Is 138 (Dishonor of Cheque) a Criminal Offence?

Negotiable instruments are basically signed documents that promise the payment of a certain amount to a specific individual. It carries the details of the exact amount that is to be paid along with the specific date the instrument has been signed on. They are transferable by nature and allow the holder to get cash for the funds or use it in any appropriate way at their discretion.

Usage of Negotiable Instruments

Negotiable instruments have been used for commerce since a long time. With the development in the banking sector, the use of cheques (being a negotiable instrument) became even more popular. However, the chances of the cheque being dishonored for insufficiency of funds also increased. With a view to curb this practice and to safeguard the interests of the drawee, a need was felt to make the dishonor of cheque a punishable offence.

Keeping the aforesaid in mind, Sections 138 to 142 were inserted in the Negotiable Instruments (NI) Act by The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988. However, it was found that procedure provided was cumbersome, punishment inadequate. Accordingly further amendments were made by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 to inter alia enhance the term of imprisonment provided under Section 138 of the Negotiable Instruments Act.

• Section 138 of the NI Act was introduced to inculcate faith in the efficacy of banking operations and credibility in transacting business of negotiable instruments.
• The intention of the legislature is clear from the aforementioned. Though primarily in the nature of civil wrong, dishonor of cheque has been given a criminal color by introducing a term of imprisonment for the dishonor of cheque.

 

When to Worry About Imprisonment

• Section 138 of the NI Act, prior to its amendment in the year 2002, provided the term of imprisonment as a maximum of 1 year.
• However, post amendment, the section provides for imprisonment which may extend to a period of 2 years.
• The fact that the amendment has increased the term of imprisonment is evidence of the legislature’s intention to deal with cheque dishonoring cases even more strictly.

Since the offence under Section 138 is a compoundable offence, many a times the cases result in a settlement between the parties to pay an agreed upon amount. Compounding of the offence though is to be encouraged at the initial stage, however, there is no bar for compounding even at the later stages of the matter.

The punitive element provided under Section 138 is mainly with the object of enforcing the compensatory element. In the alternate to the punishment of imprisonment, the provision provides for payment of a fine which may extend to twice the amount of the cheque. It is to be noted that a term of imprisonment along with the fine may also be awarded to the accused.

An interesting point to be noted is that Section 138 provides for commission of the offence only when the cheque is returned unpaid either due to insufficiency of funds or that the amount of the cheque exceeds the amount arranged to be paid from that account by an agreement made by the drawer with the bank.

However, the Hon’ble Supreme Court in a catena of judgments has included within the ambit of dishonor of cheque reasons such as ‘account closed’, ‘payment stopped’, ‘insufficient funds’, ‘signatures do not match’, etc.

The Supreme Court in the case of Laxmi Dyechem vs State of Gujarat [(2012) 13 SCC 375] has held that the provisions of Section 138 to 142 of the NI Act intend to punish only those who know fully well that they have no amount in the bank and yet issue a cheque in discharge of debt or liability already borrowed/incurred - which amounts to cheating and not to punish those who refused to discharge the debt for bona fide and substantial reason.

Procedure in a Cheque Bouncing Case

• A notice to the drawer to be issued within 30 days from date of dishonor of cheque.
• The drawer must make the payment within 15 days. If no payment is made, then a complaint to the concerned magistrate is to be filed within 30 days from the date of expiry of the 15 days specified in the notice.
• The complainant to appear before the magistrate and satisfy the Court about the substance of his matter. In case court is satisfied, then summons are issued to the Accused.
• If the Accused fails to appear then first a bailable warrant followed by a non bailable warrant is issued.
• Upon appearance of accused, they are to furnish a bail bond to ensure their appearance.
• Thereafter the plea of the accused is recorded. In case accused pleads guilty, then the matter is posted for punishment. In case accused pleads not guilty, they are allowed to adduce evidence in support of their case to counter the complaint.
• The complainant can also produce evidence in support of their case.
• Examination of the accused as well as the complainant takes place thereafter.
• Thereafter, the matter is posted for arguments and subsequently a judgment may be passed either acquitting or convicting the accused.
• The punishment in case of conviction can either be by way of imprisonment for a term not exceeding 2 years or with fine which may extend to twice the amount of the cheque or with both.

Judgements on Section 138 of Negotiable Instruments Act

The Supreme Court in the case of Kaushalya Devi Massand vs Roopkishore Khore [(2011) 4 SCC 593] has in categorical terms observed that an offence under Section 138 of the Negotiable Instruments Act, 1881, is almost in the nature of a civil wrong which has been given criminal overtones.

Furthermore, the Supreme Court in the case of P. Mohanraj & Ors vs Shah Brothers Ispat Pvt Ltd. [AIR 2021 SC 1308] observed that a Section 138 proceeding can be said to be a ‘civil sheep in a criminal wolf’s clothing’, as it is the interest of the victim that is sought to be protected, the larger interest of the State being subsumed in the victim alone moving a court in cheque bouncing cases.

Section 138 proceedings are really civil cases masquerading as criminal cases. The statutory object in effect appears to be both punitive as also compensatory and restitutive in regard to cheque dishonoring cases. The entire Chapter XVII of the NI Act titled as, ‘Of penalties in case of dishonor of certain cheques for insufficiency of funds in the accounts,’ is a unique exercise which bears the dividing line between civil and criminal jurisdictions and provides a single forum to enforce a civil and criminal remedy [R. Vijayan vs Baby (2012) 1 SCC 260].

With respect to Section 138 of the NI Act, it is to be noted that unlike other forms of crimes, the punishment provided therein is not a means of seeking retribution but is more a means to ensure payment of money. The complainant’s interest primarily lies in recovering the money rather than seeing the drawer in jail. The threat of jail is only a mode to ensure recovery.

From a conspectus of the above, it can be fairly stated that the proceedings under Section 138 of the NI Act are of a special character. Though arising from a civil dispute, it may result in a criminal consequence. Even though the statute being punitive in nature, its spirit and object is to provide compensation and ensure restitution, which must receive priority over punishment [Dayawati vs Yogesh Kumar Gosain (MANU/DE/31732017)].

Conclusion

Negotiable instruments aim to clear the payments due on a certain date and must be signed for them to be valid. These negotiable documents are transferable, which basically means that it can be given from one person to another, unlike non-transferable instruments, which cannot be altered in any way.


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