Dishonor of Cheque for Insufficiency of Funds

Section 138, Negotiable Instruments Act, 1881, deals specifically with the offense of dishonor of a cheque for insufficiency of funds in the account or drawer or if it exceeds the amount arranged to be paid by the drawer’s account.

As per Section 138, “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 honour 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 offense and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both.”

Thus as per Section 138:

1. Account must be in the name of the drawer of the cheque.
2. Account must be maintained with a Banker
3. Payment shall be for discharges of any debt or other liabilities, in full or in part.
4. The cheque must be returned unpaid by the Bank either because of insufficient balance in the account or it exceeds the arranged funds in the account
5. Punishment will be either imprisonment for a term up to two years or fine up to twice the amount of the cheque or both

Provisions of Section 138 apply if the following conditions are fulfilled:

• 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.

• The payee or the holder in due course of the cheque, 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 thirty days* of the receipt of information, regarding the return of the cheque as unpaid. *(within fifteen days w.e.f. 06-02-2003)

• The drawer of such cheque fails to make the payment of the said amount of money to the payee or to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. 
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There are some other related Sections of the NI Act as under:

Section 139 of the Negotiable Instruments Act, 1881 states that if a cheque is returned unpaid, it is presumed that the cheque was issued for the discharge of any debt or other liability. This presumption is in favour of the holder of the cheque and the burden of proof is on the accused. But if the accused proves, by presenting evidentiary proof, that they are innocent, then the burden of proof shifts to the respondent. 

 Section 140 of the Negotiable Instruments Act, 1881 states that it is not a valid defense that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. In other words, the drawer of the cheque cannot claim that they had no knowledge of the insufficiency of funds in their account at the time of issuing the cheque as a defense in a prosecution under section 138.

Section 141 of the Negotiable Instruments Act, 1881, is a crucial provision that deals with the liability of a Company or a Corporate entity in cases of offenses committed under Section 138 of the Act. Under Section 141, every person who, at the time the offense was committed, was in charge of, and was responsible to the company for the conduct of business, as well as the company itself, shall be deemed to be guilty of the offense. This includes directors, managers, secretaries, or any other officer of the company who was responsible for its business operations.

Section 142 provides that

1. Courts can take cognizance of any offense under section 138, only upon a complaint, in writing, to be made by the payee or the holder in due course of the cheque
2. Such complaint is to be made within one month of the date on which the cause of action arises 
3. Cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period
4. Courts presided by a Metropolitan Magistrate or a Judicial Magistrate of the first class or higher only can try any offense punishable under section 138.
5. The offense under section 138 shall be inquired into and tried only by a court within whose local jurisdiction it falls. 
   1. If the cheque is delivered for collection through an account, the place branch of the bank where the payee or holder in due course maintains the account, will be the place of jurisdiction. 
   2. If the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, will be the place of jurisdiction.
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There are good number of Law Cases related to Section 138. A few of them are briefed here below:

1. K. Bhaskaran v. Sankaran Vaidhyan Balan:

This case is significant as it laid down guidelines for determining the liability of a drawer in cases of dishonor of cheques. It emphasized that the drawer’s liability arises only when the cheque is presented during its validity period or within six months from the date it was drawn. 

2. Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd.: 

In this case, the Supreme Court held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque.

3. Hiten P. Dalal v. Bratindranath Banerjee:

In this case, the Supreme Court held that the drawer’s knowledge of insufficiency of funds is a crucial element for establishing the offense under Section 138. Mere issuance of a cheque without such knowledge is not sufficient to attract the penal provisions.

4. M.S. Narayana Menon v. State of Kerala:

This case dealt with the issue of whether a complaint under Section 138 could be filed against a company and its directors. The court held that if the drawer is a company, every person who was in charge of the conduct of the business of the company at the time of the offense would be deemed liable. 

5. P. Vijayan v. Rajendran:

In this case, the Supreme Court highlighted that the offense under Section 138 is a strict liability offense, and the intention of the drawer is not relevant. The drawer can be held liable even if the cheque was issued as a security and not for the discharge of a debt.

6. N. Harihara Krishnan v. J. Thomas:

The Supreme Court, in this case, clarified that the drawer’s liability under Section 138 arises only when the cheque is presented to the bank within the period of its validity or within six months from the date it was drawn, whichever is earlier. 

7. Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd.: 

In this case, the Supreme Court held that the dishonour of a cheque due to “stop payment” instructions from the drawer of the cheque would not absolve the drawer of his liability under Section 138 of the NI Act. The court, in this case, clarified that the holder of the cheque must prove that the cheque was issued for the discharge of a debt or liability. If the holder fails to establish this, the drawer may escape liability.

8. Deena Dayalu v. Ram Kishan Rohtagi:

This case highlighted the importance of strict compliance with the statutory requirements for sending a legal notice under Section 138, emphasizing that even minor deviations can render the notice invalid. 

9. Lalitha Ramesh v. M. Sriram:

In this case, the Supreme Court clarified that the notice of demand under Section 138 must be sent to the drawer within 30 days from the date on which the drawer receives the information regarding the dishonor of the cheque.

10. A.C. Narayanan Nair v. State of Maharashtra:

This case emphasized that the offense under Section 138 is a criminal offense, and the drawer’s liability is not extinguished merely by making payment after the filing of a complaint. The drawer must also pay compensation to the payee.

11. Dashrath Rupsingh Rathod v. State of Maharashtra : 

This case emphasized that the territorial jurisdiction for filing a complaint under Section 138 is determined by the place where the cheque is dishonored. In this case, the Supreme Court also held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque.

12. M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta: 

In this case, the Supreme Court held that the complaint under Section 138 of the NI Act can be filed only against the drawer of the cheque and not against the signatory of the cheque.