Money and trust go hand in hand in commercial transactions. A cheque is more than just a slip of paper; it is a promise of payment backed by law. But when that promise fails, the consequences can be serious. In India, dishonour of cheques has become a widespread issue, leading to thousands of criminal cases each year. Section 138 of the Negotiable Instruments Act, 1881 (still in force despite the introduction of new criminal codes) is the key provision dealing with cheque bounce. This article explores the legal framework, procedure, defenses, and landmark judgments shaping cheque bounce cases in India.
Why Cheque Bounce is a Big Issue in India
Cheques are widely used for business, rent, salaries, and personal transactions. When a cheque is dishonoured due to insufficient funds, account closure, or signature mismatch then the payee often faces financial loss and inconvenience. To deter such defaults, Section 138 criminalizes cheque bounce, making it not just a civil wrong but a criminal offence.
The Supreme Court has described the provision as intended to “ensure credibility of commercial transactions” and promote faith in the banking system.
Section 138 NI Act: The Legal Provision
Section 138 lays down three key conditions for an offence:
- The cheque must be drawn on an account maintained by the drawer.
- It must be issued for discharge of a legally enforceable debt or liability.
- It must be returned unpaid by the bank due to insufficiency of funds or similar reasons.
If these conditions are met, the drawer of the cheque can be punished with imprisonment up to two years, or fine up to twice the cheque amount, or both.
Procedure in Cheque Bounce Cases
The law prescribes a strict timeline:
- Presentation of Cheque – The cheque must be presented within its validity period (usually three months).
- Dishonour by Bank – On dishonour, the bank issues a return memo specifying reasons.
- Legal Notice – The payee must send a written notice within 30 days of dishonour, demanding payment within 15 days.
- Failure to Pay – If the drawer fails to pay within 15 days, the cause of action arises.
- Filing of Complaint – The payee can file a criminal complaint before a Magistrate within one month of cause of action.
This timeline is strict; missing deadlines can defeat the case.
Defenses Available to the Accused
While cheque bounce is a serious offence, the law also provides defenses:
- No Legally Enforceable Debt: If the cheque was given as a gift, security, or without liability, Section 138 does not apply.
- Payment Made: If the drawer repays within the 15-day notice period, prosecution cannot continue.
- Post-Dated or Blank Cheques: If misused without liability, courts may quash proceedings.
- Technical Defects: If notice is not served properly or complaint filed beyond limitation, the case may fail.
Judicial Precedents
- Krishna Janardhan Bhat v. Dattatraya Hegde (2008): The Court held that presumption under Section 139 (that cheque was issued for debt) is rebuttable, and the accused can disprove it by probable defense.
- Rangappa v. Sri Mohan (2010): A landmark ruling where the Supreme Court held that presumption of liability is mandatory once cheque is admitted, shifting burden to accused.
- Dashrath Rupsingh Rathod v. State of Maharashtra (2014): Clarified territorial jurisdiction — the complaint must be filed where the bank of the payee is located. Parliament later amended the law to streamline this.
- M/s. Meters and Instruments v. Kanchan Mehta (2017): The Court encouraged compounding and settlement to reduce pendency, recognizing cheque bounce as primarily a financial dispute.
Compounding and Settlement
Cheque bounce cases have clogged courts across India. Recognizing this, courts and legislatures encourage settlement. Section 147 of the NI Act allows compounding, meaning parties can settle even after filing of complaint. Many courts refer such cases to mediation, reducing litigation burden.
Practical Advice for Payees and Drawers
- For Payees (Recipients): Keep the cheque, return memo, and copy of legal notice safely. File complaint promptly within limitation. Explore settlement through mediation if possible.
- For Drawers (Issuers): Do not ignore legal notice. If liability is genuine, pay within 15 days to avoid criminal case. If cheque was misused, collect evidence and raise defense at earliest.
Conclusion
Cheque bounce law in India is a blend of criminal deterrence and civil compensation. By criminalizing dishonour, Section 138 ensures accountability in financial dealings. At the same time, courts recognize the need for flexibility through settlement and compounding. For law students, cheque bounce illustrates how commercial law intersects with criminal law. For citizens, it is a reminder that issuing a cheque is not just a promise but a legally enforceable commitment.
As India moves towards digital payments, cheque usage may decline, but until then, Section 138 remains one of the most litigated provisions, reflecting both the trust and the tension inherent in financial transactions.