Module 2 of 5 — Negotiable Instruments Act & Section 138

Section 138: Ingredients of the Offence

Reading module · approx 14 min

Section 138 of the Negotiable Instruments Act creates a criminal offence for the dishonour of a cheque for insufficiency of funds. The offence has five essential ingredients, each of which must be satisfied for a valid complaint. A defect in any one ingredient can be fatal to the case.

The five ingredients

1. The cheque was drawn on an account maintained by the drawer with a banker

The drawer must have an account with the bank on which the cheque is drawn. This is satisfied in virtually all cases where a cheque has been issued by the drawer.

2. The cheque was issued in discharge of a legally enforceable debt or liability

This is the most frequently litigated ingredient. The cheque must have been issued to discharge an existing legally enforceable debt or liability — not as a security for a future obligation, not as a gift, and not as consideration for an illegal contract. The burden of proof initially lies on the complainant to show that the cheque was issued in discharge of a debt; there is a statutory presumption under Section 139 that the cheque was issued for the discharge of a legally enforceable debt, which shifts the burden to the drawer to rebut.

3. The cheque was presented within the period of its validity

The cheque must be presented for payment within 3 months of the date on the cheque. Presentation after the validity period does not attract Section 138 liability.

4. The cheque is returned unpaid by the bank due to insufficient funds or exceeding the overdraft limit

The dishonour must be due to one of the reasons that attract Section 138 liability — insufficient funds, account closure, or exceeding the overdraft limit. A stop payment instruction is treated as equivalent to insufficient funds. Technical reasons for dishonour do not attract liability.

5. The payee sent a written demand notice within 30 days of receiving the cheque return memo

This is a mandatory procedural step. The notice must be sent within 30 days of receipt of information of dishonour. The notice must demand payment of the cheque amount within 15 days from the date of receipt of the notice by the drawer. If the drawer pays within the 15-day period, no offence is committed and no complaint can be filed.

The Section 139 presumption

Section 139 creates a statutory presumption in favour of the complainant: it shall be presumed that the holder of a cheque received the cheque for the discharge, in whole or in part, of any debt or other liability. This is a rebuttable presumption. The drawer can rebut it by proving, on a balance of probabilities, that the cheque was not issued in discharge of a legally enforceable debt.

Common defences by the drawer

Drawers typically raise one or more of the following defences:

The cheque was given as security and not in discharge of a debt
The cheque was blank when given and the payee filled in amounts without authority
The underlying debt is not legally enforceable (e.g., it is illegal, time-barred, or non-existent)
The cheque was given on condition that certain events would occur, and those events did not occur
The cheque was not issued voluntarily (coercion or fraud)

The blank cheque defence A very common defence is that the drawer gave a blank cheque (for use as security) and the payee filled in an amount higher than authorised. Indian courts have held that if the cheque bore the drawer's signature and the payee presented it for a specific amount, the drawer bears the burden of proving that the amount was not authorised. Merely signing a blank cheque and handing it to someone creates significant legal risk — the signer cannot easily deny liability for amounts subsequently filled in.

The limitation period

A Section 138 complaint must be filed within one month of the cause of action arising, which is the expiry of the 15-day demand period without payment. The Limitation Act is not applicable to Section 138 complaints — the one-month period is specified in Section 142(b) of the NI Act itself. Delay beyond one month (without condonation by the court) can result in the complaint being time-barred.

Module 3 covers the demand notice — the mandatory procedural step and the most common source of technical defects.