Section 138 NI Act: What to Do When a Cheque Bounces

Cheque dishonour is one of the most common financial disputes reaching Indian courts. Section 138 of the Negotiable Instruments Act, 1881 criminalises the dishonour of a cheque where it has been drawn to discharge a legally enforceable debt or liability and is returned for insufficient funds or if the amount exceeds the agreed arrangement.

When Does Section 138 Apply?

Not every bounced cheque gives rise to a Section 138 complaint. For the provision to apply, the following conditions must be met:

• The cheque must have been drawn on a bank account maintained by the drawer.
• It must have been drawn for the discharge of a legally enforceable debt or liability — not as a gift or advance against future consideration that has not accrued.
• The cheque must be presented to the bank within its validity period (generally three months from the date on the cheque).
• The cheque must be returned unpaid due to insufficient funds, or because the amount exceeds the amount arranged to be paid from that account.

The Step-by-Step Process for the Payee

Step 1: Obtain the Dishonour Memo

When a cheque bounces, the bank returns it to the payee along with a memo specifying the reason for return. This document is crucial evidence — keep it carefully.

Step 2: Send a Legal Notice Within 30 Days

The payee must send a written demand notice to the drawer within 30 days of receiving the cheque return memo. The notice must demand payment of the cheque amount within 15 days. The notice should be sent by registered post to the drawer's address as shown on the cheque.

Step 3: If Payment Is Not Made Within 15 Days

If the drawer fails to pay within 15 days of receiving the notice, the cause of action arises. The payee must then file a complaint before the appropriate Magistrate within 30 days of the expiry of this 15-day period.

Step 4: Filing the Complaint

The complaint under Section 138 must contain: the facts of the transaction, the details of the cheque, the dishonour memo, the demand notice and its postal receipt, and an affidavit verifying the complaint. It is filed before the Judicial Magistrate of the area where the cheque was presented for encashment.

Penalty and Relief

A conviction under Section 138 carries imprisonment for up to two years, or a fine which may extend to twice the cheque amount, or both. Importantly, Section 357 of the CrPC (now BNSS) allows courts to direct that a portion of the fine be paid as compensation to the payee — making Section 138 an effective recovery mechanism in addition to a criminal provision.

For the Drawer: Defenses Available

• The cheque was not issued for discharge of a debt or liability but as security.
• The cheque was presented after its validity period.
• The demand notice was not received or was not sent within the prescribed period.
• The complaint was filed beyond the limitation period.
• The debt or liability has been extinguished.

It is important to note that Section 139 creates a presumption in favour of the holder — that the cheque was issued for a debt — and the burden of rebutting this presumption rests on the accused.

Recent Developments

The Supreme Court has repeatedly emphasised expeditious disposal of Section 138 cases and has introduced provisions for interim compensation payable to the complainant during the trial. Under Section 143A NI Act, courts may direct the drawer to pay interim compensation of up to 20% of the cheque amount while the trial is pending.

This article is for general information only and does not constitute legal advice. For guidance on your specific matter, please consult a qualified advocate.