Section 138 of the Negotiable Instruments Act, 1881 is a provision that deals with dishonor of a cheque for insufficiency of funds in the account of the drawer. The section provides for a legal framework to deal with cases of dishonor of cheques and provides a mechanism for the recovery of the amount due.
According to Section 138 of the Act, if a cheque is dishonored due to insufficient funds in the account of the drawer or for any other reason, the payee or the holder in due course of the cheque can give a notice in writing to the drawer within 30 days of the dishonor of the cheque demanding payment of the amount due.
The drawer of the cheque is required to make the payment within 15 days of the receipt of the notice. If the payment is not made within this period, the payee or the holder in due course can initiate legal proceedings against the drawer.
The legal proceedings under Section 138 of the Act are initiated by filing a complaint before a Magistrate within 30 days of the expiry of the period of 15 days from the date of receipt of the notice. The complaint must be accompanied by the original cheque and the notice given to the drawer.
If the Magistrate is satisfied that an offence has been committed, the drawer can be punished with imprisonment for a term which may extend to two years or with a fine which may extend to twice the amount of the cheque or with both.
Section 138 of the Act has been enacted to ensure that the payment of cheques is made promptly and to discourage the issuance of cheques without sufficient funds in the account of the drawer.