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  • Writer's pictureIRALR


Source : SCC Online

This article has been authored by Saoumya Vashisht, a fifth-year student at Amity Law School, Delhi.


Parties in a commercial transaction share a fiduciary relationship. It is implied that in exchange of goods or services a monetary consideration would be provided to the other party for fulfilling their part of the obligation. The system of arrangement between the parties determines the instrument used for servicing the consideration. Emanating from the basic principle of contracts, this is precisely the way every transaction occurs in the world around us, barring the gratuitous ones. Fiat currency is not always the medium of choice for traders, ergo, based on settlement terms as well as to avoid various issues of dealing with currency like store of value, people choose to indulge in the use of Negotiable Instruments.

Negotiable instruments act as alternatives to prompt cash payments in a trade. They are documents which guarantee or promise the actualization of payment with regards to the specifications mentioned in the documents. These are extensively used among businesses to ensure continuous flow of supply, furthermore, they cover for shortage of cash at any given moment. The nature of substitution of these documents is backed up with definite time of payment to hold the drawer accountable for default.

These instruments could not be effectively and legally drawn up unless there was a legislation legalizing them. The law for negotiable instruments, dates back to pre-independence era with the objective of giving legal force to these documents so that they could pass from hand to hand by negotiation, like any other goods and to ensure credibility. The Negotiable Instruments Act, 1881 (hereinafter “Act”) defines and regulates the law related to the most commonly used negotiable instruments in the market, namely, Promissory Notes, Bills of Exchange and Cheques.

Relevance of Section 138 of the Negotiable Instruments Act, 1881

Section 138 of the Negotiable Instruments Act, 1881, is the most vigorously sought-after section in the Act with an extensive reach in both the civil and criminal segments of the law. This section deals with dishonor of cheques, the most popular negotiable instrument as a mode of deferred payment. Sections 138-142 in Chapter XVII (Penalties in Case of Dishonor of Certain Cheques for Insufficiency of Funds in Accounts) of the Act were brought forth much later in 1988 to supplement the structural integrity of banking operations through suitable mechanisms. The chapter was aimed at increasing the usage of cheques as a credible instrument and to act as an assured legal remedy in case of default in transactions made through cheques.

As stated in the section, dishonor of a cheque occurs when there is insufficiency of funds in the account maintained by the drawer with the bank or when the arrangement made by the drawer with the bank for the payment of the specified amount is less than the said amount. Reasons for dishonor of cheque can be manifold within these two parts mentioned in the section, such as closing of account due to technical difficulties or the stoppage of payment by the drawer.

This Section ensures that the act of stalling the payment is reduced efficiently through a stricter punishment in place irrespective of whether the intention of the drawer was bona-fide. The Apex Court in Goa Plast (P) Ltd. Vs Chico Ursula D’Souza, commented on Sections 138 and 139 of the Act, stating that due to large number of commercial transactions, cheques are used as a tool for stalling payment, henceforth losing their credibility as viable instruments for business. The civil as well as the criminal remedy of the section is intended to summarily enforce a civil (private) right, hence unlike all the other sections of criminal law, mens rea does not hold an import in the section. The protection of drawers in this section is secured through the process of notice and reasonable time period, that is to say 15 days, given to sort out any delay in the payment..

Amendments to Section 138 of the Negotiable Instruments Act, 1881

The Section was introduced in 1989 in the Parliament through the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, (Act 66 of 1988). The initial term of imprisonment was changed from 1 year to 2 years through the Act 55 of 2002, post the recommendations given by a Working Group regarding meeting the ideals set out for Section 138 of the Act.

The Section obtains its deterrent powers from Section 357 (3) of the Criminal Procedural Code which enforces direct payment of compensation apart from the sentence prescribed in Section 138 of the Act. This amendment introduced new sections subsequent to Section 142 in Chapter XVII of the Act, which focused on setting out details of the proceedings undertaken under Section 138 of the Act by enhancing the procedure of law through summary trial, furnishing of evidence on affidavit and making the offence compoundable.

Shortly after, the Act received another set of provisions through the Negotiable Instrument (Amendment) Act, 2018. These provisions were inserted with the objective of granting requisite relief to the complainant while the proceedings take place under Section 138 of the Act. Sections 143A and 148 of the Act deal with different stages of indictment wherein the former provides respite to the complainant when the trial is underway and the latter gets enforced in the case of an appeal.

Both the amendments subjected the drawer of cheque to higher levels of scrutiny while offering relief to the complainant even before the conviction, hence throughout the years, the Parliament has aimed to increase the number of legitimate transactions through an austere sense of retribution.

Impact of Section 138 of the Act: The Current Scenario

The problem posing the Judiciary as well as the Parliament is the magnitude of cases which are pending in the courts all over India. Section 138 alone rakes up for one fifth of pending litigations estimating to 40 lakh cases solely related to dishonor of cheques, forming a bottle neck on the top of the judicial structure leading to several backlogs. The law currently does not enable pooling of cases with respect to a single individual, for every cheque that is bounced, the complainant files a new case. One of the major issues in these litigations is of appearance of accused in the trial court which takes years to settle.

The Section fulfilled its aim of cheques being the preferable mode of deferred payment in commercial transactions, however it did set a domino effect with the ever-increasing number of cases. Notwithstanding, the aforementioned issues persistently prevail even after stringent penalization and criminalization of default of payment under Section 138 of the Act. The question that thus arises is whether or not the new set of recommendations released by the government vide Notice released on 8th June 2020, titled, ‘Decriminalization of Minor Offences For Improving Business Sentiment And Unclogging Court Processes’ worsen the status quo and lead to more logjam within the judicial system.

The pandemic added fuel to the fire with degradation of the economy due to upheaval of existing businesses though disrupted credits and supply chains. The notice came as an economic reform to provide stimulus to ease of doing business post COVID-19. The punctilious law of transactions via cheques de-incentivizes foreign companies from making large investments in India with the fear of being dragged into criminal proceedings which may take years to reach a verdict.

Commercial transactions being private in nature do not threaten the safety and security in rem, many investors are of the opinion that the ‘Punishment should fit the Crime’ especially with cases of non-compliance of minor procedures, hence the government is relooking the provisions of Section 138 of the Act. To ponder upon this issue, the government had called upon suggestions from State Governments, Public and Private Organizations, Experts, Academicians and Multilateral Institutions.


The act of decriminalizing Section 138 of the Act simply shifts the burden of criminal proceedings to civil proceedings, it will deem to unclog the judicial system by clogging it further. The provisions of Chapter XVII of the Act more often than not, provide protection to the bankers and parties which are less endowed in comparison to the franchised. Decriminalization would lead to more suits being filed as a substantial deterrent in form of imprisonment seemed inadequate for the rising number of cases, let alone a financial penalty to serve justice.

The investors may get attracted to the initial amendment incorporated by the government, however that does not guarantee a permanent stay in the country where there are other factors also involved, leaving the economy plagued with obscure and dubious commercial transactions. Section 138 of the Act is not draconian in nature, instead it acts as a firewall for the complainant especially since the criminal liability is imposed on the drawer only on failure of repayment even after statutory notices. Availability of only civil recourse to the aggrieved parties would also lead to the benefit of parties entering into agreements with malafide intent, with years to resolve the suit.


Examining the implications of decriminalization affirms that the situation would ideally lead to worsening of the status quo. The root of this problem is inefficiency of the judicial system due to lack of manpower. The reforms needed to cater to the state of affairs should correspond to quick and effective proceedings within the judiciary by removing the cumbersome hurdles at every step of the procedure.

The quantity of cases could be dealt by specialized tribunals which solely deal with cases related to dishonoring of cheques, this could further be simplified by setting up of a threshold with respect to the amount of transaction that could be made into a criminal case.

Such cases could be bifurcated into preliminary hearings and subsequent hearings wherein the judicial officials can take up the preliminary hearings to assess the gravity of the matter and put a qualification need to the case, so that the courts only have to deal with cases which require specialization. This would save court’s time and direct its attention to more grievous matters.

In conclusion, decriminalization of Section 138 of the Act would be equivalent to opening a can of worms and would require more procedural set ups than the current ones. The problem that needs to be solved is of judicial burden rather than the provisional intent, the antidote for which would be reasonable judicial set ups and threshold limits.

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