What is Section 138 of the Negotiable Instruments Act?

Section 138 of the Negotiable Instruments Act, 1881, makes the dishonour of a cheque (cheque bounce) a criminal offence if it was issued for the discharge of a debt or liability and certain conditions are met, such as sending a legal notice and the drawer failing to pay.

What are the essential conditions for filing a cheque bounce case?

The cheque must be issued for a legally enforceable debt/liability, presented within its validity (3 months), dishonoured by the bank, a legal demand notice sent within 30 days of dishonour, and the drawer must fail to pay within 15 days of receiving the notice.

What is the timeline for sending a legal notice and filing a complaint?

A legal demand notice must be sent within 30 days of receiving the cheque return memo. If the drawer fails to pay within 15 days of receiving the notice, a criminal complaint must be filed in court within 30 days from the expiry of that 15-day period.

What are the penalties for a cheque bounce under Section 138 NIA?

Upon conviction, the drawer may face imprisonment for up to two years, a fine up to twice the cheque amount, or both. The court generally also directs compensation to the complainant.

What is interim compensation in a cheque bounce case?

Under Section 143A of the NIA, the court may order the drawer to pay interim compensation to the complainant, up to 20% of the cheque amount, during the trial stage. This amount is generally payable within 60 days.

Cheque Bounce Case Procedure in India under Section 138 of the Negotiable Instruments Act

Q: Can a cheque bounce case be settled out of court?

Yes, the offence under Section 138 NIA is compoundable under Section 147 of the Act. This means parties can reach a settlement at any stage of the proceedings, and the court can record the compromise, leading to the acquittal of the accused.

Understanding Cheque Bounce and Section 138 of the Negotiable Instruments Act

A cheque bounce, also known as cheque dishonour, occurs when a bank refuses to encash a cheque due to various reasons, most commonly insufficient funds in the drawer's account. While often seen as a civil dispute, the law in India treats cheque bouncing as a criminal offence under the Negotiable Instruments Act, 1881 (hereinafter referred to as 'NIA'). Specifically, Section 138 of the NIA, 1881, makes the dishonour of a cheque a punishable offence, aiming to enhance the credibility of cheques as a mode of payment.

This article outlines the detailed procedure for filing and pursuing a cheque bounce case in India, providing a comprehensive guide for individuals and businesses dealing with such situations.

Conditions Precedent for Filing a Cheque Bounce Case under Section 138 NIA

Before initiating legal proceedings under Section 138 of the NIA, certain conditions must be met. These are crucial and their non-fulfillment can lead to the dismissal of the complaint:

Issuance of Cheque for Debt or Liability

The cheque must have been issued by the drawer to discharge a legally enforceable debt or other liability, either wholly or in part. A cheque issued as a gift, for charity, or for illegal purposes does not fall under the purview of Section 138 NIA.
Presentation of Cheque within Validity Period

The payee (the person in whose favour the cheque is drawn) must present the cheque to the bank within its period of validity. This period is generally three months from the date on which it is drawn, or before the date of its expiry, whichever is earlier.
Dishonour of Cheque

The cheque must be returned unpaid by the bank, typically with a 'return memo' stating the reason for dishonour (e.g., 'funds insufficient', 'account closed', 'stop payment', etc.). It is important to note that 'stop payment' instructions, if issued to defraud the payee, can also attract Section 138 NIA.
Issuance of Legal Notice

Upon receiving the cheque return memo, the payee must issue a written demand notice to the drawer. This notice must demand payment of the cheque amount and must be sent within 30 days of receiving the information from the bank regarding the dishonour of the cheque.
Failure to Make Payment

The drawer must fail to make the payment of the said amount to the payee within 15 days of receiving the demand notice. If the payment is made within this period, no cause of action arises under Section 138 NIA.

Step-by-Step Procedure for a Cheque Bounce Case

1. Cheque Dishonour and Bank Memo

When a cheque bounces, your bank will provide you with a 'cheque return memo' indicating the reason for dishonour. This memo is a crucial piece of evidence.

2. Sending the Legal Demand Notice

As per proviso (b) to Section 138 of the NIA, 1881, the payee must send a legal demand notice to the drawer within 30 days of receiving the cheque return memo. The notice should clearly state:

Details of the dishonoured cheque (cheque number, date, amount, bank name).
The reason for dishonour as stated by the bank.
A demand for payment of the cheque amount.
A clear statement that if payment is not made within 15 days of receiving the notice, legal action under Section 138 NIA will be initiated.

The notice should be sent via registered post acknowledgment due (RPAD) or courier, ensuring proof of delivery. It is advisable to keep a copy of the notice and the postal/courier receipt.

3. Waiting Period and Cause of Action

After the drawer receives the legal notice, they have 15 days to make the payment. If the drawer fails to make the payment within this 15-day period, the cause of action for filing a complaint under Section 138 NIA arises. If the drawer makes the payment, the matter is resolved, and no further action can be taken under Section 138 NIA.

4. Filing the Complaint

If the drawer fails to make payment within the stipulated 15 days, the payee (complainant) must file a criminal complaint before a Judicial Magistrate First Class (JMFC) or a Metropolitan Magistrate (MM) within 30 days from the date on which the 15-day period expires. This timeline is critical as per Section 142(1)(b) of the NIA, 1881.

Jurisdiction:

As per Section 142(2) of the NIA, 1881, as amended, the complaint can generally be filed in the court within whose local limits the branch of the bank on which the cheque is drawn is situated, or where the payee's bank branch (where the cheque is presented for collection) is situated, if the cheque is presented through an account maintained by the payee. For cheques presented over the counter, the jurisdiction lies where the drawee bank is located.

Documents Required for Filing the Complaint:

Original dishonoured cheque.
Original cheque return memo from the bank.
Copy of the legal demand notice sent to the drawer.
Original postal/courier receipt and acknowledgment card (or tracking report).
Any other relevant documents proving the debt or liability (e.g., invoices, agreements).
An affidavit of evidence from the complainant.

The complaint must be in writing, signed by the complainant, and accompanied by an affidavit of evidence. Court fees, as prescribed by the relevant state laws, will also need to be paid.

5. Court Proceedings

a. Cognizance and Pre-Summoning Evidence:

The Magistrate will examine the complaint and the accompanying documents. The complainant may be required to give a statement on oath (pre-summoning evidence) to establish a prima facie case. If the Magistrate is satisfied, they will take cognizance of the offence.

b. Issuance of Summons:

Once cognizance is taken, the Magistrate will issue summons to the accused (drawer) to appear before the court. The summons may be sent via registered post or through a police officer.

c. Appearance of Accused and Bail:

Upon receiving summons, the accused must appear before the court. The offence under Section 138 NIA is bailable, so the accused can apply for bail, which is generally granted upon furnishing a bail bond.

d. Plea of the Accused:

The Magistrate will explain the accusation to the accused, and the accused will be asked whether they plead guilty or claim to be tried.

e. Evidence and Cross-Examination:

If the accused pleads not guilty, the trial proceeds. The complainant will present their evidence, which typically includes the documents submitted with the complaint and their own testimony. The accused will then have the opportunity to cross-examine the complainant and their witnesses. Subsequently, the accused will present their defence evidence, and the complainant will have the opportunity to cross-examine the accused's witnesses.

f. Interim Compensation (Section 143A NIA):

Under Section 143A of the NIA, 1881, inserted by the 2018 amendment, the court may, at the stage of framing of charge or at any subsequent stage, order the drawer of the cheque to pay interim compensation to the complainant. This amount can be up to 20% of the cheque amount and must be paid within 60 days (extendable by 30 days). If the accused is acquitted, the complainant may be ordered to repay this amount with interest.

g. Arguments and Judgment:

After all evidence is presented and cross-examined, both parties will present their final arguments. The Magistrate will then deliver the judgment, either convicting or acquitting the accused.

Penalties for Cheque Bounce under Section 138 NIA

If the accused is convicted, the punishment under Section 138 of the NIA, 1881, can include:

Imprisonment for a term which may extend to two years, or
A fine which may extend to twice the amount of the cheque, or
Both.

The court will also generally direct the accused to pay compensation to the complainant, often equivalent to the cheque amount, which may be adjusted against the fine imposed.

Defences Available to the Accused

An accused in a cheque bounce case can raise various defences, including:

The cheque was not issued for a legally enforceable debt or liability.
The cheque was a security cheque that was misused.
The signature on the cheque is forged.
The legal notice was not properly served or was defective.
Payment was made within the 15-day notice period.
The complaint was not filed within the statutory time limit.
The cheque was presented after its validity period.

The burden of proof initially lies with the complainant to prove the issuance of the cheque and its dishonour. However, Section 139 of the NIA, 1881, creates a presumption that the holder of a cheque received it for the discharge of a debt or liability. The accused then has the burden to rebut this presumption.

Compounding of Offence (Settlement)

The offence under Section 138 of the NIA, 1881, is compoundable, as per Section 147 of the NIA, 1881. This means that the parties can reach a settlement at any stage of the proceedings, even after conviction, and the court can record the compromise and acquit the accused. This often involves the drawer paying the cheque amount, along with any agreed-upon compensation or interest, to the payee.

Appeals

If either party is dissatisfied with the judgment of the Magistrate's court, they can file an appeal in the Sessions Court. If the accused is convicted and files an appeal, the appellate court may, under Section 148 of the NIA, 1881, order the appellant to deposit a minimum of 20% of the fine or compensation awarded by the trial court, in addition to any interim compensation already paid under Section 143A.

Conclusion

The cheque bounce case procedure under Section 138 of the Negotiable Instruments Act, 1881, is a detailed legal process designed to ensure financial discipline and protect the interests of payees. While the law provides a robust framework, strict adherence to timelines and procedural requirements is crucial for a successful outcome. Understanding each step, from issuing the legal notice to navigating court proceedings, is vital for both complainants and accused individuals.

Disclaimer: This article provides general information about the cheque bounce case procedure under Section 138 of the Negotiable Instruments Act, 1881, in India. It is not intended as legal advice. Laws can be complex and specific facts of a case can significantly alter the legal approach and outcome. Readers are strongly advised to consult a qualified advocate for advice pertaining to their specific legal situation.