Cheque dishonour: how a Section 138 case proceeds

Section 138 of the Negotiable Instruments Act, 1881 makes the dishonour of a cheque an offence in defined circumstances. It is one of the most commonly filed categories of case in India, and also one of the most commonly mishandled, because the provision is unforgiving about procedure.

When the offence arises

The essential requirements are that:

1. The cheque was drawn on an account maintained by the drawer.
2. It was issued for the discharge, in whole or in part, of a legally enforceable debt or other liability. A cheque given as a gift, or as security in circumstances where no debt exists, stands differently.
3. It was presented within its period of validity.
4. It was returned unpaid for insufficiency of funds, or because it exceeded the arrangement with the bank.

The sequence, and the time limits

This is where cases are usually won or lost.

1. Return memo. The bank returns the cheque with a memo stating the reason. Keep the original cheque and the original memo.
2. Demand notice within 30 days. The payee must issue a written notice demanding payment within thirty days of receiving information from the bank about the dishonour.
3. 15 days to pay. The drawer has fifteen days from receipt of the notice to make payment. If payment is made, no offence arises.
4. Complaint within one month. If payment is not made, the cause of action arises, and a complaint must be filed within one month of the date on which that cause of action arose.

These periods are cumulative and strict. A notice issued on the thirty-first day, or a complaint filed after the month has run, ordinarily cannot be saved.

1. The starting point Return memo The bank returns the cheque with a memo stating the reason. Keep the original cheque and the original memo.
2. Within 30 days Demand notice The payee must issue a written notice demanding payment, within thirty days of receiving information from the bank about the dishonour.
3. Then 15 days The drawer may pay Fifteen days from receipt of the notice to make payment. If payment is made, no offence arises.
4. Within 1 month Complaint filed If payment is not made the cause of action arises, and the complaint must be filed within one month of the date on which it arose.

These periods are cumulative and strict. A notice issued on the thirty-first day, or a complaint filed after the month has run, ordinarily cannot be saved.

Drafting the notice

The demand notice is the foundation of the case. It should identify the cheque by number, date and amount, state the bank and the reason for return, set out the underlying liability, and demand the cheque amount specifically. Send it by a mode that produces proof of dispatch and delivery, and keep the postal receipts and tracking record.

A notice that demands amounts beyond the cheque amount, or that is vague about the underlying liability, gives the defence something to work with.

How the trial runs

A complaint under Section 138 is tried as a summons case. The complainant's evidence is ordinarily led on affidavit. The accused is then examined, may cross-examine the complainant, and may lead defence evidence.

The Act raises presumptions in favour of the holder of the cheque — broadly, that the cheque was issued for a debt or liability. Those presumptions are rebuttable. The accused does not have to prove the defence beyond reasonable doubt; it is enough to raise a probable defence that displaces the presumption, after which the burden returns to the complainant.

Common defences

• There was no legally enforceable debt or liability on the date of the cheque.
• The cheque was given as security, or was a blank signed cheque later filled in.
• The statutory notice was never served, or was defective, or was issued out of time.
• The complaint was filed beyond the prescribed period.
• The debt was barred by limitation when the cheque was issued.
• The signature is not that of the drawer, or the cheque was materially altered.

Settlement and compounding

Section 138 matters are compoundable, and courts actively encourage settlement, often through mediation or Lok Adalat. Settling early is usually cheaper for both sides than a contested trial, and the terms can be recorded so that they are enforceable.

Conclusion

Section 138 rewards precision. For a payee, the case is made or lost in the first six weeks after the cheque is returned. For a drawer, the same period is the best opportunity to resolve the matter before a criminal complaint is filed at all.

Legal disclaimer

This content is provided for general informational purposes only and should not be considered legal advice. Every legal matter depends on its specific facts and circumstances. Readers should seek appropriate professional legal advice for their individual situation.