Negotiable Instruments Act, Section 138

Negotiable Instruments Act, Section 138: Dishonour of Cheque for Insufficiency of Funds

Section 138 of the Negotiable Instruments Act, 1881 creates criminal liability for the dishonour of cheques issued towards a legally enforceable debt or liability.

The provision seeks to ensure credibility, trust, and financial discipline in cheque-based commercial and financial transactions.

1. Essential Conditions for the Offence

An offence under Section 138 arises when a cheque issued towards a legally enforceable debt or liability is dishonoured after being presented within its validity period.

The offence is completed only if a statutory notice is issued and the drawer fails to make payment within the prescribed time.

2. Cheque Must Be Issued for a Legally Enforceable Debt or Liability

The cheque must have been issued wholly or partly towards a legally enforceable debt or liability for Section 138 to apply.

Cheques issued as gifts, for unlawful considerations, or for liabilities not recognized by law generally do not attract liability under Section 138.

3. Grounds of Dishonour Covered Under the Section

The section applies where a cheque is returned unpaid because the funds available in the drawer’s account are insufficient to honour the cheque.

It also applies where the cheque amount exceeds the arrangement, overdraft facility, or credit limit agreed between the drawer and the bank.

4. Criminal Nature of Liability and Punishment

Upon fulfilment of all statutory requirements, the drawer is deemed to have committed an offence under Section 138.

The drawer may be punished with imprisonment up to two years, a fine up to twice the cheque amount, or both, in addition to any civil liability.

5. Presentation of Cheque Within Validity Period

The cheque must be presented to the bank within six months from the date of drawing or within its period of validity, whichever is earlier.

If the cheque is not presented within this prescribed period, the provisions of Section 138 cannot be invoked.

6. Mandatory Statutory Notice Requirement

After receiving information regarding dishonour, the payee or holder in due course must issue a written demand notice to the drawer within thirty days.

The notice must demand payment of the cheque amount and provide the drawer an opportunity to avoid prosecution by making payment.

7. Failure to Pay Within Fifteen Days of Notice

If the drawer makes payment within fifteen days of receiving the statutory notice, no offence under Section 138 arises.

However, failure to make payment within that period completes the offence and gives rise to a cause of action for prosecution.

8. Rights of Holder in Due Course and Concurrent Civil Remedies

Section 138 protects both the original payee and the holder in due course, allowing a bona fide transferee to initiate proceedings for cheque dishonour.

The provision also preserves the right to pursue civil recovery of money in addition to criminal prosecution under the Act.