This article has been written by Sarthak Mittal, a student at the Vivekananda Institute of Professional Studies of Indraprastha University, Delhi. It explains the rationale behind Section 138 of the Negotiable Instrument Act, 1881 as to why a civil liability has been given a criminal colour and the punishment that follows the given offence.

Introduction

The Negotiable Instrument Act, 1881 came into force on 1st March of 1882 to provide a uniform law for governing different instruments used in place of fiat money as a matter of convenience.A new Chapter XVII was inserted into the Act on 1st April of 1989 by Section 4 of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, (Act 66 of 1988) due to various kinds of frauds and immoral practices that were taking place in the mercantile community. The amendment was made to preserve the sanctity of cheques’ instrumentality as an alternative payment mode. In the case of Krishna vs. Dattatraya (2008), a division bench of the Hon’ble Supreme Court observed that the object of the amendment was regulation of business, trade, commerce and industrial activities in the country and to cast strict liability on the drawers of the cheques, to cast greater vigilance in financial matters, and to safeguard the interest of the creditors by restoring their faith in the instrument of cheque which is imperative to the economic life of a developing country like India. 

It is also pertinent to note that along with cheques in contemporaneous times, electronic fund transfer has also become a frequently used mode of payment, and interestingly, as per Section 25(5) of the Payment and Settlement Systems Act, 2007, even dishonouring electronic fund transfers is also governed by provisions of Chapter XVII of the Negotiable Instrument Act, 1881, which makes it more essential to understand various legal intricacies related to Section 138 of the Negotiable Instrument Act, 1881, which was one of the major highlights of the 1988 amendment as it made the dishonouring of such instruments a criminal offence.

What does Section 138 NI Act say 

Section 138 provides for prosecution in instances of dishonouring a “cheque”. The term “cheque” has been defined in Section 6 of the Act as a bill of exchange wherein the drawer is the person who is making the cheque, the drawee is the bank of the drawer, and the payee or holder in due course is the person to whom the amount of the cheque is to be paid by the bank. The provision also provides that it is always payable on the demand of the payee and not otherwise. The term “cheque” will include an electronic image of a truncated cheque and a cheque in electronic form. 

On careful perusal of the Section, it can be concluded that mere dishonour of a cheque will not be punishable however, it becomes an offence if the following essentials are fulfilled:- 

1. Cheque should be presented to the bank within 3 months from the date on which it was drawn. 3 months is the period of validity vide RBI’s notification (2011-12). 
2. After the presentation of the cheque by the payee, the cheque should be returned unpaid by the bank due to insufficiency of funds in the bank to honour the payment or due to an arrangement made between the bank and the drawer the bank is unable to pay the said amount. 
3. After the cheque is dishonoured the bank will send a bank memo to the payee informing him about the dishonour of the cheque and the reason for such dishonour, the payee is to send a notice within 30 days from the date of receiving the memo to the drawer demanding him to pay the amount.  
4. If the drawer of the cheque fails to make the payment within 15 days from the date of receipt of such notice, the offence will be made out under Section 138. 

All the above-mentioned essentials are mandatory to be fulfilled to invoke Section 138. A person culpable under Section 138 of the Act can be made liable for a punishment that may extend up to 2 years of imprisonment or a fine that may extend up to twice the amount of the cheque in dispute, or both. Further, it is pertinent to note that there is a limitation period of 1 month from the date on which the cause of action arose, as provided under Section 142(1)(b), and the proviso to the said provision also provides for condonation of delay in the cases where there is a sufficient cause for delay. 

Nature of offence under Section 138 NI Act 

In the case of Kaushalya Devi Massand v. Roopkishore Khore (2011), the Supreme Court observed that an offence under Section 138 of the Negotiable Instrument Act, 1881, cannot be equated to any offence under the Indian Penal Code, 1860 as Section 138 attached liability to a civil wrong that has been given a criminal overtone. In the given case, the appellant was an old and widowed lady who had been arguing the case against the respondent for the last 14 years. The Appellant was to recover Rs. 3,00,000 as a consideration in lieu of a property; however, the cheques given by the respondent were dishonoured due to insufficiency of funds, and the appellant thereby pressed upon the fact that imprisonment in such a case is a must to restore the faith of people in the judicial system and that it would act as a deterrent to other people who draw cheque with malign intentions to defraud the payees. Both the High Court and the Supreme Court in the given case observed that there should be some special circumstances in the case to make the accused liable to imprisonment, and in the given case there was no other special circumstance other than the victim being an old and widowed lady. Consequently, the High Court increased the compensation from Rs. 4,00,000 to Rs. 6,00,000 and the Supreme Court increased the compensation from Rs. 6,00,000 to Rs. 8,00,000 and held that in the following case monetary compensation can be sufficient to compensate the victim and there is no need to impose any sentence of imprisonment. 

From the given case, we can conclude that Section 138 is a civil wrong and is treated as such, and only in the presence of some special circumstances it will lead to sentence of imprisonment imposed and not otherwise, as it is compensatory in nature. This proposition of law was further reiterated and clarified in the case of M/s Meters and Instruments v. Kanchan Mehta (2017), wherein it was held that an offence under Section 138 is compensatory in nature, and the punitive element that is present in the provision is to make the compensatory mechanism more effective. The Supreme Court also observed that the trial is in accordance with Section 262 to Section 265 which is the summary procedure provided by the Code of Criminal Procedure, 1973 which is usually followed in criminal trials. The reason behind adopting a criminal trial to resolve a criminal wrong is that it provides for a more robust remedy. The quasi-criminal nature of Section 138 was also observed in the case of CIT v. Ishwarlal Bhagwan Das and Ors. (1965). It is also pertinent to mention the judgement in the case of P. Mohan Raj v. M/s Shah Brothers Ispat Pvt. Ltd. (2021) wherein it was made clear that the propensity of the court should be towards compensating the victim rather than penalising the accused in cases of Section 138. 

Further, in the cases of Rangappa v. Sri Mohan (2010) and Indian Bank Association and Ors. v. Union of India (2013), the Supreme Court observed that an offence punishable under Section 138 is regulatory in nature as it relates to a civil wrong that affects only the private parties involved in the suit. It is pertinent to note that Section 139 of the Act provides for the reversal of the burden of proof on the accused, as the burden of proof on the prosecution is discharged itself by the presumption under Section 139. So the court, keeping in mind the nature of the offence, went ahead and held that the accused cannot be expected to discharge a high burden of proof, thereby settling that Section 139 casts a burden on the accused to prove “preponderance of the probabilities” and not beyond a reasonable doubt as in the cases of other criminal offences. 

Punishment under Section 138 NI Act 

Punishment under Section 138 has been provided for imprisonment up to a term of 2 years or a fine, which may extend up to twice the amount of the fine or both. As has been discussed earlier in Section 138, the compensatory nature of the provision is paramount to the punitive nature of the provision, which means that even if the statute provides for imprisonment in such cases, the first instinct of the court will be to look for appropriate measures to compensate the complainant in such a case. From here, the question arises as to why we have the option of imprisonment in the first place. This discussion has been made in various ways in the legal fraternity which are as follows:- 

Judicial pronouncements 

The discussion on decriminalisation of Section 138 first took place in the case of Makwana Mangaldas Tulsidas v. State of Gujarat (2020), wherein a division bench comprising the then Hon’ble Chief Justice S.A. Bobde and Hon’ble Justice L. Nageswara Rao observed that Section 138 deals with civil wrong which was justified in 1989 but contemporaneously the offence enumerated can be decriminalised. The following judgement of the Supreme Court has also been considered by the Bombay High Court in the case of Karmayogi Shankarraoji Patil and Ors. v. Ruia & Ruia Pvt. Ltd. and Ors. (2022). Further, in the case of Gimpex Private Ltd. v. Manoj Goel (2021) a division bench of the Supreme Court comprising Hon’ble Justice D.Y. Chandrachud and Hon’ble Justice B.V. Nagarathna while relying on a notice issued by the Ministry of Finance on 8th June 2021, observed that Section 138 being a criminal offence in India has severely affected the ease of doing business in India and has disincentive the investors from making investments in India, by observing the following issue the court hasmade its propensity towards decriminalising of Section 138 more apparent. 

Suggestions by legislature 

The Law Commission in its 213th Report adduced in 2008, observes the hardships that the payee of the cheque is facing contemporaneously due to the unscrupulous practice of issuing cheques by drawers with no intention to pay. The report also observed how the time-consuming process of such lengthy trials is adding to the hardship of such payees and simultaneously attacking the credibility attached to the institution of cheques and banking. Further, to resolve the problem, the commission suggested the formation of fast-track courts at the ministerial level, the rationale being that additional infrastructure, along with focused intention and adjudication by the magistrates having specialised knowledge on the subject, will make disposing of cases efficient and more effective and also help in restoring the faith of the public in the judiciary. The following recommendation of the commission has also been observed by the court in the case of In Re: Expeditious Trial of Cases Under Section 139 of the Negotiable Instrument Act, 1881 (2022) and also functioning of various special courts for such cases has been observed in the judgement which are established in the states of Delhi, Bombay, Rajasthan, Allahabad, Gujarat, and Rajasthan. The Hon’ble Court has also given shape to such recommendations by providing guidelines over the training of magistrates and staff, duration of studies to be conducted, pay and service duration of the officers, etc. The given report aims to form more stringent law to deter the accused under Section 138  and more efficacious systems to adjudicate the complaints. 

After a decade, a notice issued on 8th June 2020  by the Ministry of Finance discusses that the decriminalisation of minor offences where there is no need to impose criminal liability will be in consonance with government policies initiated during the pandemic to invite foreign investors and simultaneously incentivise the mercantile community in India by increasing the ease of doing business in India. The notice also specified Section 138 as one of such provisions, wherein the government invited the opinions of the stakeholders on its suggestion of decriminalising the following offence. 

It is also pertinent to note that India is a signatory to the International Covenant on Civil and Political Rights (ICCPR) which is part of the international bill of human rights that was founded by the United Nations. Article 11 of the Covenant provides that no one should be imprisoned due to the mere reason of his inability to fulfil a contractual obligation and in the case of Jolly George Verghese and Anr. v. Bank of Cochin (1980), Hon’ble Justice V.R. Krishna Iyer observed that the following Article of the covenant is in line with Article 21 of the Indian Constitution. The judgement tries to bring out the need to decriminalise civil wrongs in India and by the same analogy, a strong and compelling argument can be made against the criminal liability attached to Section 138. It is also pertinent to note that the United Kingdom introduced the Debtors Act, 1869 to decriminalise such failure to fulfil contractual obligations along the same lines, and the United States of America in 1833 decriminalised the imprisonment of debtors for their inability to repay their debts. 

Negative Impact of Decriminalisation of Section 138

Most of the time, in such kinds of offences, there exists an element of fraud that will go unpunished if Section 138 is decriminalised and some unscrupulous people may get incentivised by decriminalisation. Further, in the mercantile community there has been a prevalent usage, especially after the introduction of these new laws under Chapter XVII of the Negotiable Instrument Act, 1881 which is of accepting Post Dated Cheques (PDCs) as a security for extending trade credits which makes the transactions more convenient and trustworthy, such kind of transactions where the deterrent of dishonouring of cheque plays an important role will get affected severely. 

The most important point that is to be considered is that the complainant will always have a right to file an FIR and initiate criminal proceedings against the accused under Section 420 of the Indian Penal Code, 1860 which provides for cheating by dishonestly inducing a person to deliver his property. This will create an additional burden on the courts, and the goal of decriminalisation of cheques will be defeated. The Act of decriminalisation will promote cash transactions, the country will move further away from its goal of becoming a cashless economy, and the circulation of black money in the economy will increase as a result. 

Alternatives to decriminalisation of Section 138 

The legislature can provide a limit of sum until which there can be no criminal consequences however if the cheque is for the limit of sum prescribed criminal consequences can ensue.  The Credit Information Bureau (India) Limited provides the CIBIL score of the drawer whose drawn cheque bounces; it can also be lowered to deter him from dishonouring his cheques. Alternative modes of settlement of disputes like mediation and conciliation can be promoted to resolve the problem of case pendency. 

An interesting solution has been propounded in the jurisdiction of Scotland which is to attach the funds in the bank of the drawer of the dishonoured cheques till the time the bank receives the rest of the funds from the drawer to honour the cheque or a letter by the payee to satisfy the court that he has no further interest in the cheque. Another interesting solution can be found in the jurisdiction of Japan, where dishonouring of a cheque twice in six months can lead to the suspension of the bank account for two years. Further, it is pertinent to note that in jurisdictions like England, Australia, Singapore, Malaysia, France, and the United Arab Emirates, the act of dishonouring of cheques provides only civil remedies to the payee. 

Conclusion 

Chapter XVII of the Negotiable Instrument Act, 1881 has helped ameliorate the credibility of cheques; however, the efficacy of the law depends on its implementation, and there have been various contentions regarding how the laws relating to the dishonouring of cheques are being implemented. The first major contention is the high pendency of cases of dishonouring of cheques which can be controlled by the formation of fast track courts, as has been implemented and explained in the case of In Re: Expeditious Trial of Cases Under Section 139 of the Negotiable Instrument Act, 1881 (2022).

Further, the second contention is regarding the criminal overtone given to the dispute which is civil in nature which makes it imperative to understand that criminal procedure provides for a faster remedy in comparison to civil cases and that there is already an existing right to bring a suit for recovery of money under Order XXXVII of the Code of Civil Procedure, 1908 which in itself provides for a summary procedure thereby, abolishing the criminal overtone given to the dispute will not fasten the process. 

The third contention is regarding the criminal liability of imprisonment, which can be awarded under Section 138, which may not be an appropriate thing to do as imprisonment is only awarded in cases where special circumstances have been proved by the complainant, as was observed in the case of Kaushalya Devi Massand v. Roopkishore Khore (2011). The best solution in such cases can be to devise proper and clear guidelines which help in deciding what are the special circumstances to make the accused liable for imprisonment. Furthermore, the government can choose to add a pecuniary limit for cases that can be exempted from criminal liability and imprisonment and can also insert such policies as have been followed in Scotland and Japan of suspending or freezing the accounts of the drawers however, decriminalisation of Section 138 will only incentivise people to commit fraud, which will again impact the economy. 

Frequently asked questions (FAQs)

Should insufficiency of funds be the only reason for dishonouring of cheque to invoke Section 138?

Insufficiency of funds can not be the only reason for invoking Section 138 of the Negotiable Instrument Act, 1881 rather, it can also be invoked in cases where dishonour of cheque is due to a mismatch of signatures, as was held by the Supreme Court in the case of Laxmi Dyechem v. State of Gujarat (2012). Further, in the case of NEPC MICON ltd. and Ors. v. Magma Leasing (1999) it was held by the Supreme Court that Section 138 can be invoked even in  cases where a cheque has been drawn from an account that is closed. However, Section 138 will not apply to lost cheques as per the judgement in the case of Rajkumar Khurana v. State of NCT of Delhi (2009) and also will not apply to time-barred debts as per the judgement in the case of Sasseriyil Joseph v. Devassia (2001). 

Is Section 138 applicable on post-dated cheques and blank cheques?

The Hon’ble Supreme Court held in the case of Sampelly Satya Narayan Rao v. Indian Renewable Energy Development (2016) that post dated cheques are commonly given as a security and that Section 138 can be made out on the dishonouring of such cheques given that the liability should be outstanding on the date of the dishonouring of the cheque. It is pertinent to note that in the case of Ashok Yeshwant Badave v. Surendra Nighojkar (2001) it was held that a post-dated cheque may have the title of a bill of exchange in the beginning, but whenever the date of presentment reckons, it becomes a cheque, and from that date onwards dishonouring of such a cheque will also be covered under Section 138. 

In cases of blank cheques the Supreme Court held in the case of M/s Kalamani Tex v. P. Balasubramaniam (2021) that Section 138 can be invoked and even the presumption of Section 139 will be attracted given that it should be voluntarily signed and handed over to the payee; the same proposition of law was also reiterated in the case of Raj Singh v. Yashpal Singh Parmar (2022).  

Can a dishonoured cheque be presented again?

In the case of Sadanandan Bhadran v. Madhvan Sunil Kumar (1998), Supreme Court held that only one cause of action can arise from one cheque, and presentation of a dishonoured cheque again will not give rise to a new cause of action. However, it is pertinent to note that this proposition of law was not accepted by a later judgement in the case of MSR Leathers v. S. Palaniappan (2013) wherein it was held that dishonoured cheque can be presented any number of times during its period of validity which is of 3 months reckoning from the date on the cheque and each successive dishonour will give rise to a new cause of action. It is pertinent to note that both the judgements of the court are by a division bench therefore, the clarity on this proposition of law is not so cogent; however, the latest judgement by the court is more in line with the nature and object of the Act, and for the time being, it should be followed. 

What are the consequences of sending two notices during the notice period under Section 138?

Generally, in such cases, the contention is raised that the act of sending two notices during the notice period of 30 days will vitiate the proceedings or that the sending of a second notice will give rise to a new period of 15 days for making payment to the drawer, which would ultimately result in prolonging the time for filing the suit. However, in the case of N. Parameswaran Unni v. G Kannan (2017), it was held that even in the cases where the payee or the holder in due course has sent two notices the trial will not be vitiated and a second notice will be seen as a mere reminder and all the relevant prescribed periods will be computed as per the first notice. 

References 

1. https://blog.ipleaders.in/the-negotiable-instruments-act-and-its-special-provisions/
2. https://blog.ipleaders.in/nature-section-138-negotiable-instruments-act-1881/#Introduction
3. https://www.juscorpus.com/impact-of-decriminalization-of-section-138-of-negotiable-instruments-act-1881/#:~:text=On%20the%20other%20hand%2C%20if,additional%20non%2Dpayment%20of%20dues.
4. https://theadvocatesleague.in/blogs/view/DECRIMINALISATION-OF-SECTION-138-OF-THE-NEGOTIABLE-INSTRUMENTS-ACT-Qn5jrf.html
5. https://indialawjournal.org/criminalize-or-decriminalize-s-138.php
6. https://www.scconline.com/blog/post/2021/02/16/cheque-dishonour/
7. https://www.mondaq.com/india/crime/966664/decriminalization-of-criminal-offence-under-section-138-of-negotiable-instruments-act-1881
8. https://crlreview.in/2020/10/07/decriminalization-section-138-ni-act/
9. https://ijirl.com/wp-content/uploads/2022/03/DECRIMINALISATION-OF-SECTION-138-OF-THE-NEGOTIABLE-INSTRUMENTS-ACT-1881-IS-IT-A-STEP-FORWARD.pdf 
10. https://www.themarshallproject.org/2015/02/24/debtors-prisons-then-and-now-faq#:~:text=In%20the%20United%20States%2C%20debtors,Fourteenth%20Amendment’s%20Equal%20Protection%20clause. 
11. https://www.jetir.org/papers/JETIR2010399.pdf