Chequemate? Negotiable Instruments and the impact of COVID-19

The article examines the available remedies for individuals so affected by the COVID-19 lockdown.
Chequemate? Negotiable Instruments and the impact of COVID-19

While India is a cash-dominant economy, there are additional instruments of payment that augment cash and facilitate credit-based commercial transactions. The legislative basis for these additional instruments lies in the Negotiable Instruments Act, 1881 (NI Act).

Section 6 of the Act is the statutory basis for the most widely used payment instrument, a banker’s cheque. Section 6 provides:

“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 a cheque in the electronic form.”

The growing iniquitousness of such instruments in the facilitation of commercial transactions impressed upon the legislature the need to ensure credibility in such transactions by introducing penalties for the dishonour of these instruments. Thus, Chapter XVII, containing "penalties in case of dishonor of certain cheques for insufficiency of funds in the accounts", came to be introduced.

Section 138 of the Negotiable Instruments Act governs dishonor of cheques and states that the same is an offence, attracting up to 2 years of imprisonment and fine. Sub-section (a) of Section 138, read with the Circular of the Reserve Bank of India passed in November 2011, provides that the validity of a cheque lasts up to 3 months only.

Considering the COVID-19 lockdown, there may be numerous individuals who have been unable to present issued cheques to their respective banks within the period of the validity, owing to logistical difficulties.

Further, parties to commercial transactions who were expected to maintain sufficient balance for the period of the validity of cheques issued by them stand at peril. In case the validity periods of the cheques are extended, the issuer of the cheque will be expected to maintain sufficient balance for the extended period too, which he might not have contemplated while issuing the cheque.

In this article, we propose to examine available remedies, if any, for individuals so affected in both the scenarios.

Examination of existing moratoriums

The Reserve Bank of India (RBI) and the Central government have acted swiftly in numerous arenas with a view to bringing relief to the common masses.

The RBI, vide a notification dated March 27, has given all term-loan debtors the option of a moratorium on loan repayments for 90 days for the instalments due in March, April, and May, with the assurance that it will not affect their respective credit scores. This is applicable to commercial banks, regional rural banks, primary (urban) co-operative banks/state co-operative banks/district central co-operative banks, financial institutions and non-banking financial companies (NBFCs) (including housing finance companies).

In terms of judicial relief to borrowers, the Bombay High Court and the Delhi High Court have ordered lenders to exclude the duration of the lockdown while calculating the 90-day period for classification of the term-loan as a Non-Performing Asset (NPA). This was done with a view to protecting cash strapped businesses that have been economically affected by the lockdown against being unduly classified as NPAs.

Under the Insolvency and Bankruptcy Code, 2016 (IBC), the threshold for initiating the Corporate Insolvency Resolution process (CIRP) was increased to Rs 1 crore, effectively excluding a majority of operational creditors from initiating the insolvency resolution process, since most of them are unlikely to operate at such high margins.

Also Read
Threshold of default under Section 4, IBC for initiation of insolvency proceedings raised to Rs 1 crore [Read Notification]

Omission in reliefs under the NI Act

Unfortunately, none of the abovementioned reliefs and moratoriums substantially deal with dishonour of cheques, meaning that lenders are still free to invoke proceedings under Section 138 for credit transactions.


Let us consider A & B, who are parties to a leave and license agreement whereby, the licensee uses and occupies the licensor's immovable property for the operation of a commercial establishment.

A, the licensee issues B, the licensor, a cheque on January 21, 2020 towards three months’ instalment of rent. As per the proviso to Section 138, B may present the cheque to the drawee bank within 3 months. If the cheque in the present instance is valid for a period of 3 months, B is well within his rights to present the cheque to the drawee bank up to April 23, 2020.

B is, however, impeded from doing so in the midst of the lockdown because the nearest branch of the drawee bank is located at a considerable distance and he is unable to access public transport. The validity of the cheque expires and B has to rely upon the goodwill of A to re-issue a cheque.

The logistical ability of payees to present their cheques for clearance is considerably ameliorated during the period of the lockdown. Further, the socio-economic and demographic diversity of India necessarily implies that payees are inequitably affected.

For instance, those in rural areas where bank branches are far and wide, senior citizens who cannot walk long distances, and underprivileged individuals who do not have access to personal vehicles, are all constrained to depend upon the goodwill of the drawer who may or may not re-issue a cheque.

This also creates scope for drawers, in this instance, A to escape his financial liability due to expiry of the validity of the cheque. The extension regarding limitation for filing a suit/petition/appeal (as mentioned in the order of the Supreme Court dated March 23) is of no use to B for recovery of his proceeds, because the instrument itself has expired and does not meet the requirements of Section 138(a).


Conversely, if the Government extends the validity of cheques by six months in view of COVID-19 (for example), then B will be able to present the cheque prior to its expiry. But A, who was expected to maintain sufficient balance for the clearance of the cheque for three months, shall now have to maintain it for another three months. If he is unable to maintain sufficient funds in his account so as to ensure the clearance of the cheque issued, then A stands to be penalized under Section 138 of NI Act.

Clarification with respect to validity of a cheque and possible extension might not be a very fair idea from a issuers perspective, as it would be unfair to prosecute people whose accounts are not sufficiently funded (since they were legally bound to honour the cheques only for a period of 3 months from the date of issue).

Therefore, taking care of the first problem might lead to another. Hence, the government needs to balance the probabilities to avoid class-specific legislation which would lead to unfairness or arbitrariness on the touchstone of Article 14 of the Constitution.


The legislative framework of Section 138 of the NI Act does not address the extraordinary situation of a pandemic-induced lockdown. Numerous creditors/payees that have been unable to present their cheques for clearance stand to forgo their rightful entitlement(s).

In the absence of a well-established defence of force majeure (either by statue or by judicial precedent), debtors/drawers are vulnerable to potential criminal and civil proceedings for an external event that could not have been reasonably foreseen.

However, any notification/clarification or ordinance should address the issue from the perspectives of both the drawer and the drawee. If the government only focuses on one party, it will be creating undue hardship on the other party, and would invariably lead to litigation and create burden on the courts.

Wasim Beg is a Partner and Swarnendu Chatterjee is a Senior Associate at L&L Partners, New Delhi.

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