What is Section 138 of the Negotiable Instruments Act?

Section 138 of the Negotiable Instrument Act, 1881, holds significance in regulating financial transactions involving cheques. It addresses the legal repercussions of dishonouring a cheque due to insufficient funds or other reasons.This article will help you understand the section in an easy manner.

 

See also: What is a cancelled cheque?

 

Importance of section 138

Section 138 of the Negotiable Instruments Act outlines crucial provisions concerning the dishonour of cheques, ensuring the integrity of financial transactions and upholding the credibility of cheques as a payment instrument. 

The section mandates that cheques must be presented within three months of issuance and imposes a duty on the drawer to make payment within 15 days of receiving a notice of dishonour from the bank. Failure to comply with these conditions can result in imprisonment, a fine, or both.

Overall, Section 138 plays a significant role in instilling accountability among cheque drawers, protecting the interests of payees and creditors and acting as a deterrent against fraudulent practices, thereby maintaining trust in the banking system.

 

Subjects of law where section 138 is applicable

Section 138 of the Negotiable Instruments Act, 1881, applies primarily to matters concerning financial transactions involving cheques. Here are some key areas where Section 138 is applicable:

Commercial Law

Section 138 governs commercial transactions involving the issuance and acceptance of cheques as a mode of payment. It regulates the rights and obligations of parties engaged in commercial activities.

Banking Law

Cheques are fundamental instruments in banking operations, facilitating the transfer of funds between accounts. Section 138 ensures the integrity of banking transactions by imposing penalties for dishonoured cheques.

Contract Law

The dishonour of a cheque can give rise to legal disputes under contract law, particularly if the cheque was issued as part of a contractual agreement. Section 138 provides a legal framework for resolving such disputes.

Civil Law

While Section 138 pertains to criminal liability for dishonoured cheques, it also has implications in civil law. Payees or holders in due course may pursue civil remedies for compensation in addition to or instead of criminal prosecution.

Financial regulation

Section 138 contributes to financial regulation by deterring fraudulent practices and promoting accountability in cheque transactions. It helps maintain the integrity of financial markets and consumer confidence in banking systems.

 

Limitation period effect on Section 138

The limitation period refers to the maximum duration within which legal action can be initiated for a particular cause of action. In the context of Section 138, the limitation period has implications for the enforcement of legal remedies against dishonoured cheques. Here’s how it affects Section 138:

Time-barred actions

Section 138 specifies a limitation period for initiating legal proceedings arising from dishonoured cheques. As per the provision, such actions must be initiated within one month from the date on which the cause of action arises.

Timely enforcement

The limitation period ensures timely enforcement of legal rights and obligations concerning dishonoured cheques. It encourages prompt action by payees or holders in due course to seek redress for financial losses.

Preservation of evidence

Initiating legal action within the limitation period allows for the preservation of relevant evidence, including bank records, communication exchanges and notice documentation. This enhances the prospects of a successful prosecution or civil claim.

Legal certainty

Adherence to the limitation period promotes legal certainty and finality in cheque-related disputes. It prevents the indefinite prolongation of legal proceedings and facilitates the resolution of conflicts within a reasonable timeframe.

Condonation of delay

In exceptional circumstances where there is a valid reason for delay, the court may condone the delay in initiating legal action beyond the limitation period. However, such condonation is subject to judicial discretion and must be supported by sufficient grounds.

 

Punishment under section 138

Section 138 of the Negotiable Instrument Act, 1881, establishes provisions for punishing individuals who dishonour cheques. Understanding the penalties outlined in this section is crucial for maintaining the integrity of financial transactions and upholding the sanctity of cheques as a payment instrument.

Imprisonment

One of the primary penalties outlined under Section 138 is imprisonment. The Act stipulates that offenders may face imprisonment for a term extending up to two years.

Monetary fine

In addition to imprisonment, offenders may also be liable to pay a fine. The fine imposed can extend up to twice the amount of the bounced cheque.

Combination of penalties

It’s important to note that the court has the discretion to impose either imprisonment or a monetary fine, or both, depending on the severity of the offence and other relevant factors.

Compensatory nature

Despite the availability of imprisonment as a punishment, Section 138 is primarily compensatory in nature. The focus is on compensating the payee or holder in due course for the loss incurred due to the dishonoured cheque.

Deterrent effect

The inclusion of imprisonment and substantial fines serves as a deterrent against fraudulent practices such as issuing cheques without adequate funds, thereby promoting financial integrity and trust in the banking system.

 

Decriminalisation of Section 138 and its effects

Section 138 of the Negotiable Instrument Act, 1881, which deals with the dishonour of cheques, has been a subject of debate regarding its criminalization. Decriminalisation refers to the process of removing criminal penalties for certain offences. Read further to understand the potential effects of decriminalising Section 138:

Economic impact

Positive effects: Decriminalisation may reduce the burden on courts and law enforcement agencies, potentially freeing up resources for more pressing matters. It could also streamline the legal process for resolving cheque disputes, thereby promoting business efficiency.

Negative effects: However, decriminalisation might weaken deterrence against fraudulent practices, leading to an increase in dishonoured cheques and financial losses. This could undermine confidence in the banking system and negatively impact economic stability.

Legal ramifications

Positive effects: Decriminalisation may lead to a shift towards civil remedies, such as monetary compensation or arbitration, for resolving cheque disputes. This could result in faster resolution of cases and reduce the adversarial nature of legal proceedings.

Negative effects: However, the absence of criminal penalties might embolden dishonest actors to exploit legal loopholes, potentially increasing litigation and complicating enforcement efforts. Moreover, victims of dishonoured cheques may feel less protected without the threat of criminal prosecution against offenders.

Business environment

Positive effects: Decriminalisation could foster a more business-friendly environment by reducing the risk of criminal liability for cheque-related issues. This might encourage entrepreneurship and investment, particularly among small and medium enterprises.

Negative effects: Conversely, the perception of weakened legal protections for creditors and payees may deter individuals and businesses from relying on cheques as a payment method. This could lead to a shift towards alternative payment options, potentially disrupting established business practices.

Social implications

Positive effects: Decriminalisation may promote a more equitable and proportionate approach to addressing cheque-related offences, particularly for individuals facing financial hardship or unintentional errors. This could enhance access to justice and mitigate the disproportionate impact of criminalization on vulnerable populations.

Negative effects: However, without criminal penalties, there may be less incentive for individuals to exercise caution and accountability when issuing cheques. This could erode trust and integrity within commercial relationships, potentially straining social cohesion and mutual reliance.

 

FAQs

Should insufficiency of funds be the only reason for dishonouring a cheque to invoke Section 138?

No, Section 138 can also be invoked in cases of signature mismatches or closed accounts, among other reasons.

Is Section 138 applicable to post-dated and blank cheques?

Yes, Section 138 can be invoked for dishonoured post-dated and blank cheques, provided the liability exists at the time of dishonour.

Can a dishonoured cheque be presented again?

Yes, a dishonoured cheque can be represented during its validity period, giving rise to a new cause of action with each dishonour.

What are the consequences of sending two notices during the notice period under Section 138?

Sending two notices during the notice period does not invalidate the proceedings. The trial proceeds based on the first notice received.

Does Section 138 apply to lost cheques or time-barred debts?

No, Section 138 does not apply to lost cheques or time-barred debts as per relevant judgments.

Why is imprisonment included as a punishment under Section 138?

Imprisonment serves as a deterrent against fraudulent practices and reinforces the seriousness of dishonouring cheques.

What are the alternatives to decriminalisation of Section 138?

Alternatives include setting pecuniary limits for criminal liability, lowering defaulters' credit scores and promoting alternative dispute resolution mechanisms.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected]