GSL

(India) Ltd.
GSL means a better yarn

and the legal team

of GSL

Welcomes
to all

PRESENTATION
ON:

SECTION

138

of the Negotiable

Instruments Act 1881and the

Amendments

of the Act

An Overview by:

Vijyant Nigam
Law Officer

Under the thankful

cooperation and guidance of:

Syt. Ashish Babu

Sri. B. Bhushan
Sri. Prem Jha
Sri. Mahesh Pareek
&
Sri. Manoj Sinsinwar

[Act No. 26 of Year

1881, dated 9-12-1881]

Negotiable
Instruments
Act 1881
Came into force on 1st March, 1882

the said act

was
enacted to
define and to

provide the law

promissory
notes,
relating to

bills of exchange
and cheques !

Promissory Note:
Section

4 of the Act defines:

A Promissory Note is an
instrument in writing containing
an unconditional undertaking
signed by the maker to pay a
certain sum of money only to, or
to the order of a certain person,
or to the bearer of the
instrument.

Bill of Exchange:
Section

5 of the Act defines:

A bill of exchange is 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 or to
the bearer of the instrument

Cheque:
Section

6 of the Act defines:

A cheque is a bill of exchange

drawn on a specified banker and
not expressed to be payable
otherwise than on demand.
Or we can say a cheque is a bill
of exchange which is payable on
demand and which is drawn on
a specified banker.

But the cheques have assumed

great importance these days due
to rapid industrialisation followed
by the economic liberalisation or
because of the increasing
participation in the international
commercial activities. Increasing
use of the cheque called for
strengthening the reliability of
payment when made through
cheque so that cheques could be
used with more credibility and
better reliance.

Two things were of great concern

viz., such provisions were
required to be made that prove to
be of deterrent effect to the others
and in case of dishonouring of
cheque, the amount is paid to the
payee as early as possible
together with interest and
compensation.
In other words, the emphasis was on
the speedy justice, exemplary and
compensatory justice

From 1st April 1989

(1988 Amendment)

If a person issues a cheque and it

got dishonoured the person is said to
have done

an offence.

Whatever be the reason for the

dishonour weather for insufficiency of
funds or whatever, the same does
not matter.

1988 Amendment
towards achieving the goal on the
speedy justice, exemplary and
compensatory justice new
provisions with enlightened
jurisprudential foundation were
engrafted and put on the statute
book in the year 1988 in the form of
institution of

Chapter XVII
to the Negotiable Instruments Act,
1881

Chapter
XVII

The said chapter was incorporated for penalties

in case of dishonour of cheques due to
insufficiency of funds in the account of the
drawer of the cheque or whatsoever (like stop
payment etc.).
Object
These provisions were incorporated with a view
to encourage the culture of use of cheques
and enhancing the credibility of the instrument.

The larger objective

is to protect the
interest of honest
people dealing in
cheques.

1988 Amendment

DRAWER
BEWARE

Because, by the said

amendment the
DISHONOURED CHEQUE is
being TREATED as an
CRIMINAL OFFENCE

Certain new sections included in

the Negotiable Instruments Act
through the Chapter

XVII

and are numbered as:

Section 138,
139,
140 and 141

New sections in
the Chapter XVII

Section

138:

this section defines the

dishonour of cheque is an
offence. The same also
defines the main ingredients
which have to be fulfilled to
made it, an offence.

Basic Presumption of
Section 138:

Dishonour
of Cheque
is an
Offence

ingredients of
section 138 which shall have

Five basic

to be fulfilled for creating an offence for dishonour

of a
cheque
cheque should have been
drawn
by the drawer in payment of a
legal liability to discharge the existing debt. Cheque given by
way of gift would not come under this provision.

The cheque should be presented within the validity period i.e.

within six months or three months as the case may be.
Common sense demands that the cheque should reach the
drawer bank within the validity period.

Return memo by the drawer bank to the drawee bank and

subsequently by the drawee bank to the drawee reporting that
the cheque got unpaid is must. Reasons for dishonour is not
material at this stage.

Giving notice to the drawer of the cheque by the drawee or the

holder of the cheque in due course is must for making the said
payment within fifteen days. The notice must be sent to drawer
within 15 days (amended to 30 days by the 2002 amendment) of
the receipt of the information from the drawee bank that the
cheque got dishonoured.

The drawer of the cheque fails to make the payment of the said
amount of money to the payee or to the holder in due course
within 15 days of the receipt of the said notice.

Supreme Court also held in K. Bhaskaran

Vs. Sankaran Vaidyan Balan:
Its not necessary that all the five acts should have been
perpetrated at the same locality. It is possible that each of
those five acts could be done at five different areas.
In this context a reference to section 178 (d) of the Cr. P. C. is
useful:

Where the offence consists of

several acts done in different local
areas, it may be inquired into of
tried by a court having jurisdiction
over any of such local areas.

Moreover the section 138 also

provides for the punishment for
dishonour of cheque:
viz. imprisonment for a
term which may extend to
one year, or with fine
which may extend to twice
the amount of the cheque,
or with both.
(the term of punishment extended to two years
vide 2002 amendment )

New sections in the

Chapter XVII

Section

139:

By this section it shall be

presumed that the holder of
a cheque received the
cheque for the discharge of
some liability or any debt.

New sections in the

Chapter XVII

Section

140:

This section says that defence in

the prosecution under section
138 shall not be available to the
drawer if the ingredients of 138
are completed.

New sections in the

Chapter XVII
Section 141:
This section defines that if an offence
done by any company, the person/s
shall be held liable who were in
charge and responsible to the
company, for the conduct of the
business of the company, at the time
the offence under section138 was
committed.

1988 amendment

The object of the

amendment was, to
enhance the acceptability
of cheques in settlement
of liabilities by making the
drawer liable for penalties
in case of bouncing of
cheques.

Supreme Court
examined:
The provisions of sections
138 and 141 of the Act
and noted that mere
dishonour of a cheque
would not raise a cause of

action unless the payee makes a

demand in writing to the drawer of the
cheque for the payment and drawer
fails to make the payment of the said
amount of money to the payee.

Section 141:
The chapter XVII of the Act gained much
importance among companies due to the
section 141 because, this is the section,
through which the persons shall be held
liable for the conduct / offence committed
under the Act by a company.
The section also gave a reason to think twice
to the responsible person/s of a company
who makes commitment for and on behalf
of the company to pay someone through
negotiable instrument/s.

More Over From 06.02.2003

(by the 2002 amendment)
The said offence will be punishable
with

imprisonment

for a term up to

2 years or with

fine twice the amount of the

cheque or both
under section 138 of the Act

2002
Amendment

Another amendment came into force from

06.02.2003 as
Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002
Through the said amendment:
Sections 6, 64, 81 and 89 have been
amended due to entrance of the electronic
technology in the Negotiable Instruments.
Section 138(a) amended regarding the term of
imprisonment increased to Two years from
One year and through 138(b) the period of
giving notice of demand to the drawer
increased from fifteen days to thirty days.

2002
Amendment

Section 142(b) amended by the insertion of a

proviso: Provided that the cognizance of a
complaint may be taken by the court after
the prescribed period, if the complainant
satisfies the court that he had sufficient
cause for not making a complaint within
such period.
Note: Prior to this amendment there was no
provision in the Act for the condonation of
delay in preferring the complaint under
section 138.

2002
Amendment

Moreover new sections from 143 to

147 have been inserted for the
speedy disposal of the cases under
section 138.

Note: The aforesaid sections were

inserted to boost up the speed of the
proceedings in courts in the cases
under section 138 of the Act

New sections
inserted through
the 2002

Section 143:
amendment:

This section provides the power to

courts to try cases, under section
138, summarily and the trial of the
case, as far as practicable, should
be continued from day to day until its
conclusion and endeavour is to be
made to conclude the trial within six
months.

New sections
inserted through
the 2002

amendment:

Section 144:

This section provides that the

copy of summon/s may also be
issued by speed post or by such
courier services as are
approved by a court of session.

New sections
inserted through
the 2002

Section 145:
amendment:

This section provides that the evidence

of a complainant may be given by
him in an affidavit and that will be
read in evidence, and the court, if it
thinks fit, shall on application of the
prosecution or the accused, summon
and examine any person who is
giving evidence on affidavit.

New sections
inserted through
the 2002

amendment:

Section 146:

This section provides the court

shall presume the fact of
dishonour of a cheque on
production of Banks slip or
memo having thereon the
official mark denoting that the
cheque has been dishonoured.

New sections
inserted through
the 2002

amendment:

Section 147:

Every offence punishable under

this Act shall be compoundable.
Which means that a compromise
in the matters under section 138
can be made between the
complainant and the accused at
any stage of the case.

Meaning of Compoundable
in 138 N. I. Act:

The case may be closed and the accused

may be discharged, by the magistrate but
only on his sole discretion, if some
settlement executed between the
complainant and the accused and the
complainant gave his statement before the
magistrate that he want to close the matter
and they (complainant and the accused)
have settled upon a certain conditions and
now the complainant has no more
grievance against the accused.
Compounding can be done at any stage of
the case whether it is before the original
magistrate or before any appellate authority.

Some frequently asked queries on the chapter

of section 138 of the act:

What is Pay order and Holder in Due Course?

Supreme court held in the matter of Punjab and Sindh

Bank Vs Vinkar Sahakari Bank Ltd. and ors. (AIR 2001
SC 3641, 2001 AIR SCW 3709)
Pay order is also a negotiable Instrument.
21. Section 142 of the Act envisages a complaint to be
made in writing "either by the payee or the holder in due
course of the cheque, as the case may be". Section 8 of
the Act defines "holder" as any person entitled in his
own name to the possession of the cheque and to receive
or recover the amount due thereon from the parties
thereto. We have no doubt that complainant-bank was
well within its right to possess the cheque and to receive
or recover the amount covered by the instrument.
"Holder in due course" means a person who for
consideration became the possessor of a cheque if
payable to bearer before the amount became payable.
(vide S. 9).
22. In this context reference has to be made to S. 118(g)
of the Act which contains a mandate that until the contrary
is proved the holder of a negotiable instrument shall be
presumed to be a holder in due course.

Some frequently asked queries on the chapter

of section 138 of the act:

Where does the Nominee Director

Stand?

Supreme Court observed in Punjab National Bank

Vs. Surendra Prasad Sinha (AIR 1992 SC 1815)
The answer is that a nominee director enjoys full
immunity under the newly enacted provisions of the
Negotiable instruments Act.
Basically a Nominee Director is a person appointed
in a company for observation by some other
company (mainly financial or governmental) whose
interest involve in the business of the said company
A nominee director whose position is purely nonexecutive in the board of a company fully protected
against prosecution and harassment under
section 141.
The vicarious liability of a person for being
prosecuted for an offence committed by a company
arises if at the material time he was in charge of and
responsible to the company for the conduct of its
business.

Some frequently asked queries on the chapter

of section 138 of the act:

Weather a Non-Bailable
Warrant Can be issued for the
offence under section 138?

Madras High Court Observed:

Personal liberty of a person is protected
under Article 21 of the Constitution Of India.
Therefore a Non-Bailable warrant shall not
be issued under section 138 cases unless it
is absolutely necessary.
Considering that section 138 is a matter of
dispute between two individuals relating to
civil liabilities and the magistrate shall
always use his discretion in favour of the
accused and issue only a Bailable Warant.
The offence is Bailable.

Some frequently asked queries on the chapter

of section 138 of the act:

Can second notice of demand

from drawer gave a new
cause to the drawee?

The answer is NO.

the drawee, of a cheque that is
dishonoured, has only one life i.e.
only one cause for action that he has
to use within the prescribed time and
file the case. Else, this will become a
technical defence that the court will
have to uphold.
Its a technical defence for the
accused.

Some frequently asked queries on the chapter

of section 138 of the act:

Post-Dated Cheque (PDC) is a

Valid Instrument?
The answer is Yes.
Supreme Court in Ashok Yashwant
Badve Vs Surendra Madhavrao
Nighojkar and anr. (AIR 2001 SC 1315)
has resolved the issue.
A PDC is a cheque that bears a date
that is after the date when the
cheque is made out, signed and
delivered and is given to the creditor
well in advance so that he can
present it on such due date.

Some frequently asked queries on the chapter

of section 138 of the act:

Shall Section 138 apply in case of a Disnonoured

Cheque drawn without any liability to pay?

Cheque should have been drawn by the

drawer in payment of a legal liability to
discharge the existing debt.
Supreme Court in C. Anthony Vs K.
Raghavan Nair (2002 SOL Case No.550
supremecourtonline.com) has resolved the issue.
It is necessary for the drawee/ complainant
to prove before the court that the cheque
was received by him in the discharge of
some liability.
If complainant could not prove that the
cheque was in the discharge of some
liability, the complaint will be dismissed and
the accused will be acquitted.

Some frequently asked queries on the chapter

of section 138 of the act:

Who can take cognizance of the

offence under section 138?

As per the Section 142 (c) of the Act.

No court inferior to a Metropolitan
Magistrate or a Judicial Magistrate can try
the offence.

Supreme Court Case:

K. Bhaskaran
Vs
Sankaran Vaidyan Balan
A case between two brothers for the
offence under section138:
In this case the court held that the
burden is on the accused to
rebut the presumption of
section 139 that holder of a
cheque received it for
discharge of any debt or
liability.

Section 29(2) of Cr. P. C.:

Fine can not be more than
Rs.5,000/In the previous case the Supreme Court
also held that the appellate court shall
not inflict greater punishment for the
offence which in its opinion the accused
has committed, then might have been
inflicted for that offence by the court
passing the order or sentence under
appeal.
In this context a reference to section 29(2)
of the Cr. P. C. is necessary as it contains
a limitation for the magistrate of first
class in the matter of imposing fine as a
sentence or as a part of the sentence.

Goaplast V/s Shri Chico

Ursula D Souza

Stop Payment Instructions

will not take a case out of the

purview of Section 138, it has
elaborated on the reasons why this
should be so. More importantly, it
would follow from the judgments
affirming this position that the
court will give great credence to
the presumption that cheques have
been issued in discharge of a debt
or liability and will not accept any
argument to the contrary.