Cheque is not merely a piece of paper rather it holds significant importance. It has been defined under section 6 of Negotiable Instruments Act, 1881 (NIA) as 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 a cheque in the electronic form. When the chapter XVII was introduced into the NI Act, the legislative intent was to address the problem of commercial confidence. The object of it was to enhance the credibility and acceptability of cheque as method of payment. It introduced the liability of drawer in cheque bounce cases while also incorporating the safeguards against the harassment of honest drawers.
The legislative object therefore was not simply to punish a person in case of cheque dishonour rather to make the cheque a more credible instrument of payment. However, more than three decades later the environment in which that objectives operate has changed considerably. The payments which were once made heavily through cheque are now made easily through UPI, NEFT, RTGS and other payment methods. The Ministry of finance in April 2026 announced that UPI has become one of world's largest real time payment platform. This transformation raises a question whether the cheques have become obsolete? And further does the criminalisation of cheque dishonour continue to serve the regulatory purposes for which section 138 NIA was introduced?
From Cheque Credibility to Criminal Liability: Why Section 138 Was Created
To address the growing issues of cheque dishonour section 138 was introduced in NIA. The parliament felt that cheque as an instrument of settlement of liabilities has weakened. The drawer may issue the cheque and it fails due to certain reasons, and it was treated only a civil liability or mere breach of contract. The provision however made the cheque dishonour as a statutory offence. The objective of the provision was to address the growing issue of cheque dishonour by introducing the criminal liability to deter defaults and uphold the credibility of cheque as a mode of payment. The supreme court gave the objective considerable weight as in the case of Goa Plast (P) Ltd. v. Chico Ursula D'Souza, the Court explained that Chapter XVII was intended to promote the efficacy of banking operations and ensure credibility in business transactions conducted through cheques.
This rationale explains why parliament chose to make it a criminal offence because it may seem like a private monetary dispute at first but it has far reaching consequences as a dishonoured cheque does not merely affect the immediate payee. The underlying concern was that repeated instances of cheque dishonour could undermine the confidence in a commercial instrument.
The regulatory intention however was never purely punitive, as dishonour alone doesn't result in a criminal liability. One of the conditions is when the cheque is returned unpaid due to any of the reasons mentioned in section 138 NIA, the payee is required to serve a demand notice on the drawer within 30 days from the date he received the information from the bank regarding the return of cheque as unpaid and the drawer has to pay it within a stipulated time ie 15 days from the date of receipt of notice. However, when the drawer fails to pay even after the notice then from the 16th day the cause of action arises. So, the structure of the section demonstrates an attempt to balance deterrence with the safeguards.
The case of P Mohanraj v Shah Brothers Ispat Pvt. Ltd is a good example on this. It exposes a structural tension at the heart of Section 138 NIA. While introducing the provision the intent of parliament was to protect the credibility of a payment instrument but it has increasingly used by people as a means of securing payment of their money for the liability of the drawer. The offence under the section is bailable, compoundable and non-cognizable.
The supreme court noted in this case that although section 138 creates criminal liability, in practice it is frequently used to obtain the cheque amount and a good amount of the cases are later compounded through payment. The court further quoted that the proceedings under Section 138 of the Negotiable Instruments Act can be termed as "Civil Sheep" in the "Criminal Wolf" Clothing.
So, the issue is not whether the cheque dishonour should still be criminalised or not rather the reasons for introducing such liability are still relevant today or not?
India has moved past cheques- has section 138?
Section 138 was introduced at a time when cheques occupied an important place in commercial and banking transactions. However today this landscape has changed as India has moved from a predominantly paper-based system to electronic payments. UPI is one of the important examples of it, through UPI, the payment can be made within seconds. Currently UPI has become a major component of India's retail payment infrastructure. RBI's payment system data reveals this shift by highlighting that the digital payments account for majority of the retail payments today while the paper-based instruments constitute only a small portion of the overall payment ecosystem. As per RBI'S report paper clearing fell to 0.4% in 2023-24 from 81.9%in 2005-2006. And the digital retail transactions accounted for 90.9% of the total value of retail payments in 2023–24. Thus, this change is not merely a technological advancement but it alters the very context in which the regulatory logic of section 138 NIA operates.
However, this does not mean that cheque has become obsolete and people have stopped using it. They continue to be used particularly in high value transactions because cheque is considered to be a safe payment instrument for high value transactions and other payment modes have a financial limit. However, the important point that arises is not whether cheque has become obsolete, but it no longer occupies the same position in India's payment architecture as it did when section 138 was introduced into NIA. Therefore, the continued existence of section 138 needs to be reconsidered against a payment system that has become substantially less dependent on cheques.
The changing payment environment however has not resulted in the disappearance of section 138 rather the enormous volume of cheque dishonour cases has itself increased the burden on the courts which has been acknowledged by the court in some cases. In Indian Bank Association v. Union of India, the court observed that due to the delays in disposal of cases, the very purpose with which section 138 was introduced, is defeated.
In Meters and Instruments Pvt. Ltd. v. Kanchan Mehta, the court emphasised that the main object of 138 was primarily compensatory the penal action was taken only for the enforcement of compensatory element.
So, now the important thing to be considered is that since India has transformed its payment system, the regulatory framework of section 138 should now be considered in the light of India's digital payment economy.
Not every dishonoured cheque is a crime
Though the dishonour of the cheque causes inconvenience to the payee it necessarily does not mean that there was fraudulent or dishonest intention. Section 138 attaches the criminal liability when certain conditions are satisfied. However, this made sense when cheque occupied the central position in India's payment infrastructure and it was important to maintain the confidence in cheque but now its continuing criminal character deserves reassessment.
the central purpose of the provision is recovery of amount due, recourse to the criminal proceedings may not always be the appropriate response. It becomes crucial in the light of the Supreme court's recent judgment in Dineshchand Surana v UCO Bank, wherein the court assessed the nature of proceedings under section 138 and held that it is quasi criminal in nature as proceedings have both civil and criminal nature.
Though, the primary purpose of section 138 is compensatory, criminal liability serves an important deterrent in cases where cheques are deliberately misused or dishonoured undermining the confidence of the payee.
The challenge therefore, is not that section 138 should not be used rather it needs to identify the cases involving genuine fraud or misconduct and those where there is no misconduct on the part of drawer but due to certain reasons, he could not make payment and the payee only wants to recover the money. Until this is done, section 138 will keep treating both the person who wilfully defaulted and the person who could not pay due to some genuine reasons. Thus, the provision should be reconsidered to ensure that the criminal liability should be attracted for deliberate cheque bounce on the other hand for ordinary recovery disputes proportionate actions should be taken.
Author is an LLM student at Gujarat national law University, Gandhinagar. Views are personal.