Section 138 of the Negotiable Instruments Act, 1881provides for the legal recourse when a cheque is dishonoured due to insufficient funds or other reasons, and a legal action can be taken.
NEW DELHI: Negotiable instruments play a vital role in commercial and financial transactions, facilitating smooth business dealings and providing a source of financing when needed. These instruments serve as legal documents that represent financial obligations and entitle their holders to specific payments. Essentially, a negotiable instrument is a certificate of financial ownership that signifies a monetary commitment.
A document is considered a negotiable instrument when it explicitly states the right to payment and is transferable only upon complete delivery. The rightful owner of such an instrument is the individual who possesses it and holds the associated rights.
Definition Under the Negotiable Instruments Act, 1881
Section 13 of the Negotiable Instruments Act, 1881 defines a negotiable instrument as:
“A negotiable instrument” means a promissory note, bill of exchange, or cheque payable either to order or to bearer.”
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Types of Negotiable Instruments
Negotiable instruments are broadly categorized into two types:
- Negotiable Instruments by Statute
- Promissory Notes
- Bills of Exchange
- Cheques
- Negotiable Instruments by Usage
- Bank Notes
- Drafts
- Share Warrants
- Bearer Debentures
- Dividend Warrants
- Treasury Bills
Cheque Bounce: An Overview
A cheque is a type of bill of exchange payable on demand. The drawer is the individual or entity that issues the cheque, while the drawee is the person or entity in whose favor the cheque is drawn. A cheque is said to have bounced or been dishonored when the bank refuses to honor the payment.
Common Reasons for Cheque Dishonor
Several factors can lead to cheque dishonor, including:
- Insufficient funds in the drawer’s account.
- Mismatch of signatures between the cheque and the bank records.
- Closed account or an account that has been frozen.
- Cheque presented after its validity period (typically three months).
- Stop payment instructions issued by the drawer.
- Discrepancies in the cheque details, such as a mismatch between words and numbers.
- Joint accounts requiring multiple signatures but signed by only one party.
- Deceased account holder or an account holder declared unsound.
- Exceeding the overdraft limit allowed by the bank.
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Section 138 of the Negotiable Instruments Act, 1881
Legal Provisions Governing Cheque Dishonor
Section 138 of the Negotiable Instruments Act, 1881, explicitly addresses cheque dishonor cases. It states that:
“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 honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank….”
Essential Ingredients of Section 138
To constitute an offense under Section 138, the following conditions must be met:
- The cheque must be drawn by the drawer on an account maintained with a banker.
- The cheque must be presented to the drawee bank.
- It must be issued to discharge a legally enforceable debt or liability.
- It should be presented within six months or within its validity period, whichever is earlier.
- The cheque must be returned unpaid due to insufficient funds or exceeding the overdraft limit.
- The drawer must receive a written notice of dishonor within 30 days.
- The drawer must fail to make payment within 15 days of receiving the notice.
If the drawer settles the obligation within 15 days, no offense is constituted. However, failure to make the payment within this period can lead to legal consequences, including:
- Imprisonment for up to two years
- A fine up to twice the cheque amount
- Both imprisonment and fine
It is important to note that merely issuing a cheque does not establish liability unless it is backed by a valid debt or obligation. If a cheque issued as a gift bounces, Section 138 does not apply.
Jurisdiction for Filing a Case
In the case of K. Bhaskaran v. Sankaran Vaidhyan Balan, the Supreme Court held that a complaint under Section 138 can be filed in any of the following locations:
- Where the cheque was drawn.
- Where the payment was due.
- Where the cheque was presented for clearance.
- Where the cheque was dishonored.
- Where the notice of dishonor was served to the drawer.
Procedure for Filing a Cheque Bounce Complaint
As per the ruling in Indian Bank Association v. Union of India, the process to file a complaint under Section 138 includes:
Step 1: Consult a Lawyer
The complainant should hire a lawyer experienced in Negotiable Instrument matters.
Step 2: Prepare Necessary Documents
The following documents are required:
- Memo of Parties
- Complaint under Section 138 of the NI Act
- Pre-Summoning Evidence (Affidavit in some courts)
- List of Witnesses
- List of Documents with supporting evidence
- Vakalatnama (Authorization for legal representation)
Step 3: Filing the Complaint
The lawyer will file the complaint in the appropriate court.
Step 4: Examination and Summons
The Metropolitan Magistrate/Judicial Magistrate will examine the complaint and supporting documents. If found in order, the court will take cognizance and issue summons to the accused.
Step 5: Court Hearings and Judgment
The court will hear arguments and evidence before delivering a final verdict.
Punishment for Cheque Bounce Cases
A person found guilty under Section 138 may face:
- Imprisonment up to two years
- Fine up to double the cheque amount
- Both imprisonment and fine
Additionally, Section 143(1) of the NI Act (introduced via Amendment Act No. 55 of 2002) empowers Magistrates to impose fines exceeding Rs. 10,000, which was previously capped under Section 29 of the CrPC.
The Negotiable Instruments Act primarily serves as a civil law to facilitate business transactions, but it incorporates criminal provisions to ensure the reliability of cheques. While penalties exist for defaulting parties, safeguards such as the notice period provide an opportunity for the drawer to rectify the situation. This balance between civil remedies and criminal liability highlights the legislature’s intent to maintain commercial integrity while protecting individuals from undue criminalization.
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