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  • Jharna Jagtiani

Section 138 of the Negotiable Instruments Act: Dishonor of Cheques and Legal Implications

Updated: Nov 19, 2023


Section 138 of the Negotiable Instruments Act: Dishonored cheques and legal consequences. Protecting payees' interests.

Section 138 of the Negotiable Instruments Act deals with the dishonor of cheques due to insufficient funds or exceeding the arranged limit in the account. It outlines the consequences and punishment for such offenses.


Legal Provisions and Implications:

According to Section 138, if a person's cheque is returned unpaid due to insufficient funds or exceeding the account limit, it is deemed an offense. The offender can face imprisonment for up to two years, a fine up to twice the amount of the cheque, or both.


Conditions for Applying Section 138:

To apply Section 138, certain conditions must be met:

(a) The cheque must be presented to the bank within six months from its date or within its validity period, whichever is earlier. (b) The payee or holder in due course must issue a written notice demanding payment within 30 days of receiving information about the dishonor. (c) The drawer must fail to make the payment within 15 days of receiving the notice.


Case Law:

Mrs. Jain Babu vs K.J.Joseph:

In the case of Mrs. Jain Babu vs K.J. Joseph, the essence of the offense under Section 138 was the dishonor of the cheque due to insufficient funds. The court emphasized that the liability to be prosecuted for the offense lies in the inability or refusal of the drawer to make payment upon demand. The offense was considered technical and did not involve moral turpitude.


Conclusion:

Section 138 of the Negotiable Instruments Act serves as an essential provision to protect the interests of payees and holders of cheques. It aims to deter individuals from issuing cheques without sufficient funds, promoting fair and ethical financial transactions.

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