Section 138 NI Act — Dishonour of Cheque for Insufficiency of Funds

Section Text

Section 138 of the Negotiable Instruments Act, 1881 provides that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

Plain Language Explanation

In everyday terms, Section 138 makes it a criminal offence when a cheque issued by someone bounces because there is not enough money in their bank account. The provision was introduced to enhance the credibility of cheques as a mode of payment in commercial transactions.

Before this section was enacted in 1988, a bounced cheque was primarily a civil matter. The introduction of criminal liability was meant to instil confidence in the banking system and to deter people from issuing cheques without ensuring sufficient funds.

However, not every bounced cheque attracts criminal liability. The law requires specific conditions to be met: the cheque must have been issued for the discharge of a legally enforceable debt or liability, a demand notice must be sent within 30 days of receiving the dishonour information, and a complaint must be filed within the prescribed limitation period if the drawer fails to pay within 15 days of receiving the notice.

The offence under Section 138 is a compoundable offence, meaning the parties can settle the matter at any stage of the proceedings with the permission of the court.

Key Elements

**1. Cheque Drawn on an Account**

The cheque must be drawn on a bank account maintained by the drawer. Post-dated cheques are also covered. The cheque must be presented for payment within the period of its validity (generally three months from the date of issue, as per RBI guidelines since April 2012).

**2. For Discharge of Debt or Liability**

The cheque must have been issued for the discharge, in whole or in part, of a legally enforceable debt or other liability. A cheque given as a gift, as security, or for a purpose other than discharging a debt does not attract Section 138. However, Section 139 raises a presumption that every cheque received by the holder was for the discharge of a debt or liability.

**3. Dishonour Due to Insufficient Funds**

The cheque must be returned unpaid by the bank because of insufficient funds or because the amount exceeds the arrangement with the bank. If the cheque is dishonoured for other reasons (such as signature mismatch, account closed, or stop payment), the position has evolved through judicial interpretation, and in many cases, such dishonour can also attract Section 138.

**4. Statutory Notice (Section 138 Proviso (b))**

The payee or holder in due course must send a written demand notice to the drawer within 30 days of receiving information of the dishonour from the bank. This notice must demand payment of the cheque amount.

**5. Failure to Pay Within 15 Days**

The drawer must fail to make the payment within 15 days of receipt of the demand notice. Only upon such failure does the offence become complete.

**6. Filing of Complaint (Section 142)**

The complaint must be filed within one month from the date on which the cause of action arises (i.e., after the expiry of 15 days from receipt of notice). The complaint must be filed by the payee or the holder in due course.

Practical Application

**Step-by-Step Process for the Complainant**:

1. Present the cheque to the bank within its validity period.

2. Upon dishonour, receive the bank memo stating the reason for return.

3. Within 30 days of receiving the dishonour memo, send a legal demand notice to the drawer by registered post or speed post.

4. Wait for 15 days from the date the drawer receives the notice.

5. If payment is not made, file a criminal complaint under Section 138 before the competent Magistrate within one month of the expiry of the 15-day period.

**Jurisdiction**: Following the Supreme Court's decision in *Dashrath Rupsingh Rathod v. State of Maharashtra* (2014) and the subsequent amendment, the complaint is to be filed at the place where the cheque is delivered for collection through an account, i.e., the branch of the bank where the payee presents the cheque.

**Compounding**: Since the primary objective is recovery of the cheque amount, courts encourage settlement. The offence can be compounded at any stage with the permission of the court.

**Interim Compensation**: Under Section 143A (inserted in 2018), the court may direct the drawer to pay interim compensation of up to 20% of the cheque amount during the pendency of the case. This provision was introduced to discourage dilatory tactics.

Important Judgments

**1. Dashrath Rupsingh Rathod v. State of Maharashtra (2014) 9 SCC 129**

The Supreme Court held that the territorial jurisdiction for filing a Section 138 complaint lies at the place where the cheque was drawn (i.e., where the bank of the drawer is located). This was subsequently overturned by a legislative amendment, restoring jurisdiction to the place where the cheque is presented for collection.

**2. Meters and Instruments Pvt. Ltd. v. Kanchan Mehta (2018) 1 SCC 560**

The Supreme Court emphasised that Section 138 proceedings are essentially about recovery of money and suggested alternative dispute resolution mechanisms, including online settlement platforms.

**3. Rangappa v. Sri Mohan (2010) 11 SCC 441**

The Supreme Court held that once the issuance of a cheque and the signature of the drawer are admitted, the presumption under Section 139 operates in favour of the holder that the cheque was issued for the discharge of a legally enforceable debt. The burden shifts to the accused to rebut this presumption.

**4. Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd. (2000) 2 SCC 745**

The Court clarified that the cause of action under Section 138 arises when the cheque is dishonoured by the bank and not when the demand notice is issued or when the period of 15 days expires.

**5. Surinder Singh Deswal v. Virender Gandhi (2019) 11 SCC 341**

The Supreme Court held that even at the appellate stage, the power to direct deposit of a portion of the compensation or fine exists. This reinforces the principle of ensuring meaningful justice to the complainant.

Frequently Asked Questions

What should I do if a cheque given to me bounces?

Upon receiving a bank memo informing you of the dishonour, you should send a legal demand notice to the person who issued the cheque within 30 days. The notice should clearly demand payment of the cheque amount. If the drawer does not pay within 15 days of receiving the notice, you can file a criminal complaint under Section 138 before the appropriate Magistrate within one month after the 15-day period expires. Maintaining documentation of the bank memo, notice dispatch proof, and any acknowledgement of receipt is essential.

Can a person go to jail for a bounced cheque?

Yes. Section 138 provides for imprisonment that may extend to two years, or a fine up to twice the amount of the cheque, or both. However, in practice, courts often impose fines and direct payment of compensation to the complainant. Imprisonment is typically reserved for cases where the accused shows deliberate defiance of court orders or repeated dishonesty.

Is a stop payment on a cheque also covered under Section 138?

The Supreme Court has held that if a cheque is dishonoured due to stop payment instructions given by the drawer, it can attract Section 138 liability, provided the other ingredients of the offence are satisfied. The drawer cannot escape liability merely by instructing the bank to stop payment after issuing a cheque for a legally enforceable debt. However, if the stop payment is for a genuine reason and the debt itself is disputed, the drawer may have a valid defence.

Can a company or its directors be prosecuted under Section 138?

Yes. Under Section 141 of the NI Act, when an offence under Section 138 is committed by a company, every person who at the time the offence was committed was in charge of and responsible for the conduct of the business of the company shall be deemed guilty. Directors and other officers can be prosecuted if they were responsible for the affairs of the company. The complainant must specifically allege the role and responsibility of each individual sought to be made liable.

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*This content is for educational and informational purposes only and does not constitute legal advice. For guidance on specific situations, consulting a qualified legal professional is recommended.*