Cheque Returned for “Positive Pay Order”: Does Section 138 Still Apply?

With banks implementing the Positive Pay mechanism pursuant to RBI directions, cheque return memos increasingly record reasons such as “Positive Pay not registered” or “Positive Pay mismatch”.

This has given rise to a new question: If a cheque is returned due to Positive Pay non-compliance, does Section 138 of the Negotiable Instruments Act, 1881 still apply?

Inthe author's view, the answer is yes — since the dishonour is still attributable to the drawer.

This post examines the issue through statutory interpretation and settled Supreme Court jurisprudence.

Understanding the Positive Pay Mechanism:

The Positive Pay system requires the drawer of a cheque to pre-register key cheque particulars—such as cheque number, date, amount, and payee name—with the bank before presentation.

If the details are:

• Not registered, or

• Incorrectly registered,

the cheque may be returned unpaid even if sufficient funds are available.

The critical point is: Positive Pay compliance is a post-issuance obligation that lies entirely within the drawer’s control.

Section 138 NI Act:

Section 138 criminalises dishonour of cheques issued towards discharge of a legally enforceable debt or liability.

Although the provision refers to dishonour due to “insufficient funds” or “exceeds arrangement”, courts have consistently rejected a narrow or literal interpretation.

The settled judicial approach is: The wording of the return memo is not determinative. What matters is whether the dishonour is attributable to the drawer.

This purposive interpretation prevents the misuse of technical banking processes to defeat statutory liability.

Precedents Supporting the Case:

1. NEPC Micon Ltd. v. Magma Leasing Ltd. (1999) 4 SCC 253- Dishonour due to “account closed” was held to attract Section 138. The Court cautioned against interpretations that allow drawers to defeat the object of the Act through technical devices.

Relevance: Failure to comply with Positive Pay after issuing a cheque is equally a drawer-attributable act.

2. Laxmi Dyechem v. State of Gujarat (2012) 13 SCC 375- Dishonour due to reasons such as:

• Signature mismatch,

• Image not found,

• Account closed,

was held to fall within Section 138.

Relevance: Once a cheque is issued, the drawer bears responsibility to ensure it is honoured.

3. Modi Cements Ltd. v. Kuchil Kumar Nandi (1998) 3 SCC 249- The Supreme Court held that stop-payment instructions, even where funds exist, attract Section 138.

Relevance: Positive Pay non-registration performs the same functional role as stop payment, albeit without an express instruction.

4. MMTC Ltd. v. Medchl Chemicals & Pharma (P) Ltd. (2002) 1 SCC 234- Presumptions under Sections 118 and 139 apply even in instruction-based dishonour cases.

Relevance: In Positive Pay returns, the burden shifts to the drawer to explain non-compliance.

Misuse of Positive Pay as a De-Facto Stop-Payment Tool:

A troubling trend is now visible in commercial disputes and loan recoveries.

Instead of issuing formal stop-payment instructions—which clearly attract Section 138 liability as per Modi Cements (supra)—drawers are increasingly:

• Issuing cheques;

• Failing to register Positive Pay details thereafter; and

• Relying on the return memo description “Positive Pay Order” to claim technical immunity.

This conduct achieves the same practical result as stop payment, while attempting to avoid the legal consequences attached to it.

Courts are unlikely to permit such circumvention.

Indian jurisprudence has consistently rejected attempts by drawers to:

• Create self-serving banking impediments;

• Take advantage of internal bank procedures; or

• Use technical return reasons to defeat the object of Section 138.

Where Positive Pay non-compliance is:

• Repeated,

• Selective,

• Or unexplained,

courts are likely to infer intentional avoidance of payment, thereby strengthening—rather than weakening—the complainant’s case.

What lenders should do?

• Always issue statutory notice despite Positive Pay return;

• Plead drawer attribution clearly;

• Annex bank circulars mandating compliance.