Negotiable Instruments Act
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This article is written by Daisy Jain, pursuing B.COM.LLB (Hons) from the Institute of Law, Nirma University. This is an exhaustive article which talks about what to do if your cheque gets dishonoured.


In India, cheques are issued for a variety of transactions, the majority of which are commercial dealings. It is common practice for business owners to issue post-dated cheques to their distributors or service providers; moreover, it does happen that a cheque gets dishonoured when delivered to the bank caused by a lack of finances. Cheques are often used in roughly all payments, including loan repayment, payment of fees, payment of bills, salary payment, and so on. Regularly, banks process and clear the wide proportion of the cheques that come through their doors. Cheques are issued to obtain documentation of payment. The introduction of cheques into the economy has provided a novel path for the financial industry and commercial world, as well as for individuals. Individuals now wish to hold and undertake a slip of paper known as a cheque instead of having cash in their pockets. Transactions involving checks are essential and significant not just in the banking industry, but also in the fields of trade and commerce, as well as in the overall national economy. However, the increase in the use of cheques has also increased the practice of granting cheques to people who have no purpose of honouring them. 

If the sum of money of the cheque is given to the payee by the bank, the cheque is deemed to have been honored by that bank. If the bank denies paying the sum of money of the cheque, the cheque is deemed to be dishonoured and is returned to the sender. As a result, a dishonoured cheque indicates that the bank has refused to pay the sum of the amount of the cheque to the payee. The drawer draws an e-cheque without complying with the norms and legislation of issuing a cheque, or the drawer draws the cheque with a balance over the bank account’s available funds. Section 138 of the Negotiable Instruments Act 1881 is intended to curb malpractice on the part of the drawer by causing him or her to draw a cheque without adequate money in his or her account managed by him or her in a bank and to provoke the payee to respond on the cheque in the proper course of events. The primary goal of this statute is to impart confidence in the productivity of financial transactions as well as the robustness of transactions involving negotiable instruments in the general public.

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What is a cheque

A cheque is considered to be a negotiable instrument. It is governed by Section 6 under the Negotiable Instruments Act of 1881. In the financial world, a ‘cheque’ is a bill of exchange drawn on a definite banker and not expressly stated to be payable except on demand. It also involves a computerized picture of a compressed cheque and a cheque in digital format. In layman’s terms, a cheque is a paper that is drawn by one individual for the benefit of another individual to whom he has consented to pay a specific amount of money within a specific time frame. There are three parties to a cheque:

  1. Drawer- The drawer is the individual who is responsible for issuing the cheque.
  2. Drawee- In the case of a cheque, the banker on whom the cheque is drawn is indeed the person who receives the cheque.
  3. Payee- The individual to whom the cheque is to be made payable.

The number of commercial transactions is increasing at an alarming rate. As a result, it is hard for an individual to hand over liquid money to some other individual. In such circumstances, a cheque serves as a means of transferring money from one individual to another, ensuring that the transfer of money is secure and that both parties benefit from the savings in time that the cheque provides. While there are numerous advantages of using a cheque: 

  • Some protocols must be pursued when money is transferred through the use of a cheque. A crossed cheque ensures that only the payee can obtain the funds. 
  • It also ensures that the drawer has a bank account; the cheque must be given some obligations to the recipient (payee); and, in form of finance, there must be adequate funds in the drawer’s bank account for the cheque to be issued and not to be dishonoured due to inadequacy of funds. 
  • Most pertinently, it ensures that only the payee can obtain the funds.

Dishonour of cheque

As the number of individuals conducting commercial transactions grows daily, the consistency of retaining a positive bank balance has fluctuated in response to the people’s monetary requirements. If an individual issues a cheque to another, it is possible that he or she is not cognizant of the actual bank balance, and as a result, the cheque may be rejected. In such cases, the drawer of the cheque is provided a 30-day grace period to pay back the amount to the payee. However, if the drawer does not agree to pay the amount within that time, the payee has the alternative to file a lawsuit against the drawer seeking payment of the sum of money of the cheque and also an amount of interest as remuneration for the default induced by the drawer.

Cheques are deemed to have been honored when the payee’s bank transfers payment of their portion of the cheque amount to the drawee bank. On the other hand, when a bank refuses to pay the sum of the amount of a cheque to the payee, the cheque is referred to as being “dishonoured.” A cheque may be returned unpaid by the drawee bank for a variety of factors, one of which is insufficient money in drawee’s checking or savings account. When a cheque is returned unpaid, the drawee’s bank immediately issues a ‘Cheque Return Memo’, which details the causes for the cheque’s non-payment. At this point, the payee has the alternative of furthering legal claims for dishonour as soon as possible or resubmitting the cheque for realization after receiving confirmation from the drawer that the cheque will be honored the second time around. It is critical, after all, that any legal action can be taken if the cheque is presented to the bank after the validity period of 3 months or 90 days.

Reasons for the dishonour of cheque

In the following cases the cheque gets dishonoured:

  • If there is an overwriting or if the signatures do not complement.
  • If there is any reason to think about the authenticity of the cheque.
  • A discrepancy in the account number may even result in a cheque being bounced or a cheque being dishonoured.
  • The customer’s insanity, bankruptcy, and death as a result of providing a cheque at the incorrect branch are all possibilities.
  • The bank will dishonour the cheque if the drawer has requested the bank to stop payment and not pay for the cheque already issued.
  • If the payment is made to the bank after three months from the date which is written on the cheque then the cheque will be dishonoured due to the expiry of that period and this type of cheque is known as a stale cheque.
  • When the government or the court will order the bank to freeze all the accounts of that individual and thereafter the cheque pertaining to that individual’s account will be dishonoured. 
  • In case the drawer closes his account before a cheque is presented to the bank then the cheque will be dishonoured. If the drawer doesn’t have adequate funds to pay the amount mentioned in the cheque then the cheque will be dishonoured. What happens when the cheque is dishonoured by the bank

According to the Negotiable Instruments Act, 1881, the dishonour of a check is a criminal offence, and the person in whose favor the cheque is issued can seek both civil and criminal redress. An individual who has obtained a cheque in exchange for services provided or for other obligations will incur financially if the very instrument that guarantees to honor the payment in the mode of a cheque is not honored. When a cheque is dishonoured, the law contains regulations that ensure the payee is not left without recourse in form of money that he is lawfully authorized to and emotional trauma that he has been subjected to, and he must take specific measures, which involve sending a legitimate demand notice to the drawer or filing a lawsuit if the drawer fails to honor the cheque after receiving such a demand notice. dishonouring certain cheques has been made an offence under Section 138 of Negotiable Instrument Act, 1881 punishable by imprisonment for up to two years, a pecuniary fine, or both.  To put this into impact, the Public Financial Institutions, Banking, and Negotiable Instruments Laws (Amendment) Act, 1988, was passed, which amended the Negotiable Instruments Act, 1881. The Negotiable Instruments Act was amended to include a new Chapter VII, consisting of Sections 138 to 147. Sections 143 to 147 of the Negotiable Instruments (Amendment) Act, 2002, have been incorporated into the same Chapter.

According to Section 138, if an individual draws a cheque from an account managed and maintained by the same individual with a banker with an intention of the repayment for his debt or other liability to another individual from that account wholly or partially, and then it is reverted by the bank unpaid either due to the sum of money standing to the credit of that account had inadequacy of money in the account or it exceeds the sum of money which had to be paid from his account through an agreement signed between the bank and the individual, such individual would be considered to have committed an offence and shall be liable for that offence without any bias to any other provision of this act and shall be punished for an extended term of 2 years of imprisonment, or with a fine which can be more than twice the amount of the cheque, or shall be liable for both imprisonment and fine.

Essential ingredients to constitute an offence under Section 138

Legally enforceable debt or other liability

If the drawer intended to use the cheque to discharge a legally enforceable debt or other liability, the drawer should have issued the cheque to the payee in full or in proportion. The repercussions of dishonouring a cheque when it is provided as a gift to a private person, or as a charity or donation to a charitable organization, or even as an unexpected cost or reward, are not addressed by Section 138 of the Act, as determined by the Supreme Court in the case of Uplanche Mallikarjun and Ors. v. Raj Kanti Vimala and Anr. (1997). Even if the cheque is issued as a safety or as a discharge of liability as a guarantor, provisions of Section 138 of the Act apply in these cases.

Presentment within three months

The cheque should have been addressed to the bank by the payee within the time specified on the cheque. Normally, a cheque’s time frame is three months from the date of issue; however, if a shorter period prescribed (for example, less than three months) is stipulated on the cheque, that time frame is taken into consideration.

Return of cheque due to insufficiency of funds

In this case, the cheque should have been given back to the drawer by the bank because the sum of money standing to the credit of the account is inadequate or surpasses the amount of money organized to be paid from that account. When we say “money standing to the credit of the account,” we refer to the resources available in the account that can be used to honor the cheque issued by the drawer. Unless otherwise specified, the phrase “amount organized” relates to the money that is currently in the drawer’s account plus any funds that have been organized by the drawer with the banker, whether through an overdraft agreement or other means. A stop payment will be considered to have been dishonoured for inadequacy unless a valid reason for the stop payment can be demonstrated.

What to do if cheque gets dishonoured

30 days notice to the drawer

As soon as a payee or an account holder learns that a cheque has been dishonoured due to a lack of funds in the drawer’s account, he or she must send a notice to that drawer requesting that the cheque amount be paid within 30 days of receiving notice of dishonour from their bank. It is not possible to give notice under Section 138 of the Act verbally. The notice may be provided in any written form, as well as by fax, email, or any other electronic means of communication.

Failure of the drawer to make payment within 15 days of receipt of notice 

The person who received the aforementioned cheque should have failed to make payment within 15 days of receiving the notice from the payee, as stipulated in the agreement. It is important to consider that the holder does not have access to the cause of action at the time the cheque is dishonoured. When the holder receives notice of a dishonoured cheque and transmits a notice seeking payment of the cheque amount within 30 days of receiving notice of the dishonoured cheque, and the drawer fails to pay the exact thing within 15 days of receiving the said notice, the situation is then called for.

Filing of complaint with magistrate under Section 142

When an individual provides a cheque or payment that is not honored, the banker notifies the individual that the cheque has been dishonoured. Following that, he delivers a notice to the drawer, requesting that the amount of the cheque be paid within 30 days of receiving notice of dishonouring the check. After the notice is issued to the drawer, and if the payee does not make the payment within 15 days of receiving the notice, an offence is committed under Section 138. The drawer’s cause of action for filing a complaint emerges on the 16th day following receipt of the notice, which is when the complaint is filed. Section 142 talks about the cognizance of offences. 

Offence by companies

Everything about commercial transactions, especially the efficient and timely governance of cheques as instruments, is dependent on the credibility and sincerity of the parties involved in the transaction. There is no denying that a bank’s failure to honor a cheque causes the payee irreparable loss, damage, and discomfort and that the complete validity of business transactions conducted within and out of the country suffers a sharp downturn as a result. As a corporation, is an independent entity formed by law, a corporation operates through its board of directors and officers, who are accountable for the overall operation of the corporation. Criminal liability for cheque dishonour is mainly imposed on the drawer company, but it may also be imposed on officers of the company. Generally speaking, in cases that involve criminal liability, the rule against vicarious liability applies, which means that no one can be held criminally liable for the actions of another. This general rule, however, is subject to an exception which makes the drawer vicariously liable under Section 138 of the Negotiable Instrument Act, 1881, but the drawer will only be held liable if the drawer itself is a corporation or a firm or an association of people, and at the commencement of that offence, all such persons were involved in that offence and were held guilty for that offence under Section 138 of Negotiable Instrument Act, 1881. Companies are subject to the provisions of Section 141 of the Negotiable Instruments Act, 1881.

Punishment and penalty

The court will issue a summons and hold a hearing on the particular matter after obtaining the complaint of the alleged crime, as well as an affidavit and all relevant documentation. The defaulter may be penalized with a monetary punishment that is twice the amount of the cheque in issue, or he may be imprisoned for a term that can last up to two years, or he may be prosecuted with a combination of the two. In addition, the bank has the authority to suspend the defaulter’s access to his or her checkbook and to close the account if the defaulter has a history of bounced checks. Unless the drawer fails to make payment on the disputed cheque within 15 days of receiving the notice, the drawer is not considered to have committed an offence. Alternatively, the payee may file a complaint in the court of a jurisdictional magistrate within one month of the date on which the 15 days specified in the notice was completed.

Case laws

Dashrath Rupsingh Rathod v. the State of Maharashtra & Anr (2014)

Because of the above-mentioned groundbreaking Supreme Court decision, the foundational standard for filing criminal complaints about cheque dishonour under Section 138 of the Negotiable Instruments Act, 1881 has been altered. Initially, a case under Section 138 could only be brought by the person who received the cheque at his or her business premises or residential, but this has changed. According to the above-mentioned verdict, the complaint must be filed in the county where the branch of the bank on which a cheque was drawn is situated, and the judgment will be applied retroactively, i.e., lakhs of cases currently pending in numerous courts across the nation will be subjected to an interstate transfer of cheque bouncing cases and dishonouring of cases under the verdict.

Dalmia Cement (Bharat) Ltd. v. M/S. Galaxy Trades & Agencies Ltd. (2001)

It was in this case that the Supreme Court delivered a milestone decision, in which the rationale behind the implementation of Section 138 of the Negotiable and Instruments Act, 1881, was laid out. The facts of the case begin and end around the non-payment of a cheque, for which a notice was issued to the convicted to inform him of his rights. When the complainant obtained the complaint, the time limit for filing the complaint was extended until that point. The exact thing happened a second time, with the suspect failing to give the required sum of money. Based on the current facts, the court held that Section 138 of the Act was created to protect against any sort of violation of a person’s legal rights who have not received payment and that if a scenario comes up that makes it extremely difficult for the person to receive payment, then Section 138 should operate as it has been legislated to maintain the person’s legal rights. As a result, in this case, the court ordered that actions be taken against the respondent following the Act.

M/S Meters and Instruments Private Limited & Anr. v. Kanchan Mehta (2017)

In this case, the Supreme Court took into consideration the object linked with Section 138, as well as other existing laws stipulated in Chapter XVII of the Negotiable Instruments Act, 1881, and decided on whether Section 138 was constitutionally valid.

On the grounds of a pre-existing agreement between the two parties, the complainant Kanchan Mehta filed a complaint against the plaintiff under Section 138 of the Act, alleging that the latter had failed to pay a sum to the complainant every month as stipulated in that agreement. The court dismissed the complaint. The company had issued a check to the complainant, thereby discharging their legal obligations to that person or entity. The inadequate funds were handed back to the sender because there were inadequate funds on hand. Legal notices were served on the company for them to complete their payment, but the company failed to comply, and as a result, the company was held liable for the violation of Section 138 of the relevant Act of Parliament. Furthermore, when the company’s director expressed a willingness to pay the complainant, the demand draft was rejected by the company’s legal department on their end. As a result, the company filed a lawsuit against the complainant under Section 147 of the Act, which provided for the prosecution of compoundable offences. The complaint was dismissed by the concerned High Court because the complainant had not given his assent to the holding that the offence was compounding in character.

The Supreme Court of India has ruled that all of the crimes listed under Section 138 are civilmen’s. In addition, the Negotiable Instruments (Amendments and Miscellaneous Provisions Act, 2002 contains a statute for compoundable offences, which requires the assent of both parties in the transaction in question to be effective. Because the company agreed to remunerate the complainant, the court, in the interest of appropriate administration of justice, considered discharging the accused because the complainant had been compensated with the amount that was required to be given in the first place.

Canara Bank v. Canara Sales Corporation (1987)

This case provides a foundation for understanding the relationship held in common between a bank and its customers, which is bound together by strands of responsibilities and justice, particularly in the event of negligence on the part of either party or involvement in deceitful actions on the part of either party. As a result of this investigation, the respondent was found to have a bank account with the plaintiff’s bank, which was later discovered to have been linked to illegal transactions because the cheques that were cashed did not bear the initials of their managing director, the respondents. As a result, fraud occurred in the particular instance. The respondents have filed a lawsuit to be compensated for the money they believe they have lost. The Court noted that there was negligence on the part of both the creditor and the debtor, but that the equilibrium of negligence tipped more in favor of the banker than in favor of the company. In this case, the bank’s simple negligence cannot be used as a justification for not utilizing the service. The court ultimately determined that the company is entitled to compensation, and the case was dismissed as a result.

Dayawati v. Yogesh Kumar Gosain (2017)

The Delhi High Court’s decision in 2017 opened the door to a new avenue known as the alternate dispute resolution mechanism for deciding crimes classified under Section 138 of the Act that is criminally compoundable by nature. This decision not only signaled a shift in the way the Act was dealt with, but it also signaled a shift in the Indian judicial system. It went on to say that because the offences listed under the Negotiable Instruments Act, 1881 are distinct from other criminal offences, they can be given a priority to be remedied distinctly and more expeditiously than other criminal offences.


When it comes to the crime of dishonouring checks, the element of motive, or ‘mens rea,’ which is a vital aspect of all criminal offences, is not pertinent in this case. When cheques are dishonoured because there are insufficient funds in the drawer’s account, Section 138 of the Negotiable Instruments Act makes it a statutory offence, and the situations in which the dishonor occurred are insignificant. However, the law only takes into consideration the fact that a check has been dishonoured and does not take into consideration the numerous causes that led to it. 

The dishonour of a cheque is one of the most common problems that parties encounter when moving funds through negotiable instruments. Even though the drawer was ignorant of the inadequacy of the funds in his account within a recommended period, he will be held liable. However, the law itself offers them a decent length of time to reimburse the money to the payee. The mistake that occurs after such a time frame must be treated as a criminal offence because it entails the illegal intention of not repaying the money which is due to the party in the first place. As a result, the law makes it evident that the parties signing a cheque must be cognizant of the amount of money in their respective banks at the time of signing.


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