Criminal Law

What is purpose of Section 138 of NI Act

The purpose of section 138 NI Act is that in business people had started losing trust in cheques as negotiable instruments because drawers were not acting responsibly. To restore that trust, the lawmakers introduced Section 138. This section aims to:

Reinforce the credibility of cheques.

Build public faith in the effectiveness of banking systems for negotiable instruments.

Hold the irresponsible drawer accountable for issuing cheques without funds.

Discourage continued carelessness by drawers.

Protect honest drawers.

Safeguard the payee, who often suffers loss due to bounced cheques.

The Supreme Court highlighted these objectives in Vinaya Devanna Nayak vs. Ryot Sewa Sahakari Bank Ltd., AIR 2008 SC 716, and also in Bir Singh vs. Mukesh Kumar, (2019) 4 SCC 197.

What is the Validity Period of a Cheque ?

The bank treats a cheque as valid for three months from the date written on it (earlier it was six months).
If a person issues a post-dated cheque, the bank considers it valid only from the date mentioned on the Cheque not from the date of issue.

The Supreme Court confirmed this in:

Shri Ishar Alloy Steels Ltd. vs. Jayaswals NECO Ltd. (AIR 2001 SC 1161)

Ashok Yashavant Badave vs. Surendra Madhavarao Nigojakar & Another (AIR 2001 SC 1315)

If someone makes a visible material alteration to the cheque, the court does not convict the drawer under Section 138.

The Karnataka High Court gave this ruling in: M.B. Rajasekhar vs. Savithramma (2011 KantLJ 6 476)

Can Someone Revalidate a Cheque? 

Yes, a person can revalidate a cheque.

The drawer (person who issued the cheque) can strike off the old date after six months and write a new date on the cheque. After doing so, the cheque becomes valid again for another six months from the new date.

The Supreme Court confirmed this in the case: Veera Expert vs. T. Kalavathy, AIR 2002 SC 38.

What is the Effect of Issuing a Blank Cheque?

When a person signs a cheque but leaves all other columns blank, and hands it over to the payee with permission to fill it as agreed, the law treats the cheque as valid. If the bank dishonours such a cheque, Section 138 of the Negotiable Instruments Act applies.

The Karnataka High Court confirmed this in:

S.R. Muralidhar vs. G.Y. Ashok, ILR 2001 Kar 4127.

Section 20 of the Negotiable Instruments Act supports this legal position.

If the accused claims that:

He issued the cheque long ago, and

The payee used it later beyond its validity,

then:

The court must determine when the drawer signed the cheque.

The court can send the cheque to a handwriting expert to verify the age of the ink and signature, if the accused requests it.

Relevant cases:

Kalyani Bhaskar vs. M.S. Sampoornam, (2007) 2 SCC 258.

T. Nagappa vs. Y.R. Muralidhar, AIR 2008 SC 2010 

Bir Singh vs. Mukesh Kumar, (2019) 4 SCC 197

The Supreme Court held that if the drawer voluntarily signed and handed over a blank or post-dated cheque, the law presumes it was given to discharge a legal liability, unless the accused proves coercion or undue influence.

Kalamani Tex & Another vs. P. Balasubramanian, (2021) 5 SCC 283.

The Court ruled that Sections 118 and 139 presumptions apply when the drawer voluntarily signs and delivers the Cheque. The provision of anticipatory bail is applicable for non-bailable offences only.

Under Section 138 of NI Act, What is Its Legal Effect of a Postdated Cheque a Cheque ?

A postdated cheque acts as a bill of exchange until the date written on it arrives.

Under Sections 5 and 6 of the Negotiable Instruments Act, a cheque is a bill of exchange drawn on a bank and payable on demand. So, if a postdated Cheque is presented before its due date, the bank does not honour it, because it is not payable on demand yet. Thus, before the mentioned date, it does not qualify as a cheque and has no legal effect.

Once the date written on it arrives, the postdated cheque becomes valid, and the law treats it as a cheque.

Important Supreme Court rulings:

Ashok Yashavant Badave vs. Surendra Madhavarao Nigojakar & Another, AIR 2001 SC 1315

Goaplast Pvt. Ltd. vs. Chico Ursula D’Souza, AIR 2003 SC 2035

DCM Financial Services Ltd. vs. J.N. Sareen, AIR 2008 SCW 4034

Rangappa vs. Mohan, AIR 2010 SC 1898 - The Court reaffirmed that once the date on the postdated Cheque arrives, it assumes the character of a Cheque, and Section 138 applies upon dishonour.

Question and Answer on Section 138 of NI Act

1. What does Section 138 of the NI Act deal with?
Section 138 punishes the drawer when a Cheque bounces due to insufficient funds or closed account.

2. Who can file a complaint under Section 138?
Only the payee or the holder in due course can file a complaint against the drawer.

3. What is the punishment under Section 138?
The court can sentence the drawer to two years' imprisonment or fine up to twice the cheque amount.

4. When does the offence under Section 138 get committed?
The offence gets committed if the drawer fails to pay within fifteen days after receiving the legal notice.

5. What is the time limit to present the Cheque?
The payee must present the Cheque to the bank within three months from its date.

6. What is the time limit to issue a demand notice?
The payee must send a written demand notice within thirty days of cheque return from the bank.

7. What is the time limit to file a complaint under Section 138?
The complainant must file the case within one month after expiry of the notice period.

8. Can the drawer be prosecuted without issuing a notice?
No, the complainant must issue a written demand notice before prosecuting the drawer.

9. Can the court prosecute a company under Section 138?
Yes, the court can prosecute both the company and the person in charge of its business.

10. Can the parties settle a Cheque bounce case?
Yes, the parties can compound the offence anytime with mutual consent and court’s permission.