Cheque Dishonour

What is Cheque Dishonour?

**Cheque dishonour**, commonly known as a **cheque bounce**, occurs when a cheque presented for payment at a bank is returned unpaid. The most common reason is **insufficient funds** in the drawer's (cheque writer's) account, but a cheque can also be dishonoured for reasons such as the signature not matching, the cheque being post-dated, the account being closed, or the amount in words and figures differing.

In everyday terms, when you deposit someone's cheque in your bank and the bank sends it back saying the money cannot be paid, that is a cheque bounce. Under Indian law, this is not just a civil matter — it is a **criminal offence** punishable with imprisonment and fine.

Legal Framework

Cheque dishonour is primarily governed by **Sections 138 to 142 of the Negotiable Instruments Act, 1881** (as amended). These provisions were introduced by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, to strengthen the credibility of cheques as a payment instrument.

Section 138: Dishonour of Cheque for Insufficiency of Funds

This is the core provision. It states that where any cheque drawn by a person on an account maintained by them with a banker for payment of any amount to another person from that account is returned unpaid due to:

- **Insufficiency of funds**, or

- The amount exceeding the **arrangement** (overdraft limit) with the bank,

the drawer of the cheque is deemed to have committed an offence punishable with:

- **Imprisonment up to 2 years**, or

- **Fine up to twice the cheque amount**, or

- **Both**.

Conditions for Prosecution Under Section 138

Three conditions must be fulfilled before prosecution:

**1. Presentation within validity period**

The cheque must be presented to the bank **within the period of its validity** (currently 3 months from the date on the cheque, as per RBI guidelines) or within the period mentioned on the cheque.

**2. Demand notice within 30 days (Section 138(b))**

The payee or holder in due course must send a **written demand notice** to the drawer within **30 days** of receiving information from the bank that the cheque has been returned unpaid. The notice must demand payment of the cheque amount.

**3. Failure to pay within 15 days (Section 138(c))**

If the drawer fails to make payment within **15 days** of receiving the demand notice, the offence under Section 138 is complete, and the payee can file a criminal complaint.

Section 139: Presumption in Favour of the Holder

This section creates a **presumption** that the holder of the cheque received it for the discharge (in whole or in part) of a legally enforceable debt or liability. The burden shifts to the drawer to prove otherwise. This presumption significantly strengthens the complainant's case.

Section 141: Offences by Companies

If the offence under Section 138 is committed by a company, every person who was in charge of and responsible for the conduct of the business of the company at the time of the offence is deemed guilty. This includes **directors and officers** of the company.

Section 142: Cognizance and Jurisdiction

- The complaint must be filed **within one month** from the date the cause of action arises (i.e., after the 15-day notice period expires).

- The complaint can only be filed by the **payee or holder in due course**.

- The court with jurisdiction is the court within whose local jurisdiction the **cheque was presented for payment** (i.e., where the payee's bank is located).

Section 143A: Interim Compensation (2018 Amendment)

Introduced by the 2018 Amendment, this section empowers the court to direct the drawer to pay **interim compensation** to the complainant during the trial, which shall not exceed **20% of the cheque amount**. This addresses the problem of prolonged trials being used as a delaying tactic.

Section 148: Power to Direct Deposit (2018 Amendment)

In appeal against conviction, the appellate court may direct the appellant to deposit a minimum of **20% of the fine or compensation** awarded by the trial court as a condition for staying the sentence.

When Does This Term Matter?

In Business and Commercial Transactions

Cheques are widely used in business transactions — for payment to suppliers, settlement of dues, and honouring financial commitments. A bounced cheque disrupts business relationships and cash flow. Section 138 gives the payee a powerful criminal remedy to recover the amount.

In Loan Repayments

Lenders, both institutional and private, routinely collect **post-dated cheques (PDCs)** from borrowers as security for loan repayments. If a PDC bounces, the lender can invoke Section 138 to pursue criminal proceedings, in addition to civil recovery.

In Settlement of Disputes

Parties sometimes settle disputes by issuing cheques. If such a cheque bounces, it constitutes a fresh cause of action under Section 138, independent of the underlying dispute.

In Personal Financial Matters

Rent payments, deposits for services, and personal loans are often transacted through cheques. A dishonoured cheque in any of these contexts gives the payee recourse under Section 138.

Step-by-Step Process for Filing a Cheque Bounce Case

1. **Cheque returned:** The bank returns the cheque unpaid with a memo stating the reason (e.g., "insufficient funds").

2. **Send demand notice:** Within **30 days** of receiving the bank memo, send a written notice to the drawer demanding payment.

3. **Wait 15 days:** Give the drawer **15 days** from the date of receipt of the notice to make payment.

4. **File complaint:** If the drawer does not pay within 15 days, file a criminal complaint under Section 138 before the competent Magistrate's court **within one month** of the expiry of the 15-day period.

5. **Trial:** The case proceeds as a summary trial (for cheques up to Rs 5 lakh) or a summons trial. The court may award interim compensation under Section 143A.

6. **Judgment:** If convicted, the drawer faces imprisonment up to 2 years and/or fine up to twice the cheque amount.

Practical Significance

- **Criminal deterrent:** The criminal nature of Section 138 acts as a strong deterrent against issuing cheques without adequate funds.

- **Presumption of debt:** Under Section 139, the court presumes the cheque was issued for a valid debt, placing the burden on the accused to disprove it.

- **Compoundable offence:** Cheque bounce cases can be **compounded** (settled) at any stage of the proceedings, even after conviction, with the permission of the court. This encourages settlement.

- **High volume of cases:** Section 138 cases constitute a significant proportion of pending criminal cases in Indian courts. To address this, the Supreme Court in **Meters and Instruments Pvt Ltd v. Kanchan Mehta (2018) 1 SCC 560** suggested the use of video conferencing and that the personal appearance of the accused may be exempted.

Frequently Asked Questions

Does every cheque bounce amount to a criminal offence?

No. A criminal offence under Section 138 arises only when the cheque is returned for **insufficiency of funds** or because the amount exceeds the arrangement with the bank. If the cheque is dishonoured for other reasons — such as the drawer's signature not matching, the cheque being stale (presented after validity), or a stop-payment instruction for valid reasons — it may not attract criminal liability under Section 138.

What if the demand notice is not sent within 30 days?

If the payee fails to send the demand notice **within 30 days** of receiving the bank's return memo, the right to file a criminal complaint under Section 138 is lost for that particular presentation. However, the payee may present the cheque again (if still within the validity period), and if it bounces again, a fresh 30-day period begins for sending the notice.

Can a cheque bounce case be settled out of court?

Yes. A Section 138 case is a **compoundable offence**, meaning the parties can settle it at any stage with the permission of the court. In practice, most cheque bounce cases are settled when the drawer pays the cheque amount (along with interest and legal costs). Even after conviction, the Supreme Court has permitted compounding in appropriate cases.

What is the role of the legal demand notice?

The **demand notice** is a mandatory prerequisite for filing a complaint under Section 138. It serves as a final opportunity for the drawer to make good on the cheque before criminal proceedings are initiated. The notice must clearly demand payment of the cheque amount. It should be sent by **registered post or courier** to ensure proof of delivery. If the drawer pays within 15 days of receiving the notice, no criminal case can be filed.