa v. Sri Mohan,[5] a three-judge bench of the Supreme Court held that the presumption mandated by Section 139 includes a presumption that there exists a legally enforceable debt or liability. However, this presumption is rebuttable. The accused can rebut this presumption by adducing evidence to show that such debt or liability did not exist or that the cheque was not issued in discharge thereof. The standard of proof for the accused to rebut this presumption is that of 'preponderance of probabilities'.[5], [12]

Earlier, in Krishna Janardhan Bhat v. Dattatraya G. Hegde,[12] the Supreme Court had observed that Section 139 merely raises a presumption in regard to the cheque being issued in discharge of a debt or liability but not that the debt or liability itself exists. However, Rangappa[5] clarified that the presumption under Section 139 does indeed cover the existence of a legally enforceable debt or liability. The Court in Rangappa[5] also noted that Section 139 is an example of a reverse onus clause and that the accused is not required to disprove the prosecution case in its entirety but only to raise a probable defence. Once the accused adduces evidence to rebut the presumption, the onus shifts back to the complainant to prove beyond reasonable doubt that the cheque was issued for a legally enforceable debt or liability.[12]

The Supreme Court in Hiten P. Dalal v. Bratindranath Banerjee,[5], [12], [22] held that the court is obliged to raise the presumption under Section 139 in every case where the factual basis for raising such presumption has been established. It is not an optional presumption. The Court in Laxmi Dyechem v. State Of Gujarat And Others[9], [17] reiterated that Section 139 raises a statutory presumption that the cheque is issued in discharge of a lawfully recoverable debt or liability, shifting the burden to the drawer to prove otherwise.

Service of Notice: Presumptions and Requirements

The issuance of a written demand notice (Proviso (b) to Section 138) is a mandatory prerequisite for initiating prosecution. The interpretation of "giving of notice" and what constitutes valid service has been clarified by the judiciary. In C.C Alavi Haji v. Palapetty Muhammed And Another,[2] the Supreme Court extensively discussed the presumption of service. It held that when a notice is sent by registered post to the correct address of the drawer, it is presumed to have been served, by virtue of Section 27 of the General Clauses Act, 1897, and Section 114 of the Indian Evidence Act, 1872. The Court clarified that the drawer who claims non-receipt of the notice has the opportunity to make payment within 15 days of receiving summons in the complaint under Section 138 and can contend during trial that there was no proper service of notice. If he fails to do so, he cannot complain that there was no proper service of notice.

The decision in K. Bhaskaran v. Sankaran Vaidhyan Balan And Another[4] adopted a liberal interpretation of "giving of notice," stating that dispatch of notice by registered post suffices. If the notice is returned "unclaimed," it can be deemed to be served, as the drawer should not be allowed to evade service. This principle of deemed service for "unclaimed" notices was also upheld in High Court decisions like Puchakayala Venkateswarlu v. M. Laxminarasaiah & Anr.[31] and Aparna Agencies, Hyd. v. P. Sudhakar Rao & Anr.[32] However, the complainant must prove that the notice was properly addressed and dispatched. The importance of proving service of notice was highlighted in SARIT KUAMR BOSE@SARIT KUMAR BASU v. SMT RITA MALLICK & ANR,[20] where the appellate court relied on the accused's admission of receipt of notice in his Section 313 Cr.P.C. statement, even though the notice documents were not formally exhibited in the trial court.

Reasons for Dishonour: Scope of Section 138

Section 138 explicitly covers dishonour due to "the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank." The judiciary has interpreted this to include various scenarios:

  • "Insufficient Funds," "Exceeds Arrangements," "Instructions for Stopping Payment": In Electronics Trade & Technology Development Corpn. Ltd. v. Indian Technologists & Engineers (Electronics) (P) Ltd.,[1] the cheque was dishonoured with endorsements "referred to drawer," "instructions for stopping payment," and "exceeds arrangements." The Supreme Court held that this would attract liability under Section 138.
  • "Stop Payment" Instructions: The Supreme Court in Modi Cements Ltd. v. Kuchil Kumar Nandi[11] firmly established that a "stop payment" instruction issued by the drawer after the cheque is issued but before it is presented or honoured can still lead to an offence under Section 138. The Court reasoned that if the cheque is dishonoured due to stop payment instructions, it would still fall within the purview of Section 138, as otherwise, an unscrupulous drawer could issue a cheque and then instruct "stop payment" to evade liability. This was reiterated in cases like Goaplast (P) Ltd. v. Chico Ursula D'Souza.[5], [9] The case of R. Sarangapani v. R.S. Nammalwar[25] also involved dishonour due to "stop payment."
  • "Account Closed": Dishonour of a cheque on the ground that the account is closed is also considered an offence under Section 138. This is treated as a situation where the funds are insufficient, as a closed account inherently has no funds. This was implied in Jugesh Sehgal v. Shamsher Singh Gogi[8] where one of the grounds for quashing was that the cheque was issued from an account not maintained by the appellant, or it was non-existent. The Calcutta High Court in SARIT KUAMR BOSE[20] dealt with a cheque returned as "Account was closed."
  • "Signature Mismatch": Initially, there was some ambiguity regarding whether dishonour due to "signature mismatch" would attract Section 138. However, the Supreme Court in Laxmi Dyechem v. State Of Gujarat And Others[9], [17] settled this issue. The Court held that dishonour of a cheque on account of "signature mismatch" can constitute an offence under Section 138, subject to the rebuttable presumption under Section 139. It reasoned that the expression "amount of money ... is insufficient" is a genus, and dishonour for reasons such as "account closed," "payment stopped," or "referred to drawer" (which could include signature mismatch) are species of that genus. A drawer could deliberately cause a signature mismatch to evade liability.

Territorial Jurisdiction

The determination of territorial jurisdiction for offences under Section 138 has seen significant evolution. In K. Bhaskaran v. Sankaran Vaidhyan Balan And Another,[4] the Supreme Court held that the offence under Section 138 is composed of several acts: (i) drawing of the cheque, (ii) presentation of the cheque to the bank, (iii) returning the cheque unpaid by the drawee bank, (iv) giving notice in writing to the drawer of the cheque demanding payment, and (v) failure of the drawer to make payment within 15 days of receipt of the notice. The Court ruled that a complaint could be filed in any court having jurisdiction over any of the local areas within which any of these five acts occurred. This led to complainants filing cases in places convenient to them, often causing hardship to the accused.

This position was significantly altered by the Supreme Court in Dashrath Rupsingh Rathod v. State Of Maharashtra And Another.[13] Overruling K. Bhaskaran on the point of jurisdiction, the Court held that the territorial jurisdiction for an offence under Section 138 NI Act is restricted to the court within whose local jurisdiction the drawee bank (the bank on which the cheque is drawn and which dishonours the cheque) is situated. The Court reasoned that the offence is completed only when the cheque is dishonoured by the drawee bank. This decision aimed to prevent harassment of the accused and reduce forum shopping. The earlier High Court views, such as in Ponnappan v. Sibi[27] and V. Ramadoss v. Papanasam Palaniappan Chit Funds Pvt. Ltd.,[30] which followed the K. Bhaskaran ratio, are no longer good law on this specific aspect of jurisdiction. Subsequently, the Negotiable Instruments (Amendment) Act, 2015, inserted Section 142(2) and Section 142A, largely codifying the principle laid down in Dashrath Rupsingh Rathod with some modifications, primarily allowing the case to be tried where the cheque is presented for payment by the payee through his bank, in addition to the drawee bank's location if the cheque is presented for payment by the payee otherwise through an account.

Compounding of Offences and Expeditious Disposal

Offences under Section 138 are compoundable. In M/S. Meters And Instruments Private Limited & Anr. v. Kanchan Mehta,[6] the Supreme Court emphasized the compensatory aspect of the provision. It held that where the accused is willing to deposit the cheque amount along with interest and costs, the court is entitled to close the proceedings and discharge the accused, even if the complainant does not consent, particularly at the appellate stage, to reduce the burden on the criminal justice system. The Court referred to Section 143 of the NI Act, which provides for summary trials, and the need for expeditious disposal. It also discussed the guidelines laid down in Damodar S. Prabhu v. Sayed Babalal H.[6] regarding compounding at different stages with graded costs.

The Supreme Court in Indian Bank Association And Others v. Union Of India And Others[7] issued several directions to expedite the trial of Section 138 cases. These include the use of affidavit evidence by the complainant, summary trial procedures, and service of summons through modern means. The objective was to ensure that cases under Section 138 are disposed of efficiently, given the large pendency of such matters.

Interplay with Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)

In Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd. And Others,[10] the Supreme Court addressed whether proceedings under Section 138 NI Act could be initiated or continued against a company declared sick under SICA. The Court held that Section 22 of SICA, which provides for suspension of legal proceedings, contracts, etc., does not automatically bar criminal prosecution under Section 138 NI Act. Criminal proceedings for dishonour of cheques can proceed irrespective of the company's sick status, unless a specific restraint order under Section 22-A of SICA was in effect at the time the cheque was dishonoured, preventing disposal of assets, which might impact the execution of fines but not the initiation of prosecution itself.

Quashing of Proceedings under Section 482 CrPC

The High Courts possess inherent powers under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) to quash criminal proceedings to prevent abuse of the process of court or to secure the ends of justice. In Jugesh Sehgal v. Shamsher Singh Gogi,[8] the Supreme Court affirmed the quashing of a complaint under Section 138 where the fundamental ingredients of the offence were not met. Specifically, the cheque was allegedly issued from an account not maintained by the appellant, or the account was non-existent. The Court reiterated that the power under Section 482 CrPC should be exercised sparingly, but when a complaint ex-facie does not disclose an offence or is an abuse of process, the High Court is justified in quashing it.

Liability of Legal Heirs

An important question arises regarding the liability of legal heirs if the drawer of the cheque dies. In Bupinder Lima & Ors. v. State Of A.P & Anr.,[26] the Andhra Pradesh High Court held that criminal liability under Section 138 is personal to the drawer. If the person who allegedly committed the offence dies, the criminal liability abates, and his legal heirs (wife and daughters in that case) cannot be prosecuted for the offence committed by the deceased drawer.

Defence Which May Not Be Allowed (Section 140)

Section 140 of the NI Act stipulates: "It shall not be a defence in a prosecution for an offence under Section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section."[14] This provision curtails the scope of defences available to the drawer, emphasizing the strict liability nature of the offence once the ingredients are met.

Procedural Aspects and Cognizance of Offence (Section 142)

Section 142 of the NI Act lays down conditions for taking cognizance of offences under Section 138. It provides, inter alia:[16], [21]

  • (a) Written Complaint: No court shall take cognizance of any offence punishable under Section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque. The Madras High Court in Gopala Krishna Trading Co. v. D. Baskaran[24] clarified that a company, being a juristic person, can file a complaint through its manager.
  • (b) Limitation: Such complaint must be made within one month of the date on which the cause of action arises under clause (c) of the proviso to Section 138 (i.e., after the failure of the drawer to make payment within 15 days of receipt of the demand notice).
  • (c) Competent Court: No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under Section 138.

The interplay between Section 138 and other penal provisions, such as Section 420 of the Indian Penal Code (IPC), has also been considered. The Kerala High Court in ELANGO v. STATE OF KERALA[29] referred to an Apex Court judgment stating that if an accused is already convicted under Section 138 NI Act, he could not be tried or punished again under Section 420 IPC on the same facts, invoking principles akin to double jeopardy under Section 300 CrPC.

Conclusion

Section 138 of the Negotiable Instruments Act, 1881, has evolved significantly through judicial interpretation since its enactment. The judiciary, particularly the Supreme Court of India, has played a crucial role in clarifying its scope, procedural requirements, and the balance between the rights of the complainant and the accused. The provision has largely succeeded in its objective of enhancing the credibility of cheques as financial instruments and promoting fiscal discipline in commercial transactions. Key developments regarding the presumption under Section 139, the definition of "drawer," the expansive understanding of "reasons for dishonour," the streamlining of jurisdictional issues, and the emphasis on expeditious trial and compounding have collectively shaped Section 138 into a robust legal mechanism. While challenges in implementation and interpretation persist, the legal framework surrounding Section 138 continues to adapt to the exigencies of modern commerce, underscoring its importance in the Indian financial landscape.

References

  1. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. Indian Technologists & Engineers (Electronics) (P) Ltd. And Another (1996 SCC 2 739, Supreme Court Of India, 1996)
  2. C.C Alavi Haji v. Palapetty Muhammed And Another (2007 SCC 14 750, Supreme Court Of India, 2007)
  3. Aparna A. Shah v. Sheth Developers Private Limited And Another (2013 SCC 8 71, Supreme Court Of India, 2013)
  4. K. Bhaskaran v. Sankaran Vaidhyan Balan And Another (1999 SCC 7 510, Supreme Court Of India, 1999)
  5. Rangappa v. Sri Mohan . (2010 SCC 11 441, Supreme Court Of India, 2010)
  6. M/S. Meters And Instruments Private Limited & Anr. v. Kanchan Mehta (2017 SCC ONLINE SC 1197, Supreme Court Of India, 2017)
  7. Indian Bank Association And Others v. Union Of India And Others (2014 SCC 5 590, Supreme Court Of India, 2014)
  8. Jugesh Sehgal v. Shamsher Singh Gogi . (2009 SCC 14 683, Supreme Court Of India, 2009)
  9. Laxmi Dyechem v. State Of Gujarat And Others (2012 SCC 13 375, Supreme Court Of India, 2012)
  10. Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd. And Others (2000 SCC 2 745, Supreme Court Of India, 2000)
  11. Modi Cements Ltd. v. Kuchil Kumar Nandi . (1998 SCC 3 249, Supreme Court Of India, 1998)
  12. Krishna Janardhan Bhat v. Dattatraya G. Hegde . (2008 SCC CRI 2 166, Supreme Court Of India, 2008)
  13. Dashrath Rupsingh Rathod v. State Of Maharashtra And Another (2014 SCC 9 129, Supreme Court Of India, 2014)
  14. Ashok Yeshwant Badave v. Surendra Madhavrao Nighojakar And Anr. (Supreme Court Of India, 2001)
  15. BIR SINGH v. MUKESH KUMAR (Supreme Court Of India, 2019)
  16. M.M. Malik And Ors. v. Prem Kumar Goyal (Punjab & Haryana High Court, 1991)
  17. Laxmi Dyechem v. State Of Gujarat And Others (Supreme Court Of India, 2012) [Also cited as Ref 9]
  18. Ashok Yeshwant Badave v. Surendra Madhavrao Nighojakar And Another (Supreme Court Of India, 2001) [Also cited as Ref 14]
  19. Dr. Geetha v. Vasanthi S. Shetty (Karnataka High Court, 2010)
  20. SARIT KUAMR BOSE@SARIT KUMAR BASU v. SMT RITA MALLICK & ANR (Calcutta High Court, 2024)
  21. Anchor Capitals Of India Ltd. v. State Of Gujarat & Anr. (Gujarat High Court, 1998)
  22. MANOJ KUMAR GOYAL v. HAKIM SINGH (Madhya Pradesh High Court, 2015)
  23. R. Priyadharshini v. Lic Housing Finance Ltd. (2005 SCC ONLINE MAD 309, Madras High Court, 2005)
  24. Gopala Krishna Trading Co., Rep. By Manager P. Sivaram v. D. Baskaran (1992 SCC ONLINE MAD 140, Madras High Court, 1992)
  25. R. Sarangapani Petitioner v. R.S. Nammalwar (2017 SCC ONLINE MAD 16220, Madras High Court, 2017)
  26. Bupinder Lima & Ors. v. State Of A.P & Anr. (1999 SCC ONLINE AP 499, Andhra Pradesh High Court, 1999)
  27. Ponnappan v. Sibi (1998 SCC ONLINE KER 536, Kerala High Court, 1998)
  28. Sureshbhai Narsinhbhai Patel v. State of Gujarat (Gujarat High Court, 2011)
  29. ELANGO v. STATE OF KERALA (Kerala High Court, 2024)
  30. V. Ramadoss v. Papanasam Palaniappan Chit Funds Pvt. Ltd., Represented By Its Foreman Pl.M. Palaniappan, Papanasam (Madras High Court, 2001)
  31. Puchakayala Venkateswarlu… v. M. Laxminarasaiah & Anr.… (Andhra Pradesh High Court, 1999)
  32. Aparna Agencies, Hyd.… v. P. Sudhakar Rao & Anr.… (Andhra Pradesh High Court, 1999)