Stop Payment of Cheque and Section 138 of the Negotiable Instruments Act, 1881

A bank's return of a cheque marked "payment stopped by drawer" can attract Section 138 of the Negotiable Instruments Act, 1881. A stop-payment instruction does not, by itself, protect the drawer from prosecution.

Cheques may be stopped because they are lost, a replacement cheque has been issued, payment has already been made by another method, goods are defective, services are deficient or the underlying contract is disputed. Sometimes, however, stop-payment instructions are used to avoid paying an existing debt. The legal outcome depends on the transaction, the enforceability of the liability, compliance with statutory requirements and evidence presented by the parties.

What does Section 138 provide?

Section 138 of the Negotiable Instruments Act, 1881 provides criminal consequences where a cheque drawn on an account maintained by a person is dishonoured in circumstances covered by the provision, provided it was issued towards discharge, wholly or partly, of a legally enforceable debt or other liability and the statutory conditions are satisfied.

The prescribed punishment can extend to two years' imprisonment, or a fine up to twice the cheque amount, or both. The offence is not established solely because the bank returned a cheque; the other legal ingredients must also be proved.

Conditions, legal notice and time limits

1. Debt or liability: The cheque must relate to a legally enforceable debt or other liability.
2. Presentation: The cheque must be presented within its validity period. The Act refers to six months or the cheque's validity, whichever is earlier; RBI directions generally restrict ordinary cheque validity to three months from the date of issue.
3. Dishonour: The bank returns the cheque unpaid, including with a stop-payment endorsement where the applicable legal principles are met.
4. Demand notice: The payee or holder in due course must issue a written demand notice within 30 days of receiving information from the bank about dishonour. The earlier 15-day notice period is no longer the law.
5. Opportunity to pay: The drawer must fail to pay the cheque amount within 15 days of receipt of the demand notice.
6. Complaint: Under Section 142, the complaint is ordinarily filed within one month from the date on which the cause of action arises after expiry of that 15-day payment period. A court may condone delay on sufficient cause.

Service of notice, calculation of limitation, the identity of the complainant and jurisdiction can be decisive. The payee should preserve the original cheque, bank return memo, notice, proof of dispatch or service and transaction records.

Supreme Court rulings on stop-payment cheques

Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249

The Supreme Court held that stop-payment instructions do not automatically exclude Section 138. Otherwise, a drawer could avoid the provision merely by directing the bank not to honour a cheque issued against a debt. The decision clarified the operation of Section 139's presumption even when the bank return is marked "payment stopped by drawer". See the Supreme Court judgment.

M.M.T.C. Ltd. v. Medchl Chemicals and Pharma (P) Ltd., (2002) 1 SCC 234

The Court reaffirmed that dishonour following a stop-payment instruction can fall within Section 138. The statutory presumption is rebuttable. The drawer may establish, on the evidence, that sufficient funds existed and that payment was stopped for a valid reason, including absence of an enforceable liability. A disputed factual defence generally requires adjudication rather than automatic dismissal of the complaint.

Goa Plast (P) Ltd. v. Chico Ursula D'Souza, (2004) 2 SCC 235

The Supreme Court again recognised that issuing stop-payment instructions does not itself defeat the remedy under Section 138 where a cheque was issued against an enforceable obligation.

For further official judicial discussion, see the Supreme Court judgment discussing these authorities.

Can the drawer defend a stop-payment cheque case?

Yes. Section 139 creates a rebuttable presumption in favour of the holder that the cheque was received towards a debt or liability. The accused may rebut that presumption on the standard of preponderance of probabilities, using the complainant's evidence, documents or defence evidence. A bare denial is generally insufficient.

Relevant circumstances may include proof that the debt was already discharged, that the cheque was issued for a transaction that did not result in an enforceable liability, or that a material contractual dispute affected the amount legally payable. For example, a purchaser who stops payment because of defective goods or deficient services should retain the contract, correspondence, inspection records, return requests, payment proof and contemporaneous objections. A commercial dispute or allegation of defective goods does not automatically extinguish the cheque liability.

Similarly, evidence of sufficient account balance can support a defence but is not an automatic exemption from Section 138. The court considers whether the presumption has been rebutted and whether a legally enforceable debt existed in the relevant circumstances.

Related provisions and practical guidance

• Section 118(a): Presumption of consideration for negotiable instruments, subject to rebuttal.
• Section 139: Presumption in favour of the holder regarding discharge of a debt or liability.
• Section 140: Restricts the defence that the drawer had no reason to believe the cheque might be dishonoured.
• Section 141: Addresses offences committed by companies and the conditions for liability of persons responsible for their business.
• Section 142: Governs cognizance, limitation and territorial jurisdiction of complaints.
• Section 143A: Permits interim compensation in specified circumstances, subject to statutory requirements.
• Section 147: Makes offences under the Act compoundable.
• Section 148: Provides for deposit of a sum in certain appeals against conviction.

For the cheque holder

Obtain the bank return memo, verify the date of intimation, issue a legally compliant demand notice within 30 days, and calculate the 15-day payment period and complaint limitation carefully. Preserve records establishing the underlying transaction and liability.

For the cheque drawer

Give written stop-payment instructions to the bank where justified, notify the payee promptly, preserve documentary evidence and respond to any statutory demand notice. If an enforceable debt remains outstanding, stopping the cheque does not cancel the debt or prevent possible prosecution.

This article provides general legal information, not advice on any particular dispute. Check the current statutory text and applicable judgments before taking legal action.