A cheque is a type of negotiable instrument that can be easily encashed. It is defined under section 6 of the Negotiable Instruments Act, 1881 as ‘a bill of exchange on a specific banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.’[1] The person who creates the cheque is referred to as the ‘Drawer’, while the individual to whom the cheque is addressed or the recipient of the cheque is known as the ‘Payee’. The entity that is instructed to make the payment, typically the bank, is termed the ‘Drawee’.

DISHONOUR OF CHEQUE

A cheque is considered dishonored when the Payee submits it to the bank for payment and it is subsequently returned unpaid from the bank account. It can be due to multiple reasons as:

• When the signature of the drawer does not match with that of the Cheque
• When the amount in words does not match with that of the numbers on the cheque
• When there is alteration, modification, or overwriting on the cheque
• When the validity of the cheque has expired
• When the cheque has been damaged
• When the drawer has used a cheque from an old chequebook which has been discontinued by the bank

But when the dishonour is due to insufficiency of funds in the drawer’s bank account, the cheque is bounced, it is an offence. The bank rejects and returns such cheques with a memo of insufficient funds. The drawer of the check may be served with a notice that the cheque has bounced, demanding payment of the full amount.

The notice is sent under section 138 of the Negotiable Instruments Act, 1881.[2] If the cheque is bounced due to some other reasons than insufficient funds, then the bank cannot issue such notice and the cheque can be resubmitted. The drawer cannot be prosecuted if the dishonored cheque was a gift.

STRICT LIABILITY

Section 138 of the Negotiable Instruments Act, 1881 imposes strict liability on the drawer so that regular business transactions are easily settled.[3] Dishonour of a Cheque is said to be a criminal offence that is punishable by fine or punishment which may extend to 2 years or both. It is a bailable offence.

PROCEDURE FOLLOWED AFTER CHEQUE GETS DISHONOURED

1. Upon receiving the returned dishonoured cheque from the bank, the payee is obligated to issue a cheque-bound legal notice to the drawer within 15 days of the date the notice is received. This notice must be sent within 30 days of the date of the acknowledgment of the ‘Cheque Return Memo’.
2. After the expiry of 15-day time period, if the drawer is still unable to pay the amount, he can be punished under section 138 of the Negotiable Instruments Act.[4] The complaint can be filed in the court of Judicial Magistrate of First Class or Metropolitan Magistrate.

• If the court finds the payee’s claim satisfactory, then it may call upon the drawer by issuing summons.

1. If the drawer declines to show up in court, the magistrate may issue a warrant against him that is subject to bail. If the accused does not show up in court then a bailable warrant is issued, and if even after the accused does not appear in court, a non-bailable warrant is issued.
2. If the accused pleads guilty, the court sentences him and if the accused pleads not guilty, the accused is given a copy of the complaint made out against him.
3. The parties can then cross-examine one other and present their supporting evidence.

• The judgment is issued by the court and is subject to appeal by either side.

DOCUMENTS REQUIRED TO FILE A CASE OF CHEQUE DISHONOUR IN INDIA

The documents required are as follows:

1. A duplicate copy of the notice delivered to the drawer.
2. Evidence of notice delivery, such as a courier receipt or registered mail receipt.

• Original cheque on record.

1. A cheque return memo issued by the banker to the drawer.
2. Proof of the existence of a legally enforceable debt or liability.

JURISDICTION IN CASE OF FILING CHEQUE DISHONOURED SUIT

According to Section 142(2) of the Negotiable Instruments (Amendment) Act, 2015, the payee can file the complaint before the Magistrate at the place where the drawee banker’s branch is situated and at no other place.[5]

OTHER LIABILITIES

Apart from a complaint under the N.I.A, other remedies can also be invoked:

Criminal Law- An FIR can be filed against the accused. Further, a case can be filed under sections 406 and 420 of the Indian Penal Code,1860 that is Criminal breach of trust and Cheating respectively.[6]

Civil Law- A summary proceeding can be filed under order XXXVII of the Code of Civil Procedure.[7] The facility of summary procedure is available even when the bill or the note is non-negotiable.

Consumer (Protection) Act, 1986- ‘Banking’ as a service is included in section 2(1)(o) of the CPA therefore,[8] when the bank wrongfully dishonours the cheque, it amounts to a deficiency in service on the part of the bank and for that, it must be liable to pay compensation for any loss including the loss of reputation.

LANDMARK JUDGMENTS

1. In the case Dashrath Singh Rathod vs. State of Maharashtra it was held that it is not a valid ground under section 140 of the N.I.A.,[9] that the drawer had no idea about the dishonour of the cheque. The state of mind of the accused, mens rea, knowledge or reasonable beliefs are not essential in such cases.[10]
2. In N Parameswaran Unni vs G Kannan, it was held that when a notice is sent by registered post and is returned with postal endorsement “refused” or “not available in the house” or “house locked” or “shop closed” or “addressee not in the station”, the due service of the notice within 15 days is presumed.[11]
3. In Dashrathbhai Trikambhai vs. Hitesh Mahendrabhai Patel, it was held that the presence of a legally enforceable debt at the date of encashment is important.[12]

RECENT AMENDMENTS IN THE ACT

• 20% of the check’s value will be paid as temporary compensation to the payee by the cheque’s drawer.
• Within 60 days of the date of the court’s order, the interim compensation must be paid.
• The payee must repay the compensation with interest if the court determines that the cheque’s drawer was not at fault and is found not guilty.

APPLICABILITY OF SECTION 138 WHEN ELECTRONIC FUNDS ARE DISHONOURED

ELECTRONIC CLEARING SERVICE (ECS)

ECS is an electronic method of receipt and payment for routine and recurring transactions. ECS essentially allows for the mass transfer of funds from one bank account to numerous bank accounts or the opposite.

ECS credit facilitates the payment of funds for the distribution of dividends, interest, salary, pension, etc., of the user institution whereas ECS debit helps pay periodic or repetitive bills that are owed to the user institution by a large number of consumers, such as phone, electricity and water bills, cess and tax collections, loan instalment repayments, periodic investments in mutual funds, insurance premiums, etc.

When there are insufficient funds to perform an electronic transfer of payments or when the amount to be transferred would exceed the payer’s credit limit, Section 25 of the Payment and Settlement Systems Act, 2007 can be invoked under which the payer is liable to be either imprisoned for 2 years or fined an amount which is twice the amount of the electronic funds’ transfer or both.[13] Thus dishonour of electronic funds is an offence. Certain exceptions to this offence are:

1. If the payment of any amount of money of electronic funds was initiated to discharge another person of any liability by paying in whole or in part;
2. When the electronic funds transfer was initiated in accordance with the relevant procedural guidelines as issued by the system provider;
3. When the beneficiary has given a demand notice within 30 days of receiving information from the bank concerning dishonour of electronic transfer of funds;
4. When the person making the payment has transferred the funds within 15 days of receiving the said notice.

Electronic fund transfers and their regulations are carried out by the Reserve Bank of India. The chief manager of RBI issued a clarification that ‘the act of dishonour of an electronic funds transfer carries the same penalties as the act of dishonour of a cheque and that Section 25 of the Payment and Settlement Systems Act offers the same rights and remedies as Section 138 of the Negotiable Instruments Act’.[14]

Further in Ritu Jain vs The State and another, it was held that when section 25 of the Payment and Settlement Act is invoked, section 138 of the Negotiable Instruments Act is also applicable.[15]

CONCLUSION

Today, in a world that is expanding quickly, we all conduct our business both online and offline. In most cases, we give someone a cheque in the form of an order to pay or withdraw the money from the bank. The new ruling and changes have made it better prepared in case of a conflict, but concurrently, events like frivolous appeals and arbitrary delays to procedures can postpone the payment of the cheque. In many ways, this is still highly harmful to the payee, and to address it, the law needs to be made more comprehensive.

Written by Divyanshi Maheshwari, 3rd Year Law Student at the Institute of Law, Nirma University.

References:

[1] Negotiable Instruments Act 1881, s 6.

[2] Negotiable Instruments Act 1881, s 138.

[3] Negotiable Instruments Act 1881, s 138.

[4] Negotiable Instruments Act 1881, s 138.

[5] Dashrath Rupsingh Rathod vs. State of Maharashtra, (2014) 9 SCC 129.

[6] Indian Penal Code 1860, s 406 & Indian Penal Code 1860, s 420.

[7] Code Of Civil Procedure 1908, o XXXVII.

[8] Consumer (Protection) Act 1986, s 2 (1) (o).

[9] Negotiable Instruments Act 1881, s 140.

[10] Dashrath Rupsingh Rathod vs. State of Maharashtra, (supra).

[11] N. Parameswaran Unni Vs. G. Kannan, (2017) 5 SCC 737.

[12] Dashrathbhai Trikambhai Patel vs. Hitesh Mahendrabhai Patel, Criminal Appeal No. 1497 of 2022 (SC).

[13] Payment and Settlement Systems Act 2007, s 25.

[14] DPSS. CO.PD.No.497/02.12.004/2011-12.

[15] Ritu Jain Vs. The State, W.P.(CRL) 1266/2019.

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In contemporary business transactions, cheques remain a fundamental instrument of payment despite the rapid advancement of digital payment systems. A cheque represents not merely a piece of paper but embodies trust, financial obligation, and commercial credibility. When a cheque gets dishonoured or bounces upon presentation to the bank, the consequences extend far beyond simple financial inconvenience, entering the realm of criminal liability. Understanding the legal framework governing dishonoured cheques becomes essential for both creditors seeking recovery and drawers wanting to protect themselves from potential prosecution.

The dishonour of cheques created significant challenges in commercial transactions before legislative intervention. Payees found themselves with limited recourse when cheques bounced, often forced to pursue lengthy civil litigation with uncertain outcomes. Recognizing this gap, the Indian Parliament introduced stringent provisions to restore credibility to negotiable instruments and protect the interests of honest creditors.

Historical Context and Legislative Intent

Prior to 1988, when a cheque was dishonoured, the payee could only pursue civil remedies through recovery suits or alternative dispute resolution mechanisms like conciliation and arbitration. This proved inadequate to deter the misuse of cheques and failed to maintain commercial discipline. The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 introduced Chapter XVII containing Sections 138 to 142 into the Negotiable Instruments Act, 1881, transforming cheque dishonour from a purely civil matter into a quasi-criminal offence.

The Supreme Court in Modi Cements Ltd v. Kuchil Kumar Nani [1] articulated the legislative objective behind introducing these provisions, stating that the object was to promote the efficacy of banking operations and ensure credibility in transacting business through cheques. The Court emphasized that once a cheque has been drawn and issued to the payee, if any instructions are issued to the bank for non-payment and the cheque is returned with such an endorsement, it amounts to dishonour and falls within the meaning of the provision.

This legislative intervention aimed to inculcate faith in the banking system and prevent cheques from being used as tools of dishonesty. The provisions established strict liability for dishonoured cheques, sending a clear message that financial commitments must be honoured. The dual nature of these provisions, being both punitive and compensatory, distinguishes them from ordinary criminal offences.

Legal Framework Under the Negotiable Instruments Act

The cornerstone of the legal framework addressing dishonoured cheques is Section 138 of the Negotiable Instruments Act, 1881. This provision stipulates that 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 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.

The punishment prescribed includes imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both. However, the provision does not operate blindly and incorporates several safeguards to ensure fairness. These conditions precedent must be satisfied before an offence under this provision can be established.

First, the cheque must be 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. Second, the payee or holder in due course must make a demand for payment by giving notice in writing to the drawer within thirty days of receiving information from the bank regarding the return of the cheque as unpaid. Third, the drawer must fail to make payment of the said amount within fifteen days of receiving the said notice.

These conditions ensure that the drawer receives adequate opportunity to rectify the default before facing criminal prosecution. The statutory notice requirement introduces an essential element of fairness and accountability, ensuring that honest individuals who may have faced inadvertent default are given a fair opportunity to make payment.

Statutory Presumptions and Burden of Proof

One of the most significant features of the legal framework governing dishonoured cheques is the statutory presumption established under Section 139 of the Negotiable Instruments Act. This provision states that unless the contrary is proved, it shall be presumed that the holder of a cheque received the cheque for the discharge, in whole or in part, of any debt or other liability. This presumption operates in favour of the complainant and shifts the burden of proof to the accused.

The landmark judgment in Rangappa v. Sri Mohan [2] clarified the scope and application of this presumption. The Supreme Court held that once the issuance of the cheque is admitted or proved, the trial court is duty bound to raise the presumption that the dishonoured cheque was indeed issued in discharge of a legally enforceable debt or liability. The Court emphasized that this presumption is a rebuttable one and it is for the accused to prove that the cheque in question was not issued for the discharge of any debt or liability.

The Court further explained that the offence made punishable by this provision can be better described as a regulatory offence since the bouncing of a cheque is largely in the nature of a civil wrong whose impact is usually confined to the private parties involved in commercial transactions. In such a scenario, the test of proportionality should guide the construction and interpretation of reverse onus clauses, and the accused cannot be expected to discharge an unduly high standard of proof.

In Kumar Exports v. Sharma Carpets [3], the Supreme Court elaborated on how the accused can rebut this presumption. The Court held that the accused has two options: he can either show that consideration and debt did not exist or that under the particular circumstances of the case, the non-existence of consideration and debt is so probable that a prudent man ought to suppose that no consideration and debt existed. The standard of proof required is preponderance of probabilities rather than proof beyond reasonable doubt.

Procedural Framework and Trial Process

The procedural framework for cases involving dishonoured cheques has been specifically designed to ensure speedy disposal while maintaining fairness. Section 142 of the Negotiable Instruments Act prescribes that the complaint must be made in writing by the payee or holder in due course within one month from the date on which the cause of action arises. The cause of action arises when the drawer fails to make payment within fifteen days of receiving the statutory notice.

The complaint must be filed before a Judicial Magistrate First Class. Section 143, as inserted by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, mandates that all offences under Chapter XVII shall be tried summarily in accordance with the provisions of Sections 262 to 265 of the Code of Criminal Procedure, 1973. This provision empowers the magistrate to pass a sentence of imprisonment for a term not exceeding one year and a fine exceeding five thousand rupees.

Recognizing the burden that dishonoured cheque cases place on the judicial system, the Supreme Court in Indian Bank Association v. Union of India [4] issued comprehensive guidelines to streamline the trial process. The Court directed that the Metropolitan Magistrate or Judicial Magistrate should scrutinize the complaint on the day it is presented and, if accompanied by proper affidavit and documents, take cognizance and direct issuance of summons immediately. The Court emphasized that summons should be sent by post as well as by email to ensure effective service.

The Court further directed that examination of witnesses must be completed within three months and that courts have the option of accepting affidavits instead of oral testimony. These directions aim to reduce unnecessary adjournments and ensure that genuine creditors receive timely justice without prolonged litigation. The emphasis on summary trial reflects the legislative intent to provide swift remedies for what is essentially a commercial dispute with criminal consequences.

Defences Available to the Accused

While the legal framework establishes strict liability for dishonoured cheques, it does not operate blindly against the drawer. The accused has the right to rebut the statutory presumptions by raising credible defences based on the preponderance of probabilities. One commonly invoked defence is the absence of a legally enforceable debt or liability at the time of issuance of the cheque. The accused may argue that the cheque was issued as security or that there was no subsisting debt.

Courts have held that even a security cheque may fall within the scope of the provision if the liability had crystallised by the time the cheque was presented. However, the drawer can establish through evidence that the cheque was misused or presented contrary to the terms of the agreement. Another valid defence pertains to the lack of proper service of the statutory notice. Since the notice is a condition precedent to prosecution, any defect in its service or content may vitiate the proceedings.

The defence that a blank signed cheque was lost or misused has been examined in several cases. In Rangappa v. Sri Mohan, the Court observed that merely claiming that a blank cheque was lost would not suffice if the accused fails to provide credible evidence supporting this claim. The Court noted that if the defence raised by the accused was true, he would have issued instructions to stop payment of the cheque instead of allowing it to be presented and dishonoured.

Stop payment instructions do not absolve the drawer from liability. The Supreme Court in Modi Cements Ltd v. Kuchil Kumar Nandi clarified that once a cheque has been issued to the payee and subsequently the drawer issues stop payment instructions, the dishonour still attracts liability under the provision. The Court held that accepting any other interpretation would defeat the very object of introducing these provisions in the statute.

Jurisdiction and Territorial Considerations

The question of territorial jurisdiction in cases involving dishonoured cheques has evolved through judicial interpretation. The provision creates an offence that is completed only when all the conditions precedent are satisfied. This includes the presentation of the cheque, its dishonour, issuance of notice, and failure to pay within the stipulated period. Each of these acts may occur in different territorial jurisdictions, creating potential complexity.

Courts have held that jurisdiction can lie where the cheque was drawn, where it was delivered, where it was presented for payment, or where it was dishonoured. This interpretation ensures that complainants have reasonable options for filing their complaints without facing undue hardship. However, the Supreme Court has emphasized that jurisdiction must be established through proper pleading and evidence, and cannot be assumed.

Compounding and Settlement

Recognizing that these cases often involve commercial disputes between parties who may wish to settle, the provision makes the offence compoundable. This means that the complainant and the accused can mutually agree to resolve the matter, even after the trial has commenced. The court’s permission is required for compounding, and once compounding is allowed, the accused is discharged.

The compensatory nature of these provisions has been repeatedly emphasized by courts. While the criminal consequences serve as a deterrent, the ultimate objective is to ensure that the payee receives payment. Compounding facilitates this objective by allowing parties to reach settlements without prolonged litigation. Courts have been directed to encourage compounding at early stages to reduce the burden on the judicial system.

Recent Developments and Judicial Trends

Recent amendments and judicial pronouncements have further refined the legal framework. The introduction of interim compensation under Section 143A allows complainants to receive partial relief during the pendency of proceedings. Courts have also increasingly emphasized the use of alternative dispute resolution mechanisms and mediation to resolve these disputes efficiently.

The judiciary has maintained a balance between protecting creditors and ensuring that the provisions are not misused for harassment. Courts scrutinize cases to ensure that the complainant has established all the essential ingredients of the offence and that the statutory notice complies with the requirements. At the same time, courts have been strict in ensuring that accused persons do not take advantage of procedural technicalities to delay justice.

Conclusion

The legal framework governing dishonoured cheques in India represents a carefully calibrated balance between commercial discipline and procedural fairness. The provisions transform what would otherwise be a civil dispute into a criminal offence, thereby creating a strong deterrent against the misuse of cheques. The statutory presumptions favour honest creditors while ensuring that accused persons have adequate opportunity to defend themselves.

Understanding this framework is essential for anyone engaged in commercial transactions. Creditors must ensure strict compliance with procedural requirements, particularly regarding the issuance of statutory notices and timely filing of complaints. Drawers must recognize that issuing a cheque creates a serious legal obligation and that failure to honour it carries significant consequences. The emphasis on summary trials and speedy disposal ensures that genuine disputes are resolved efficiently without unnecessary delay.

As commercial transactions continue to evolve, the principles established by these provisions remain relevant. They reinforce the fundamental expectation that financial commitments must be honoured and that the legal system will intervene decisively when this trust is breached. The framework serves not merely to punish but to restore confidence in negotiable instruments and maintain the integrity of commercial relationships.

References

[1] Modi Cements Ltd v. Kuchil Kumar Nani, AIR 1998 SC 1057. Available at: https://indiankanoon.org/doc/975556/ 

[2] Rangappa v. Sri Mohan, (2010) 11 SCC 441. Available at: https://indiankanoon.org/doc/150051/ 

[3] Kumar Exports v. Sharma Carpets, (2009) 2 SCC 513. Available at: https://indiankanoon.org/doc/363129/ 

[4] Indian Bank Association v. Union of India, AIR 2014 SC 2528. Available at: https://indiankanoon.org/doc/164769777/ 

[5] Negotiable Instruments Act, 1881 (Act No. 26 of 1881), Section 138. Available at: https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_33_00042_00042_1523271998701&sectionId=45718&sectionno=138&orderno=143 

Published and Authorized by Rutvik Desai

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