Cheque Bounce (Section 138 of the Negotiable Instruments Act)

In day-to-day business and personal dealings, cheques are one of the most trusted forms of payment. They represent a promise to pay, backed by law. However, when a cheque is dishonoured or returned unpaid by the bank, it can create serious legal and financial consequences.
Under Indian law, a bounced cheque is not just a financial issue — it is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881.

1. Understanding Cheque Bounce

A cheque bounce occurs when the bank refuses to honour the cheque, returning it unpaid. The most common reasons for cheque bounce are:

• Insufficient balance in the account.

• Mismatch of signature.

• Account closed or dormant.

• Payment stopped by the drawer.

• Cheque date expired or post-dated cheque presented early.

In simple terms, a cheque bounce means that the promise of payment made through a cheque has failed, and the payee has the right to seek legal remedy.

2. What the Law Says – Section 138

Section 138 of the Negotiable Instruments Act, 1881, makes cheque dishonour a punishable offence. The law was enacted to promote faith in banking transactions and to discourage wilful default in payments made by cheque.

According to Section 138, if a cheque issued for the discharge of a legally enforceable debt or liability is returned unpaid due to insufficient funds or any other reason, the drawer of the cheque can face criminal prosecution, provided certain legal steps are followed.

3. Legal Procedure in Cheque Bounce Cases

The law lays down a clear process that must be followed step by step before initiating a criminal case:

Step 1 – Dishonour of Cheque

The cheque is presented in the bank within its validity period (currently 3 months from the date of issue). If it is returned unpaid, the bank issues a Cheque Return Memo specifying the reason for dishonour.

Step 2 – Legal Notice

Within 30 days of receiving the return memo, the payee (person who received the cheque) must send a legal demand notice to the drawer of the cheque.
This notice must mention the cheque details, the amount due, the reason for dishonour, and a demand for payment within 15 days.

Step 3 – Waiting Period

After the notice is received, the drawer has 15 days to make the payment and settle the matter. If the drawer fails to pay within this time, a criminal case can be filed.

Step 4 – Filing of Complaint

If the amount is still unpaid, the payee can file a criminal complaint in the court within 30 days from the date when the 15-day notice period ends.
The case is filed before a Judicial Magistrate First Class (JMFC) or Metropolitan Magistrate having jurisdiction over the area.

Step 5 – Trial

The court issues summons to the drawer. The accused gets an opportunity to defend himself. Evidence is presented by both sides, and after hearing the matter, the court delivers its judgment.

4. Punishment and Penalty

If convicted under Section 138, the drawer can face:

• Imprisonment up to 2 years, or

• Fine up to twice the cheque amount, or

• Both, as decided by the court.

Additionally, the court may direct the drawer to compensate the complainant. Many cases are also settled through compromise, where the accused agrees to make full or part payment.

5. Rights and Responsibilities

Both parties have specific rights and duties under this law:

• The payee (complainant) has the right to demand payment and initiate legal action if the cheque is dishonoured.

• The drawer (accused) has the right to defend himself by proving that the cheque was not issued for a legally enforceable debt or that payment was already made.

Common defences include proving that:

• The cheque was issued as a security, not for payment.

• There was no existing debt or liability.

• The complainant has already received payment through other means.

6. Importance of Proper Documentation

Maintaining clear and accurate records is crucial in cheque bounce matters. The following documents are usually required:

• Original cheque and return memo from the bank.

• Copy of the legal notice and proof of dispatch (postal receipt, courier slip, etc.).

• Proof of delivery of notice.

• Any correspondence or acknowledgment of liability.

Strong documentation helps the court determine the genuineness of the transaction and the intention behind issuing the cheque.

7. Cheque Bounce in Business and Commercial Dealings

In business transactions, cheque bounce cases are common due to delayed payments, credit arrangements, or disputes between parties.
Filing a case under Section 138 often acts as a deterrent and ensures that parties honour their financial commitments.

Businesses should ensure that:

• Cheques are received only against written invoices or agreements.

• Payments are followed up systematically.

• All dishonoured cheques are promptly acted upon within the legal time limits.

8. Settlement and Compounding of Offences

The law encourages amicable settlement of cheque bounce cases.
Even after a case is filed, the parties can reach a compromise at any stage — before or during trial — by agreeing on payment terms.
The court can allow “compounding” of the offence, meaning that the case can be closed once both sides agree and payment is made.
This approach saves time and promotes reconciliation between parties.

9. Civil and Criminal Remedies

Apart from filing a criminal complaint under Section 138, the payee also has the option to file a civil recovery suit for the cheque amount along with interest and damages.
While criminal proceedings focus on punishment, civil proceedings aim to recover the money legally due.
In many cases, both remedies are pursued together.

10. Time Limits and Jurisdiction

The case must be filed within the prescribed limitation period. Any delay may result in dismissal unless sufficient reason is shown.
The jurisdiction of the court is based on the place of the bank branch where the payee presented the cheque for clearance. This ensures clarity and avoids jurisdictional confusion.

11. Importance of Legal Advice

Cheque bounce cases may appear straightforward but often involve technicalities. Missing a time limit or an error in the legal notice can render the complaint invalid.
Legal guidance helps in:

• Drafting accurate notices within time.

• Filing complaints with proper documentation.

• Understanding possible defences and negotiating settlements.

• Avoiding procedural mistakes that could delay justice.

An experienced advocate ensures that the matter is handled professionally and lawfully at every stage.

12. Conclusion

The law on cheque bounce aims to maintain trust and discipline in financial transactions. Section 138 is not meant to harass genuine drawers but to ensure that people honour their commitments made through cheques.

For individuals and businesses alike, being aware of their rights, responsibilities, and timelines under this law is essential. Prompt legal action and accurate documentation can help recover dues effectively, while respectful communication and negotiation can often prevent disputes from escalating to court.