According to Section 6 of the Negotiable Instruments Act, 1881, 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 cheque in the electronic form.[1] In simpler words, a cheque is an instrument which lets a person pay a sum by ordering the bank to transfer the required amount from his amount to the person’s account in whose name the cheque is issued.

Today due to day to day growing business transactions, use of cheque is increasing. Cheques is the most safe, secure and efficient method of transferring liquid money. When a person carries hard cash he can become a victim of theft or robbery, paying through cash acts a safe option. It rules out the probability of theft, robbery and losing money.


Mainly, there are three parties to a cheque-

  1. DRAWER– the party which draws the cheque is called drawer. In simpler terms, the person who issues the cheque by signing it and orders the bank to pay the sum is called a drawer.
  2. DRAWEE- the bank on whose name the cheque is being drawn and is directed to pay the specified sum is called drawee.
  3. PAYEE- the person who is named in the cheque to get the specified sum. Payee is the beneficiary of the cheque.


Section 138 of the Negotiable Instruments Act deals with dishonor of cheques. It says that if cheque is dishonored due to insufficiency of funds or if an agreement is made with the bank to pay a lesser amount than stated in cheque then the person can be punished with two years of imprisonment or fine which may extend to double the amount of cheque or both.

Ingredients to be fulfilled before filing suit under section 138, the Negotiable Instruments Act, 1881 include-

  1. A person should have written a cheque to someone in order to pay off his debt.
  2. Cheque should be presented to drawee bank within three months from date of issue of cheque.
  3. The cheque should be returned by drawee bank due to insufficient funds or because the amount written in cheque is more than the agreement made with the bank.
  4. The payee demands payment of money by sending a demand notice to the drawer within 15 days of receipt of memo from the bank regarding the unpaid cheque and the reason behind it.
  5. Failure of payment by drawer within 15 days of receipt of demand notice.


  • CIVIL LIABILITY- When a cheque written by drawer is dishonoured he becomes principal debtor, the holder of the cheques, who is liable to receive his payment holds the position of creditor and can file a suit to recover his money.
  • CRIMINAL LIABILITY- The holder of the cheque can file a criminal suit on the drawer of cheque if the cheque is dishonoured due to insufficiency of funds in account or if the amount is more than what has been agreed with the bank. The maximum punishment for dishonour of cheque is imprisonment of upto 2 years or fine twice the amount of cheque or both.


On 8th June, 2020, Ministry of Finance issued a notification under the Statement of Reason titled “Decriminalisation of minor offences for improving Business Sentiment and Unclogging Court Processes” in order to ask for suggestions from stakeholders regarding decriminalization of dishonor of cheque along with other 38 small economic offences. The main reason behind this is to promote swift business transactions as fear of imprisonment due to dishonour of cheques limits use of cheque for business and transactions.

The landmark case behind this proposal is Makwana Mangaldas Tulsidas v State of Gujarat,[3] the honorable Supreme Court in this case noted that over 35 lakhs cases regarding dishonour of cheque were pending in courts. Because of this reason it registered a suo moto case to devise an efficient mechanism for speedy disposal of such cases.


  1. According to the 213th Report of Law Commission of India, more than 38 lakh cases of dishonour of cheques were pending in courts and out of them over 7.6 lakh cases were pending in criminal courts of Delhi alone.
  2. Due to plenty of cases related to dishonour of cheques alone, trial of other cases is also slowed down which reduces efficiency of our judicial system. 
  3. The fear of imprisonment in instances which are not always done with an intention to defraud hinders investment and engagement in such means. Decriminalization of dishonour of cheques will attract more investment. 
  4. In order to reduce backlog of such cases, the legislature has made it a compoundable offence which has already reduced its criminality.


  1. Section 138 was introduced to enhance credibility if cheques, decriminalizing dishonour of it may affect its credibility and people might think twice before accepting cheques.
  2. This step will lessen the burden of criminal courts but on the other hand will increase burden on civil courts. 
  3. The fear of criminal suits was also a reason why people were more careful regarding honouring cheques, decriminalizing it will remove this fear and people might take it casually.


  1. Dalmia Cement (Bharat) Ltd. v. Galaxy Traders and Agencies Ltd

The complainant filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 which was quashed by the High Court because the complainant failed to file it within the limitation period.

Later, the Supreme Court[4] said that section 138 was inserted in the Act with some specific objective and this section should be interpreted in light of such objectives even if there are some deviations from the general law and the procedure given for the redressal of the grievances to the litigants. The court imposed a strict liability and held the respondents liable. 

  • Canara Bank v. Canara Sales Corporation

This case[5] defines the relationship in the law of equity between the banker and its customer about each other’s duty and points out the negligence in performing the duty. This case describes parts played by both the parties in matter of fraud and whom to blame for negligence. 

In this case the respondent company had an account in appellant bank. Later some irregularities were found in appellant company’s accounts and they found that some cheques were encashed though appellant never signed them. A suit was filed for recovery of stolen amount as the money encashed was not encashed by the company. The company claimed that they had no idea regarding the fraud until it was discovered by their new accountant. The bank contended that the company was negligent on its part because if the company had identified the fraud earlier the fraud would be of much lesser amount.

The court held that it was the duty of the banker to dishonor such forged cheque and the company should have timely reviewed its pass book statements. According to the court, mere negligence would not prevent a customer from suing a bank for recovery of the amount and the company was liable to get compensation.


[1] The Negotiable Instruments Act, 1881 (Act 26 of 1881),s.6.

[2] The Negotiable Instruments Act, 1881 (Act 26 of 1881),s.138.

[3] AIR 2020 SC 2447.

[4] AIR  2002 SC 676.

[5] AIR 1987 SC 1603.


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