In India, cheques continue to be an everyday and trusted form of payment. Cheques can allow for some convenience and documentation in the transaction, but they can also be dishonoured for reasons such as insufficient funds, incorrect signing, or other banking issues. A dishonoured cheque or "cheque bounce" can be very serious. Depending on the dispute, most disputes of a financial nature would be considered civil in nature, including loans, forbearances, etc. However, cheques that bounce in India are not considered a civil dispute but instead a criminal dispute. Infact, the law governing cheque bounce cases involves criminal liability and penalties governing the transaction under Section 138 of the Negotiable Instruments Act, 1881. The penalties generally include incarceration and or fines. Cheques and payments involving cheques are given criminal liability to ensure legitimacy in cheque payments and to deter misuse of the cheque.

In this article, you will get to read about:

What is Meant by Cheque Bounce or Dishonour?
Is Cheque Bounce a Criminal Offence in India?
Legal Consequences and Penalties for Cheque Bounce.
Relevant Case Laws.

What Is Meant By Cheque Bounce Or Dishonour?

A cheque is considered to be a negotiable instrument. Under Section 6 of the Negotiable Instruments Act, 1881 (NI Act), a cheque is defined as a bill of exchange drawn on a banker specified in the cheque and which is not expressed to be payable otherwise than on demand. When a person issues a cheque, they are in effect ordering their bank to pay a stated sum of money to the person specified on the cheque (the payee) from their bank account.

A cheque bounce (also called a cheque dishonour) occurs when the payor bank refuses to honour the cheque and make the payment to the payee. This could happen due to a lack of funds in the payor's bank account, and for other technical reasons. The bank returns the cheque to the payee with a "cheque return memo" indicating the reason for dishonour.

Definition of Cheque Bounce Or Dishonour under Negotiable Instruments Act, 1881

The definition of a "cheque bounce" or "dishonour of cheque" is primarily addressed under Section 138 of the Negotiable Instruments Act, 1881. This section outlines the specific conditions under which the dishonour of a cheque becomes a criminal offense.

Here's the definition and key elements as per Section 138:

A cheque is said to be dishonoured or bounced under the Negotiable Instruments Act, 1881, when:

A person draws a cheque on an account maintained by them with a banker.
This cheque is for the payment of a certain amount of money to another person.
The cheque is issued for the discharge, in whole or in part, of any debt or other legally enforceable liability. (This is a crucial point; a cheque given as a gift or for an illegal purpose, if dishonoured, would not attract Section 138).
The cheque is returned by the bank unpaid for either of the following reasons:
- The amount of money standing to the credit of that account is insufficient to honour the cheque (i.e., "insufficient funds").
- The amount of the cheque exceeds the amount arranged to be paid from that account by an agreement made with the bank (e.g., overdraft limit exceeded).

However, for this dishonour to constitute an offense under Section 138, certain conditions must also be met:

The cheque must have been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier.
The payee (the person to whom the cheque was issued) or the holder in due course must make a demand for the payment of the said amount by giving a written notice to the drawer of the cheque within thirty days of receiving the bank's memo regarding the return of the cheque as unpaid.
The drawer of such a cheque fails to make the payment of the said amount of money to the payee within fifteen days of the receipt of the said notice.

Common Reasons for Cheque Dishonour

Cheques can be dishonoured for numerous reasons, but Section 138 of the NI Act deals specifically with dishonour due to "insufficient funds in the account of the drawer". Some other common reasons for cheque dishonour, which usually would not constitute criminal liability under Section 138, are:

Insufficient Funds (Funds Unavailable / Account Closed): This is the most common reason and the primary ground for criminal liability under Section 138.
Signature Mismatch: The signature on the cheque does not match the specimen signature held by the bank.
Stale Cheque: The cheque is presented after its validity period (usually three months from the date of issue).
Post-Dated Cheque (PDC) presented early: A cheque with a future date presented before that date.
Payment Stopped by Drawer: The issuer has instructed their bank to stop payment on the cheque.
Account Closed: The issuer's bank account has been closed.
Alterations on Cheque: Any material alteration on the cheque without proper authentication.
Damaged Cheque: The cheque is physically damaged and cannot be processed.
Amount in Words and Figures Differ: Discrepancy between the numerical and written amount.
Drawer's Account Dormant: The account has been inactive for a long period.
Garnishee Order: A court order freezing the account.

Is Cheque Bounce A Criminal Offence In India?

Yes, a cheque bounce is a criminal offence in India according to Section 138, Negotiable Instruments Act, 1881. This section was added to improve the reliability of cheques as negotiable instruments and to stop dishonest drawers from writing cheques with insufficient funds. Prior to the introduction of Section 138, a bounced cheque was a civil wrong treated civilly, requiring a long civil recovery process that was not always effective.

Explanation of the Relevant Law (Section 138 of the NI Act, 1881)

Section 138 of the Negotiable Instruments Act, 1881, specifies the circumstances under which dishonour of a cheque becomes a crime. For there to be an offence under Section 138, the following conditions must be satisfied:

Cheque issued for Discharge of Debt or Liability

The cheque must have been drawn by a person on an account maintained by him with a bank for the payment of any amount of money to another person from out of that account. This payment must be for the discharge, in whole or in part, of any debt or other liability. This means the cheque must be against an existing, legally enforceable debt or liability, not a gift or a promise for future payment.

Presentation within Validity Period

The cheque must be presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier.

Dishonour for Insufficiency of Funds

The bank must return the cheque unpaid, either because the amount of money in the drawer's account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank.

Legal Notice of Demand

The payee (the person to whom the cheque is issued) must make a demand for the payment of the said amount of money by giving a notice in writing to the drawer (the person who issued the cheque) within 30 days of receiving information from the bank regarding the dishonour of the cheque.

Failure to Pay within 15 Days of Notice

The drawer must fail to make the payment of the said amount of money to the payee within 15 days of the receipt of the said notice.

Complaint within One Month

A complaint must be filed by the payee in a court of competent jurisdiction (Judicial Magistrate First Class or Metropolitan Magistrate) within one month from the date on which the cause of action arises (i.e., after the expiry of the 15-day period given to the drawer for payment).

Legal Consequences And Penalties For Cheque Bounce

The penalties prescribed under Section 138 of the NI Act are significant and aim to act as a strong deterrent against cheque dishonour.

Detailed Explanation of Penalties

Imprisonment: The drawer can be punished with imprisonment for a term which may extend to two years.
Fine: The drawer can be punished with a fine, which may extend to twice the amount of the cheque.
Both Imprisonment and Fine Possible: The court has the discretion to impose either imprisonment or a fine, or both, depending on the circumstances of the case.

Example: If a cheque of ₹50,000 bounces, the court can impose a fine of up to ₹1,00,000 (twice the cheque amount) and/or imprisonment for up to two years.

Additional Consequences

Beyond the direct penalties under Section 138, a cheque bounce can lead to several other adverse consequences:

Damage to Credit Score: If the dishonoured cheque is linked to a loan or credit card payment, it can severely damage the drawer's credit score (CIBIL score), making it difficult to obtain loans or credit facilities in the future.
Bank Penalties: Banks levy charges on both the drawer and the payee for a dishonoured cheque. For the drawer, these charges can be substantial.
Legal Costs: Both parties will incur legal costs, including advocate's fees, court fees, and other miscellaneous expenses during the entire legal process.
Reputational Damage: For businesses or individuals, a cheque bounce can harm their financial reputation and trustworthiness in the market.
Disqualification for Directors: If a company's cheque bounces, its directors may face disqualification from holding directorships in other companies under the Companies Act, 2013, if they are found liable.
Possibility of Civil Suit: Even if a criminal case under Section 138 is initiated, the payee can simultaneously or separately file a civil suit for recovery of the original debt amount.
Summary Trial: Cases under Section 138 are often tried under the summary trial procedure as per the Code of Criminal Procedure, 1973 (CrPC) [now replaced by Bharatiya Nagarik Suraksha Sanhita, BNSS 2023], which aims for faster disposal, though practical delays are common.

Civil vs. Criminal Remedies For Cheque Bounce

The unique aspect of cheque bounce in India is the availability of both civil and criminal remedies, which can often run concurrently.

Civil Remedies

Recovery Suit: The payee can file a civil suit for the recovery of the cheque amount along with interest and costs. This is typically filed under Order 37 of the Code of Civil Procedure, 1908 (CPC), which deals with summary suits. These suits are designed for expeditious disposal in cases where the defendant has no real defence.
Purpose: To recover the money owed. The focus is on financial compensation.
Outcome: A civil decree for the recovery of money.
Burden of Proof: On the plaintiff (payee) to prove the debt and default.
Timeframe: Can be protracted, even with summary procedures, but generally less stringent with respect to specific timelines for initiating action compared to criminal cases.
Applicability: Can be pursued even if the conditions for Section 138 (e.g., proper notice) are not met, or if the cheque dishonoured for reasons other than insufficient funds.

Criminal Remedies (Under Section 138 NI Act):

Complaint under Section 138: As discussed, this is a criminal offense, designed to punish the drawer for issuing a cheque without sufficient funds to cover it.
Purpose: To punish the drawer for the criminal act of dishonouring a cheque and to provide effective deterrence. It also aims to recover the cheque amount through the fine imposed.
Outcome: Imprisonment and/or fine, which can be awarded up to twice the cheque amount. A significant portion of the fine, if recovered, is usually directed to be paid as compensation to the complainant.
Burden of Proof: While the initial burden is on the complainant to prove the issuance of the cheque and its dishonour, there is a statutory presumption under Section 139 of the NI Act that the cheque was issued for the discharge of a debt or liability. The burden then shifts to the drawer to prove that the cheque was not issued for such a purpose.
Timeframe: Strict timelines for notice and filing of complaint are stipulated (30 days for notice after dishonour, 15 days for payment, 1 month for filing complaint after 15 days expire).
Applicability: Only when dishonour is due to "insufficiency of funds" (or related reasons like 'account closed' that essentially mean funds are not available) and all conditions of Section 138 are met.

Cheque Bounce: Civil vs Criminal Remedies

Feature	Criminal Remedy	Civil Remedy
Primary Aim	To punish the drawer for the offense of dishonouring the cheque and compel payment.	To recover the amount due, along with interest and damages.
Governing Law	Negotiable Instruments Act, 1881 (specifically Section 138 to 142).	Code of Civil Procedure, 1908 (primarily Order 37 for summary suits, or general recovery suits).
Nature of Offense	Considered a criminal offense (though often viewed as a civil wrong with criminal implications, aimed at restitution).	A civil wrong (breach of contract/debt recovery).
Punishment/Relief	Imprisonment up to 2 years. Fine up to twice the cheque amount. Or both. Compensation to the payee.	Order for recovery of the cheque amount. Interest on the amount. Damages or other costs incurred.
Initiating Action	Filing a criminal complaint before a Judicial Magistrate First Class or Metropolitan Magistrate.	Filing a civil suit for recovery of money (e.g., summary suit under Order 37 CPC, or an ordinary money suit).
Pre-requisites	Cheque returned unpaid due to insufficient funds/exceeding arrangements. Cheque presented within 3 months of issue/validity. Legal notice sent within 30 days of receiving bank memo. Drawer fails to pay within 15 days of receiving notice. Complaint filed within 30 days after the expiry of the 15-day notice period.	Demand for payment (can be a legal notice, but not strictly bound by NI Act timelines for civil suit). Cause of action for debt recovery.
Burden of Proof	Primarily on the complainant to prove all ingredients of Section 138; statutory presumption shifts burden to the accused once initial ingredients are proven.	On the plaintiff to prove the existence of the debt and the defendant's liability.
Limitation Period	1 month from the date the cause of action arises (i.e., after the 15-day notice period expires).	Generally 3 years from the date the debt becomes due or the cause of action arises.
Outcome	Conviction (if guilty) leading to punishment, or acquittal. Often leads to out-of-court settlement/compounding.	Decree in favour of the plaintiff for the amount due.
Arrest/Bail	Possible arrest (though usually summons first); non-bailable offence under Section 138, but bail is often granted by courts.	No arrest or imprisonment for non-payment of a civil debt (unless contempt of court).
Applicability to Debt	Strictly for cheques issued in discharge of a legally enforceable debt or liability.	Applicable for any legally enforceable debt, whether through cheque or otherwise.
Scope of Reasons for Bounce	Primarily, insufficient funds or exceeding arrangements (though other reasons like "account closed" or "stop payment" are also covered if they arise from an underlying debt/liability).	Broader, covers any situation where a debt is not paid, even if a cheque is not involved or bounces for other reasons.
Complexity & Time	Generally faster than a regular civil suit (summary trial procedure).	Can be time-consuming, especially if it's not a summary suit or is heavily contested.
Option of Pursuing Both	Yes, both civil and criminal proceedings can be initiated simultaneously or independently. The outcomes are independent.	Yes, can be pursued alongside or instead of criminal proceedings.

Landmark Case Laws

A few case laws on cheque bounce being a criminal offence are as follows:

K. Bhaskaran v. Sankaran Vaidhyan Balan

The Supreme Court's decision in MSR Leathers v. S. Palaniappan (2013) is a pivotal judgment that clarified the legal position on whether multiple complaints can be filed for successive dishonours of the same cheque under Section 138 of the Negotiable Instruments Act, 1881.

Parties

Appellant: MSR Leathers (the payee/complainant)
Respondent: S. Palaniappan (the drawer of the cheque)

Issues

The central issue before the Supreme Court was whether a prosecution under Section 138 of the Negotiable Instruments Act, 1881, can be initiated based on a second or successive dishonour of a cheque, even if no prosecution was initiated following the first dishonour. This directly addressed and reconsidered the precedent set by an earlier Supreme Court judgment in Sadanandan Bhadran v. Madhavan Sunil Kumar (1998), which had held that only one cause of action arises for the dishonour of a cheque, thus limiting the right to prosecute to the first instance of dishonour and subsequent non-payment after notice.

Judgement

The Supreme Court overruled its previous decision in Sadanandan Bhadran v. Madhavan Sunil Kumar and held that prosecution based on a second or successive dishonour of a cheque is indeed permissible, provided all the conditions stipulated under the proviso to Section 138 of the Negotiable Instruments Act are satisfied each time.

The Court reasoned that:

There is nothing in Section 138 or 142 of the Act that forbids the holder of a cheque from presenting it for encashment multiple times within its validity period.
Allowing successive presentations and subsequent prosecutions provides the drawer with further opportunities to honour their commitment and avoid criminal proceedings. It aligns with the legislative intent of Section 138, which is to ensure the payment of cheques and enhance the credibility of negotiable instruments.
If the payee chooses not to launch prosecution after the first dishonour (perhaps due to assurances from the drawer), it should not result in the forfeiture of their right to initiate proceedings if the cheque is subsequently dishonoured again and all conditions under Section 138 are met.
Every time a cheque is presented and dishonoured, followed by a valid notice and failure to pay within the stipulated time, a fresh cause of action arises.

NEPC Micon Ltd. v. Magma Leasing Ltd.

The case NEPC Micon Ltd. v. Magma Leasing Ltd. was decided by the Supreme Court of India that significantly broadened the interpretation of Section 138 of the Negotiable Instruments Act, 1881, concerning cheque dishonour.

Parties

Appellant: NEPC Micon Ltd. and Others
Respondent: Magma Leasing Ltd.

Issues

The central issue in this case was whether the dishonour of a cheque due to the closure of the drawer's account would attract the penal provisions of Section 138 of the Negotiable Instruments Act, 1881. The appellant contended that Section 138 only covered cases where the cheque was returned due to "insufficient funds" or "exceeds arrangement" as explicitly mentioned in the section, and not for other reasons like "account closed."

Judgment

The Supreme Court dismissed the appeal, holding that the dishonour of a cheque on the ground of "account closed" would indeed fall within the ambit of Section 138 of the Negotiable Instruments Act, 1881.

The Court reasoned that:

The expression "the amount of money standing to the credit of that account is insufficient to honour the cheque" in Section 138 is a genus (a broader category), and "that account being closed" is a specie (a specific type) within that genus. When an account is closed, it inherently implies that there are no funds available to honour the cheque, effectively leading to "insufficiency of funds."
Adopting a strict and literal interpretation of Section 138, which would exclude dishonour due to "account closed," would defeat the very purpose and object of the Act. The legislative intent behind introducing Section 138 was to enhance the credibility of cheques as negotiable instruments and deter dishonest drawers. Allowing drawers to escape liability by simply closing their accounts after issuing cheques would render the provision toothless.
The Court emphasized that penal provisions, while generally to be strictly construed, should not be interpreted in a manner that makes them ineffective or a "dead letter."

Conclusion

The dishonour of a cheque for insufficiency of funds is indeed a criminal offense in India, as specifically provided under Section 138 of the Negotiable Instruments Act, 1881. This provision was enacted to instill faith in the cheque system and ensure that financial commitments are honored. The penalties for such an offense are severe, including imprisonment up to two years and/or a fine up to twice the cheque amount.

While civil remedies for recovery of the debt also exist, Section 138 introduces a punitive element, acting as a powerful deterrent. It is crucial for both cheque drawers to be mindful of their account balances and for payees to adhere to the strict timelines and procedural requirements for initiating action under Section 138. Understanding these legal nuances is vital for anyone dealing with cheques in India, ensuring both accountability and the enforceability of financial commitments.

FAQs

A few FAQs are:

Q1. Is cheque bounce a criminal offense in India?

Yes, absolutely. Cheque bounce (dishonour of cheque due to insufficient funds) is a criminal offense in India under Section 138 of the Negotiable Instruments Act, 1881.

Q2. What is Section 138 of the Negotiable Instruments Act about?

Section 138 of the NI Act makes the dishonour of a cheque for insufficiency of funds a criminal offense. It lays down specific conditions that must be met for a complaint to be filed, including issuance for a debt, presentation within validity, legal notice, and failure to pay after notice.

Q3. What are the penalties for a cheque bounce under Section 138?

The penalties for a cheque bounce under Section 138 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.

Q4. What is the process to file a cheque bounce case?

After the cheque bounces due to insufficient funds, the payee must send a legal demand notice to the drawer within 30 days of receiving the 'dishonour memo'. If the drawer fails to pay within 15 days of receiving the notice, a criminal complaint can be filed in court within one month after the expiry of the 15-day period.

Q5. Can I file both a civil and criminal case for a cheque bounce?

Yes, it is legally permissible to pursue both civil (for recovery of money) and criminal (under Section 138) remedies simultaneously for a cheque bounce. However, if the amount is recovered through the criminal proceedings, the civil suit may be withdrawn.

Disclaimer: The information provided here is for general informational purposes only and should not be construed as legal advice.

For personalized legal guidance, please consult with a qualified civil lawyer.

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