Section 138 of the Negotiable Instruments Act (N.I. Act) & Its Legal Analysis
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.
Frequently Asked Questions on Section 138 of NI Act
1. Why did lawmakers introduce Section 138 of the NI Act?
Answer: Lawmakers introduced Section 138 to restore public trust in cheques and discourage irresponsible issuance.
2. What does Section 138 aim to protect?
Answer: Section 138 aims to protect payees from losses due to dishonoured cheques.
3. How does Section 138 strengthen the banking system?
Answer: It builds public faith in cheques as reliable banking instruments.
4. Who becomes liable under Section 138?
Answer: The drawer becomes liable for issuing a cheque without sufficient funds.
5. What validity period does the bank allow for a cheque?
Answer: The bank allows a cheque to remain valid for three months from its date.
6. From which date does a post-dated cheque become effective?
Answer: A post-dated cheque becomes effective from the date written on it.
Case Laws related Question Answers for Section 138 of NI Act
7. What did the Supreme Court rule in Ishar Alloy Steels Ltd. v. Jayaswals NECO Ltd.?
Answer: The Court ruled that a cheque becomes valid only from its mentioned date.
8. What happens if someone alters the contents of a cheque?
Answer: The court does not convict the drawer under Section 138 if the cheque is materially altered.
9. Can a drawer revalidate a cheque?
Answer: Yes, the drawer can revalidate it by striking the old date and writing a new one.
10. How does the law treat a blank but signed cheque given with consent?
Answer: The law treats it as valid and binding under Section 138.
11. Which provision supports the validity of blank cheques?
Answer: Section 20 of the NI Act supports the validity of blank cheques filled by the payee.
12. What can the court do if the drawer claims the cheque was misused later?
Answer: The court can send the cheque to a handwriting expert to verify when it was signed.
13. What presumption does the law make for signed and delivered cheques?
Answer: The law presumes they were given to discharge a legal debt or liability.
14. What did the Court decide in Kalamani Tex v. P. Balasubramanian?
Answer: The Court decided that signed and delivered cheques raise a presumption of legal liability.
15. What is the legal effect of a postdated cheque before its due date?
Answer: It acts as a bill of exchange and has no legal effect until the date arrives.