Dishonor of Cheque (Section 138 Negotiable Instruments Act 1881)

In simple words, dishonour of cheque means that the cheque in question is not honoured by the bank, on which it is drawn for whatever reason. Cheque plays an important role in the business community and otherwise also as a safe mode of transfer of money from one person to another.

When there is a default on the part of the drawer of a cheque in discharge of its legally enforceable debt or other liability to the payee of the cheque as a result of which the cheque is dishonoured due to insufficiency of funds or if the amount exceeds the amount in the bank of the drawer, the legal remedy, available to the payee of the cheque is to proceed under Section 138 of the Negotiable Instruments Act. Bouncing of a cheque invites criminal prosecution under the Act and is a punishable offence and the drawer/signatory of the cheque can be punished with imprisonment for a term which may extend to two years, or with a fine which may extend to twice the amount of the cheque, or with both. It is to be noted that Proceedings under Section 138 N.I. Act is an alternate remedy. An aggrieved party can also simultaneously initiate proceedings before the Civil Court for Recovery.

If the drawer is an individual, the proceedings would happen under Section 138 of the NI Act. If the drawer is a Company, its managing director, Whole Time Director and other officers/Directors of the Company who are actively involved in the transaction, pursuant to which cheque is issued, can be personally prosecuted under Section 141 of the Act also.

In the event of Insolvency Proceedings being initiated against the Accused Company, Cheque Bounce Complaint can be continued and there is no automatic stay of the proceedings.

Essential Ingredients of Section 138 Before  One is to  Proceed for Criminal Complaint:

To constitute an offence under Section 138 of the Act, the following ingredients are required to be fulfilled:

1. A person must have drawn a cheque on a bank account maintained by him.
2. The cheque should have been issued for the discharge, in whole or in part, of any debt or other liability;
3. That cheque has been presented to the bank within three months from the date on which it is drawn
4. That cheque is returned by the bank unpaid, either because of the amount of money standing to the credit of the account is insufficient to honour the cheque or issuance of stop payment instructions by the Drawer to the Drawee Bank or that it exceeds the amount arranged to be paid from that account by an agreement made with the bank or when there is a deliberate mismatch of signature of the cheque;
5. The payee or the holder in due course of the cheque makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid:
6. The drawer of such cheque fails to make payment of the said amount of money to the payee or the holder in due course of the cheque within 15 days of the receipt of the said notice:
7. The complaint is to be filed before the Court of Chief Judicial Magistrate/Chief Metropolitan Magistrate within one month of the date of expiry of the 15 days of receipt of the notice.

Where can be a complaint filed?

The Complaint can be filed only in a Court within whose local jurisdiction the bank branch of the payee, where the payee deposits the cheque for payment through his account, is situated, except in case of bearer cheques, which are presented to the branch of the drawee bank and in that case the local court of that branch would get jurisdiction.

List of Documents to be submitted in Court:

In case the Complaint is to be filed:

1. Any agreement/contract between complainant & accused including order(s) placed (if any)
2. Invoice / Bill against which dishonoured cheque was issued
3. Any other document that is evidence of the creation of debt or liability
4. Correspondence Exchanged between the parties.
5. Original Dishonoured Cheque
6. Bank Memo stating the reason for dishonour of cheque
7. Copy of the legal notice sent to the accused
8. Proof of dispatch of the above legal notice
9. Postal Acknowledgment received from the accused

In case of accused:

1. Communication exchanged between the parties
2. Documents evidencing that the accused has no liability.
3. Reply to Demand Notice.

The proceedings under the cheque bounce matter are summary in nature, meaning, thereby that the Courts would not go for normal criminal trials, which are very lengthy and more complex.
For contesting the matter, the accused person has to take bail from the Court. In cheque bounce cases, the parties also have the option of settling the matter amicably outside the court, as it is a compoundable offence.

INTERIM COMPENSATION UNDER SECTIONS 143 A AND 148 OF N.I. (AMENDMENT) ACT 2018

Under the provisions of section 143 A, courts can issue directions for interim compensation which shall not exceed 20% of the amount of cheque.