A cheque refers to an instrument in writing which contains an unconditional
order, addressed to a banker and is signed by a person who has deposited his
money with the banker. This order, requires the banker to pay a certain sum of
money on demand to the bearer of cheque (person holding the cheque) or to any
other person who is specifically mentioned as payee therein. A cheque in
simple language means a printed form, used instead of money to make payments
from your bank account.
A cheque derives its effectiveness and legal enforceability from the Negotiable
Instruments Act, 1881 (hereinafter referred to as Act), though a cheque could be
seen or perceived as a simple banking instrument which is used for making
payments and settling debts, a deeper insight into its possible impacts and
repercussions of dishonouring could lead one to understand that a cheque is not
merely one of the means of making payment like liquid cash, fund transfer etc.,
rather it has capacity to act as a legally binding instrument which could make
delinquent drawer criminally liable.
Unlike other means of payment, a cheque has some stringent provisions attached
to it which makes it preferred option among the parties involved in commercial
transactions. A cheque is classified as a bill of exchange under the Act,
section 6 of the Act reads as under:
A "cheque" is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand and it includes the electronic
image of a truncated cheque and a cheque in the electronic form.
Section 138 of the Act is one of the most significant and often most
contentious part of the Act, it is this particular section which provides for
imprisonment of the delinquent issuer. It is due the criminal nature of this
section which has led to humongous litigation in the already burdened courts in
India, as on 31st December, 2019, around 35.16 lakhs cases were pending under
section 138 in the various courts of India.
Realising the gravity of the issue, the apex court constituted a constitutional
bench which was led by erstwhile Chief Justice of India Mr. S.A. Bobde on the
February 25th 2021 and decided to take up a suo moto petition in order to tackle
this issue of pendency and formulate guidelines for speedy disposal of cases
under section 138, thereby the apex court appointed Mr. Sidharth Luthra and Mr.
K. Parameshwar as amici curiae.
The humongous number of cases related to section 138 is a testimony in itself
about the enormous usage of cheques in trade and banking related transactions
and it is also reflective of the fact that parties involved in commercial
transactions are increasingly becoming dependent upon using cheque which
provides for additional protection as compared to other payment options.
Is section 138 applicable only in instances of dishonour of cheque due to
insufficiency of funds?
One the most common causes behind dishonour of cheques is the lack or
insufficiency of funds maintained by the drawer in a bank account from which a
cheque has been drawn, however there are other causes also which effects a
dishonour of a cheque like signature mismatch, stale cheque and other
Given plethora of causes, each of which could lead to dishonouring of a cheque,
it becomes pertinent to identify the causes which could invoke criminal
liability under section 138, though the section mentions that a cheque should
have been dishonoured either because of the amount of money standing to the
credit of drawer's account is insufficient to honour the cheque or that it
exceeds the amount arranged to be paid from that account by an agreement made
with that bank.
The courts in India have always interpreted the section liberally in order to
include other factor (of same or similar genus as that of insufficiency of
funds) into the ambit of section 138.
The apex court in the case of Laxmi Dychem v. State of Gujarat and Ors
has made it categorically clear that the expression "amount of
money...........is insufficient" appearing in Section 138, N.I. Act is a genus
and dishonour for reasons such as "account closed", "payment stopped", "referred
to the drawer" are only species of that genus and would attract penal liability
under section 138 of the Act.
Hence, it is clear that causes which are similar to insufficiency of funds i.e.
stop payment, account closed etc., which reflect some sort of unwillingness or
deception on the part of the drawer in discharging his/her obligation, could
make a person liable under section 138 of the Act.
Status of Accused:
A mere perusal of section 138 of the Act makes it amply clear that it is a
drawer of the dishonoured cheque who can be prosecuted under the said section.
Criminal liability under section 138 of the Act is fastened upon a person for
being a drawer of the cheque, this simple proposition assumes much complexity
when a cheque is issued by a partnership firm or by a company or by any
association of persons or when issued out of a joint account where only one
person has signed the cheque.
The apex court in a celebrated case titled as Aparna A. Shah V/s Sheth
Developers Private Limited and Another
, has held that each and every
joint account holder cannot be prosecuted unless he has signed the cheque. This
judgement leads to understanding that only those directors, partners, persons or
officers can be held responsible for the offence punishable under Section 138 of
the Act who are responsible for the conduct of the business of his/her
organisation which imply connivance on the part of such responsible person.
At this juncture it becomes pertinent to recall the element of mens rea
(literally means guilty mind) which is one of the core determinant factor in
establishing whether an act committed is criminal act or not, hence in order to
establish whether or not a person would be guilty under Section 138 element of
connivance, consent, malice or intention to defraud has to be present.
Further, a guarantor can also be prosecuted under section 138 of the Act as it
penalizes the dishonour of any cheque which has been issued in the discharge of
the whole or part of "any debt or other liability" and the liability of the
guarantor and principal debtor is co-extensive. Hence, the guarantor cannot
escape liability under section 138 of the Act, if the guarantor has issued a
cheque towards the discharge of the liability of the principal debtor.
Once criminal proceedings are set in motion against the accused then the accused
has to be declared as 'not guilty' by the court in order for the accused person
to be set free. The criminal liability under section 138 of the Act is dependent
upon meeting of essentials under provided under the section, so if the essential
requirements under the said section are not met then the complaint has to be
dismissed by the court which shall result into acquittal of the accused person.
The apex court in V.K. Bhat vs. G. Ravi Kishore
 has held that
dismissal of the complaint for non-appearance of the complainant amounts to
acquittal as contemplated in Section 256 of the Code of Criminal Procedure.
Section 141: Offences by Companies and Firms:
Though the heading of Section 141 of the Act reads
'offences by companies'
but according to the explanation provided under that section, "company" means "any body corporate and includes a firm or other association of individuals and
"director", in relation to a firm means "a partner in the firm".
Therefore, if an offence under section 138 is committed by a company or by a
partnership firm then in such situation, every person who, at the time the
offence was committed, was in charge of, and was responsible to the company or
partnership firm for the conduct of the business of the company or partnership
firm, shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly. The apex court in the case of S.P.
Mani and Mohan Dairy vs. Snehalatha Elangovan
 held as under �
"Evidently, the gist of Section 138 is that the drawer of the cheque shall be
deemed to have committed an offence when the cheque drawn by him is returned
unpaid on the prescribed grounds. The conditions precedent and the conditions
subsequent to constitute the offence are drawing of a cheque on the account
maintained by the drawer with a banker, presentation of the cheque within the
prescribed period, making of a demand by the payee by giving a notice in writing
within the prescribed period and failure of the drawer to pay within the
prescribed period. Upon fulfilment of these requirements, the commission of the
offence which may be called the offence of 'dishonour of cheque' is complete.
If the drawer is a company, the offence is primarily committed by the company.
By virtue of the provisions of Sub-section (1) of Section 141, the guilt for the
offence and the liability to be prosecuted and punished shall be extended to
every person who, at the time the offence was committed, was in charge of and
was responsible to the company for the conduct of its business; irrespective of
whether such person is a director, manager, secretary or other officer of the
company. It would be for such responsible person, in order to be exonerated in
terms of the first proviso, to prove that the offence was committed without his
knowledge or despite his due diligence."
Sub-section (2) of section 141 of the Act further provides that when any
criminal act has been committed by a company and it is proved that the such act
has been committed with the consent or connivance of, or is attributable to, any
neglect on the part of, any director, manager, secretary or other officer of the
company, then such director, manager, secretary or other designated officer
shall be deemed to be guilty of that offence and shall be liable to be
prosecuted against and punished accordingly.
It is because of section 141 of the Act that penal liability under section 138
is casted on the persons who are connected with the company or a firm, it
postulates that a person who is in charge of affairs of the company or who is
responsible for the conduct of company's business, shall also be deemed guilty
of the offence.
In the present context a drawer can be a company, a firm or an association of
individuals, however, only those directors, partners, or officers can be held
responsible for the offence punishable under section 138 of the Act who are
responsible for the conduct of the business of their respective organizations.
Liability of a Company in respect of which Winding Up Proceedings have been
The apex court in the case of Kusum Ingots and Alloys Ltd. V/s Penner
Peterson Securities Ltd
., observed that if the ingredients of section
138 of the Act are satisfied then there is no bar for initiating criminal
proceeding against the company and its directors, on the basis of complaint made
by the payee under the Act.
Even in cases where winding up petitions have been instituted against a company,
it cannot escape the penal liability for dishonour of cheque under section 138
of the Act on the ground that the payment of the cheque pursuant to issuance of
notice would amount to disposition of property of company and, hence, void under
section 536 (2) of the Companies Act, 2013.
Whether Conviction under Section 138 of the Act Absolves Drawer of Cheque
from Civil Liability?
It is a well settled principal of the law that if a person commits an act which
accrues to him/her both criminal and civil liability then he/she would be liable
under the both. A criminal liability upon a person cannot absolve him/her from
the civil liability and vice-versa. Therefore, conviction in the criminal
proceeding under section 138 of the Act will have no bearing on the decree or
order which may have been passed by the judicial authority pursuant to any civil
remedy exercised by aggrieved person.
The Gauhati High Court in the case of Golden Menthol Export Pvt. Ltd. V/s
Sheba Wheels (P) Limited
 has observed that a proceeding under section
138 of the Act cannot be construed to be an alternative to a civil suit or any
other proceeding for realization of the amount remaining unpaid as a debt
following the dishonour of a cheque by the debtor.
The implication which flows from above cited case law makes it amply clear that
a person who is found to be guilty under section 138 of the Act can also be sued
for civil remedy like money suit, specific performance and security enforcement
It has almost become a custom now for the banks and financial institutions to
obtain undated or post-dated cheques from their customers or borrowers to whom
loans or advances are made, such cheques provide additional safeguard to the
banks and financial institutions by providing additional recourse against the
delinquent customers/borrowers, therefore these cheques are often referred to as
"security cheque" in the banking parlance.
Though these cheques cannot be (and should not be) construed as a form of
security, as these cheques are enabling instruments which provide for additional
recourse at law to the banks and financial institutions against their
customers/borrowers. A cheque technically is not an instrument of security like
hypothecation, mortgage, lien and pledge etc.
Which are commonly obtained by the banks and financial institutions, however,
owing to the penal provision attached with its dishonouring, a cheque assumes
coercive nature which has capacity to force a drawer (customer of the bank or
financial institution) to make the due payments to the bank or financial
institution in order to discharge his/her debt/liability.
The expression "security cheque" is not a statutorily defined expression in the
Act, further, the Act does not per se carve out an exception in respect of a
"security cheque" therefore even if the dishonoured cheque in question was
issued as a security cheque, it will still be covered under the ambit of Section
138 of the Act.
The only prerequisite is that the said cheque must be backed by some form of
legally enforceable debt or liability towards the payee or the holder of the
cheque. Moreover, unless and until, the defence is able to prove that the cheque
was never meant to be presented for encashment, a mere claim to that effect does
not rebut the presumption under section 118 (a) of the Act that every negotiable
instrument is made or drawn for consideration.
By very nature of some commercial transactions there is a requirement for
cheques to be issued without any date or issued as post-dated cheques, holder of
cheque enters the date as per his/her suitability, and thereafter such cheques
are presented for payment. This process does not make a cheque devoid of its
enforceability under the law. On this issue the Bombay High Court in case of
Purushottamdas Gandhi vs. Manohar Deshmukh
 has observed that inserting
such date does not amount to tampering or alteration but by delivery of such
undated cheque the drawer authorizes holder to insert date.
As long as the cheque has been signed by the drawer, the fact that the name and
figures are written or the date filled up by the complainant is not a material
alteration for the purposes of section 87 of the Act. The only requirement
is that the cheque must be backed by a legally enforceable debt or liability.
The Supreme Court in the case of Bir Singh vs. Mukesh Kumar has held that
"Even a blank cheque leaf, voluntarily signed and handed over by the accused,
which is towards some payment, would attract presumption under Section 139
of the Negotiable Instruments Act, in the absence of any cogent evidence to show
that the cheque was not issued in discharge of a debt." The judgment delivered
in this case was relied upon by the apex court later again in the recent case of
Jain P. Jose V/s Santosh & Anr.
Once the accused has admitted the signatures on the cheque in question, then the
court is bound to raise presumption under section 139 of the Act Hence, if a
signed blank cheque is voluntarily presented to a payee, towards some payment,
the payee may fill up the amount and other particulars then a cheque would be
The onus would still be on the accused to prove that the cheque was not in
discharge of a debt or liability by furnishing appropriate evidence. The
provisions of the Act make it amply clear that a person who signs a cheque and
hands it over to the payee remains liable unless such person adduces reliable
evidence to rebut the presumption that the cheque had been issued for payment of
a debt or in discharge of a liability.
It is immaterial that the cheque may have been filled in by any person other
than the drawer, if the cheque is duly signed by the drawer and it is otherwise
valid then the penal provisions of Section 138 would be applicable even when the
cheque was issued as a blank cheque.
Fastening of Criminal Liability and Criminal Procedure Code:
A person held guilty under section 138 of the Act can be punished with
imprisonment for a term which may be extended to two years, or with fine which
may extend to twice the amount of the cheque, or with both. The substantive law
under section 138 of the Act provided for quantum of punishment and penalty,
however, it is worth mentioning relevant provisions of the procedural law i.e.
Code of Criminal Procedure, 1973 (CrPC) which provides for procedure to be
followed for punishing a guilty person.
Section 29 of CrPC deals with the sentences which Magistrates may pass, a Chief
Judicial Magistrate is empowered to pass any sentence authorized by law (except
sentence of death or imprisonment for life or imprisonment for a term exceeding
seven years). On the other hand, sub-section (2) of Section 29 empowers a court
of a Magistrate of First Class to pass a sentence of imprisonment for a term not
exceeding three years or fine not exceeding Rs.10,000/- or of both.
Thus, it would seem that a Magistrate of First Class would not be able to impose
a fine more than Rs.10,000/-. The difficulty caused by the ceiling imposed by
section 29(2) of CrPC has been subsequently removed by insertion of section
143(1) in the Act (by Amendment Act No.55 of 2002) with effect from 6th
Section 143(1) of the Act provides that notwithstanding anything contained in
CrPC, all offences under Chapter XVII of the Act should be tried by a Judicial
Magistrate of the First Class or by a Metropolitan Magistrate and the provisions
of sections 262 to 265 of the CrPC (relating to summary trials) shall, as far as
may be, apply to such trials. In view of conferment of such special power and
jurisdiction upon the First Class Magistrate, the ceiling as to the amount of
fine stipulated in section 29(2) of CrPC is removed, therefore, a First Class
Magistrate can impose fine upto twice the amount of the cheque.
If the Magistrate orders the convict to pay fine, then either whole or part of
such fine may be awarded as compensation under section 357(1) of CrPC to the
complainant (payee). However, if the Magistrate chooses not to impose fine and
confines the sentence to imprisonment only, then a Magistrate can award
compensation under section 357(3) of CrPC. Sub-section (3) of section 357 of
CrPC is categorically provides that compensation can be awarded only where fine
does not form part of the sentence. Section 357(3) has been the subject-matter
of judicial interpretation by the Supreme Court in several decisions.
In the case of State of Punjab vs. Gurmej
 the apex court held that "A
reading of sub-section (3) of Section 357 would show that the question of award
of compensation would arise where the court imposes a sentence of which fine
does not form a part"
The apex court in the case of Sivasuriyan V/s Thangavelu
 held that
the only question that arises for consideration is whether the court can direct
payment of compensation in exercise of power under sub- section (3) of Section
357 in a case where fine already forms a part of the sentence. Apart from
sub-section (3) of Section 357 there is no other provision under the Code
whereunder the court can exercise such power:"
After extracting section 357(3) of CrPC, the apex court proceeded to hold thus:
"On a plain reading of the aforesaid provision, it is crystal clear that the
power can be exercised only when the court imposes sentence by which fine does
not form a part"
When an order has been passed for payment of compensation or fine, recovery of
the same should be pursued, and in such cases, the fact that the sentence of
imprisonment in default has been fully undergone should not be a bar to the
issue of a warrant for levy of the fine.
The compensation awarded under section 138 of the Act is recoverable as a fine
according to section 431 of CrPC which states that any money (other than a fine)
payable by virtue of any order made under this Code, and the method of recovery
of which is not otherwise expressly provided for, shall be recoverable as if it
were a fine. Section 431 of CrPC makes it clear that any money other than a fine
payable on account of an order passed under the CrPC shall be recoverable as if
it were a fine.
Further, when an order has been passed for payment of compensation or fine,
recovery of the same should be pursued, and in such cases, the fact that the
sentence of imprisonment in default has been fully undergone should not be a bar
to the issue of a warrant for levy of the fine.
It is pertinent to look at section 64 of the Indian Penal Code (IPC) which reads
as "In every case of an offence punishable with imprisonment as well as fine, in
which the offender is sentenced to a fine, whether with or without imprisonment,
and in every case of an offence punishable with imprisonment or fine, or with
fine only, in which the offender is sentenced to a fine.
It shall be competent to the Court which sentences such offender to direct by
the sentence that, in default of payment of the fine, the offender shall suffer
imprisonment for a certain term, which imprisonment shall be in excess of any
other imprisonment to which he may have been sentenced or to which he may be
liable under a commutation of a sentence".
An ordinary reading of the provisions of sections 357(3) and 431 CrPC together
with section 64 of IPC is sufficient to imply that a court while making an order
for payment of compensation is also empowered to include a default sentence in
case of non-payment of the same. On this point it is important to note that in
Vijayan V/s Sadanandan K
 the apex court held that while awarding
compensation under section 357(3) CrPC, the court is within its jurisdiction to
add a default sentence of imprisonment as was held in the case of Hari Singh
V/s Sukhbir Singh
Section 138 of the Act is particularly helpful to the cause of banks or
financial institutions which advance loans to the borrower after collecting
post-dated or undated cheques which are often called as 'security cheques' in
the lending parlance. Banks and financial institutions derive great deal of
comfort in having such security cheques as they can potentially act as effective
recovery tool against the errant borrowers.
It is the penal provision of section 138 which makes post-dated/security cheques
a very effective recovery tool as the apprehension of getting imprisoned pushes
the delinquent drawer (who generally will be a borrower to the banks/financial
institutions) into making due payments to the lender. The banks and financial
institutions also prefer taking recourse under section 138 as the same will not
adversely affect the civil, contractual and statutory remedies like arbitration,
money suit, specific performance etc as available to them by virtue of being a
Considering the compelling nature of cheques as payment instrument which are
widely used for paying consideration, discharging financial obligations and
other related purposes, it could reasonably said that Section 138 of the Act not
only brings in trade discipline but it also expands the business landscape of
the financial institution which are able to develop risk appetite to take
exposure on the tricky borrowers, which in absence of security cheques the banks
and financial institutions wouldn't have taken.
Moreover, the cases related to section 138 of the Act are summarily tried under
the CrPC, therefore having recourse under it would be more efficient way of
realising the dues as compared to having recourse under other civil remedies
which do not provide for summary proceedings.
- Section 7 of the Act defines payee as 'The person named in the
instrument, to whom or to whose order the money is by the instrument
directed to be paid, is called the "Payee"
- Section 7 of the Act defines drawer as 'The maker of a bill of exchange
or cheque is called the "drawer"; the person thereby directed to pay is
called the "drawee"
- Section 7 of the Act defines bill of exchange as 'A "bill of exchange"
is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or
to the order of, a certain person or to the bearer of the instrument'
- Section 138 of the Acts reads as "Dishonour of cheque for insufficiency,
etc., of funds in the account.�Where any cheque drawn by a person on an
account maintained by him with a banker for payment of any amount of money
to another person from out of that account for the discharge, in whole or in
part, of any debt or other liability, is returned by the bank unpaid, either
because of the amount of money standing to the credit of that account is
insufficient to honour the cheque or that it exceeds the amount arranged to
be paid from that account by an agreement made with that bank, such person
shall be deemed to have committed an offence and shall, without prejudice to
any other provision of this Act, be punished with imprisonment for 8 [a term
which may be extended to two years'], or with fine which may extend to twice
the amount of the cheque, or with both: Provided that nothing contained in
this section shall apply unless (a) the cheque has been presented to the
bank within a period of six months from the date on which it is drawn or
within the period of its validity, whichever is earlier; (b) the payee or
the holder in due course of the cheque, as the case may be, makes a demand
for the payment of the said amount of money by giving a notice; in writing,
to the drawer of the cheque, 9 [within thirty days] of the receipt of
information by him from the bank regarding the return of the cheque as
unpaid; and (c) the drawer of such cheque fails to make the payment of the
said amount of money to the payee or, as the case may be, to the holder in
due course of the cheque, within fifteen days of the receipt of the said
notice. Explanation: For the purposes of this section, "debt of other
liability" means a legally enforceable debt or other liability".
- Suo Motu Writ Petition (CRL.) No.2 of 2020, available at
- Reported in (2012) 13 SCC 375
- Reported in (2013) 8 SCC 71
- Reported in (2016) 13 SCC 243
- Section 141 reads as "Offences by companies: (1) If the person
committing an offence under section 138 is a company, every person who, at
the time the offence was committed, was in charge of, and was responsible
to, the company for the conduct of the business of the company, as well as
the company, shall be deemed to be guilty of the offence and shall be liable
to be proceeded against and punished accordingly: Provided that nothing
contained in this sub-section shall render any person liable to punishment
if he proves that the offence was committed without his knowledge, or that
he had exercised all due diligence to prevent the commission of such
offence: 1 [Provided further that where a person is nominated as a Director
of a company by virtue of his holding any office or employment in the
Central Government or State Government or a financial corporation owned or
controlled by the Central Government or the State Government, as the case
may be, he shall not be liable for prosecution under this Chapter.] (2)
Notwithstanding anything contained in sub-section (1), where any offence
under this Act has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to, any neglect on the part of, any director, manager,
secretary or other officer of the company, such director, manager, secretary
or other officer shall also be deemed to be guilty of that offence and shall
be liable to be proceeded against and punished accordingly. Explanation: For
the purposes of this section, � (a) "company" means anybody corporate and
includes a firm or other association of individuals; and (b) "director", in
relation to a firm, means a partner in the firm."
- Available at MANU/SC/1189/2022 (16.09.2022 - SC)
- Reported in (2000) 2 SCC 745
- Reported in 2007 (2) GLJ 211
- 2007 (1) Mh.L.J. 210
- Section 87 of the Act reads as "Effect of material alteration: Any
material alteration of a negotiable instrument renders the same void as
against anyone who is a party thereto at the time of making such alteration
and does not consent thereto, unless it was made in order to carry out the
common intention of the original parties. Alteration by indorsee: And any
such alteration, if made by an indorsee, discharges his indorser from all
liability to him in respect of the consideration thereof
- (2019) 4 SCC 197
- Section 87 of the Act reads as "Presumption in favour of holder: It
shall be presumed, unless the contrary is proved, that the holder of a
cheque received the cheque of the nature referred to in section 138 for the
discharge, in whole or in part, of any debt or other liability"
- SLP (Crl.) No(s). 5241 OF 2016, available at https://main.sci.gov.in/supremecourt/2016/18389/18389_2016_8_17_39530_Order_10-Nov-2022.pdf
- Section 357(1) of CrPC read as: When a Court imposes a sentence of fine
or a sentence (including a sentence of death) of which fine forms a part,
the Court may, when passing judgment order the whole or any part of the fine
recovered to be applied., rest of the section can be accessed from
- when a Court imposes a sentence, of which fine does not form a part,
Court may, when passing judgment, order the accused person to pay, by way of
compensation, such amount as may be specified in the order to the person who
has suffered any loss or injury by reason of the act for which the accused
person has been so sentenced
- Appeal (crl.) 318 of 2001, available at https://indiankanoon.org/doc/1832276/
- 2004 (13) SCC 795
- Reported in (2009) 6 SCC 652
- Reported in (1998) 4 SCC 551