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Demystifying The Negotiable Instruments Act with Special Emphasis on Sections 138 & 143A

Updated: Jun 22, 2023

~ Rachna Verma & Ansh Sharma

The Negotiable Instruments Act[1] came into force in 1881 and has been amended time to time to ensure speedy disposal of cases, especially relating to the offence of dishonour of cheques. Originally a colonial law, it is still widely used in practice and was introduced to ease the growth of banking and commercial transactions. The primary objective was to legalize the system of Negotiable Instruments. The Central Body in charge to oversee the Negotiable Instruments system is the Ministry of Finance.

What is a Negotiable Instrument?

A signed document that promises to pay a certain amount to a specified person or the assignee is referred to as a negotiable instrument. In other words, it is a formalized type of IOU: a transferable, signed document that guarantees the payment of a certain amount to the bearer at a specified time or upon demand. The instrument must contain a name or other indication of the payee, who receives the money.[2]

A Negotiable Instrument in practice means a piece of paper in writing containing a right entitling the holder to claim something, usually money, but sometimes goods. For the purpose of the Negotiable Instruments Act, a “negotiable instrument” means a promissory note, bill of exchange or cheque.[3]

Section 138 of N.I Act

Section 138 of the act talks about punishment for dishonouring the cheques. An amendment to the Negotiable Instruments Act in 1989 introduced Section 138 as a criminal offence. One of the objectives to introduce this section was to encourage the use of cheques and increase the credibility of transactions through cheques by making dishonouring of cheques an offence punishable by law.

Section 138 of the N.I Act is free from the requirement of proving mens rea, also by virtue of succeeding two sections that is Section 139 which carves out the presumption that the holder of a cheque has received it for discharge of any liability, and Section 140 which clarifies that it will not be available as a defense to the drawer that he had no reason to believe that the cheque would be dishonoured when he issued it. Section 138 provides that when the cheque is dishonoured for insufficiency of funds or for any of the prescribed reasons, the one who is a defaulter can be punished with imprisonment for a term that may extend to two years, or with a fine that may extend to twice the amount of the cheque, or both. It is a non-cognizable offence.

Essentials of action under Section 138 of N.I Act

1. There should be dishonour of the cheques- Section 138 makes the dishonour of cheques in certain cases an offence, however the provision does not cover the dishonour of other negotiable instruments.

A pay order has been held to be a cheque and dishonour of the same can attract proceedings under Section 138 of the Negotiable Instruments Act.[4]

In Smt. Ramawati Sharma v. Union of India[5] it was held by the Allahabad High Court that a cheque stands on a different footing from a promissory note and bill of exchange, making the non-application of Section 138 to instruments other than cheques, not violative of Articles 14 and 21 of the Constitution of India.

2. Payment in the discharge of a debt or liability- The cheque has been drawn by a person on an account with a banker for payment of money to another person for its discharge, in whole or in part, of any debt or other liability.

The debt or liability in such a case means a legally enforceable debt or other liability.

It is not a payment for a legally enforceable obligation or liability if the cheque payment is made as a gift or charitable donation. The dishonour of such a cheque does not attract the provision of section 138 of the Negotiable Instruments Act.[6]

3. Presentation of the cheque within the period of validity- It is necessary that the cheques which have been presented before it becomes stale and invalid which means it has to be presented within a period of three months from the date on which it is drawn or within the period of validity, whichever is earlier. A Cheque may be presented a number of times during the period of validity, but the cause of action arises only once. The cause of action arises only after the issue of statutory notice and non-compliance with the demand, within the period prescribed.

Section 143A of N.I. Act

This Section was inserted by the Negotiable Instruments (Amendment) Act, 2018 and states that "Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Court trying an offence under section 138 may order the drawer of the cheque to pay interim compensation to the complainant -

a) in a summary trial or a summons case, where he pleads not guilty to the accusation made in the complaint; and

b) in any other case, upon framing of charge."

The amount of interim compensation cannot exceed 20% of the value of the dishonoured cheque.

The interim compensation can be recovered using the procedures outlined in Section 421 of the Criminal Procedure Code.

If the drawer of the cheque is found not guilty, the court will order the complainant to pay back the interim compensation to the drawer, along with interest at the bank rate published by the Reserve Bank of India at the beginning of the relevant financial year within 60 days from the date of such order.

Section 143A of the NI Act, 1881 is brought into play during the trial as it is apparent through the provisions of Section 143A of the NI Act, 1881 itself, when it specifies that the drawer of the check may be ordered to pay interim compensation by the Court "trying" an offence under Section 138 of the NI Act, 1881. The usage of the word may in sub-section (1) of 143-A of NI Act, 1881 shows the intent of the legislature behind making the said provision so as not to make it mandatory but discretionary upon the decision of the courts. It is not necessary that in all cases, the Court must necessarily direct the respondent to pay interim compensation.[7]


The Negotiable Instruments Act seeks to legalise the method through which the instruments could be transferred from one person to another by negotiation, just like any other product. Its purpose was to present an orderly and authoritative statement of the leading rules of law relating to negotiable instruments. The Legislature in its wisdom thought it proper to make provision in the Act for conferring such privileges to the mercantile instruments contemplated under it and provided special procedure in case the obligation under the instrument was not discharged.

References : [1] [2] [3] Section 13(1) N.I Act [4] Punjab and Sind Bank v. Vinkar Sahakari Bank Ltd, A.I.R. 2002 S.C. 3641. [5] Smt. Ramawati Sharma v. Union of India, A.I.R. 1999 All 21. [6] Uplanche v. R.K. Vimala, 1998 I.S.J. (Banking) 175 (A.P. High Court). [7] SB Cargo and Freight Forwarder Pvt. Ltd. and Ors V. State and Anr, 2021 SCC Del 5425

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