Legal Article

Section 138 of the Negotiable Instruments Act: The Law Surrounding Cheque Bounces

Shivendra Pratap Singh

Advocate

High Court Lucknow

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Published on: 1 Aug, 2023

Cheque transactions remain a mainstay in both business and personal financial landscapes. A significant aspect that safeguards the sanctity of cheques in India is Section 138 of the Negotiable Instruments Act, 1881. This section specifically addresses the contentious issue of cheque bounces, cementing the legal foundation for the repercussions faced by defaulters. Let’s dive deep into understanding Section 138 and its implications.

Basics of Section 138

Section 138 of the Negotiable Instruments Act, 1881, pertains to the dishonour of cheques due to insufficiency of funds or if it exceeds the amount arranged to be paid by an agreement with the bank.

Key Provisions

  1. Offence and Penalty: The drawer of a dishonoured cheque can be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to twice the amount of the cheque, or with both.
  2. Demand for Payment: The payee or holder in due course of the cheque must make a demand for the payment of the said amount by giving a written notice to the drawer within 30 days of receiving information about the cheque’s dishonour from the bank.
  3. Drawer’s Response Time: The drawer has 15 days from the receipt of the notice to make the payment.
  4. Initiating Legal Proceedings: If the drawer fails to remit payment within the 15-day period after receiving the notice, the payee can initiate legal proceedings against the drawer within 30 days.

Jurisdictional Nuances

A significant amendment in 2018 clarified the jurisdiction for filing cheque bounce cases. It can be initiated:

  1. In the area where the branch of the bank, where the payee (person who was to receive the money) maintains his account, is located.
  2. If the cheque is presented for payment through electronic means, the jurisdiction lies in the area of the bank branch where the drawer maintains his account.

Recent Developments

There has been a growing demand for decriminalizing minor offences, including the offence under Section 138, to improve the ease of doing business. This argument stems from the notion that civil liabilities can effectively address the concerns that this section seeks to redress.

Implications and Importance

  1. Upholding Trust: By having stringent provisions, Section 138 plays a pivotal role in upholding trust in cheque transactions, a widely used mode of payment.
  2. Protecting Rights of Payee: The section acts as a deterrent for those who recklessly issue cheques without maintaining sufficient funds, ensuring that the rights of the payee or holder are not jeopardized.
  3. Avoiding Litigations: The provision of sending a notice and giving a 15-day window for payment serves as a preliminary step to resolve matters without resorting to litigation.

Conclusion

Section 138 of the Negotiable Instruments Act serves as a cornerstone in safeguarding the interests of individuals and entities involved in cheque transactions. It ensures that a fundamental financial instrument like the cheque retains its reliability and credibility. For anyone operating in India’s financial landscape, an understanding of this section is crucial.

Tags: #Section138 #NegotiableInstrumentsAct #ChequeBounce #FinancialLaw #IndianLaw