What is Section 138 of the Negotiable Instruments Act?

The Negotiable Instruments Act, 1881, is a significant piece of legislation in India that governs the instruments of negotiability, such as cheques, bills of exchange, and promissory notes. Among its various provisions, Section 138 stands out as a crucial section that addresses the dishonor of cheques due to insufficient funds or if it exceeds the amount arranged to be paid by the drawer's account. This article delves into the nuances of Section 138, elucidating its provisions, implications, and the legal recourse available to aggrieved parties.

Understanding Section 138 of the Negotiable Instruments Act

Section 138 of the Negotiable Instruments Act, 1881, was introduced to enhance the credibility of cheques as a mode of payment and to provide a remedy for the payee in case of dishonor of a cheque. The section was incorporated by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, and has since been a vital tool for ensuring the integrity of financial transactions in India.

Key Provisions of Section 138

Section 138 outlines the following key provisions:

• Dishonor of Cheque: The section applies when a cheque is returned by the bank due to insufficient funds or if it exceeds the amount arranged to be paid by the drawer's account.
• Notice Requirement: The payee must provide written notice to the drawer within 30 days of receiving the information regarding the dishonor of the cheque.
• Grace Period: The drawer is granted a period of 15 days from the date of receipt of the notice to make the payment.
• Punishment for Offence: If the drawer fails to make the payment within the stipulated period, they can be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to twice the amount of the cheque, or with both.

Elements of an Offence Under Section 138

To successfully establish an offence under Section 138, certain elements must be proven:

• Existence of a legally enforceable debt: The cheque must have been issued in discharge of a legally enforceable debt or liability.
• Dishonor of the cheque: The cheque must be dishonored upon presentation for payment.
• Service of notice: The payee must serve a proper notice to the drawer regarding the dishonor of the cheque.
• Failure to make payment: The drawer must fail to make the payment within the grace period provided after receiving the notice.

Legal Procedure for Filing a Complaint Under Section 138

Filing a complaint under Section 138 involves a structured legal process:

1. Presentation of the Cheque: The payee must present the cheque to the bank within three months from the date of its issue.
2. Receiving Dishonor Information: Upon dishonor, the bank will provide a return memo indicating the reason for dishonor.
3. Issuing Notice: The payee must send a legal notice to the drawer within 30 days of receiving the dishonor memo.
4. Waiting Period: The drawer has 15 days to respond to the notice and make the payment.
5. Filing a Complaint: If the payment is not made, the payee can file a complaint in the appropriate Magistrate's Court within one month of the expiry of the grace period.

Judicial Interpretations and Landmark Cases

Over the years, various judicial interpretations have shaped the application of Section 138. Some landmark cases include:

• Modi Enterprises v. T. S. K. Nair: This case highlighted the importance of the notice requirement under Section 138, emphasizing that a mere sending of the notice is not sufficient; it must be duly served upon the drawer.
• K.K. Verma v. Union of India: The Supreme Court clarified that the drawer's liability under Section 138 arises only when there is a clear and unequivocal demand for payment.
• V. K. Sood v. Smt. Rani Sood: The court ruled that the complainant must prove the existence of a legally enforceable debt to succeed in a complaint under Section 138.

Defences Available to the Drawer

While Section 138 provides a strong legal framework for the payee, the drawer has certain defenses available in case of a complaint:

• Insufficient Evidence: The drawer can argue that there was no legally enforceable debt at the time of issuing the cheque.
• Non-Receipt of Notice: If the drawer can prove that they did not receive the notice of dishonor, it can serve as a valid defense.
• Cheque Issued for Different Purpose: If the cheque was issued for a purpose other than the discharge of a debt, the drawer can contest the complaint.

Impact of Section 138 on Commercial Transactions

Section 138 has played a pivotal role in enhancing the reliability of cheques as a mode of payment in commercial transactions. The provision has instilled confidence among businesses and individuals, ensuring that cheques are honored and that there are legal ramifications for those who default.

FAQs

1. What is the time limit for filing a complaint under Section 138?

The complaint must be filed within one month from the expiry of the 15-day period given to the drawer to make the payment after receiving the notice.

2. Can a company be prosecuted under Section 138?

Yes, a company can be prosecuted under Section 138. However, the individuals in charge of the company, such as directors, may also be held liable.

3. What happens if the cheque is post-dated?

If a post-dated cheque is presented before the date mentioned, it will not be considered for dishonor under Section 138.

4. Is it necessary to file a civil suit before filing a complaint under Section 138?

No, it is not necessary to file a civil suit before filing a complaint under Section 138. The provision allows for a criminal complaint directly.

5. Can the drawer challenge the validity of the cheque in a Section 138 case?

Yes, the drawer can challenge the validity of the cheque by proving that it was not issued for a legally enforceable debt.

6. What is the penalty for dishonoring a cheque under Section 138?

The penalty can include imprisonment for up to two years, a fine that may extend to twice the amount of the cheque, or both.

7. Can a cheque be dishonored for reasons other than insufficient funds?

Yes, a cheque can also be dishonored if it is stopped by the drawer or if the account is closed.

8. Is it mandatory to send a legal notice after a cheque is dishonored?

Yes, sending a legal notice is mandatory under Section 138 before initiating criminal proceedings.

9. What if the drawer pays the amount after receiving the notice?

If the drawer pays the amount after receiving the notice but before the complaint is filed, the payee cannot proceed with the complaint under Section 138.

10. Can a cheque be issued as a gift?

A cheque issued as a gift can still fall under the purview of Section 138 if it is dishonored, provided there is a legally enforceable debt involved.

Conclusion

Section 138 of the Negotiable Instruments Act, 1881, serves as a vital mechanism for ensuring the reliability of cheques in financial transactions. By outlining the consequences of cheque dishonor and providing a framework for legal recourse, it has significantly contributed to the integrity of commercial dealings in India. Understanding the provisions of this section is essential for both payees and drawers, as it not only protects the rights of the aggrieved party but also delineates the responsibilities of those issuing cheques. As the landscape of banking and finance continues to evolve, the relevance of Section 138 remains steadfast in upholding the sanctity of negotiable instruments in India.