Section 138

About Section 138

Section 138 of the Negotiable Instruments Act, 1881, is a crucial legal provision in India that deals with the dishonor of cheques due to insufficient funds or other reasons.

This section was introduced to provide a legal framework for addressing cheque bounce cases and ensuring the credibility of negotiable instruments in commercial transactions.

Under Section 138, if a cheque issued by a person for the discharge of a debt or liability is dishonored by the bank due to insufficient funds or any other reason, the recipient of the cheque can initiate legal action against the drawer of the cheque by sending a notice demanding payment within a stipulated period, usually 15 days.

If the drawer fails to make the payment within the prescribed period, the recipient can file a criminal complaint before the Magistrate within one month from the date of expiry of the notice period. The Magistrate, after hearing the case, may impose penalties including imprisonment or fine, or both, on the drawer of the dishonored cheque.

Section 138 provides a swift and effective mechanism for recovering dues in cases of dishonored cheques, thereby promoting trust and reliability in commercial transactions. It acts as a deterrent against issuing cheques without ensuring the availability of funds and emphasizes the importance of honoring financial commitments.

Ingredients of Section 138

The ingredients of the offence as contemplated under Sec.138 of the Act are as under:

The cheque must have been drawn for discharge of existing debt or liability. Legally recoverable debt.
Cheque must be presented within 3 months or within validity period whichever is earlier.
Cheque must be returned unpaid due to insufficient funds or it exceeds the amount arranged.
Fact of dishonour be informed to the drawer by notice within 30 days.
Drawer of cheque must fail to make payment within 15 days of receipt of the notice.

Recent Trends

Negotiable Instruments have been used in commercial world since long as one of the convenient modes for transferring money.

Development in banking sector and with the opening of new branches, cheque become one of the favorite Negotiable Instruments. When cheques were issued as a Negotiable Instruments, there was always possibility of the same being issued without sufficient amount in the account.

With a view to protect drawee of the cheque need was felt that dishonour of cheque he made punishable offence. With that purpose Sec.138 to 142 were inserted by Banking Public Financial Institutions and Negotiable Instruments clause (Amendment) Act, 1988.

This was done by making the drawer liable for punishments in case of bouncing of the cheque due to insufficiency of funds with adequate safeguards to prevent harassment of an honest drawer.