Changing the Paradigm of Law: Decriminalization of Section 138- Negotiable Instrument Act, 1881

This Research Paper is written by Nimisha Gautam, a Third Year B.A LL.B (Hons.) Student at PES Modern Law College Pune, Maharashtra.


This article will describe the Decriminalisation of Section138 of the Negotiable Instrument Act 1881. Decriminalisation of Section 138 is the most important proposal by the Ministry of Finance. Section 138 of the Negotiable instrument act provides for circumstances under which a case for dishonour of cheques is filed. Section 138 is like a clearance platform which is used to slow down the defective system of dishonoured cheques and improve the efficacies of the banking system and not enforcing civil law rights through criminal law. Some of the people of India are in favour of Decriminalisation of section 138 because they feel that this proposal will change the paradigm of law and may lessen the burden on the criminal justice delivery system and it will improve the ease of doing business.


“A Negotiable instrument is one, the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from whom he took it” – Justice Willes.

[1]In India, According to the 213th Law Commission Report, there are about 40 lakh cheque bounces cases and over 7.6 lakh cases were pending in the criminal court in Delhi at the magisterial level as on 1st June, 2008. The law relating to negotiable instruments is contained in the negotiable instrument act, 1881 which applies and extends to the whole of India. The word Negotiable means ’transferable by delivery’ and the word Instrument means’ a written document by which a right is created in favour of some person’. The term ‘Negotiable instrument ‘literally means a written document which creates a right in favour of somebody and is freely transferable by delivery. A negotiation instrument is a piece of paper which entitles a person to a certain sum of money and which is transferable from one person to another person by delivery or by endorsement and delivery. Section 138 of the Negotiable instrument act provides for circumstances under which a case for dishonour of cheques is filed because of insufficiency of funds in the account and provides punishment or penalties for the same.


The Act was originally drafted in 1866 by the 3rd Indian Law Commission and introduced in December 1867 in the council and after a lot of criticism by the local government, the High courts and the chambers it was revised again and again. After the lapse of a sufficient period, on the recommendation of the new Law Commission, the bill was redrafted and again it was sent to a selected committee which adopted most of the additions recommended by the new law Commission. The draft thus prepared for the fourth time was introduced in the council and was passed as law in 1881 being the Negotiable Instrument Act, 1881. The most important class of credit instruments that evolved in India were termed as Hundi and these were used in credit and trade transactions. They were used as remittance instruments for the purpose of transfer of funds from one place to another. In the modern era Hundi served as traveller’s cheque.


According to Section 13(a) of the Act , “ Negotiable instrument means a promissory note , bill of exchange or cheque payable either to order or to a bearer whether the word ”order” or to “bearer” appear on the instrument or not”. Although the Act mentions only these three instruments ([2] such as promissory note, bill of exchange and cheques) it does not exclude the possibility of adding any other document which satisfies the following two conditions of negotiability:

The instrument should be freely transferable (by delivery or by endorsement and delivery) by the custom of trade and the person who obtains it in good faith and for value should get it free from all defects, and be entitled to recover the money of the instrument in his own name. As such documents like shares, debentures and dividend warrants are negotiable instruments. A negotiable instrument may be made payable to two or more payees jointly or it may be made payable in the alternative to one of two or one or some of several payees.


  • Section 138 of the Negotiable instrument Act, 1881 talks about the dishonour of cheque for insufficiency of funds etc in the account and it also states about the essential ingredients, exceptions, punishments and fine. It is important that any cheque withdrawn by an accused on an account being maintained by him in a bank for discharge or debt or liability, is returned unpaid for insufficiency of funds or for the reason that the amount exceeds the arrangement with the bank.
  • These points are exceptional in Section 138 of Negotiable Instrument Act.
  • The cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier.
  • 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 given by notice in writing to the drawer of the cheque (within 30 days)  of the receipt of information by him from the bank regarding the return of the cheque as unpaid.
  • The drawer of such cheque fails to make 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 15 days of the receipt of the said notice.


  • Imprisonment for a term which may extend to two years and Fine which may extend to twice the amount of the cheque.
  • Section 142 of the Negotiable Instrument Act, states the cognizance, procedure and jurisdiction of the offence u/s 138.[3]


The objective of Section 138 of Negotiable instrument Act is to promote the efficiency of banking operations and to ensure credibility in transacting business through cheques as mentioned in the case of Modi Cements Ltd v. Kuchil kumar Nandi .[4] The Supreme Court gave a landmark judgement on the law relating to “Stoppage of payment under the negotiable instrument act, 1881.

The law relating to negotiable instruments is the law of the commercial world legislated to simplify the activities in trade and commerce making provision of giving sanctity to the instruments of credit which could be deemed to be convertible into money and easily passable from one person to another.

Section 138 of the NI act is not to protect unscrupulous drawers who never intended to honour the cheques issued by them or accused person with insufficient fund should be punished. It was mentioned in the case Vinod Shivappa v. Nanda Belliappa.


After the introduction of the Companies (amendment) Act 2020, which decriminalizes 46 sections of the Companies Act 2013, the Ministry of finance proposes the decriminalization of minor offences specially section 138 of negotiable instrument act. This move will help in improving businesses, growth of economy and unburden the courts from check- bouncing cases pending at various level of judiciary. As per the 213th Law Commission Report, about 40 lakh cases or 205 of the cases pending in courts were that of dishonour of cheques.


With the increase in trade and commerce, the use of cheques as well as related disputes has also increased. With this status, there are many disputed cases pending at every judiciary level. The parliament in 1988 introduced sections 138-142 of NI Act, 1881 to deal with the disputes related with dishonour of cheques.

Section 138 of the NI Act makes a person criminally liable for fine or imprisonment or both. The section imposes both criminal as well as civil liability. The prosecution for the dishonoured cheque is only permitted when the notice of the same is envisaged to the drawer by the drawee to complete the required payment covered by the cheque and drawer fails to make the same within the stipulated time given under the act. It is a non- cognizable and bailable offence. The intention behind imposing the criminal penalty on cases of cheque bouncing was to dissuade people from dishonouring cheques and to secure the credibility of the cheques.

Some important judgements on section 138 of NI Act are-

Case : [5]Dayawati  v. Yogesh Kumar Gosain ( CRL REF.No.1/2016) In a remarkable judgement passed by the Delhi High Court , the Court has drawn a distinction between traditional criminal cases and offence under section 138 of NI Act,1881 to hold that it is legal to refer a criminal compoundable case as one under section 138 of NI Act to mediation.

Case : M/s Meters and Instruments Private Limited and Anr. v. Kanchan Mehta (CRL.A.No.1731/2017) – In this case, Two Judge bench of Supreme court made some key observations regarding dishonour of cheque cases and also issued directions for use of modern technology for speedy disposal of cheque cases under Section 138 of NI Act, 1881. 

Decriminalisation of Section 138 of NI Act  – This proposal does not account for long term consequences for cheque holders. It deprives bona-fide cheque holders of an opportunity to initiate criminal prosecution against bogus high value cheques. This move will affect the growth of India’s economy and specially trade & commerce sector and it includes many theft and fraudulent cases of dishonour cheques. It encourages financial crime, harms creditors’ confidence and hurts Indian economy.

According to a different point of views, Decriminalisation of Section 138 of NI Act – This move will impactfully lessen the burden on the criminal justice delivery system and bring the law in line with the policy, legislative and legal initiatives undertaken over the last two decades and improve India’s position in the rule of law index. The Negotiable instrument Act was amended in 2002 to allow scanned cheque images and use the electronic form of cheques. With the world and India moving towards paperless and cashless, it is time to rethink Section 138. Dishonour of cheques is not a crime against society. It is a primarily civil wrong .It should be considered in the civil judicature. Right from its inception, the courts have given latitude to the accused to discharge the civil liability to avoid imprisonment. Pending Cheque bouncing cases that clogged the entire judicial system. With the help of this amendment, these cases would be disposed of speedily so as to preserve the object of criminalization of act.

Despiste Decriminalisation of section 138 of the negotiation act, there are other methods like alternate dispute resolution along with Section.89 of the Code of Civil Procedure and Civil Judicature.


To conclude, Decriminalisation of Section 138 of negotiation act, 1881 is a good move by the Ministry of Finance. We surely think that the move would definitely lessen the burden which currently the judiciary is facing in India. It might promote the efficiency of banking operations and to ensure credibility in transacting businesses through cheques. But the provisions under the Act were rarely enforced and this amendment is likely to encourage people to default deliberately and the interest of the payee has been overlooked which is improper and not justified. A major drawback with Section 138, NI act is that it mentions both punishment and fine without considering the presence of intention. It would be highly helpful if the provision is included in civil liability and the cases would be disposed of speedily. If this amendment is included in Negotiable Instrument Act, 1881 it is surely welcomed by the people.

[1]According to the 213rd Law commission Report November 2008

[2]Types of Negotiable Instrument

[3] Section 142

[4] Related case  Shri Alloys Ltd v/s Jayaswals Neco Ltd”Dishonour of Cheque – How Criminal Liability arises”

[5] Section 243 (2017) Delhi court times – 117(DB) decided on 17 October,2017