Cheque Bounce: Section 138, Negotiable Instruments Act

Section 138 of the Negotiable Instruments (NI) Act, 1881, provides a statutory remedy where a Cheque issued for a legally enforceable debt is returned unpaid. The provision aims to preserve confidence in Cheque payments and to avoid irresponsible or fraudulent conduct in commercial and personal transactions. In India, dishonor of cheque has serious legal consequences. This article explains when a bounced cheque becomes an offence, the requirements under Section 138, important Supreme Court rulings, and the remedies available to the drawee of the cheque.

A Cheque may be considered as bounced for a variety of reasons. The most commonly grounds in practice are:

• Insufficient Funds in the drawer’s bank account. 
• Stop-Payment Instructions issued by the drawer to the bank.
• The Cheque amount exceeds the arrangement permitted by the bank (for example, when overdraft limits are exceeded).
• Signature Mismatch.
• Account closed by the drawer of the cheque OR frozen.

The bank’s return memo is the primary evidence of dishonor; thus it is incumbent upon the drawee of the cheque to preserve the original cheque returning memo and copies of all relevant communications.

To establish an offence under Section 138, NI Act the complainant must establish the following conditions, which in common parlance are often referred to as the cheque bounce rules-

1. The cheque in question was issued by the drawer for a legally enforceable debt/liability;
2. The said cheque must be presented within the prescribed limit i.e within 3 months after the date of issuance
3. The cheque in question is returned unpaid for such reasons as already mentioned hereinbefore
4. A statutory legal demand notice is issued within 30 days from the date of said return and is served upon the drawer by the drawee of the cheque through a counsel calling upon the drawer to make the payment of the cheque amount within 15 days from the date of receipt of the legal notice. Therefore, 
5. However, despite the receipt of the said legal demand notice, the drawer fails to make the payment of the cheque amount within 15 days, the offence under section 138 NI Act is said to have been committed on the expiry of 15 days as aforesaid.

The most common reason for dishonour is lack of funds. If cheque bounces due to insufficient balance, the law presumes that the drawer was aware of the shortage at the time of issuing the cheque.

Legal implications in such cases:

• Strong presumption against the drawer.
• Burden shifts to accused to prove innocence.
• Conviction if the presumption is not rebutted by the accused with a probable defence.

However, many cases still get resolved amicably once legal pressure builds. Early settlement often saves time, money, and reputation for both parties.

A common doubt people have is: is cheque bounce a criminal offence in India? The answer is yes, but only when legal conditions under Section 138 are satisfied.

Important points to understand:

• Not every bounced cheque is a criminal offence.
• Criminal liability arises only after failure to pay despite notice i.e the debt/liability remaining unpaid after the lapse of 15 days time from the date of receipt of legal notice.
• The offence is considered quasi-criminal in nature.

This means the law treats cheque bounce seriously but still allows room for settlement. Once a complaint is filed, court proceedings begin and cannot be ignored.

If these conditions are well established, Section 138 prescribes a penal consequence which is imprisonment for a term which may extend to two years, or a fine which may extend to twice the amount of the Cheque in question, or both. 

The Supreme Court in a landmark judgment titled as Rangappa v. Sri Mohan (2010) in para 14 held that -

“The presumption mandated by Section 139 of the Act does indeed include the existence of a legally enforceable debt or liability.”

 The Court further held that “this is of course in the nature of a rebuttable presumption and it is open to the accused to raise a defence wherein the existence of a legally enforceable debt or liability can be contested.” 

Judicial interpretation of Section 138 and 139 is decisively relevant to both complainants and accused. The two most significant points derived from this verdict are:

Once the issuance of the cheque and the signature on the same are admitted by the drawer, a presumption is raised in favor of the complainant qua the existence of a legally enforceable debt.

The mere existence of presumption in favor of the complainant does not ipso facto mean that the complainant has been able to establish a legally enforceable debt. However, the said presumption may be rebutted by the accused by leading evidence. Once the accused is able to put forth a plausible defence, his/her liability towards the complainant qua the cheque in question gets absolved. However, mere denial of the debt or giving sham defence without evidence is not enough to rebut the presumption so raised in favor of the complainant. The accused however must come up with some probable defence supported by documentary evidence.

The following steps should be taken to institute a complaint under section 138 of the NI Act:

The first and foremost step to initiate the proceedings is to serve a written demand notice/legal notice within thirty days of receipt of the bank’s return memo, stating the Cheque particulars, dates, and a demand for payment to me made within fifteen days of receipt of notice. Service of the said legal notice should be done the by registered post, courier, and electronically, via WhatsApp and E-mail.

If the drawer fails to pay the amount within fifteen days, the holder may initiate criminal proceedings under Section 138, in accordance with the procedures prescribed under the Bharatiya Nagrik Suraksha Sanhita, 2023 (BNSS).

1. If the drawer responds and offers payment or a proposal to pay back the amount in a few instalments, the same should be agreed upon, by executing a settlement agreement in writing.

If upon receipt of the legal notice, the drawer still does not pay back the amount within 15 days, the offence is said to be committed.

where the drawer alleges forgery, loss or misuse, the complainant should place on record contemporaneous materials (invoices, acknowledgements, bank transfers, witnesses) that establish the debt or liability and rebut the drawer’s claim.

Sending a legal notice is a prerequisite and mandatory step in every cheque bounce case. A cheque bounce notice must be sent within 30 days from the date the bank informs about dishonour.

Key timelines to remember:

• Legal notice to be sent within 30 days.
• Drawer gets 15 days under the 138 notice period to make payment from the date of receipt of legal notice.
• Complaint must be filed within the time limit prescribed under section 138 of Negotiable Instrument Act i.e within 30 days from the date of expiry of the 15 days period.

If any of these timelines are missed, the complainant may lose the legal right to proceed. This is why documentation and timely action are extremely important.

Section 138 of the Negotiable Instruments (NI) Act, 1881, provides a statutory remedy where a Cheque issued for a legally enforceable debt is returned unpaid. The provision aims to preserve confidence in Cheque payments and to avoid irresponsible or fraudulent conduct in commercial and personal transactions. In India, dishonor of cheque has serious legal consequences. This article explains when a bounced cheque becomes an offence, the requirements under Section 138, important Supreme Court rulings, and the remedies available to the drawee of the cheque.