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Can a cheque issued by an NGO or trust be covered under Section 138?

Can a cheque issued by an NGO or trust be covered under Section 138?

01-Apr-2025

Cheque Bounce

Answer By law4u team

Yes, a cheque issued by an NGO or trust can be covered under Section 138 of the Negotiable Instruments Act, 1881, if it bounces due to insufficient funds or other reasons specified under the law. Applicability of Section 138 on NGOs and Trusts Legal Entity Status An NGO or trust is a juridical entity and can enter into financial transactions. If an NGO or trust issues a cheque that bounces, it is liable under Section 138. Who is Liable? The signatory of the cheque (trustee, chairman, or authorized signatory) is personally liable. If the NGO or trust is registered as a corporate entity (e.g., Section 8 company), its office bearers, directors, or authorized officials may also be held accountable. Conditions for Section 138 Action The cheque must be for the discharge of a legally enforceable debt or liability. The cheque must be presented within 3 months from the date mentioned on it. The payee must issue a legal notice within 30 days of receiving the bank's dishonor memo. If the issuer fails to make payment within 15 days of the notice, a complaint can be filed in court within 30 days. Defenses Available for NGOs or Trusts If the cheque was issued without a legally enforceable liability, the NGO/trust can contest the case. If the signatory had no authority to issue the cheque, liability may not arise.

Answer By Ayantika Mondal

Dear Client, In accordance with Section 138 of the Negotiable Instruments Act a check issued by a trust or non-profit organization may be subject to liability if it is returned for lack of funds or for other reasons. It is possible to prosecute the organization through the authorized signatory who signed the check. In these situations the NGO or trust is liable as a legal entity and Section 141 gives the person in charge of running its affairs at the time of the offense the potential to be held personally liable as well. I hope this answer helps. In case of future queries, please feel free to contact us. Thank you.

Answer By Anik

Dear client, as per your query, Yes, a cheque issued by an NGO or Trust can be covered under Section 138 of the Negotiable Instruments Act, 1881, but the complaint is maintainable against the trustee(s) who signed the cheque, not the Trust itself, as the Supreme Court has clarified that a Trust isn't a legal entity for prosecution, making the individuals responsible for the dishonoured payment liable. Supreme Court in, Sankar Padam Thapa v Vijaykumar Dineshchandra Agarwal 2025 INSC 1210 held that, proceedings under the Negotiable Instruments Act, 1881 are maintainable against a trustee who has signed a cheque on behalf of a trust, even if the trust itself is not arrayed as an accused. In the case of Harpreet Sahni v. ShriChand Hemnani 2024 Supreme(Online)(DEL) 17562, The Delhi High Court held that where a trust’s cheque was dishonoured for insufficiency of funds, a complaint under Section 138 of the Negotiable Instruments Act, 1881 against the trust’s trustees was maintainable. The court ruled that it was unnecessary to issue separate statutory notice to each trustee for establishing their vicarious liability, and service on the trust through its trustees was sufficient. I hope this answer was helpful. For further queries, please do not hesitate to contact us. Thank you.