Section 138 Negotiable Instruments Act, 1881


The Negotiable Act, 1881 came into India in British Colonial period. It was first drafted in year 1866 and got enacted on 9th December, 1881 by Imperial Legislative Council. The main purpose of this Act is to facilitate the settlement of payment through negotiable instruments in business transactions ensuring free transferability, easy negotiability and avoids to carry carriage of huge amount of money physically.

Negotiable Instruments are very convenient to use and therefore are being used in commercial or corporate world from a long time. Prior to enactment of this Act, there was no legal statue or provision which could fasten liability on a person who issues cheque for making payment without having sufficient funds in their account and deceit people in this way harassment of people tends to increase and some legal provision is required to stop the same to maintain trust among people in society while performing business transactions and safeguard faith of creditor in favour of drawer. This act deals with different negotiable instruments, determines liability of Drawer, Drawee and makes dishonour of cheque predominantly into criminal liability which is otherwise a civil wrong.


The term “negotiable” has been derived from the old French word “negociación” which means transferable by delivery and the term “instrument” has been derived from the old French word “instrumentum” which means written document by which right is created.

In simple words, Negotiable Instruments means a Document guaranteeing payment of specific amount of money to another person either on demand or on a set time, having name of the payer on it. It entitles a person to a certain amount of money. The instrument can only be used to pay certain sum of money without imposing any condition on bearer for withdrawing.


1. Written document and signed by parties.
2. Transfer of property and ownership from one who possess negotiable instrument to another in whose favour it is made by mere delivery.
3. Money, the negotiable instrument can only be made in respect of money and nothing else for e.g., Rice, grains, etc.
4. Time of payment must be ascertained and specified.
5. Freely Transferable by valid endorsement and there is not much paperwork involved in transfer of property.
6. Unconditional order and promise for payment.

There are two types of negotiable instruments-
1. Recognised by statutes- promissory notes, bill of exchange, cheque.
2. Recognised by usage- notes, warrants, shares, etc.

Section 13 of NI Act, 1881 determines three types of negotiable instrument those are

i. Promissory Notes
ii. Bill of Exchange
iii. Cheque

Let us understand the meaning of certain terms in simple words before proceeding further.

Drawer- maker of bill of exchange or cheque – Section 7
Drawee- person who is directed to pay – Section 7
Payee- person to who money is to be paid – Section 7

Promissory notes- Section 4

They are not bank note or currency note. As the term suggest it is a promise to pay in future. According to Section 4 promissory note is a written document containing unconditional undertaking by payer to pay certain amount to bearer of cheque. Here, two parties are involved i.e. payer/drawer/maker and Payee. It remains valid up to 3 years. It requires stamp duty to be paid u/S 35 of Indian Stamp Act. Also, attestors are not necessarily required.

Bill of Exchange – Section 5

It is a written negotiable instrument with an unconditional order, signed by its maker, directing a person to pay a certain amount of money to the order of certain person or to bearer of instrument. Here, three parties are involved i.e., Drawer, drawee and payee. Usually, drawee is the payee too. BOE is different from Promissory note in a way that former, directs to pay whereas latter, promises to pay. A BOE is required to have a Revenue Stamp under Indian Stamp act, 1899 where it is made for an amount of Rs. 5000 or more.

Cheque- Section 6

It is the most used negotiable instrument in the banking and commercial sector. A cheque is a type of BOE drawn on specified banker and only payable on demand. It includes electronic image of truncated cheque and cheque in electronic form. In simple words, cheque is a negotiable instrument which orders a bank to pay certain amount of money o bearer of cheque in their account or to person in whose name cheque is issued.


Cheques are most frequently used negotiable instruments for facilitation of business transactions and pursuant to that a frequent situation of dishonour of cheque is also faced by many genuine clients where payer issues a cheque without having sufficient balance in his account. This problem was finally resolved by the enactment of Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 through which Chapter XVII containing Section 138-148 were inserted in NI Act, 1881 which provides safeguard against dishonour of cheque. These provision converts civil liability into criminal liability by making drawer liable for punishment in case cheque bounce.

In case of Dalmia Cement Ltd. v. Galaxy Traders and Agencies Ltd. (2001) 6 SCC 463 , the Apex Court held-‘The Act was enacted and section 138 thereof incorporated with a specified object of making a special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned.’

According to Section 138-

If a cheque is drawn by a person for payment of certain amount of money on a bank account maintained by him with a banker, to another person in discharge of any debt, liability, etc. and same is returned unpaid either due to insufficient balance in account or if the amount in cheque exceeds the arranged amount agreed with the bank, such person shall deemed to have committed an offence and is liable for punishment of imprisonment which may extend to two years or with fine which may extend to twice the amount of cheque or with both.
1. The cheque must be presented in bank within 3 months from the date on which it is drawn.
2. On dishonour of cheque, the payee or holder of cheque in due course must sent a legal notice within 30 days from date of dishonour of cheque.
3. The drawer fails to pay the amount to payee or holder of cheque within 15 days from date of receipt of legal notice.

Therefore, in order to attract the provisions of Section 138 following conditions must be fulfilled-

• The cheque was drawn by drawee to discharge its existing debt or liability. The Complainant/payee must show that cheque was issued to him for clearing an existing debt or liability. Cheque issued by way of gift if gets dishonored will not constitute offence u/S 138 NI ACT.
• The cheque was presented to bank within 3 months or within the validity period of cheque whichever is earlier. In case of Somnath v. Mukesh Kumar, 2015 (4) Law Herald 3629 (P&H), it was held that cheque issued after its validity and gets dishonored will not attract provisions of Sec 138.
• Cheque must return unpaid due to insufficient balance in account or it exceeds the amount arranged. However, the Courts have liberated the grounds of dishonour of cheque such as “Payment stopped”, “No such account”, “account already closed”, etc.
• A legal notice in writing must be sent to drawer by payee within 30 days from date of receipt of dishonor of cheque.
• Even after legal notice, the drawer fails to make the payment within 15 days from date of receipt of notice.
The drawer is guilty of offence u/S 138 when he fails to repay amount after expiration of 15 days from date of receipt of legal notice.

The payee or holder of cheque in due course can make a complaint against drawer for dishonour of cheque within 30 days after expiration of 15 days of legal notice if payment is not made to him.


According to Section 139, it is presumed that cheque was drawn by drawer in favour of holder of cheque to discharge his legally enforceable debt or other liability, in whole or in part until and unless contrary is proved by drawer.

This presumption lies in favour of holder of cheque/complainant that cheque was issued in his favour by accused for discharge of debt or liabilities. However, this presumption is rebuttable i.e., accused can rebut it by proving contrary through cross-examination of prosecution witnesses that cheque was not issued to discharge any liability.

It is pertinent to mention here that this Section does not arise the presumption that any debt or liability existed, rather it only presumes that cheque was issued to discharge a debt or liability. The fact that any debt or liability existed is to be proved by prosecution to attract the ingredients of Section 138.

In case of “Goa Plast Pvt. Ltd. vs. Shri Chico Ursula D’ Souza, 1996 (4) All MR 40” relations between accused and complainant were of employee and employer. No evidence led to show that accused was liable to pay any due or part thereof and thus liability was not proved.

Similarly, it was not proved that the cheque was given towards those liabilities. Accused much prior to presentation of cheques to the Bank had appraised the complainant that he was not liable to pay any amount, and therefore, stopped payment. Bombay High Court had observed that complainant failed to prove that cheque was issued for discharge of legal liabilities.


Drawer shall not be allowed to take a defence that he had no reason to believe that cheque drawn by him will get dishonoured by bank on presentment by holder either due to insufficient funds or amount exceeds the arranged amount agreed with bank.

Further, Section 141 specifies that if such an offence has been committed by a company then the person who was in charge of conducting the business of the company shall be held liable. However, if he proves that he had no knowledge of the same and he had tried his level best to prevent the commission of the offence, he would not be held liable.


• This Section only entitles a Court to take cognizance of offence u/S 138 when a complaint is made by payee or holder of cheque in due course in writing
• The complaint should be made within thirty days after expiration of fifteen days of legal notice where accused failed to make the payment.
• However, by Amendment Act of 2002 court is empowered to take cognizance of the offence even if complaint is filed beyond one month by condoning the delay if sufficient cause is shown.
• Any Court inferior to Court of Metropolitan Magistrate of Judicial Magistrate I Class in not entitled to inquire or try case u/s 138. This means original jurisdiction to try case for offence u/S 138 is with Metropolitan Magistrate of Chief Judicial Magistrate.


The offence u/S 138 can only be inquired and tried by Court in whose territorial jurisdiction-
• In case the cheque is delivered for payment- the branch of bank is situated, where payee or holder maintains bank account.
• In case where cheque is presented for payment- the branch of bank is situated where drawer maintains bank account.

Hon’ble Apex Court in case of K. Bhaskaran vs. Shankaran AIR 1999, SC 3762, had given jurisdiction to initiate the prosecution at any of the following places:
• 1. Where cheque is drawn.
• 2. Where payment had to be made.
• 3. Where cheque is presented for payment
• 4. Where cheque is dishonoured.
• 5. Where notice is served upto drawer.

According to Section 143, the proceedings of offence u/S 138 are summarily in nature.


NI Act is a legislative piece which safeguards the rights and interests of so many genuine clients in the business and trade world, otherwise there will be so many cases of dishonour of cheque and people will be left with no speedy remedy although they can approach to criminal courts under penal provisions seeking relief which might take years to get disposed of and by the time there is possibility that subject matter of complainant frustrates. The procedure contained herein is summary in nature which obligates the Courts to hear and dispose of the case expeditiously and punishes the culprit accordingly. However, the option of compounding offence is also prescribed with a view to resolve the matter outside the court amicably this will not only lower the burden of litigation n Courts but also retain the trust among traders.

Author: kashish gupta,
Invertis University, 5th year

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