Dishonour of Cheque – Section 138 of the Negotiable Instruments Act

Section 138 of the Negotiable Instruments Act, 1881 (henceforth referred as the Act) provides for conception of criminal proceedings against a person, whose cheque has been dishonoured, deeming it to be an act alike cheating. There is a plethora of judgements on the subject delivered by Supreme Court and various High Courts and is a growing apace and is a source of considerable perplexity, and we often find ourselves in a quandary.

138. Dishonour of cheque for insufficiency, etc., of funds in the  account:

 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, without prejudice. to any other provision of  this  Act, be punished 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: 
   Provided  that  nothing  contained in this  section  shall  apply  unless-
          (a) the  cheque  has been, presented to the bank  within  a period  of six months from the date on which it is  drawn  or  within the period of its validity, whichever is earlier;
          (b) the payee or the holder in due course. of the cheque as the  case may be, makes a demand  for  the  payment  of  the said  amount of money by giving a notice, in writing,  to
the  drawer  of the cheque, within thirty days of the receipt  of information by him from the bank regarding the return of  the cheque as unpaid; and
          (c) the drawer of such cheque  fails to make the payment of the said amount of money to the payee or, as the case may be, to  the  holder in due course of the cheque,  within  fifteen  days of the receipt of the said notice.

Explanation.-For  the  purposes of this section, “debt  or  other  liability” means a legally enforceable debt or other liability.

INGREDIENTS OF OFFENCE UNDER SECTION 138

1. The cheque should have been issued for the discharge , in whole or part, of any debt or other liability
2. The cheque should have been presented within a period of six months or within its validity period whichever is earlier.
3. The payee or holder in due course should have issued a notice in writing to the drawer within 30 days of the receipt of information by him from the Bank regarding the return of the cheque as unpaid.
4. After receipt of the said notice from the holder in due course, the drawer should have failed to pay the cheque within 15 days of receipt of the said notice.

Law Pertaining To Cheque Bouncing

We received various queries from people about cheque bouncing. What we advice to all is to immediately send a notice otherwise proceedings under Negotiable Instruments Act before a Magistrate cannot commence. A person has other remedies as well. Like filing a civil suit for recovery for the amount. But the criminal proceedings before a Magistrate are an excellent option for getting the amount recovered faster because of the implications of criminal sentencing.

This post also presumes that the cheque was issued towards a debt or a legally enforceable liability. In other situations, like gifts, donations, present, etc., an offence under Negotiable Instruments Act, 1881 cannot be made out for a bounced cheque. Another important aspect is that a cheque has a shelf-life / validity of only three months from the date of issue–this used to six months earlier.

For Instance, if you deposited a cheque on May 31st and should you come to know on Monday, June 03, that the cheque has bounced for reasons like “insufficient funds” “payment stopped” “refer to drawer” etc., you need to inform the person who issued the cheque.

It is mandatory that you send a demand notice of the amount of the cheque to the person who issued the cheque within 30 days from the day you received the information of the bouncing. Hence, on or before July 02, your notice should have been dispatched to this person.