Section 138 of Negotiable Instruments Act, 1881

Introduction Section 138 

The Negotiable Instrument Act was enacted in India in 1881 and the present act is based on the English Act with certain Modifications. The main objective of this legislation to maintain the fruitfulness in banking operation through transacting the business of negotiable instruments.

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word “order” or “bearer” appears on the instrument or not.”

Here the negotiable means “Transferable” and instrument “Written Document” therefore the Negotiable instruments are nothing but the written documents which hold a monetary value and are exchangeable in nature.

Post Office Money Order and Currency Notes are the instruments which are not covered under the Negotiable Instrument Act as they are governed by the Postal rules & regulations and Indian Currency Act respectively.

The types of Negotiable Instruments defined in the Negotiable Instruments Act, 1881 are:

• Promissory Notes (defined in Sec. 4 of NI Act, 1881)
• Cheques (defined in Sec. 6 of NI Act, 1881)
• Bills of Exchange (defined in Sec 5 of the NI Act, 1881)

A promissory note is a written instrument (not a bank or currency note) which is written and by a maker to make a payment to a certain person or the bearer of the instrument.

A bill of exchange is a written acknowledge which is made by the creditor specifying the amount and the same is accepted by the debtor.

A cheque is a type of bills of exchange in which the drawer gives an unconditional order to the respective banker to pay a certain amount of money to the certain person or to the bearer of the cheque.

Whenever a person who is the maker of the note (Promissory Note), Acceptor of the bill (Bill of Exchange), Drawee (Cheque) makes a default in the payment within the stipulated time specified in the Negotiable Instrument, the same said to be dishonoured.

Section 138 of the Negotiable Instruments provides that whenever a cheque is dishonoured due to the insufficient funds or the amount is exceeding the limit then the same is a criminal offence punishable under the section.

In the following cases, it is not an offence-

(a) A cheque was given in gift.

(b)A cheque not presented within the validity period.

(c) The payee and holder have not given notice demanding payment within 15 days of dishonour in case of insufficiency of funds.

(d) The payee has paid the same within 15 days of receipt of the notice.

(e) The complaint was made after a month of a cause of action (Section 142)

• Drawing of the cheque,
• Presentation of the cheque to the bank,
• Returning the cheque unpaid by the drawee bank,
• Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount.
• Failure of the drawer to make payment within 15 days of the receipt of the notice.

Before 1988, there was no effective legal provision for the dishonour of cheque due to insufficient funds or amount exceeding the limit. Though there was a civil liability there was a delay in the justice and hence defeating the very purpose of recognizing a negotiable instrument as a speedy vehicle of commerce.

 

Historical Background of Section 138

Chapter XVII was introduced in the Negotiable Instruments Act, 1881 in 1988 by the amendment act of Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 determining dishonour of cheque as a criminal offence and providing punishment with an imprisonment for a term that may extend up to one year, or with fine which may extend to twice the amount of the cheque or can provide both.

The provisions have been made that to constitute the said offence –

(a) the cheque has been 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;

(b) the payee or the holder in due course of the cheque, as the case may be, 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 15 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails 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.

The Section 138-142 were not found sufficient in dealing with the offence of cheque dishonour therefore in the amendment of Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 there was an amendment made in the Section of 138, 141 & 142 and a set of new sections from 143-147 were added.

In this amendment, the term of punishment under Section 138 was extended from one year to two years and notice which was to be issued to the drawer within 15 days was extended to within 30 days. The reason behind the introduction of the new section was to initiate speedy disposal of the cases and making them compoundable.

 

Jurisdiction of an offence committed under Sec. 138 of Negotiable Instrument Act, 1881

In the case of K. Bhaskaran v. Sankaran Vaidhyan Balan, the jurisdiction was considered, and it was held that the case can be filed at any place where the following series of the events are taken place:

• Where the cheque was drawn.
• Where the cheque was presented for encashment.
• Where the cheque was returned unpaid by the drawee bank.
• Where notice in writing was given to drawer of cheque demanding payment.
• Where drawer of cheque failed to make payment within 15 days of receipt of the notice.

If the above 5 events have been committed in different areas, then any court in any of these areas shall have the jurisdiction to accept the case. In other words, it can be assumed that it depends on the convenience of the complainant to file in whichever court the same want to.

The consequences of this judgement caused a lot of problems to the drawer of the cheque as the cases were filed at a different location as per the convivence of the payee/drawee. Sometimes the same drawer issued a number of cheques to the same payee which were presented at different bank for payment and then the cases are filed at a different place against the same drawer.

The above case was overruled by Dashrath Rupsingh Rathod v. the State of Maharashtra,  a three-Judge Bench of the Supreme Court held that a Complaint of Dis-honour of Cheque can be filed only to the Court within whose local jurisdiction the offence was committed, which in the present context is where the cheque is dishonoured by the branch of bank on which it is drawn.

As per Section 138, the offence is said to be committed when the cheque is returned unpaid due to insufficiency of funds or exceeding the limit. Therefore, the court established that the place of the offence will be the drawer’s bank from where the cheque is dishonoured. And as per section 177 of CrPC the place where the offence has been committed, that court of that respective place will have the jurisdiction to hear the case.

The Court in the above judgement clarified that the Complainant is statutorily bound to comply with Section 177 of the CrPC. and therefore, the place where the Section 138 Complaint is to be filed is not of his choosing.

Regarding the above judgment, representations have been made to the Government by various stakeholders, including industry associations and financial institutions, expressing concerns about the judgment would have on the business interests as it will offer undue protection to defaulters at the expense of the aggrieved complainant; will give a complete go-by to the practice /concept of ‘Payable at Par cheques’ and would ignore the current realities of cheque clearing with the introduction of CTS (Cheque Truncation System) where cheque clearance happens only through scanned image in electronic form and cheques are not physically required to be presented to the issuing branch (drawee bank branch) but are settled between the service branches of the drawee and payee banks; will give rise to multiplicity of cases covering several cheques drawn on bank(s) at different places; and adhering to it is impracticable for a single-window agency with customers spread all over India.

Clarifying the jurisdiction related issue, Negotiable Instruments (Amendment) Ordinance, 2015 (6 of 2015) was issued to clarify the same. The same act inserted Section 142(2) in The Negotiable Act, 1881 which provides that:

(2) The offence under section 138 shall be inquired into and tried only by a court within whose local jurisdiction, —

(a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or

(b) if the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

Explanation. —For the purposes of clause (a), where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.

In simple words, when the cheque is presented for collection through an account, the case will be filed at the Court of the place where the branch of the bank in which the payee maintains his/her account. If the cheque is presented for the payment at the counter, then the complaint will be filed at the Court of the place where the branch of the bank in which the drawer maintains his/her account.

 

Conclusion

There has been a series of amendments since years regarding Section 138 of Negotiable Instruments Act, 1881. Insertion of the legal provisions in the Section has made lenders secured to a large extent and seeks to keep up with the modern banking system. Though there is a proper criminal liability against the accused of a fine or punishment or both, there is no provision made for the recovery of the amount which is specified in the cheque which is dishonoured.

There has also been a lot of confusion regarding the jurisdiction i.e. before which court the proceedings of Section 138 will be filed. The recent amendment made in the Negotiable Instruments Act 2882 by the Negotiable Instruments (Amendment) Ordinance, 2015 (6 of 2015) has solved the issue and also negated the changed made or the law laid down in 2014 in the judgment of Dashrath Rupsingh Rathod v. the State of Maharashtra.

The law also focuses on speedy disposal of pending cases under Section 138 of Negotiable Instruments of Act, 1881.

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