INTRODUCTION:
Section 138 of negotiable instrument Act, 1881 (herein after mentioned as NI Act) deals with the settlement of discord which arises in case where cheque, which is for the payment of certain liability, has been dishonored or bounded because of the reasons articulated in the said section. Section 138 also impose punishment in case of such return of cheque unpaid from the bank. Section 138 stipulates certain pre requisites for the applicability of the said section and to avail the remedy. Present blog will cover all those essentials of section 138 of NI Act.
What is negotiable instrument?
The term “instrument” means any document which is a proof of promise to pay any liability by the person who is issuing those documents or instrument to the assignee. The term “negotiable” means transferable therefore the such instrument or document is to give legal effect to such transfer.
The term negotiable instrument has been defined in section 13 of NI Act as under:
Section 13. ''Negotiable instrument'':
A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer…….
This section illustrates three kind of negotiable instrument that is:
- Promissory note
- Bill of exchange
- Cheque
Section 138 of NI Act is concerning Cheque as a negotiable instrument and not regarding rest of two instruments.
What is cheque?
Section 6 of NI Act enunciates that A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form…………..
A cheque is a written and signed negotiable instrument by which the drawer of the cheque instructs the bank to pay the amount to the bearer of the cheque that is payee. A drawer of the cheque is a person who sign the cheque in the name of the payee and a payee or the assignee is a person to whom such payment is made.
What is Cheque bounce or dishonor?
When a drawer issue cheque in favour of a person and the payee presents the said cheque before the bank for encashment however said cheque return unpaid it is known as cheque dishonor or cheque bounce. Section 138 of NI Act make it punishable offence and the payee can avail the remedy when all the components of section 138 of NI Act are complied by the payee.
What is section 138 of NI Act?
138. Dishonour of cheque for insufficiency, etc., of funds in the account. —
Where any cheque drawn by a person on an account maintained by him with a banker for 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, is 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, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless—
- 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;
- 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 thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
- 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.
Explanation.—
For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.]
What are the essentials of section 138 of NI Act?
- Cheque drawn by the drawer;
- Cheque issued to the payee;
- Cheque is drawn for discharge of “liability or debt” whole or in part;
- Cheque returned unpaid by the bank:
- on account of insufficient funds to honour the cheque; or
- it exceeds the agreed amount to be paid from the account (agreement with bank)
- Cheque is presented within the period of 6 month (3 months before amendment) or within the period of its validity;
- Demand notice with in the period of 30 days from the date of return of the cheque unpaid from the bank;
- Drawer has to make the payment of the cheque amount with 15 days from the date of receiving the aforesaid demand notice;
- Debt or liability claimed or being discharged through cheque should be legally enforceable.
All the components mentioned aforesaid has to be fulfilled to claim remedy under section 138. In a case where the drawer of the cheque does not discharge the amount mentioned in the cheque even after 15 days from the date of receiving the demand notice, the payee or assignee of the cheque has right to claim the said amount by the instating a criminal complaint under section 138 of NI Act.
What is the objective of section 138?
In Bir Singh vs Mukesh Kumar (2019) 4 SCC 197: court observed that the objective of section 138 of NI Act is to infuse credibility to negotiable instruments including cheques and to encourage and promote the use of negotiable instruments including cheques in financial transactions. The penal provision of section 138 of the Negotiable Instruments Act is intended to be a deterrent to callous issuance of negotiable instruments such as cheques without serious intention to honour the promise implicit in the issuance of the same.
What punishment could be imposed under section 138?
Section 138 of NI Act gives power to court to impose punishment in case of conviction under section 138 of NI Act. Such accused will be punished with imprisonment which could be maximum up to two years or with fine which could also be extended twice the amount of the cheque.
Whether offence under section 138 is compoundable or not?
A compoundable offence is the one which could be settled between the parties even before passing of the judgment of the court. Section 320 of Criminal procedure code which is section 359 Bhartiya Nagarik Suraksha Sahita, 2023 gives a list of those offences which are compoundable. It is note worthy that section 147 of NI Act consider all the offences under section 138 of NI Act as a compoundable offense irrespective of the law under section criminal procedure code or BNSS.
PROCEDURE UNDER 138 OF NI ACT:
Section 142 enunciates that only the metropolitan magistrate or judicial magistrate first class have power to take cognizance on a complaint filed under section 138 of NI Act.
- Cheque is drawn by the drawer for discharge of liability or debt in whole or in part-Section 138;
- Presentation of cheque with in the period of 6 months- section 138 (a) or within the period of its validity;
- Return of cheque as unpaid by the bank either due to insufficiency of amount or amount exceeded the amount agreed to be paid from that account;
- Demand notice within 30 days from the date of return of the cheque from the bank- Section 138(b);
- Drawer has to pay within 15 days from the date of receiving the demand notice- Section 138 (c);
- Cause of action arise after 15 days in case of non-payment;
- Complaint filed by the payee or holder of the cheque under section 142(1) of NI Act;
Section 142 impose the condition that a magistrate will take the cognizance of the complaint made under section 138 of NI Act only when complaint is made in the due course of the cheque. such complaint needs to be made with in one month form the date of when the cause of action arises.
On reading section 142 (2) and section 138 (c) a cause of action under section 138 arises when 15 days, from the date of receiving the demand notice from the payee or holder of the cheque, are over and the drawer of the cheque do not make the payment of the said cheque amount. From the date when cause of action arises within one month the payee or the holder of the cheque has to file complaint as stated under section 142 (1) (b) of NI Act.
Summary trial: Section 143 of NI Act articulates that case filed under section 138 of NI Act will be tried by the magistrate summarily and the provision of section 262 to 265 of Criminal procedure code, 1974 which is 284 to 288 of new Bhartiya Nagarik Suraksha Sahita, 2023, will be applicable for such trail.
CONCLUSION:
Section 138 of the NI Act settles disputes arising from the dishonour of a cheque or check bounce. The law makes it mandatory to comply with the essentials enunciated under section 138 of the NI Act to avail of the remedy. A complaint can be filed under section 138 read with section 142 of the NI Act before the magistrate only as stipulated under section 138; besides, serving the demand notice to the cheque drawer is mandatory.