Supreme Court Landmark Judgments on the Negotiable Instruments Act, 1881 Section 138 “Dishonor of cheques”

Section 138 of the Negotiable Instruments Act, 1881 deals with the dishonor of cheques due to insufficient funds or the amount exceeding the arrangement made with the bank. It outlines the legal consequences for issuing a cheque that gets dishonored.

Key Provisions of Section 138:

1. Cheque Dishonor for Insufficient Funds: If a cheque is returned by the bank unpaid due to insufficient funds or because it exceeds the agreed arrangement with the bank, it is considered a dishonor under Section 138.

2. Requirement of Legal Notice: Upon dishonor, the payee (or holder of the cheque) must send a legal notice to the drawer within 30 days of receiving the dishonor memo from the bank. The notice demands payment of the amount mentioned in the cheque.

3. 15 Days to Pay: The drawer has 15 days from receiving the legal notice to make the payment. If the drawer fails to make the payment within this time, the payee can initiate legal proceedings.

4. Criminal Liability: If the drawer does not pay within the stipulated 15 days, it leads to a criminal offense under Section 138. The payee can file a complaint in court, leading to potential punishment for the drawer.

5. Penalties: If convicted, the drawer can face imprisonment for up to two years or a fine which may extend to twice the amount of the cheque, or both.

6. Jurisdiction: The complaint can be filed in a court that has jurisdiction over the area where the cheque was presented or returned.

Objectives of Section 138:

• Ensure Financial Discipline: The primary aim is to maintain trust in financial transactions involving cheques, thereby ensuring financial discipline.
• Deterrent Against Fraud: The section serves as a deterrent against issuing cheques without sufficient funds, promoting good commercial practices.

The law has evolved over the years with amendments and judicial interpretations to ensure its effective implementation, balancing the interests of both parties involved in cheque-based transactions.

The Supreme Court of India has delivered several landmark judgments interpreting the Negotiable Instruments Act, 1881, particularly with respect to Section 138, which deals with the dishonor of cheques. Here are a few key judgments:

1. Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd. (2001): In this case, the Supreme Court ruled that the presentation of a cheque can happen multiple times, as long as the statutory notice of dishonor is issued within the stipulated time after the cheque is dishonored.

2. M/S. Meters and Instruments Pvt. Ltd. v. Kanchan Mehta (2017): The Supreme Court held that a court may close the case of cheque dishonor if the accused has adequately compensated the complainant, emphasizing that the object of Section 138 is to encourage settlement rather than punishment.

3. Dashrath Rupsingh Rathod v. State of Maharashtra (2014): This judgment addressed the jurisdiction of courts for cheque dishonor cases. The Court ruled that the complaint should be filed at the place where the bank on which the cheque is drawn is located, not where the cheque was presented or dishonored.

4. Kumar Exports v. Sharma Carpets (2009): The Court clarified that once the complainant proves that a cheque was dishonored, the burden of proof shifts to the accused to show that there was no liability or debt.

5. Mohan Nair v. P. K. Govindan (2009): The Court held that post-dated cheques issued as security for a loan are still covered under the Negotiable Instruments Act. If such a cheque is dishonored, the issuer can be held liable under Section 138.

These cases illustrate the evolving judicial interpretation of the Negotiable Instruments Act, especially Section 138, which aims to protect the sanctity of commercial transactions while promoting settlement and compensation.