Time limits apply. Proceedings under Section 138 are governed by strict statutory periods running from the date of the bank's return memo and from the expiry of the demand notice. Delay can extinguish the remedy altogether, so advice should be obtained promptly rather than after the periods have run.
When cheque dishonour becomes an offence
Section 138 of the Negotiable Instruments Act, 1881 makes the dishonour of a cheque an offence in specified circumstances. Broadly, the cheque must have been issued for the discharge, in whole or in part, of a legally enforceable debt or other liability; it must have been presented within its period of validity; and it must have been returned unpaid for insufficiency of funds or because it exceeds the arrangement with the bank.
Dishonour by itself is not enough. The statutory steps that follow — the demand notice and the failure to pay within the prescribed period — are what complete the offence.
The statutory demand notice
On receipt of the bank's return memo, the payee must issue a written demand notice to the drawer within the period prescribed by the statute, calling upon him to pay the cheque amount. If payment is not made within the period allowed after receipt of the notice, a cause of action arises to file a complaint.
The notice must be accurate. It should identify the cheque, the date, the amount, the bank, the reason for return and the liability for which the cheque was issued, and it should be dispatched to the correct address by a mode that provides proof of dispatch and delivery. Defective notices are a common reason for complaints failing.
Filing the complaint
A complaint is filed before the Magistrate having jurisdiction, ordinarily determined with reference to the branch of the bank where the payee maintains the account in which the cheque was presented. It must be filed within the statutory period from the date on which the cause of action arose.
The complaint is supported by the cheque, the return memo, the demand notice, the postal proofs and documents establishing the underlying liability. Where the drawer is a company, the persons responsible for the conduct of its business are arrayed in accordance with the statute.
Defending a Section 138 complaint
A person who has received a summons in a cheque case should not ignore it. Defences available on the facts may include that the cheque was not issued for a legally enforceable liability, that it was given as security in circumstances that do not attract the section, that the amount had already been paid, that the notice was not served or was defective, that the complaint is barred by limitation, or that the signature or particulars were altered.
The statute raises presumptions in favour of the holder of the cheque, and those presumptions are rebuttable. The defence therefore has to be built on documents and on the evidence led, not on denial alone.
Settlement and compounding
Offences under Section 138 are compoundable, and courts encourage settlement at every stage. A settlement may involve payment of the cheque amount with interest or costs, recorded before the court, following which the proceedings are brought to an end.
Where a settlement is reached, it should be documented properly and its terms placed before the court. An oral understanding that is not recorded frequently leads to further disputes.
The parallel civil remedy
A complaint under Section 138 is a criminal proceeding directed at the offence. It is distinct from a civil suit for recovery of the amount due, which may be filed separately. In appropriate cases both are pursued, since the objectives differ.
Interim compensation and the deposit of a portion of the amount pending appeal are provided for by the statute in the circumstances specified. See also the civil litigation page.
Documents required
- Original cheque and the bank's return memo.
- Details of the date of presentation and the reason for return.
- Documents evidencing the underlying debt or liability.
- Copy of the demand notice, with postal receipt and acknowledgement or tracking.
- Correspondence exchanged with the drawer.
- Where a company is involved, its registration details and the persons in charge.
- For the defence: the summons received and the complaint copy with annexures.
Frequently Asked Questions
- The cheque was returned for a reason other than insufficient funds. Does the section apply?
- Certain other reasons for return have been held to fall within the section, while some do not. The return memo has to be examined along with the facts before a view is taken.
- Can a cheque be presented again after dishonour?
- A cheque may be presented again within its validity period, and a fresh cause of action arises on a subsequent dishonour followed by a fresh notice. The statutory periods run afresh in that event.
- What if the drawer has moved out of Hyderabad?
- Jurisdiction under the statute is determined with reference to the bank branch where the cheque was presented, not by the residence of the drawer.
- Is imprisonment the only outcome?
- The statute provides for imprisonment, fine or both, and compensation may be awarded. Most matters are resolved through payment or settlement rather than sentence, but no outcome can be assured.