Answer By law4u team
Section 138 of the Negotiable Instruments Act, 1881 is a crucial provision under Indian law that deals with the dishonour of cheques for insufficiency of funds or other specified reasons in the bank account of the drawer. The primary objective of introducing this penal provision through an amendment in the year 1988 was to enhance the credibility of commercial transactions involving negotiable instruments like cheques and to provide a strong legal remedy to the payee against the dishonest drawer who issues a cheque without having adequate arrangements in their bank account to honour it. To understand the scope and operation of Section 138 of the Negotiable Instruments Act, 1881 (NI Act), it is essential to look at the specific ingredients that must be satisfied before a criminal complaint can be legally maintained against the drawer. The first fundamental requirement is that a cheque must have been drawn by a person on an account maintained by them 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. This means that Section 138 of the NI Act applies strictly to cheques issued towards the discharge of a legally enforceable debt or liability, and does not apply to cheques given as gifts, donations, or illegal transactions where no legal debt exists. The second crucial ingredient is that the cheque must be presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier. If the payee presents the cheque after this stipulated statutory period, the bank will return it, but the payee cannot initiate proceedings under Section 138 of the NI Act based on that late presentation. The third ingredient arises when the cheque 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. Common reasons for dishonour that attract this section include funds insufficient, account closed, stop payment instructions given by the drawer due to insufficient funds, or signatures differing, though judicial interpretations have expanded the scope based on the factual matrix of each case where the intention or direct cause is the lack of proper funds or arrangements. The fourth step in the statutory procedure is the issuance of a formal legal demand notice. Within thirty days of receiving information from the bank regarding the return of the cheque as unpaid, the payee or the holder in due course of the cheque must make a demand for the payment of the said amount of money by giving a notice in writing to the drawer of the cheque. This notice is a mandatory legal prerequisite. Without serving a proper demand notice within the statutory period of thirty days from the receipt of the bank memo, a complaint under Section 138 of the NI Act cannot be filed in court. The fifth and final ingredient involves the failure of the drawer to make the payment. The drawer of such a cheque is given a grace period of fifteen days from the date of receipt of the said notice to make the payment of the said amount of money to the payee or the holder in due course. If the drawer fails to make the payment within these fifteen days, the cause of action arises, and the offence under Section 138 of the NI Act is fully completed. Once the fifteen-day period expires without payment, the payee gets a further period of one month to file a formal criminal complaint before a judicial magistrate of the first class or a metropolitan magistrate having appropriate territorial jurisdiction. The offence under Section 138 of the NI Act is a criminal offence that carries severe legal consequences. If the drawer is convicted, they can be punished with imprisonment for a term which may extend up to two years, or with a fine which may extend to twice the amount of the cheque, or with both. Furthermore, the courts under Section 143 of the NI Act are empowered to conduct summary trials and can also direct the drawer to pay interim compensation not exceeding twenty percent of the amount of the cheque during the pendency of the proceedings under Section 143A of the NI Act.
