Privileged and Confidential

For discussions only

NOTE ON DISHONOUR OF CHEQUES AND NOTICE UNDER SECTION 138 OF THE

NEGOTIABLE INSTRUMENTS ACT, 1881

I. INTRODUCTION

The Negotiable Instruments Act, 1881 ("Act") was enacted with a view to regulate the exchange of
negotiable instruments such as promissory notes, bill of exchange and cheques. Section 138 of the Act
was introduced by way of the Banking, Public Financial Institutions and Negotiable Instruments Law
(Amendment) Act, 1988 with a view to safeguard the faith of the creditor in the drawer of the cheque
and ensure greater vigilance in financial matters.

II. KEY CONDITIONS FOR INITIATING ACTIONS UNDER SECTION 138 OF THE
ACT

The key conditions for initiating an action under the Act for dishonouring of the cheque is as under:

a) The cheque should have been drawn by the drawer on an account maintained by him with a banker
for payment of any amount of money to another person.

b) The cheque should have been returned by the bank unpaid or dishonoured due to insufficient funds
in the drawer's account or that it exceeds the amount arranged to be paid from that account by an
agreement made with that bank.

c) The cheque should have been issued towards discharge of a debt or other liability.

Note: For the purposes of these provisions under the Act, ‘debt or other liability’ shall mean a
legally enforceable debt or other liability.

III. ISSUANCE OF NOTICE UNDER THE ACT

Dishonour of cheque is an offence punishable under Section 138 of the Act. The said offence is a non-
cognizable offence (i.e. the police cannot arrest the accused without a warrant as well as cannot start
an investigation without the permission of the court) and is bailable.

Procedure to be followed under Sections 138 and 142 of the Act, while issuing the notice is as under:

a) The issued cheque should have been presented to the bank within 3 (three) months from the date
on which it was drawn or within the period of its validity, whichever is earlier.

b) Upon receiving a “Check Return Memo” from the bank indicating return of the cheque as unpaid/
bounced, a notice in writing to the drawer needs to be issued within 30 (thirty) days from the date
of receipt of information from the bank, recording the default and demanding payment of money
within 15 (fifteen) days of the date of receipt of notice by the drawer.

c) If the drawer fails to pay the amount demanded within 15 (fifteen) days from the date of receipt of
notice, then, a criminal proceeding can be initiated against the drawer under Section 138 of the Act.

Page 1 of 4
 Privileged and Confidential
For discussions only

d) A criminal proceeding under Section 138 of the Act, can be instituted by filing a criminal complaint
before the concerned magistrate’s court within 1 (one) month of the expiry of the 15 days’ notice
period.

IV. PROCEDURE TO FILE THE COMPLAINT

While lodging the complaint, the following should be taken into consideration:

a) The Complaint must be filed, in writing, either by the payee or the holder of the cheque, under
Section 200 of the Code of Criminal Procedure, 1973.

b) It must be filed within 1 (one) month from the date of expiry of 15 (fifteen) days’ notice. However,
the concerned court may take cognizance of the matter, after the expiry of the abovementioned
prescribed period if the person initiating the complaint satisfies the court that he had sufficient cause
for not making a complaint within the prescribed timeframe.

c) The complaint must be filed before the court of the Metropolitan Magistrate or a Judicial Magistrate
of the First Class.

d) The jurisdiction for filing the complaint shall be the court where: (i) either the branch of the bank
where the payee maintains an account is situated (if the cheque is delivered for collection through
an account), or (ii) the branch of the bank where the drawer maintains an account is situated (if the
cheque is presented for payment by the payee, otherwise through an account), or (iii) as may be
determined by the courts.

e) A written complaint should be filed narrating the facts of the case along with the necessary
documents.

f) Sufficient evidence, by way of affidavit, needs to be filed before the relevant court supported by all
relevant documents. The bank’s memo/ slip must also be used as prima facie evidence.

g) Thereafter, the verification process begins and the complainant or his authorized agent is required
to appear and step in the witness box and provide relevant details for filing the case.

h) After recording the verification, if the court finds substance in the complaint, then summons/ notice
will be issued to the accused to appear before the court.

i) If after being served with the summons/ notice the accused fails to appear, the court may issue a
bailable warrant.

j) If even after issuance of such warrant, the drawer does not appear, a non-bailable warrant may be
issued, pursuant to making necessary application before the court.

k) Upon appearance of the drawer/ accused, he may furnish a bail bond to ensure his appearance during
trial (or any other surety as the court may deem fit).

l) Thereafter the plea/ statement of the accused is recorded by the court. If he pleads guilty/ admits
his default, then the court will post the matter for punishment.

Page 2 of 4
 Privileged and Confidential
For discussions only

m) However, if he does not plead guilty, then the court shall serve him with a copy of the judgement
and provide him with an opportunity to lead evidence by submitting relevant documents, examining
witnesses and cross-examining the complainant. The complainant will also be given an opportunity
to cross examine the accused/drawer and its witnesses.

n) Interim Compensation (Section 143A of the Act): Pursuant to the Negotiable Instruments
(Amendment) Act, 2018, where in a summary trial or a summons case the accused pleads not guilty,
or in any other case, upon framing of charges, the court may order the drawer to pay interim
compensation to the complainant. This compensation will not be more than 20% (twenty percent)
of the cheque amount and must be paid by the accused within 60 (sixty) days from the date of order
of the court or within such further period not exceeding 30 (thirty) days for payment of such interim
compensation. The amount of interim compensation already paid by the accused shall be deducted
either from the fine imposed on him under Section 138 of the Act or from the amount of
compensation that will be/ is awarded.

o) Last stage is that of the final arguments after which the court will pass a judgment. If the accused
is acquitted of the charges, then the Court will order the complainant to repay the interim
compensation with interest at the bank rate as published by the Reserve Bank of India, prevalent at
the beginning of the relevant financial year, within 60 (sixty) days from the date of the order, or
within such further period not exceeding 30 (thirty) days as may be directed by the Court.

V. PUNISHMENT

Any person who has committed an offence under Section 138 of the Act, shall be punishable with
imprisonment for a term which may be extended to 2 (two) years, or with fine which may extend to
twice the amount of the cheque, or with both.

In addition to the prescribed sentence, the court may direct payment of compensation under Section
357(3) of the Code of Criminal Procedure, 1973 if a sentence of fine is not imposed.

VI. APPEAL MECHANISM

a) If the drawer/ accused is acquitted, then the complainant may file an appeal against the order of the
trial court in the High Court.

b) If the drawer/ accused is convicted, then such accused may file an appeal in the Sessions Court.

c) Where an appeal has been filed by the drawer, the Appellate Court may order the drawer to deposit
such sum which shall be at least 20% (twenty percent) of the compensation or fine awarded by the
trial court which shall be in addition to interim compensation paid by the appellant.

d) The above payment is to be deposited by the drawer within 60 (sixty) days from the date of the
order, or within such further period not exceeding 30 (thirty days) as may be directed by the court
on sufficient cause being shown by the appellant.

e) The appellate court may direct the release of such amount at any time during the pendency of the
appeal. Where the accused/ drawer has been acquitted, the court will order the complainant to repay

Page 3 of 4
 Privileged and Confidential
For discussions only

the amount with interest at the bank rate as published by the Reserve Bank of India, prevalent at
the beginning of the relevant financial year, within 60 (sixty) days from the date of the order, or
within such further period not exceeding 30 (thirty) days as may be directed by the Court on
sufficient cause being shown by the complainant.

VII. COMPOUNDING OF OFFENCE

a) The offence of dishonour of cheque is compoundable. Compoundable offences are those offences
where the complainant, enters into a compromise/ settlement, and agrees to have the charges
dropped against the accused.

b) No formal permission of the court is required to compound the offence.

c) Even in absence of consent of both parties to compound the matter, the court can in its discretion
close the proceedings and discharge the accused, in the interests of justice, on being satisfied that
the complainant has been duly compensated.

d) The accused/ drawer may quash the criminal proceedings by filing a petition under Section 482 of
Code of Criminal Procedure, 1973.

Disclaimer: This Note may solely be relied upon by the Client and solely in relation to the matters dealt
with above. No analysis/ observation may be inferred or implied beyond the matters expressly stated
herein and no portion of our analysis/ observations may be furnished, quoted or in any other way
published or transmitted to anyone or referred to in any public document or filed with anyone without
our prior written consent.

*********

Page 4 of 4