Introduction

One of India's oldest mercantile laws, the Negotiable Instruments Act, 1881 (NI Act), was passed during the colonial era to control the use and transfer of negotiable instruments such as checks, bills of exchange, and promissory notes. It still has a significant impact on India's banking and business dealings more than a century later.

Due to the continued usage of checks in business transactions, the NI Act continues to be extremely important in the changing financial world where digital transactions are becoming more common. Section 138, which makes it illegal to dishonour checks because of inadequate funds or the closure of the drawer's account, is the most contested and well-known clause in this law.

The Indian government has worked to improve financial discipline and expedite the cheque dishonour process in recent years, especially with the 2018 and 2020 revisions. With a focus on Section 138, its legal ramifications, and the importance of recent modifications, this page provides a thorough summary of the Act.

Objectives and Importance of the NI Act

The NI Act was enacted with the following objectives:

1. Legal Uniformity: To establish uniformity in British India's regulations pertaining to negotiable instruments.

2. Trade Facilitation: To guarantee seamless business dealings by accepting negotiable instruments as cash alternatives.

3. Security in Transactions: To foster trust in financial transactions and give legal validity to documents such as checks.

Modern Relevance of the Act

In India, checks are still widely used even with the rise of electronic payment options. As a result, the Act still fulfils the following functions:

It regulates the rights and obligations of those who employ negotiable instruments.

It increases trust in commercial dealings, particularly between vendors and small dealers.

In order to prevent abuse and uphold financial discipline, it offers criminal penalties for checks that are returned unpaid.

Key Definitions under the NI Act

Section 6: "Cheque"

A cheque is defined as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

Section 13: "Negotiable Instrument"

A negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer.

Section 138 – Dishonour of Cheque for Insufficiency of Funds

Section 138 is the cornerstone of the NI Act in terms of penal provisions. It reads:

“Where any cheque drawn by a person on an account maintained by him with a banker for the payment of any amount of money to another person… is returned by the bank unpaid, either because of the amount of money standing to the credit… is insufficient… such person shall be deemed to have committed an offence… and shall, without prejudice to any other provisions of this Act, be punished with imprisonment… or with fine… or with both”.

Essential Ingredients of Section 138

The following requirements must be met in order for an offence under Section 138 to be proven:

1. The cheque must be drawn to settle a debt or liability that is enforceable by law.

2. Because there are not enough funds or the account has been closed, the cheque must be returned unpaid.

3. The cheque must be submitted within three months of the date it is drawn (as amended in 2002, it was previously six months).

4. Within 30 days of learning about the dishonour from the bank, the payee is required to send a written demand notice to the drawer.

5. Within 15 days after getting the notice, the drawer must not pay.

Punishment

Under Section 138: The drawer may be punished with imprisonment for up to two years, or a fine which may extend to twice the amount of the cheque, or Both.

Challenges faced by Section 138

Despite its benefits, Section 138 has drawn criticism for a number of reasons:

1. Criminalisation of Civil Disputes: According to many, a bounced cheque should be regarded as a civil breach of contract rather than a crime.

2. Judicial Burden: Twenty percent of all pending litigation in lower courts consisted of cheque bounce instances, according to the Ministry of Law and Justice (2015).

3. Lender Misuse: Even for contested claims, there are cases where lenders abuse postdated checks to start criminal procedures.

4. Delayed Justice: Although Section 138 trials are meant to serve as a deterrence, procedural delays cause them to take three to five years on average.

To raise India's ranks for ease of doing business, the Ministry of Finance proposed in 2020 to decriminalise small economic infractions, such as cheque bounce under Section 138.

Trade groups and legal experts, however, strongly opposed this action, arguing that:

1. It would lessen Section 138's deterrent effect.
2. Motivate deliberate defaulters.
3. Undercut confidence between companies.
4. Following public deliberation, the government ultimately put the proposal on hold.

Compounding of Offence under Section 138

Section 147 of the NI Act makes offences under the Act compoundable, i.e., capable of being settled between the parties.

The Supreme Court in Damodar S. Prabhu v. Sayed Babalal H (2010) laid down guidelines for graded costs in compounding at different stages to encourage early settlement.

Procedure for Filing of Complaint

According to Section 138 of the NI Act, the concerned magistrate must receive the complaint within 30 days on the day the drawer's 15-day window for payment of funds ends. The complainant, a duly authorised power of attorney holder, or, in the case of a company, any individual or director duly authorised by the board in this regard, must sign the complaint. If more than one check is used to partially pay for a single transaction, a single complaint may be filed for up to four (4) checks if all of the checks are connected to the same transaction. [Civ. CC 508 All. 2019(4)]

If the complainant's affidavit is included with the complaint on the day it is delivered, the concerned magistrate will review the complaint and supporting documentation. If an offence is suspected, they will take cognisance and issue a summons to the accused, against whom the case is brought. The Summoning Order is the common name for this order. The accused will get summonses in line with section 144 of the statute, as previously mentioned. If the accused is served with a summons and shows up for court, the court will request that he provide a bail bond to guarantee his presence during the trial (because Section 138 is a bailable offence) and provide notice to the accused in accordance with Section 251 of the Cr.PC. Then the Trial of the case starts.

Judicial Interpretation of Section 138

Case: Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd., (2000) 2 SCC 745

The Supreme Court held that the offence under Section 138 is quasi-criminal in nature and intended to serve as a deterrent to prevent misuse of cheques.

Case: M/S Meters and Instruments v. Kanchan Mehta, (2018) 1 SCC 560

The Court held that offences under Section 138 are primarily civil wrongs that have been criminalized to ensure the sanctity of cheques. Hence, compounding of offences should be encouraged at all stages, including in appellate and revisional courts.

Recent development under the NI Act (Judgements)

M/s Celestium Financial v. A. Gnanasekaran & Ors., 2025 INSC 804

The Court noted that the term "victim" includes anyone who has suffered loss or injury due to an act or omission for which the accused is charged. It emphasized that a person can be both a complainant and a victim, but the proviso to Section 372 CrPC allows a victim to file an appeal as a matter of right against acquittal, conviction for a lesser offence, or inadequate compensation.

The dishonour of a cheque is punishable by imprisonment, a fine, or both under Section 138 of the NI Act, which makes it a considered offence with criminal repercussions. The complaint has the right to appeal because they are the ones who are losing money.

Dinesh Sharma v. Emgee Cables and Communication Ltd. & Anr. (2025 INSC 571)

The Supreme Court held that the High Court committed a serious error by quashing the FIR merely because of the existence of long-term business transactions. It failed to consider that the creation of dummy/shell companies and diversion of funds by the Respondents were indicative of a fraudulent intention.

This judgment reinforces that:

1. Economic offences, even when embedded within civil transactions, must not be quashed prematurely if there is prima facie evidence of criminality.
2. High Courts must not use Section 482 CrPC to stifle legitimate investigations at an early stage.
3. Mens rea (criminal intention) can be inferred from subsequent conduct, such as dishonoured cheques, dummy companies, and evasion.
4. The existence of civil remedies does not preclude criminal prosecution where cheating or fraud is involved.

Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel, 2022 SCC OnLine SC 1376.

According to the Court, a partial payment of the debt must be endorsed on the cheque in accordance with Section 56 of the Act if it is made after the cheque was written but before it is cashed. Without registering the partial payment, the cheque cannot be presented for encashment. Since the unendorsed cheque does not, at the moment of encashment, represent a legally enforceable debt, the violation under Section 138 would not be committed if it were to be dishonoured upon presentation.

Dilip Hariramani v. Bank of Baroda, 2022 SCC OnLine SC 579.

The Supreme Court noted in the case at hand that the phrase "every person" is sufficiently broad and inclusive to encompass a director, partner, or other officers or individuals. Therefore, under Section 141 of the NI Act, a person who does not meet the qualifications of being "in charge of and responsible to the company for the conduct of its business" is not liable vicariously. The burden is on the prosecution to show that the person prosecuted was in charge of and responsible to the company for conduct of its business. According to the proviso, which is an exception in nature, a person who is liable under sub-section (1) will not be punished if he can demonstrate that the act was committed without his knowledge or that he took all reasonable precautions to stop it from happening. It is the accused's responsibility to fulfil the conditions and benefit from the proviso.

It does not, however, relieve the prosecution of the initial burden of proving the requirements of sub-section (1) of Section 141 of the NI Act. A person who would otherwise be held vicariously accountable under sub-section (1) of Section 141 of the NI Act is granted immunity by the proviso.

Gajanand Burange v. Laxmi Chand Goyal, 2022 SCC OnLine SC 1711.

It is evident from a simple reading of clause (c) of the proviso that a complaint cannot be filed for an offence under Section 138 of the NI Act until the 15-day period has passed. According to the legislation, any complaint that is submitted before 15 days have passed after the date the drawer or accused received the notification is not a complaint at all. When a complaint is made before the 15-day period from the date notice was served to him, it is not considered premature and, according to the law, is not a complaint at all. Actually, among other things, Section 142 of the NI Act prohibits the court from taking cognisance of an offence under Section 138 unless a formal complaint is submitted.

Oriental Bank of Commerce v. Prabodh Kumar Tewari, 2022 SCC OnLine SC 1089.

According to the Court, Section 139 of the act mandates that it shall be presumed unless contrary is proved, that the holder of a cheque received it in full or in part as payment for a debt or duty.

The presumption under Section 139 of the Act is rebuttable, as indicated by the phrase "unless the contrary is proved." The three-judge bench of this court in Rangappa ((2010) 11 SCC 441) concluded that the proportionality test must be used to determine whether the presumption has been rebutted, citing this as an example of a "reverse onus clause."

The standard of proof for rebuttal of the presumption under Section 139 of the Act is guided by a preponderance of probabilities. This Court held thus In the absence of compelling justifications, reverse onus clauses usually impose an evidentiary burden and not a persuasive burden. Keeping this in view, it is a settled position that when an accused has to rebut the presumption under Section 139, the standard of proof for doing so is that of “preponderance of probabilities”.

Recent Amendments made to the NI Act

The Indian government has brought about noteworthy amendments in 2015, 2018 and 2020 to address challenges in cheque bounce litigation.

The Negotiable Instruments (Amendment) Act, 2015

During the winter session of Parliament, the Negotiable Instruments (Amendment) Bill 2015, was passed.

SECTION 6

With this alteration, Explanation 1 was moved from Section 2(i) to clause (a), and the terms "electronic form of a cheque" and "truncated cheque" were added. A "cheque is an electronic form," according to this section, that is created with a computer program and signed.

SECTION 142A

1. If a case is transferred to a court which has jurisdiction under Section 142(2) such transfer shall be deemed to have been transferring under this act, irrespective of any orders, judgements or decree passed by any court or anything contained in CrPC.
2. If a payee makes a complaint against a cheque drawer under Section 142(2) or the matter is moved under Section 142(1), any complaints arising under Section 138 against that drawer must be filed in that court, regardless of whether the cheques are within that court's jurisdiction.
3. If a payee files more than one case against the same drawer in various courts before the start of this Act, and the court is aware of this, the court shall transfer all of the cases to the court with jurisdiction under Section 142(2), where the first case was filed and is still pending.

The Supreme Court ruled in Dashrath Rupsingh Rathod v. State of Maharashtra and Others, 2009, which was delivered on August 1, 2014, that the courts' territorial jurisdiction over dishonour and cheque writing is limited to those that are under the jurisdiction of the bank where the offence was committed. This implies that cases pertaining to the dishonour of checks issued by a bank that is not under the court's jurisdiction cannot be heard by the courts. The number of cases under Section 138 of the NIA was transferred to the courts with jurisdiction over them in accordance with the Supreme Court's ruling. Furthermore, the government presented a number of claims to the relevant institutions, claiming that the aforementioned ruling would provide the defaulters with excessive protection. Among other things, the 2015 Act that was passed by Parliament allowed for the addition of a new Section 142A. The courts would benefit from this section when they handled instances involving the transfer of jurisdiction.

SECTION 142(2)

Only a court having local jurisdiction can investigate and can conduct the trial for the offence committed under Section 138

1. If a cheque is delivered to a branch of a bank for collection, the account, where the payment is made can maintain the account where the holder or the payee is located.
2. If a cheque is presented to a branch of a bank for collection, the account where the payment is made can maintain the account where the holder or the payee is located.

The 2018 Amendment Act added Sections 143A and 148 to the principal Act.

Section 143A – Interim Compensation

Allows the court to direct the drawer to pay up to 20% of the cheque amount as interim compensation during the pendency of the trial.

Compensation is payable within 60 days, extendable by a maximum of 30 days.

Helps the complainant recover some amount pending the final decision.

Section 148 – Deposit in Appeal Against Conviction

In case of appeal by the drawer against a conviction, the Appellate Court may order deposit of at least 20% of the fine or compensation awarded by the Trial Court.

The amount is in addition to interim compensation paid under Section 143A.

Significance of These Amendments

1. They reduce frivolous litigation by holding the drawer financially accountable at an earlier stage.
2. Provide speedy relief to the aggrieved party.
3. Help in tackling delays in cheque bounce cases, which form a large chunk of pendency in criminal courts.

The 2020 (Proposed) Negotiable Instruments (Amendment) Bill

The 2020 Bill suggested additional measures to:

1. Encourage digital settlement and electronic cheque transmission, however they have not yet been implemented.
2. Offer a structure for reporting dishonour electronically.
3. Give judges the authority to more rigorously implement summary trial processes.

Conclusion

A key component of India's commercial legal system is Section 138 of the Negotiable Instruments Act, 1881. It strikes a compromise between safeguarding the rightful rights of creditors and making sure the accused is treated fairly throughout the legal process. The insertion of interim compensation in the 2018 amendments represents a substantial advancement in the jurisprudence surrounding cheque bounces. These clauses avoid needless delays while simultaneously accelerating the payee's rate of recovery. Nonetheless, structural problems including trial delays, backlogs in the court system, and abuse of criminal legislation continue to exist. Stakeholders rightfully opposed the plan to decriminalise cheque dishonour because it would be detrimental to remove the criminal penalties in a nation like India where confidence in financial instruments is brittle. Going on, the statute requires more digital tools, stringent enforcement of summary trials, and additional procedural simplification. The effectiveness of the NI Act can be increased by implementing strong fines for pointless litigation, mediation for compoundable violations, and fast-track courts for financial offences.