Section 138 of Negotiable Instrument Act

Section 138 of Negotiable Instrument Act. Negotiable instrument act is the main act in India who deals with the negotiable instrument .such as cheque, promissory note, Bill of exchange, bankers draft etc. The primary aim of the Act was to legitimize the system that allows the instruments it covers to be transferred from one person to another through negotiation, similar to the transfer of ordinary goods. Additionally, the Act sought to promote the use of cheques and strengthen the trustworthiness of such instruments.
Provision of section 138 NI Act
Section 138 of the Negotiable Instruments Act, 1881 outlines the legal consequences for the dishonor of cheques due to insufficient funds or when the cheque amount exceeds the arrangement with the bank. The main points of this provision are:

Offence: If a person issues a cheque that is dishonored because of inadequate funds or it surpasses the agreed limit with the bank, it is treated as a criminal offence by the issuer.

Punishment: The person responsible may be subjected to imprisonment for up to two years, a fine that can be as much as twice the amount of the cheque, or both.

Cause of Action: The offence is deemed complete if the drawer does not make the payment within 15 days after receiving a formal legal notice regarding the cheque bounce.

Cheque
Under Section 6 of the Negotiable Instruments Act, a cheque is described as a type of bill of exchange that is drawn on a specific bank and is payable only on demand. This definition also includes cheques in electronic format as well as electronic images of cheques that have been truncated.
Explanation:

A cheque in electronic form is one that is generated digitally using a computer system and is signed with a secure digital or electronic signature, which may include biometric data and is created using an asymmetric cryptographic system.

A truncated cheque is a physical cheque that, during the clearing process, is converted into a digital image either by the clearing house or the concerned bank. Once the electronic image is created, the physical cheque is no longer required to be moved, and the transaction continues based on the digital image.
Essential Elements of the Offence Under Section 138 of the N.I. Act 
 While Section 138 of the Negotiable Instruments Act deals with punishment for cheque dishonour, the mere return of a cheque unpaid is not enough to constitute an offence. Certain conditions must be met for it to be treated as a legal offence:

The cheque must have been issued (drawn) by the person.

The cheque must be presented to the bank within its validity period.

The cheque must be returned unpaid by the bank.

A written notice must be sent to the cheque issuer (drawer) demanding payment of the cheque amount.

The drawer must fail to make the payment within 15 days from the date of receiving the notice.

Reasons for Cheque Dishonour 
 Section 138 of the Negotiable Instruments Act mainly deals with two primary reasons for the dishonour of a cheque:

Insufficient Funds: This is the most frequent reason for cheque bounce.

Exceeding Arrangement: When the amount mentioned on the cheque goes beyond the agreed limit of the account.

In addition to these, there are other reasons recognized by courts:

Account Closed: As held in Nepc Micon Ltd. vs. Magma Leasing Ltd. (1999), dishonour due to account closure also falls under Section 138.

Signature Mismatch: This was discussed in Lakshmi Dyechem vs. State of Gujarat (2012), where such a mismatch was considered valid for action under Section 138.

Security Cheques: In Sampelly Satyanarayan Rao vs. Indian Renewable Energy Development Agency (2016), the Supreme Court ruled that if a security cheque is dishonoured and there is still an outstanding liability, Section 138 can be invoked.

Is cheque bounce criminal or civil
A bounced cheque can have both criminal and civil implications, depending on the context in which it was issued and subsequently dishonoured.
In India, under Section 138 of the Negotiable Instruments Act, 1881, cheque dishonour is treated as a criminal offence if the cheque was issued to settle a legally enforceable debt or liability and is returned unpaid due to insufficient funds or other valid reasons. In such cases, the issuer of the cheque (the drawer) can face criminal prosecution, which may lead to imprisonment, a fine, or both.
However, if the cheque was given for purposes such as an advance, a gift, a donation, or any other situation where there is no legal obligation to pay, then the matter is civil in nature. In these instances, the affected party can approach a civil court to recover the amount, possibly along with interest and compensation for any damages suffered.
Specific nature section 138 of Negotiable instrument Act
In India, under Section 138 of the Negotiable Instruments Act, 1881, cheque bounce is considered a criminal offence if the cheque was issued to repay a legally enforceable debt or liability and is later returned unpaid due to insufficient funds or any other valid reason. In such cases, the issuer of the cheque (drawer) may face legal action, which can result in imprisonment, a monetary fine, or both.
Although Criminal proceedings under Section 138 of the Negotiable Instruments Act can only begin after a legal notice is sent to the drawer, demanding payment and allowing them a chance to settle the amount. If the drawer does not make the payment within 15 days of receiving this notice, the affected party is entitled to file a criminal complaint before the appropriate court. 
Detailed Steps to Initiate Prosecution for Cheque Bounce under Section 138 of the Negotiable Instruments Act
To initiate legal proceedings for a bounced cheque under Section 138 of the Negotiable Instruments Act, 1881, the complainant must first satisfy certain legal requirements. These steps serve as essential preconditions, and unless all are fulfilled, no prosecution can be validly initiated. The detailed procedure is as follows:
Presentation of the Cheque Within Validity Period
The cheque in question must be submitted to the bank for clearance within its validity period. As per earlier norms, cheques were valid for six months from the date of issue. However, the Reserve Bank of India (RBI), through Notification reduced the validity period to three months. Therefore, it is mandatory that the cheque is presented to the bank within three months from the date written on the cheque or within any shorter validity period mentioned on the cheque itself.
Issuance of a Legal Notice (Demand Notice)
If the cheque is returned unpaid by the bank due to reasons such as "insufficient funds" or "exceeds arrangement," the next step is for the payee (the person expecting payment) to issue a formal written notice to the drawer (the person who issued the cheque). This notice must be sent within 30 days of receiving the bank’s intimation of cheque dishonour. The notice should clearly state that the cheque has been dishonoured and must demand payment of the cheque amount. It must be sent through a reliable mode, preferably by registered post with acknowledgment, to ensure legal compliance and future proof of service.
Failure to Make Payment Within 15 Days
Upon receiving the legal notice, the drawer is given a grace period of 15 days to make the payment of the cheque amount. This provides the drawer a final opportunity to settle the debt and avoid legal consequences. If the drawer fails to make the payment within this 15-day window, the offence under Section 138 is considered to be complete.
Filing of Criminal Complaint
Once the 15-day period expires without payment, the payee has the right to file a criminal complaint before the appropriate magistrate’s court. This complaint must be filed within one month from the date on which the cause of action arose (i.e., the day after the 15-day payment window closes).
Only when all these steps are properly followed presentation of the cheque within its validity, issuance of timely legal notice, and non-payment within 15 days of notice can a valid prosecution be launched under Section 138. Failure to meet any of these conditions may result in the complaint being dismissed on technical grounds.
Penalties and Compensation under Section 138 
 A person found guilty under Section 138 of the Negotiable Instruments Act may be subject to the following consequences:

Imprisonment for a term that can extend up to two years.

A monetary fine that may amount to as much as double the value of the dishonoured cheque.

In addition, the court may order the offender to pay compensation to the payee under Section 357(3) of the Criminal Procedure Code (CrPC)and has been incorporated into the Bharatiya Nagarik Suraksha Sanhita (BNSS) as Section 355(3).

Conclusion
Section 138 of the Negotiable Instruments Act, 1881 serves as a crucial legal provision in upholding the credibility of cheques and ensuring accountability in financial transactions. By criminalizing the dishonour of cheques issued for the discharge of legally enforceable debts or liabilities, the law acts as a strong deterrent against financial fraud and negligence. 
The Act lays down a clear and structured procedure for initiating legal action, which includes timely presentation of the cheque, issuance of a legal notice, and a grace period for the drawer to make the payment. It balances the interests of both parties by offering the drawer a fair opportunity to rectify the default before prosecution begins. 
Furthermore, the penalties under Section 138 including imprisonment, fines, and compensation—underscore the seriousness of the offence and protect the rights of the payee. Recent legal interpretations and judicial precedents have expanded the scope of this provision to include cases such as account closure, signature mismatch, and dishonour of security cheques, reinforcing the provision’s effectiveness. 
In essence, Section 138 plays a pivotal role in maintaining trust in commercial transactions, promoting responsible use of negotiable instruments, and ensuring that such instruments continue to serve as reliable substitutes for cash in modern financial systems. 
Frequently Qsked Questions
Q1. What is Section 138 of the Negotiable Instruments Act? 
Ans. Section 138 deals with the offence of dishonour of a cheque due to insufficient funds or if the amount exceeds the arrangement with the bank. It makes such dishonour a criminal offence when the cheque is issued to settle a legal debt or liability.
Q2. Is cheque bounce a civil or criminal offence? 
Ans. Cheque bounce can be both. It is a criminal offence under Section 138 when the cheque is issued to discharge a debt or liability and dishonoured due to valid reasons. It may be treated as a civil matter if issued as a gift, advance, or where no legal obligation exists.
Q3. What are the essential conditions to file a case under Section 138? 
Ans. To initiate prosecution under Section 138, the following conditions must be met:

The cheque was issued for a legally enforceable debt or liability.

The cheque was presented to the bank within 3 months from the date of issue.

The cheque was returned unpaid.

A written legal notice was sent to the drawer within 30 days of dishonour.

The drawer failed to pay within 15 days of receiving the notice.

Q4. What is the punishment under Section 138? 
Ans. The offender may face:

Imprisonment up to 2 years, or

A fine up to twice the cheque amount, or

Both, along with compensation as per CrPC Section 357(3) (now Section 355(3) under BNSS).

Q5. What is the time limit to file a complaint under Section 138? 
Ans. The complaint must be filed within 1 month from the date on which the cause of action arises (i.e., after the expiry of 15 days from the receipt of the legal notice).
Q6. Can legal action be taken for dishonour of a security cheque? 
Ans. Yes, if a security cheque is dishonoured and a legal liability exists at the time of its presentation, action under Section 138 can be taken, as held in Sampelly Satyanarayan Rao vs. IREDA (2016).
Q7. Can I file a Section 138 case if the cheque was post-dated? 
Ans. Yes, post-dated cheques are valid, and action can be taken if they are dishonoured, provided all other legal conditions are satisfied.
Q8. What if the cheque is dishonoured due to a signature mismatch? 
Ans. Cheque dishonour due to signature mismatch can also attract Section 138, as per the Supreme Court ruling in Lakshmi Dyechem vs. State of Gujarat (2012).
Q9. Can a company be prosecuted under Section 138? 
Ans. Yes, if a company issues the cheque, both the company and the responsible officials (e.g., directors) can be prosecuted.
Q10. What should be included in the legal notice sent to the drawer? 
Ans. The notice must include:

Details of the cheque (number, date, amount)

Reason for dishonour

A demand for payment

A 15-day time frame to make the payment

Negotiable instrument act is the main act in India who deals with the negotiable instrument .such as cheque, promissory note, Bill of exchange, bankers draft etc. The primary aim of the Act was to legitimize the system that allows the instruments it covers to be transferred from one person to another through negotiation, similar to the transfer of ordinary goods. Additionally, the Act sought to promote the use of cheques and strengthen the trustworthiness of such instruments.

Provision of section 138 NI Act

Section 138 of the Negotiable Instruments Act, 1881 outlines the legal consequences for the dishonor of cheques due to insufficient funds or when the cheque amount exceeds the arrangement with the bank. The main points of this provision are:

Offence: If a person issues a cheque that is dishonored because of inadequate funds or it surpasses the agreed limit with the bank, it is treated as a criminal offence by the issuer.
Punishment: The person responsible may be subjected to imprisonment for up to two years, a fine that can be as much as twice the amount of the cheque, or both.
Cause of Action: The offence is deemed complete if the drawer does not make the payment within 15 days after receiving a formal legal notice regarding the cheque bounce.

Cheque

Under Section 6 of the Negotiable Instruments Act, a cheque is described as a type of bill of exchange that is drawn on a specific bank and is payable only on demand. This definition also includes cheques in electronic format as well as electronic images of cheques that have been truncated.

Explanation:

A cheque in electronic form is one that is generated digitally using a computer system and is signed with a secure digital or electronic signature, which may include biometric data and is created using an asymmetric cryptographic system.

A truncated cheque is a physical cheque that, during the clearing process, is converted into a digital image either by the clearing house or the concerned bank. Once the electronic image is created, the physical cheque is no longer required to be moved, and the transaction continues based on the digital image.

Essential Elements of the Offence Under Section 138 of the N.I. Act

While Section 138 of the Negotiable Instruments Act deals with punishment for cheque dishonour, the mere return of a cheque unpaid is not enough to constitute an offence. Certain conditions must be met for it to be treated as a legal offence:

The cheque must have been issued (drawn) by the person.
The cheque must be presented to the bank within its validity period.
The cheque must be returned unpaid by the bank.
A written notice must be sent to the cheque issuer (drawer) demanding payment of the cheque amount.
The drawer must fail to make the payment within 15 days from the date of receiving the notice.

Reasons for Cheque Dishonour

Section 138 of the Negotiable Instruments Act mainly deals with two primary reasons for the dishonour of a cheque:

Insufficient Funds: This is the most frequent reason for cheque bounce.
Exceeding Arrangement: When the amount mentioned on the cheque goes beyond the agreed limit of the account.

In addition to these, there are other reasons recognized by courts:

Account Closed: As held in Nepc Micon Ltd. vs. Magma Leasing Ltd. (1999), dishonour due to account closure also falls under Section 138.
Signature Mismatch: This was discussed in Lakshmi Dyechem vs. State of Gujarat (2012), where such a mismatch was considered valid for action under Section 138.
Security Cheques: In Sampelly Satyanarayan Rao vs. Indian Renewable Energy Development Agency (2016), the Supreme Court ruled that if a security cheque is dishonoured and there is still an outstanding liability, Section 138 can be invoked.

Is cheque bounce criminal or civil

A bounced cheque can have both criminal and civil implications, depending on the context in which it was issued and subsequently dishonoured.

In India, under Section 138 of the Negotiable Instruments Act, 1881, cheque dishonour is treated as a criminal offence if the cheque was issued to settle a legally enforceable debt or liability and is returned unpaid due to insufficient funds or other valid reasons. In such cases, the issuer of the cheque (the drawer) can face criminal prosecution, which may lead to imprisonment, a fine, or both.

However, if the cheque was given for purposes such as an advance, a gift, a donation, or any other situation where there is no legal obligation to pay, then the matter is civil in nature. In these instances, the affected party can approach a civil court to recover the amount, possibly along with interest and compensation for any damages suffered.

Specific nature section 138 of Negotiable instrument Act

In India, under Section 138 of the Negotiable Instruments Act, 1881, cheque bounce is considered a criminal offence if the cheque was issued to repay a legally enforceable debt or liability and is later returned unpaid due to insufficient funds or any other valid reason. In such cases, the issuer of the cheque (drawer) may face legal action, which can result in imprisonment, a monetary fine, or both.

Although Criminal proceedings under Section 138 of the Negotiable Instruments Act can only begin after a legal notice is sent to the drawer, demanding payment and allowing them a chance to settle the amount. If the drawer does not make the payment within 15 days of receiving this notice, the affected party is entitled to file a criminal complaint before the appropriate court.

Detailed Steps to Initiate Prosecution for Cheque Bounce under Section 138 of the Negotiable Instruments Act

To initiate legal proceedings for a bounced cheque under Section 138 of the Negotiable Instruments Act, 1881, the complainant must first satisfy certain legal requirements. These steps serve as essential preconditions, and unless all are fulfilled, no prosecution can be validly initiated. The detailed procedure is as follows:

Presentation of the Cheque Within Validity Period

The cheque in question must be submitted to the bank for clearance within its validity period. As per earlier norms, cheques were valid for six months from the date of issue. However, the Reserve Bank of India (RBI), through Notification reduced the validity period to three months. Therefore, it is mandatory that the cheque is presented to the bank within three months from the date written on the cheque or within any shorter validity period mentioned on the cheque itself.

Issuance of a Legal Notice (Demand Notice)

If the cheque is returned unpaid by the bank due to reasons such as "insufficient funds" or "exceeds arrangement," the next step is for the payee (the person expecting payment) to issue a formal written notice to the drawer (the person who issued the cheque). This notice must be sent within 30 days of receiving the bank’s intimation of cheque dishonour. The notice should clearly state that the cheque has been dishonoured and must demand payment of the cheque amount. It must be sent through a reliable mode, preferably by registered post with acknowledgment, to ensure legal compliance and future proof of service.

Failure to Make Payment Within 15 Days

Upon receiving the legal notice, the drawer is given a grace period of 15 days to make the payment of the cheque amount. This provides the drawer a final opportunity to settle the debt and avoid legal consequences. If the drawer fails to make the payment within this 15-day window, the offence under Section 138 is considered to be complete.

Filing of Criminal Complaint

Once the 15-day period expires without payment, the payee has the right to file a criminal complaint before the appropriate magistrate’s court. This complaint must be filed within one month from the date on which the cause of action arose (i.e., the day after the 15-day payment window closes).

Only when all these steps are properly followed presentation of the cheque within its validity, issuance of timely legal notice, and non-payment within 15 days of notice can a valid prosecution be launched under Section 138. Failure to meet any of these conditions may result in the complaint being dismissed on technical grounds.

Penalties and Compensation under Section 138

A person found guilty under Section 138 of the Negotiable Instruments Act may be subject to the following consequences:

Imprisonment for a term that can extend up to two years.
A monetary fine that may amount to as much as double the value of the dishonoured cheque.
In addition, the court may order the offender to pay compensation to the payee under Section 357(3) of the Criminal Procedure Code (CrPC)and has been incorporated into the Bharatiya Nagarik Suraksha Sanhita (BNSS) as Section 355(3).

Conclusion

Section 138 of the Negotiable Instruments Act, 1881 serves as a crucial legal provision in upholding the credibility of cheques and ensuring accountability in financial transactions. By criminalizing the dishonour of cheques issued for the discharge of legally enforceable debts or liabilities, the law acts as a strong deterrent against financial fraud and negligence.

The Act lays down a clear and structured procedure for initiating legal action, which includes timely presentation of the cheque, issuance of a legal notice, and a grace period for the drawer to make the payment. It balances the interests of both parties by offering the drawer a fair opportunity to rectify the default before prosecution begins.

Furthermore, the penalties under Section 138 including imprisonment, fines, and compensation—underscore the seriousness of the offence and protect the rights of the payee. Recent legal interpretations and judicial precedents have expanded the scope of this provision to include cases such as account closure, signature mismatch, and dishonour of security cheques, reinforcing the provision’s effectiveness.

In essence, Section 138 plays a pivotal role in maintaining trust in commercial transactions, promoting responsible use of negotiable instruments, and ensuring that such instruments continue to serve as reliable substitutes for cash in modern financial systems.

Frequently Qsked Questions

Q1. What is Section 138 of the Negotiable Instruments Act?

Ans. Section 138 deals with the offence of dishonour of a cheque due to insufficient funds or if the amount exceeds the arrangement with the bank. It makes such dishonour a criminal offence when the cheque is issued to settle a legal debt or liability.

Q2. Is cheque bounce a civil or criminal offence?

Ans. Cheque bounce can be both. It is a criminal offence under Section 138 when the cheque is issued to discharge a debt or liability and dishonoured due to valid reasons. It may be treated as a civil matter if issued as a gift, advance, or where no legal obligation exists.

Q3. What are the essential conditions to file a case under Section 138?

Ans. To initiate prosecution under Section 138, the following conditions must be met:

The cheque was issued for a legally enforceable debt or liability.
The cheque was presented to the bank within 3 months from the date of issue.
The cheque was returned unpaid.
A written legal notice was sent to the drawer within 30 days of dishonour.
The drawer failed to pay within 15 days of receiving the notice.

Q4. What is the punishment under Section 138?

Ans. The offender may face:

Imprisonment up to 2 years, or
A fine up to twice the cheque amount, or
Both, along with compensation as per CrPC Section 357(3) (now Section 355(3) under BNSS).

Q5. What is the time limit to file a complaint under Section 138?

Ans. The complaint must be filed within 1 month from the date on which the cause of action arises (i.e., after the expiry of 15 days from the receipt of the legal notice).

Q6. Can legal action be taken for dishonour of a security cheque?

Ans. Yes, if a security cheque is dishonoured and a legal liability exists at the time of its presentation, action under Section 138 can be taken, as held in Sampelly Satyanarayan Rao vs. IREDA (2016).

Q7. Can I file a Section 138 case if the cheque was post-dated?

Ans. Yes, post-dated cheques are valid, and action can be taken if they are dishonoured, provided all other legal conditions are satisfied.

Q8. What if the cheque is dishonoured due to a signature mismatch?

Ans. Cheque dishonour due to signature mismatch can also attract Section 138, as per the Supreme Court ruling in Lakshmi Dyechem vs. State of Gujarat (2012).

Q9. Can a company be prosecuted under Section 138?

Ans. Yes, if a company issues the cheque, both the company and the responsible officials (e.g., directors) can be prosecuted.

Q10. What should be included in the legal notice sent to the drawer?

Ans. The notice must include: