Stopped Payment of Cheque: Liability Under Section 138 of the Negotiable Instruments Act, 1881

Abstract

The phenomenon of stopped payment of cheques has emerged as a significant concern in commercial transactions, particularly where unscrupulous drawers attempt to evade their legal obligations through strategic manipulation of banking procedures. While a stopped payment of cheque order typically serves legitimate purposes such as addressing lost or stolen cheques, it has increasingly been misused as an instrument of deception to circumvent liability under Section 138 of the Negotiable Instruments Act, 1881. This analysis examines the judicial interpretation of stopped payment orders within the framework of Section 138, evaluating the evolving jurisprudence that has emerged from various High Courts and the Supreme Court of India regarding the criminal liability of drawers who issue stop payment instructions.

Introduction

The relationship between a customer and their bank fundamentally operates on a debtor-creditor paradigm, wherein the bank assumes the obligation to honour all valid and proper payment orders from the customer’s account, contingent upon the availability of sufficient funds [1]. This contractual arrangement permits the customer to rescind payment instructions until the bank effectuates the payment, thereby creating a window for legitimate stop payment requests. However, the 1988 amendment to the Negotiable Instruments Act, which introduced criminal sanctions under Section 138, remains conspicuously silent regarding the treatment of stopped payment orders in the context of cheque dishonour offences.

The legislative intent behind the introduction of Chapter XVII of the Negotiable Instruments Act in 1988 was to enhance the efficacy of banking operations and ensure credibility in commercial transactions conducted through cheques [2]. Prior to this amendment, unscrupulous drawers exploited various mechanisms to avoid criminal liability, including the strategic use of stopped payment of cheque instructions, account closures, and other banking endorsements that would result in cheque returns without triggering penal consequences.

Legislative Framework and Section 138 of the Negotiable Instruments Act

The Statutory Provision

Section 138 of the Negotiable Instruments Act, 1881, as amended, establishes the criminal liability for dishonour of cheques in the following terms:

“Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both” [3].

The section further stipulates three essential conditions through its proviso: (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b) the payee or the holder in due course makes a demand for payment by giving notice in writing to the drawer within thirty days of receiving information from the bank regarding the return of the cheque as unpaid; and (c) the drawer fails to make payment within fifteen days of receipt of such notice.

Essential Elements for Liability

The jurisprudence has consistently identified five fundamental ingredients that must be established for an offence under Section 138. These elements include: the drawing of a cheque on a bank for discharge of a legally enforceable debt or liability; the return of the cheque by the bank unpaid; the specific ground for return being insufficiency of funds or exceeding the arranged amount; service of proper notice by the payee claiming the amount within the prescribed timeframe; and the drawer’s failure to make payment within fifteen days of receiving such notice.

Judicial Interpretation of Stopped Payment of Cheque

Early High Court Perspectives

The initial judicial approach towards stopped payment cheque orders reflected a narrow interpretation of Section 138’s scope. Several High Courts adopted the position that the criminal liability under Section 138 was confined exclusively to situations involving inadequate account balances, thereby excluding other grounds for dishonour from the ambit of the penal provision.

The Punjab and Haryana High Court, in its analysis of the statutory requirements, emphasized that Parliament had deliberately confined the offence to cheques returned due to insufficient funds, suggesting that dishonour on other grounds did not constitute a criminal offence under the Act. This interpretation was premised on a literal reading of the section’s language, which specifically mentions two contingencies: insufficiency of funds and exceeding the arranged payment amount.

Similarly, the Kerala High Court initially held that countermanded payments fell outside the scope of Section 138, reasoning that such actions did not satisfy the specific conditions enumerated in the statute. This judicial stance reflected a formalistic approach that prioritized the literal interpretation of statutory language over the broader legislative intent to prevent cheque dishonour through various stratagems.

The Supreme Court’s Definitive Ruling

The Supreme Court’s landmark decision in Electronics Trade & Technology Development Corporation Ltd. v. Indian Technologists & Engineers (Electronics) Pvt. Ltd. [4] fundamentally transformed the legal landscape regarding stopped payment orders. In this case, a cheque presented for encashment was returned with multiple endorsements, including “refer to drawer,” “instructions for stopping payment,” and “stamp exceeds arrangements.”

The Supreme Court unequivocally held that when a cheque drawn by a person on an account maintained with a banker for payment to another person for discharge of debt or liability is returned by the bank with endorsements such as “refer to drawer,” “instructions for stoppage of payment,” or “stamp exceeds arrangement,” it constitutes dishonour within the meaning of Section 138. The Court further established that upon issuance of notice by the payee demanding payment within fifteen days of receipt, the failure to make payment satisfies the statutory presumption of dishonest intention.

This judicial pronouncement established several critical principles. First, the Court recognized that the specific reason for dishonour, whether insufficiency of funds or stopped payment instructions, does not preclude the application of Section 138. Second, the decision emphasized that the legislative intent behind the provision was to prevent unscrupulous practices that defeat the credibility of cheque transactions, regardless of the technical grounds for dishonour.

Evolution of Judicial Thinking

The Supreme Court’s reasoning in the Electronics Trade case reflected a purposive interpretation of Section 138, recognizing that a restrictive reading would enable sophisticated methods of avoiding criminal liability. The Court observed that if various grounds for dishonour were to be treated as exceptions, the Legislature would have explicitly enumerated them within the statutory framework. The absence of such exceptions indicated a legislative intent to create a comprehensive deterrent against cheque dishonour practices.

The decision also acknowledged the practical reality that dishonour presupposes non-payment, and that in circumstances where funds are not forthcoming, the failure to pay within the prescribed notice period constitutes an offence irrespective of the technical banking procedure that resulted in the cheque’s return. This approach prevented the defeat of Section 138’s specific provisions through ingenious actions designed to circumvent the law’s deterrent effect.

Subsequent High Court Alignment

Following the Supreme Court’s authoritative pronouncement, various High Courts have aligned their jurisprudence with this broader interpretation. The Bombay High Court, in its Division Bench decision, emphasized that the Legislature had deliberately avoided creating exceptions for common reasons such as account closure or payment stoppage. The Court noted that if such exceptions were intended, they would have been explicitly incorporated into the statutory framework.

The Kerala High Court, revising its earlier position, recognized that the object of Section 138 cannot be defeated by ingenious actions such as stopped payment orders. The Court held that dishonour presupposes non-payment, and in circumstances where funds are not forthcoming, the failure to pay within the statutory timeframe constitutes an offence regardless of the specific endorsement on the returned cheque.

Contemporary Legal Position and Regulatory Framework

Current Statutory Interpretation

The contemporary legal position establishes that the ground or reason for cheque dishonour is immaterial for establishing criminal liability under Section 138. Whether a cheque is returned with endorsements such as “stopped payment by drawer,” “signature differs,” or any other banking notation, the offence is deemed complete upon the drawer’s failure to make payment within fifteen days of receiving proper notice.

This interpretation serves the statute’s fundamental purpose of ensuring that obligations undertaken through cheque issuance as deferred payment mechanisms are honoured. The criminal provisions contained in Sections 138 to 142 were specifically enacted to provide swift and effective remedies against defaulters, preventing the misuse of negotiable instruments in commercial transactions.

Presumptions and Burden of Proof

Section 139 of the Negotiable Instruments Act creates a statutory presumption that unless proven otherwise, the holder of a cheque received it for the discharge of debt or liability [5]. This presumption operates in favour of the payee and places the evidential burden on the drawer to establish that no legally enforceable debt existed at the time of cheque issuance.

The statutory framework provides the drawer with two distinct opportunities to demonstrate good faith: first, when the bank informs them of insufficient funds, and second, when they receive the statutory notice under Section 138. The failure to utilize either opportunity to rectify the situation creates a strong presumption of dishonest intention.

Time Limitations and Procedural Requirements

The statutory scheme imposes strict time limitations that must be scrupulously observed. The cheque must be presented within six months of its date or within its validity period, whichever is earlier. The payee must serve notice within thirty days of receiving information about the cheque’s dishonour, and the drawer must make payment within fifteen days of receiving such notice.

Section 142 of the Act governs the procedural aspects of prosecution, requiring that complaints be filed within one month of the cause of action arising [6]. The 2015 amendment to Section 142(2) clarified jurisdictional issues by establishing that offences should be tried by courts in whose jurisdiction the payee’s bank branch is located.

Analysis of Contemporary Challenges

Technological Developments and Electronic Payments

The rapid advancement of digital payment systems and electronic banking has created new complexities in the application of Section 138. While the fundamental principles established by the Supreme Court remain applicable, courts must now address situations involving electronic cheques, mobile banking instructions, and digital payment platforms that may result in transaction failures.

The core principle that the specific technical reason for payment failure does not absolve the drawer of liability continues to apply in these contemporary contexts. Whether a payment fails due to technical malfunction, electronic stop payment instructions, or system errors, the focus remains on whether the drawer fulfils their obligation to make payment within the prescribed statutory timeframe.

Commercial Implications and Deterrent Effect

The judicial interpretation of stopped payment orders has significant implications for commercial transactions and banking practices. The Supreme Court’s approach ensures that the deterrent effect of Section 138 is not undermined by sophisticated avoidance techniques, thereby maintaining confidence in cheque-based transactions.

This legal framework encourages parties to honour their commitments and provides payees with effective recourse against defaulting drawers. The criminal sanctions, including potential imprisonment and monetary penalties, serve as powerful incentives for compliance with cheque obligations.

Balancing Legitimate Banking Practices

While the law prevents misuse of stopped payment orders in context of cheque for avoiding liability, it continues to recognize legitimate circumstances where such instructions may be necessary. The key distinction lies in the drawer’s subsequent conduct: genuine cases involve prompt communication with the payee and alternative payment arrangements, while fraudulent schemes involve deliberate avoidance of payment obligations.

The statutory framework’s focus on the fifteen-day notice period provides a mechanism for distinguishing between bona fide mistakes and intentional defaults. Drawers who act in good faith typically utilize this grace period to rectify genuine errors or arrange alternative payment methods.

Comparative Analysis with International Practices

Common Law Jurisdictions

The approach adopted by Indian courts aligns with international best practices in common law jurisdictions, where the emphasis is placed on the substance of the transaction rather than technical banking procedures. Countries such as the United Kingdom and Australia have developed similar frameworks that prevent the circumvention of payment obligations through procedural manipulation.

The focus on deterrent effect and protection of commercial confidence reflects universal concerns about maintaining the integrity of payment systems in modern economies. The Indian approach, emphasizing the drawer’s ultimate responsibility to honour their commitments, resonates with international commercial law principles.

Civil Law Systems

Continental European legal systems have developed analogous frameworks that prioritize the protection of payees and the maintenance of commercial trust. While the specific mechanisms may differ, the underlying principle that technical grounds for payment refusal do not absolve substantive payment obligations remains consistent across jurisdictions.

Recommendations for Legal Practice

For Legal Practitioners

Legal practitioners representing clients in Section 138 matters should focus on the substantive aspects of the debt relationship rather than technical grounds for cheque dishonour. The jurisprudence clearly establishes that stopped payment of cheque orders do not provide a defence to criminal liability, making it essential to address the underlying payment obligation.

Practitioners should ensure strict compliance with statutory timeframes and procedural requirements, as these elements are critical for establishing or defending against Section 138 charges. The notice provisions, in particular, require careful attention to ensure proper service and timing.

For Commercial Entities

Commercial entities should implement robust internal controls to prevent situations where cheques may be issued without adequate funding arrangements. The broad interpretation of Section 138 means that technical banking reasons for dishonour do not provide protection against criminal liability.

Organizations should establish clear protocols for handling payment disputes and ensure that any legitimate concerns about cheque payments are addressed through direct communication with payees rather than through banking instructions that may result in dishonour.

For Financial Institutions

Banks and financial institutions should provide clear guidance to customers about the legal implications of issuing a stopped payment cheque, particularly in the context of Section 138 of the Negotiable Instruments Act. While banks are obligated to process legitimate instructions from customers, they should also ensure that customers are made aware of the potential criminal consequences of using such mechanisms to evade payment obligations.

Future Developments and Legislative Considerations

Potential Reforms

The legal framework surrounding Section 138 continues to evolve in response to changing commercial practices and technological developments. Future reforms may address the application of these principles to emerging payment methods and digital financial instruments.

There has been ongoing discussion regarding the decriminalization of certain aspects of Section 138, particularly for minor commercial disputes [7]. However, any such reforms would need to carefully balance the need for commercial efficiency with the protection of payees and the maintenance of payment system integrity.

Technological Integration

The integration of blockchain technology, digital currencies, and smart contracts may create new challenges for the application of Section 138 principles. Courts will need to adapt the fundamental concepts established in cases like Electronics Trade to these emerging technologies while maintaining the core protective purposes of the legislation.

Conclusion

The judicial interpretation of stopped payment of cheques under Section 138 of the Negotiable Instruments Act represents a significant evolution in commercial law jurisprudence. The Supreme Court’s landmark decision in Electronics Trade & Technology Development Corporation Ltd. established definitive principles that prevent the circumvention of criminal liability through technical banking procedures.

The contemporary legal position clearly establishes that regardless of the specific reason for cheque dishonour, including stopped payment of cheque instructions, the drawer remains liable under Section 138 if they fail to make payment within the prescribed statutory timeframe. This approach serves the Legislature’s intent to strengthen the credibility of cheque transactions and provide effective deterrence against payment defaults.

The focus on the drawer’s conduct following dishonour, rather than the technical grounds for the cheque’s return, ensures that the remedial purpose of Section 138 is preserved while preventing sophisticated avoidance techniques. This framework continues to provide essential protection for payees while maintaining the integrity of India’s commercial payment systems.

The principles established through this jurisprudence remain highly relevant in contemporary commercial practice, providing clear guidance for legal practitioners, commercial entities, and financial institutions operating within India’s rapidly evolving financial landscape. As payment technologies continue to advance, these fundamental principles will likely require adaptation to new circumstances while preserving their core protective functions.

References

[1] Reserve Bank of India, “Master Circular on Customer Service in Banks,” Available at: https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9857 

[2] Ministry of Law and Justice, “The Negotiable Instruments Act, 1881,” Available at: https://www.indiacode.nic.in/bitstream/123456789/15327/1/negotiable_instruments_act,_1881.pdf 

[3] “Section 138 in The Negotiable Instruments Act, 1881,” Indian Kanoon, Available at: https://indiankanoon.org/doc/1823824/ 

[4] Electronics Trade & Technology Development Corporation Ltd. v. Indian Technologists & Engineers (Electronics) Pvt. Ltd., 1996 AIR (SC) 2339, Available at: https://indiankanoon.org/doc/979235/ 

[5] “Dishonour of Cheque [S. 138 NI Act and allied sections],” SCC Times, November 28, 2020, Available at: https://www.scconline.com/blog/post/2019/05/07/dishonour-of-cheque-s-138-ni-act-and-allied-sections/ 

[6] “Section 138 of Negotiable Instruments Act, 1881,” iPleaders, September 1, 2024, Available at: https://blog.ipleaders.in/section-138-of-negotiable-instruments-act-1881/ 

[7] “Decriminalizing section 138, Negotiable Instruments Act 1881,” Lexology, September 2, 2020, Available at: https://www.lexology.com/library/detail.aspx?g=c1f86808-e817-4ed7-ab7a-b6361d5c3c64 

[8] “Section 138 Of Negotiable Instruments Act: Overview,” Mondaq, June 6, 2019, Available at: https://www.mondaq.com/india/financial-services/812822/section-138-of-negotiable-instruments-act-overview 

[9] “No Offence Under Section 138 NI Act If Cheque Is Presented For Full Amount Without Endorsing Part Payment Made By Borrower,” LiveLaw, October 12, 2022, Available at: https://www.livelaw.in/top-stories/no-offence-under-section-138-ni-act-if-cheque-is-presented-for-full-amount-without-endorsing-part-payment-made-by-borrower-supreme-court-211341