In business, credit is very important. People often use cheques, promissory notes, or bills of exchange to make payments. These documents act as a promise: “Pay this amount to the person named, and trust that the money will be given.”
The Negotiable Instruments Act, 1881 (NI Act) is a very old law, but even today it is one of the most commonly used and litigated Acts in India. Over the years, several amendments (1988, 2002, 2015, 2018) and many court judgments have strengthened it and made it relevant to modern commerce.
Basic Idea of the NI Act
The Act is based on three simple principles:
- Negotiability – These instruments can be freely transferred to others.
- Presumption of Consideration – The law assumes that every negotiable instrument is backed by some consideration unless proved otherwise.
- Strict Liability on Dishonour – If a cheque bounces due to lack of funds, the drawer faces both civil and criminal consequences.
Types of Negotiable Instruments (Section 13)
| Instrument | Example | Main Feature |
| Promissory Note | “I promise to pay Ravi ₹5 lakh.” | Two parties; clear promise to pay |
| Bill of Exchange | “Pay Shyam ₹10 lakh after 90 days.” | Three parties; order to pay |
| Cheque | Ordinary bank cheque | Always drawn on a bank; payable on demand |
Section 138 – The Most Important Provision
Section 138, added in 1988, makes cheque dishonour a criminal offence. It is one of the most frequently used criminal provisions in India.
When Section 138 Applies
- The cheque must be issued for a legally enforceable debt or liability.
- It must be presented within 3 months or within its validity.
- It must be returned for reasons like “insufficient funds” or “exceeds arrangement”.
- The payee must send a written notice within 30 days.
- The drawer must fail to pay within 15 days of receiving that notice.
Punishment
- Jail up to 2 years, or
- Fine up to double the cheque amount, or
- Both.
Important Supreme Court Judgments
| Case | Key Legal Principle | Practical Effect |
| K. Bhaskaran v. Sankaran Vaidhyan Balan (1999) | Cheque dishonour offence consists of five components, giving multiple places of jurisdiction. | Complainant could file the case at various convenient locations. |
| Dashrath Rupsingh Rathod v. State of Maharashtra (2014) | Jurisdiction lies only where the drawee bank is located. | Large-scale transfer of pending cases; caused serious inconvenience to complainants. |
| Negotiable Instruments (Amendment) Act, 2015 (Sections 142(2) & 142A) | Jurisdiction lies where the payee’s bank is located. | Restored convenience and certainty for complainants. |
| Bridgestone India Pvt. Ltd. v. Inderpal Singh (2022) | Reaffirmed the validity and retrospective effect of the 2015 Amendment. | Settled the jurisdiction issue conclusively. |
| NEPC Micon Ltd. v. Magma Leasing Ltd. (1999) | Cheque issued only as security, without an existing debt, does not attract Section 138. | Laid the foundation of the “security cheque” defence. |
| Krishna Janardhan Bhat v. Dattatraya Hegde (2008) | Existence of a legally enforceable debt is mandatory. | Courts can scrutinize the nature and legality of the debt. |
| Pulsive Technologies Pvt. Ltd. v. State of Gujarat (2015) | Mere misuse or filling up of a signed blank cheque is not by itself an offence. | Provides a strong defence to the drawer in misuse cases. |
| Bir Singh v. Mukesh Kumar (2019) | Cheque issued for a time-barred debt still attracts Section 138. | Strengthened protection for creditors. |
| Raj Reddy Kallem v. State of Telangana (2023) | Courts should actively encourage mediation and settlement in cheque bounce cases. | Promotes faster resolution and reduces pendency. |
| Gimpex Pvt. Ltd. v. Manoj Goel (2020) | Company directors are not automatically liable; specific role must be shown. | Relief for non-executive and inactive directors. |
| S.P. Mani & Mohan Dairy v. Sneha Traders (2021) | Notice to the firm alone is sufficient; separate notices to partners not required. | Simplifies prosecution in partnership firm cases. |
Illustration:
The following examples explain common situations in cheque bounce cases under Section 138 of the Negotiable Instruments Act.
For Section 138 to apply, the cheque must be given to repay a real and legally enforceable debt, either fully or partly, and the law presumes in favour of the complainant unless the accused proves otherwise.
If a builder takes a loan of ₹50 lakhs and gives post-dated cheques as security, and later repays only ₹40 lakhs, the remaining cheques can still be used. If they bounce, an offence is made out because a debt still exists, even if the cheques were called “security.”
The Supreme Court in Sripati Singh v. State of Jharkhand (2021) confirmed that security cheques can be presented if the debt is unpaid. In another case, if an employee gives a signed blank cheque to an employer for small dues, but after resignation the employer fills in a much larger amount and presents it, Section 138 normally does not apply if no such debt exists. However, the accused must prove misuse.
In Bir Singh v. Mukesh Kumar (2019), the Supreme Court held that even a signed blank cheque creates a presumption of liability, but misuse or absence of debt is a valid defence. If an old debt has become time-barred but a fresh cheque is issued later and it bounces, Section 138 still applies because the cheque is treated as a new written promise, as held in Bir Singh and reaffirmed by the Rajasthan High Court in Ratiram Yadav v. Gopal Sharma (2025).
Finally, when a company cheque is signed only by the Managing Director, other directors cannot be punished unless the complaint clearly shows they were in charge of daily business.
The Supreme Court in S.M.S. Pharmaceuticals and later cases has made it clear that mere directorship is not enough. Overall, these examples show that Section 138 protects genuine creditors but also prevents misuse by requiring proof, allowing defences, and limiting liability only to responsible persons.
Recent Changes and the Road Ahead
The Negotiable Instruments (Amendment) Act, 2018, effective from September 1, 2018, introduced Section 143A and Section 148 to the Act. These provisions aim to expedite the resolution of cases under Section 138 (dishonour of cheques) by providing financial relief to complainants and deterring delays through appeals.
Section 143A: Power to Direct Interim Compensation
This section empowers the trial court, in summary trials or summons cases, to order the drawer (accused) to pay interim compensation up to 20% of the cheque amount to the complainant. The payment can be directed at any stage after framing of charges or upon an application by the complainant.
Purpose and Examples:
It addresses the financial hardship faced by complainants due to prolonged trials, where drawers often employ delay tactics.
As for example, in a cheque of ₹10 lakhs dishonoured, the court may order ₹2 lakhs (20%) as interim compensation pending trial. This amount is adjustable against the final compensation if the accused is convicted, or refundable (with interest) if acquitted. If not paid, it can be recovered as a fine under the BNSS.
Key Judicial Interpretations:
Prospective Application: In G.J. Raja v. Tejraj Surana (2019), the Supreme Court held that Section 143A applies only prospectively—to offences committed after September 1, 2018 (or cases where cognizance is taken post-amendment). It cannot be applied retrospectively to pending cases or pre-2018 offences, as it imposes a new substantive liability before conviction.
Discretionary Nature: In Rakesh Ranjan Shrivastava v. State of Jharkhand (2024), the Supreme Court clarified that the power is discretionary (“may” not “shall”). Courts must consider factors like:
- Prima facie merits of the case.
- Financial distress of the complainant.
- Conduct of parties.
- Ability of the accused to pay.
- The court must record reasons if granting or denying interim compensation. Mere filing of a complaint does not entitle automatic relief.
Limited to Drawer: In cases involving companies, only the company (as drawer) can be directed to pay; authorized signatories (vicariously liable under Section 141) cannot, as clarified in various High Court rulings post-amendment.
No Denial of Defence Rights: Failure to pay does not bar cross-examination of witnesses (Noor Mohammed v. Khurram Pasha, 2022).
Section 148: Power of Appellate Court to Order Deposit Pending Appeal
In appeals against conviction under Section 138, the appellate court may order the appellant (convicted drawer) to deposit a minimum of 20% of the fine/compensation awarded by the trial court as a condition for suspending the sentence or granting stay.
Purpose and Examples:
It prevents frivolous appeals that delay justice, ensuring partial recovery for the complainant even during appeals. As for example, if the trial court awards ₹5 lakhs compensation, the appellate court may require deposit of at least ₹1 lakh (20%) before entertaining the appeal or suspending sentence. This is in addition to any interim compensation under Section 143A.
Key Judicial Interpretations:
Retrospective Application: In Surinder Singh Deswal @ Col. S.S. Deswal v. Virender Gandhi (2019, decided in 2020), the Supreme Court upheld Section 148’s constitutionality and held it retrospective. It applies even to appeals in cases where the original complaint was filed before 2018, as it does not impair vested appeal rights but adds a procedural condition to prevent misuse.
Generally Mandatory Minimum: The word “may” is interpreted as “shall” in most cases—the appellate court should normally direct the minimum 20% deposit, with reasons recorded if waived.
Exceptions Possible: In Jamboo Bhandari v. M.P. State Industrial Development Corp. (2023), the Supreme Court clarified that while the 20% is the rule, appellate courts can relax or waive it in exceptional circumstances (e.g., undue hardship), with specific reasons.
Distinction from Section 143A: Section 148 operates post-conviction, making the deposit condition stricter than the pre-conviction interim relief under 143A.
Supreme Court’s 2021 Reforms for Efficiency
In the suo motu case In Re: Expeditious Trial of Cases under Section 138 of N.I. Act, 1881 (order dated April 16, 2021, by a Constitution Bench), the Supreme Court acknowledged the massive pendency (over 35 lakh cases then) and suggested broader reforms:
One Cheque–One Trial (Consolidation): Suggested amending the Act to club multiple complaints arising from the same transaction (e.g., cheques issued within 12 months for the same debt) into a single trial.
Wider Use of Summary Trials: Reiterated preference for summary procedure under Section 143, converting to summons trial only with recorded reasons.
Easier Settlement: Encouraged compounding (settlement) at any stage, including appeals, with revised guidelines on reduced compensation for early settlements (considering fallen interest rates).
Other directions: Special courts, electronic summons/service, and High Courts to issue practice guidelines for speedy disposal.
These reforms, combined with Sections 143A and 148, have significantly enhanced complainant protection while balancing accused rights, reducing delays in cheque dishonour litigation.
Conclusion
The Negotiable Instruments Act, 1881 began as a basic law for bills and promissory notes, but today it plays a key role in maintaining financial discipline. Through amendments and important court decisions—from Bhaskaran to Bir Singh—the Act has fairly balanced the rights of creditors and cheque drawers. Even as India moves toward digital payments, the core values of this Act—trust, easy transfer, and accountability—will continue to guide business transactions.
