Introduction-

Section 91 to 99 of the Negotiable Instrument Act,1881 deal with dishonor of

negotiable instrument inter alia cheques as well and notice of a moral
obligation, thus people were never sincere about honour (payment ) of
cheques issued by them, therefore cases of dishonor of cheques were rampant
in society. There was no provision in the Act to deal effectively in case of
dishonor of cheques. This created a feeling of shy and fear in among the
people accepting cheques as means of payment. The holder of the cheque
aggrieved by dishonor was helpless because he had no remedy agains the
drawer of the cheque. This necessitated a new law on dishonor of cheques.
Thus, in 1988 a new Chapter XVII was incorporated for “penalties in case of
dishonor of cheques due to insufficiency of funds” in the account of the
drawer(account holder) of the cheque. New Section 138 to 142 were added in
the Act and in 2002 further Sections 143 to 147 were also added making a
complete code on dishonor of cheques as an offence and cognizance thereof.

The objects of the amendments were mainly:

a) to encourage the use of cheques, and

b) to enhance the credibility and acceptability of cheques.

Reasons for Dishonour of Cheque

a) If the cheque is overwritten.

b)If the signature is absent or the signature in the cheque does not match with
the specimen signature kept by the bank.

c)If the name of the payee is absent or not clearly written.

d)If the amount written in words and figures does not match with each other.

e)If the account number is not mentioned clearly or is altogether absent.

f)If the drawer orders the bank to stop payment on the cheque.

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g)If the court of law has given an order to the bank to stop payment on the
cheque.

h)If the drawer has closed the account before presenting the cheque.

i)If the fund in the bank account is insufficient to meet the payment of the
cheque.

j)If the bank receives the information regarding the death or lunacy or
insolvency of the drawer.

k) If any alteration made on the cheque is not proved by the drawer by giving
his/her signature.

l) If the date is not mentioned or written incorrectly or the date mentioned is

of three months before.

STATUTORY PROVISIONS
138. Dishonor of cheque for insufficiency, etc., of funds in the
accounts1
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, such person shall be deemed to have
committed an offence and shall without prejudice to any other provisions of
this Act, be punished with imprisonment for a term which may extend to one
year, or with fine which may extend to twice the amount of the cheque, or
with both:

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Negotiable Instruments Act, 1881

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Provided that nothing contained in this section shall apply unless-

(a) the cheque has been presented to the bank within a period of six months
from the date on which it is drawn or within the period of its validity,
whichever is earlier.

(b) the payee or the holder in due course of the cheque, as the case may be,
makes a demand for the payment of the said amount of money by giving a
notice, in writing, to the drawer of the cheque, within fifteen days of the
receipt of information by him from the bank regarding the return of the
cheque as unpaid, and

(c) the drawer of such cheque fails to make the payment of the said amount of
money to the payee or, as the case may be, to the holder in due course of the
cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purpose of this section, "debt or other liability" means a
legally enforceable debt or other liability.

139. Presumption in favor of holder2

It shall be presumed, unless the contrary is proved, that the holder of a cheque
received the cheque of the nature referred to in section 138 for the discharge,
in whole or in part, or any debt or other liability.

140. Defense which may not be allowed in any prosecution

under section 1383
It shall not be a defense in a prosecution of an offence under section 138 that
the drawer had no reason to believe when he issued the cheque that the
cheque may be dishonored on presentment for the reasons stated in that
section.

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Negotiable Instruments Act, 1881
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Negotiable Instruments Act, 1881

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141. Offences by companies4
(1) If the person committing an offence under section 138 is a company, every
person who, at the time the offence was committed, was in charge of, and was
responsible to the company for the conduct of the business of the company, as
well as the company, shall be deemed to be guilty of the offence and shall be
liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person
liable to punishment if he proves that the offence was committed without his
knowledge, or that he had exercised all due diligence to prevent the
commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where any offence

under this Act, has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to, any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other
officer shall also be deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.

142. Cognizance of offences5

Notwithstanding anything contained in the Code of Criminal Procedure, 1973
(2 of 1974),-

(a) no court shall take cognizance of any offence punishable under section 138
except upon a complaint, in writing, made by the payee or, as the case may be,
the holder in due course of the cheque;

(b) such complaint is made within one month of the date on which the cause -
of- action arises under clause (c) of the proviso to section 138;

(c) no court inferior to that of a Metropolitan Magistrate or a Judicial

Magistrate of the first class shall try any offence punishable under section 138.

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Negotiable Instruments Act, 1881
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Negotiable Instruments Act, 1881

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143. Power of Court to try cases summarily6 – (1)
Notwithstanding anything contained in the Code of Criminal Procedure, 1973
(2 of 1974), all offences under this Chapter shall be tried by a Judicial
Magistrate of the first class or by a Metropolitan Magistrate and the provisions
of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be,
apply to such trials:

Provided that in the case of any conviction in a summary trial under this
section, it shall be lawful for the Magistrate to pass a sentence of
imprisonment for a term not exceeding one year and an amount of fine
exceeding five thousand rupees:

Provided further that when at the commencement of, or in the course of, a
summary trial under this section, it appears to the Magistrate that the nature
of the case is such that a sentence of imprisonment for a term exceeding one
year may have to be passed or that it is, for any other reason, undesirable to
try the case summarily, the Magistrate shall after hearing the parties, record
an order to that effect and thereafter recall any witness who may have been
examined and proceed to hear or rehear the case in the manner provided by
the said Code.

(2) The trial of a case under this section shall, so far as practicable,
consistently with the interests of justice, be continued from day to day until its
conclusion, unless the Court finds the adjournment of the trial beyond the
following day to be necessary for reasons to be recorded in writing.

(3) Every trial under this section shall be conducted as expeditiously as

possible and an endeavour shall be made to conclude the trial within six
months from the date of filing of the complaint.

Section 144-Mode of service of summons 7

(1) Notwithstanding anything contained in the Code of Criminal Procedure,

1973 (2 of 1974), and for the purposes of this Chapter, a Magistrate issuing a

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Negotiable Instruments Act, 1881
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Negotiable Instruments Act, 1881

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summons to an accused or a witness may direct a copy of summons to be
served at the place where such accused or witness ordinarily resides or
carries on business or personally works for gain, by speed post or by such
courier services as are approved by a Court of Session.

(2) Where an acknowledgement purporting to be signed by the accused or the

witness or an indorsement purported to be made by any person authorised by
the postal department or the courier services that the accused or the witness
refused to take delivery of summons has been received, the Court issuing the
summons may declare that the summons has been duly served.

145. Evidence on affidavit8

(1) Notwithstanding anything contained in the Code of Criminal Procedure,
1973, (2 of 1974.) the evidence of the complainant may be given by him on
affidavit and may, subject to all just exceptions be read in evidence in any
enquiry, trial or other proceeding under the said Code.

(2) The Court may, if it thinks fit, and shall, on the application of the
prosecution or the accused, summon and examine any person giving evidence
on affidavit as to the facts contained therein.

146. Bank’s slip prima facie evidence of certain facts9

The Court shall, in respect of every proceeding under this Chapter, on
production of bank’s slip or memo having thereon the official mark denoting
that the cheque has been dishonoured, presume the fact of dishonour of such
cheque, unless and until such fact is disproved.]

Section 147-Offences to be compoundable10

Notwithstanding anything contained in the Code of Criminal Procedure, 1973
(2 of 1974), every offence punishable under this Act shall be compoundable.
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Negotiable Instruments Act, 1881
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Negotiable Instruments Act, 1881
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Negotiable Instruments Act, 1881

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Justified Dishonour: When Banker may dishonour the cheques?
Bankers are justified to dishonor the cheques of his customer in the following
circumstances:

1) For want of sufficient and adequate funds (Section 31).

2) When funds are not properly applicable to the payment of the cheques
(Section 31).

3) In case of forged cheques.

4) Where cheques are mutilated.

5) In case of stale or post-dated cheques.

6) Where cheques are materially altered.

7) Where amount of differs in words and figures.

8) When court prohibits payment from customer’s account i.e., under

Garnishee order.

9) Death of the customer(from the date of knowledge).

10) Insanity of the customer.11

Nature of Dishonor of Cheques (Section 138)

The nature of Section 138 has been explained by various High Courts and the
Supreme Court as penal provision. Recently, three- judge Bench of the

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R.N. Chaudhary, Banking Laws

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Supreme Court in Yogendra Pratap Singh v. Savitri Pandey12 has ruled that
Section 138 involves penal offence so it is a penal provision. It has been ruled
in this case that Section 142 prescribed the mode and so also the time within
which a complaint for an offence under section 138 can be filed.

Who is liable for Dishonour of Cheques :

A banker may dishonor the cheque into the following cases:

1) having insufficient funds in the account of the drawer, and

2) having sufficient funds in the accounts of the drawer.

Thus, in both cases (1) and (2) liability of dishonor of cheques extends to
drawer of the cheque against payee/holder of the cheque and not the banker.
Where bank dishonours the customer’s cheque without having sufficient
cause having sufficient funds in the account of his customer, becomes liable to
the customer. This is provided under Section 31 of the Act which reads as
follows:

“The drawee of a cheque having sufficient funds of the drawer in his hands
properly applicable to the payment of such cheque must pay the cheque when
duly required so to do, and, in default of such payment, must compensate the
drawer for any loss or damage caused by such default.”

Section 31 of the Negotiable Instrument Act,1881, fastens the liability of the

banker against the drawer where he dishonours the cheque of his customer
(drawer) having sufficient funds in the account of the customer.

Here, it is relevant to mention that banker’s liability for the loss or damage
caused to the drawer arises only where he fails or neglects payment having
sufficient funds in the account of the drawer and more so. Such funds must be
properly applicable to the payment of such cheque.

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A.I.R. 2015 S.C. 158

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So, penal liability under the amended provisions of the act extends only to the
drawer and nonetheless even in those cases where the drawer has sufficient
funds in his accounts and banker fails or neglects to pay. Banker’s liability
arises only against the drawer for any loss or damage caused by such default
and not against the payee or holder in due course.

Punishment and award of sentence

Section 138 of the N.I. Act makes the Dishonour of Cheques an offence
punishable with:

a) imprisonment for a term which may extend to two years (previously one
year), or

b) fine which may extend to twice the amount of the cheque,or

c) with both i.e., imprisonment and fine.

Present scenario- Indian law Commission in its report has mentioned

that Lakhs and Lakhs of cases are pending in the various courts. With a view
to reducing the burden of trial courts, the Law Commission has recommended
the setting of Fast Track Courts to decide the cheque bounce cases filed under
Section 138 of the Negotiable Instrument Act. This Commission was headed
by the Justice A.R. Lakshmanan.

Citing a Supreme Court judgement, the Commission said dishonouring of

cheque by a bank “causes incalculable loss, injury and inconvenience to the
payee and the entire credibility of the business transactions within and
outside the country suffers a serious setback.”

In enacting the N.I. Act, the legislature was keen on ensuring expeditious
disposal of cheque bounce cases. However, for want of an adequate number of
Courts and Judges, disposal was inordinately delayed.

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Conclusion

The Commission said the main problem was the huge pendency in Magistrate
Courts and High Courts. It was therefore absolutely essential to have
additional Courts specifically trying for cases filed under Section 138 of the
Act. The present state of affairs defeated the very object for which the
provision was inserted in the Act.

Over 38 lakh cases of cheque bouncing are pending across the country.
Credibility of business transactions suffer due to dishonor of cheques by the
bank. A bench of Justice Radha Krishnan and Deepak Mishra issued the notice
on the petition which presented the issue of public importance that had a
nationwide impact on the working of the banking financial and criminal
justice system.

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