Understanding Section 138 of the Negotiable Instruments Act


Section 138 of the Negotiable Instruments Act of 1881 is significant in regulating financial transactions involving cheques. It discusses the legal consequences of dishonoring a cheque due to inadequate money or other causes.

1. Importance of Section 138

Important guidelines regarding the dishonoring of checks, protecting the integrity of financial transactions, and maintaining the legitimacy of checks as a form of payment are outlined in Section 138 of the Negotiable Instruments Act.

This clause requires checks to be submitted within three months of the date of issuance and requires the drawer to pay the bank within fifteen days of receiving notification of dishonor. If you don’t follow these guidelines, you risk jail time, a fine, or both.

All things considered, Section 138 is crucial in keeping the financial system trustworthy by encouraging responsibility among cheque drawers, safeguarding the rights of payees and creditors, and serving as a deterrent to dishonest behavior. 

2. Subjects of law where section 138 applies

The Negotiable Instruments Act, of 1881, specifically addresses issues related to financial transactions including checks under section 138. Here are several significant domains in which Section 138 is relevant:

Commercial Law

Commercial transactions involving the issuing and accepting of checks as payment are governed under Section 138. It governs the responsibilities and rights of those taking part in business transactions.

Banking Law

The primary tool used in banking operations for transferring money between accounts is the cheque. The imposition of penalties for dishonored checks is one way that Section 138 ensures the integrity of banking transactions.

Contract Law

Contract law problems may arise from a cheque dishonored, especially if the cheque was written as part of a contractual arrangement. A legal foundation for settling such issues is provided under Section 138.

Civil Law

Although Section 138 deals with criminal penalties for returned checks, it also affects civil law. In due course, payees or holders may choose to pursue civil remedies for damages in lieu of or in addition to criminal prosecution.

financial oversight

By encouraging accountability in cheque transactions and discouraging fraudulent activity, Section 138 aids in the regulation of the financial industry. It contributes to preserving the integrity of the financial system and the trust that customers have in banks. 

3. Limitation period effect on Section 138

The term “limitation period” describes the longest amount of time that a specific cause of action may be brought to court. Regarding Section 138, the statute of limitations affects how legal remedies for dishonored checks are enforced. This is the impact of Section 138:

Time-barred activities

A statute of limitations for filing a lawsuit over unpaid checks is outlined in Section 138. According to the clause, these kinds of proceedings have to be started within a month of the date the cause of action first appears.

Timely enforcement

Regarding dishonored checks, the statute of limitations guarantees prompt enforcement of legal rights and obligations. It promotes swift action to obtain compensation for monetary losses by payees or holders in due process.

Preservation  the evidence

Filing a lawsuit within the statute of limitations enables the preservation of pertinent evidence, such as correspondence, bank records, and notice documents. This raises the likelihood that a civil lawsuit or prosecution will succeed.

Legal definiteness

Respecting the statute of limitations encourages legal clarity and closure in issues involving checks. It stops lawsuits from being endlessly drawn out and makes it easier to settle disputes in a fair amount of time.

Apologies for the wait

In extraordinary cases where there is a good justification for the delay, the court may grant permission to file a lawsuit after the statute of limitations has passed. Such a pardon, however, is contingent upon judicial discretion and needs to be backed by solid justification. 

4. Punishment under section 138

Section 138 of the Negotiable Instruments Act of 1881 makes provisions for punishing those who dishonour cheques. Understanding penalties in this section is crucial for preserving financial transaction integrity and cheque payment value.


One of the principal penalties listed in Section 138 is imprisonment. The Act states that offenders may face imprisonment for up to two years.

Monetary fine

In addition to jail, criminals may be required to pay a fine. The penalties imposed can be up to double the amount of the bounced cheque.

Combination of penalties.

It’s worth noting that the court has the authority to impose either imprisonment, a monetary fine, or both, depending on the gravity of the offense and other relevant considerations.

Compensatory nature

Despite the provision for jail as a penalty, Section 138 is essentially compensatory. The emphasis is on compensating the payee or holder on time for the damage caused by the dishonored cheque.

Deterrent effect

The inclusion of jail and significant fines acts as a disincentive to fraudulent behaviors such as issuing checks with insufficient money and fostering financial integrity and trust in the banking system. 

5. Decriminalisation of Section 138 and its effects

Section 138 of the Negotiable Instruments Act of 1881, which deals with cheque dishonor, has been the topic of controversy regarding criminality. Decriminalization is the practice of removing criminal consequences for certain acts. Read on to learn about the potential consequences of decriminalizing Section 138.

Economic impact.

Positive effects: Decriminalisation may lessen the strain on courts and law enforcement organizations, thereby freeing up resources for other serious issues. It may help streamline the legal process for settling cheque disputes, increasing corporate efficiency.

Negative effects:

However, decriminalization may reduce deterrents against fraudulent behaviors, increasing dishonored cheques and financial losses. This might damage trust in the banking system and harm economic stability.

6. Legal ramifications:

Positive effects:

Decriminalization may result in a shift towards civil remedies, such as monetary compensation or arbitration, to resolve financial disputes. This could lead to faster case resolution and less confrontational legal proceedings.

Negative effects:

However, a lack of criminal consequences may encourage dishonest individuals to exploit legal loopholes, potentially increasing litigation and complicating enforcement efforts. Furthermore, victims of dishonored cheques may feel less protected in the absence of the fear of criminal prosecution.

7. Business environment

Positive effects:

may promote a more business-friendly climate by lowering the potential of criminal liability for cheque-related concerns. This may boost entrepreneurship and investment, especially among small and medium-sized businesses.

Negative effects:

In contrast, the perception of weaker legal safeguards for creditors and payees may discourage individuals and businesses from using cheques as a payment method. This could result in a trend towards alternate payment methods, potentially undermining traditional corporate processes.

8. Social implications

Positive effects:

Decriminalization may promote a more equal and proportionate approach to handling cheque-related offenses, particularly for those experiencing financial difficulties or making inadvertent mistakes. This could improve access to justice while mitigating the disproportionate impact of criminalization on vulnerable groups.

Negative effects:

However, without criminal sanctions, individuals may have less incentive to be cautious and accountable when issuing checks. This could diminish trust and honesty in commercial interactions, jeopardizing social cohesiveness and mutual reliance.

Frequently Asked Questions (FAQs)

1Q: What is the significance of Section 138 in the Negotiable Instruments Act?

Ans: Section 138 is crucial in regulating financial transactions involving cheques, outlining the legal consequences of dishonoring a cheque due to insufficient funds or other reasons.

2Q: In which legal domains does Section 138 apply?

Ans: Section 138 applies to various areas of law, including Commercial Law, Banking Law, Contract Law, and Civil Law, where issues related to financial transactions and cheque dishonor are addressed.

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