Cheque Bounce in India: A Drawee's Guide to Section 138 of the NI Act

Introduction: When a Bounced Cheque Becomes a Criminal Offence

Oversight of the Negotiable Instruments Act, 1881

• The Negotiable Instruments Act, 1881 (“The Act”) is a foundational piece of commercial law in India that governs specific types of financial documents used to facilitate commerce, transfer money, and create legal obligations.

• The Act was enacted during British colonial rule in 1881, largely based on the principles of English Law Merchant, to establish a uniform and reliable legal framework for these instruments.

The Act's primary function is to define and amend the law relating to three key types of financial instruments:

Instrument	Particulars	Parties Involved
Promissory Note	An instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to, or to the order of, a certain person, or the bearer.	Maker (promises to pay) and payee (receives payment).
Bill of Exchange	An instrument in writing containing an unconditional order signed by the maker (drawer) directing a certain person (drawee) to pay a certain sum of money to a third person (payee).	Drawer (gives the order), Drawee (directed to pay), and Payee (receives payment).
Cheque	A type of bill of exchange drawn on a specified banker and always payable on demand.	Drawer (writes the cheque), Drawee (the bank), and Payee (receives payment).

The Act covers the entire life cycle of the above-mentioned instruments, including:

• Definition and Features: It establishes the legal characteristics of a negotiable instrument, such as being in written form, guaranteeing unconditional payment, and having free transferability.

• Transferability (Negotiation): It specifies how the instrument can be legally transferred (negotiated) from one person to another, either by mere delivery (for bearer instruments) or by endorsement and delivery (for order instruments).

• Rights and Obligations: It defines the rights and liabilities of all parties involved, including the "Holder in Due Course" (HDC), who acquires the instrument in good faith and gets better protection against defects in the title.

• Dishonour and Penalties (Section 138 of the Act): Crucially, it provides a powerful criminal remedy for the dishonour of cheques due to insufficient funds or related reasons, aiming to ensure payment enforcement and promptitude.

The primary goals of the Act are centered on fostering confidence and certainty in commercial transactions:

• Legal Recognition and Enforceability: To provide a robust legal framework that makes instruments like cheques and bills of exchange legally binding and enforceable in court.

• Facilitate Commerce and Trade: To ensure smooth, safe, and easy commercial transactions by providing a secure way to transfer money and extend credit without carrying large amounts of cash.

• Protection of Rights: To safeguard the rights of the drawee and the holder (especially the holder in due course) against prior defects or disputes.

• Uniformity: To consolidate and unify the laws related to these instruments across India, replacing older customs and inconsistent laws.

• Accountability: To curb the practice of issuing cheques without having sufficient funds, thereby ensuring the reliability of cheques as a form of payment (through the introduction of penal provisions in 1988). 

Beyond Financial Loss: Why Section 138 Matters

A cheque bounce under Section 138 of the Negotiable Instruments Act, 1881, is fundamentally a hybrid offence; it is a civil wrong that has been given a criminal color. While the underlying dispute is commercial (a civil debt), the law uses a criminal mechanism to enforce financial discipline and ensure the reliability of cheques.

Nature of the offence:

• Quasi-Criminal: The Hon’ble Supreme Court has described proceedings under Section 138 as "quasi-criminal" or a "civil sheep in a criminal wolf's clothing" in P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd. [(2021) 6 SCC 258].

• Objective: The primary objective is not merely punitive (punishment) but also compensatory and restitutive. The threat of criminal prosecution is essentially leverage to ensure the debt is paid.

• Classification: It is generally classified as a bailable, compoundable, and non-cognizable offence. Being compoundable means the matter can be legally settled between the parties at any stage of the proceedings.

Penalties of the offence:

Upon conviction, the court can impose the following penalties on the drawer of the cheque:

• Imprisonment: A term of imprisonment which may extend up to two years.

• Fine: A fine which may extend to twice the amount of the cheque.

• Both: The court may impose both the fine and the imprisonment.

In practice, courts often prioritize the compensatory aspect, frequently ordering a large fine (which goes to the complainant as compensation) rather than imposing the maximum jail term, provided the drawer agrees to pay.

The Essential Ingredients: Proving a Case Under Section 138

The Nature of the Debt

• The cheque must be issued by the drawer in favour of the drawee for the discharge of a legally enforceable debt or liability.

• It must not be for a gift, donation, or an illegal obligation.

The Cheque Presentation Deadline

• The cheque must be presented to the bank by the drawee within its validity period, which is three months from the date it was drawn.

The Grounds for Dishonour

• The cheque must be returned unpaid, primarily due to "insufficient funds" or because the amount exceeds the agreed-upon limit.

• Related reasons like 'Account Closed' or 'Stop Payment' also constitute valid causes of action for initiating proceedings under Section 138 of the Act.

Your Timeline for Action: The Statutory Windows (A Critical 60-Day Span)

Window 1: Sending the Legal Demand Notice (Strict 30-Day Limit)

• The drawee must send a written demand notice, by email and/ or Registered Post Acknowledgement Due, to the drawer within 30 days of receiving the Bank Return Memo (information of dishonour).

• Warning: Failure to adhere to this 30-day period is generally not condonable by the Court, making this the most crucial step.

Window 2: The Drawer's Payment Period (15 Days)

• The drawer is given fifteen days from the date they receive your notice to make the payment.

• If payment is made during this window, no offense is committed, and the matter is considered closed.

Window 3: Filing the Complaint (30 Days from Cause of Action)

• The Cause of Action arises on the 16th day after the drawer receives the notice (assuming they failed to pay).

The drawee must file the criminal complaint before a Magistrate within one month (30 days) from the date the cause of action accrued.

What if I Miss the Filing Deadline? (The Condonation Relief)

Seeking the Court's Discretion

• The Proviso to Section 142(b) of the Act grants the Court the authority to condone the delay in filing the complaint which may be seen as: Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period

• The key requirement is filing a separate application demonstrating "sufficient cause" for the delay.

Next Steps: Securing Professional Legal Representation

• The readers are advised to contact an advocate/ law firm immediately to ensure compliance with the strict statutory timelines and correctly draft the legal demand notice.

• The drawee is advised to keep the following documents handy while discussing their case with the advocate:

  • Original Cheque

  • Bank Return Memo

  • Copy of the legal notice and

  • Proof of Service

• The drawee may file a separate civil suit for recovery alongside the proceedings under Section 138 of the Act to enable faster debt recovery.