Case Detail

Section 138 of Negotiable Instrument act

Introduction
Section 138 of the Negotiable Instruments Act, 1881 deals with the dishonour of cheques due to insufficient funds or if the cheque amount exceeds the arrangement made by the drawer with the bank. This provision was introduced to enhance the credibility of cheques in commercial transactions and ensure accountability in financial dealings.

Key Elements of Section 138

For an offence under Section 138 to be established, the following conditions must be met:

1. Cheque Must be Drawn for Discharge of Debt or Liability

   • The cheque should have been issued to pay an existing legal debt or liability.
   • If the cheque was given as a gift or donation, Section 138 does not apply.

2. Dishonour of the Cheque

   • The cheque must be presented within its validity period (usually 3 months from the date of issue).
   • If the bank returns the cheque due to “insufficient funds” or if it exceeds the overdraft limit, the offence is considered under this section.

3. Notice to the Drawer

   • The payee (person who received the cheque) must send a written demand notice to the drawer within 30 days of receiving the bank’s dishonour memo.
   • The notice must demand payment of the cheque amount within 15 days from the date of receipt.

4. Failure to Make Payment

   • If the drawer does not make the payment within 15 days of receiving the notice, a legal complaint can be filed within 30 days after the expiry of this 15-day period.

Punishment for Dishonour of Cheque under Section 138

• Imprisonment – Up to two years or
• Fine – Up to twice the amount of the cheque, or
• Both imprisonment and fine, as per the court’s discretion.

Procedure for Filing a Case under Section 138

1. Step 1: Cheque Dishonour

   • The cheque must be presented to the bank within the validity period.
   • If dishonoured, the bank issues a memo stating the reason for dishonour.

2. Step 2: Legal Notice to the Drawer

   • A demand notice must be sent to the drawer within 30 days of cheque dishonour.
   • The drawer gets 15 days to make the payment.

3. Step 3: Filing a Complaint in Court

   • If no payment is made within 15 days, the payee can file a criminal complaint before a Judicial Magistrate First Class (JMFC) or Metropolitan Magistrate.
   • The complaint must be filed within 30 days after the expiry of the notice period.

4. Step 4: Court Proceedings

   • The court may issue summons to the drawer.
   • The accused (drawer) has a right to present a defence.
   • If found guilty, the court may impose punishment as per Section 138.

Defences Available to the Drawer

A person accused under Section 138 can take the following defences:

1. No Legally Enforceable Debt Exists

   • If the cheque was given for a gift, donation, or without a financial liability, the case may not be maintainable.

2. Cheque Was Issued Under Coercion or Fraud

   • If the cheque was obtained through force or fraudulent means, the accused can challenge the case.

3. Notice Not Served Properly

   • If the complainant fails to send a proper notice within 30 days, the case may be dismissed.

4. Cheque Presented Beyond Validity Period

   • If the cheque is presented after 3 months from its date, the case is invalid.

Landmark Judgments on Section 138

1. Krishna Janardhan Bhat v. Dattatraya G. Hegde (2008)

• The Supreme Court ruled that the burden of proving that there was no liability lies on the accused.

2. Rangappa v. Sri Mohan (2010)

• The Court held that if a cheque is issued and dishonoured, there is a presumption that it was issued for a legal debt unless the accused proves otherwise.

3. C.C. Alavi Haji v. Palapetty Muhammed (2007)

• The Court stated that if the accused does not dispute receiving the legal notice, even non-service of notice cannot be used as a defence.

Conclusion

Section 138 of the Negotiable Instruments Act provides a legal remedy to cheque beneficiaries by criminalizing the dishonour of cheques for insufficient funds. It aims to promote trust and accountability in business transactions. However, the accused has certain legal defences that can be used under specific circumstances. Courts have repeatedly upheld the principle that a cheque is presumed to be issued for a legally enforceable debt, ensuring fair enforcement of financial commitments.

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