Cheque Bounce in India Explained: A Complete Guide under Section 138 of the Negotiable Instruments Act

Introduction: When a Cheque Speaks Louder Than Words

In India, cheques are not just pieces of paper — they are a promise. A promise that money will be paid when due. But what happens when that promise fails?

Every day, thousands of cheques are dishonoured across the country, triggering legal disputes and financial anxiety. The law steps in through Section 138 of the Negotiable Instruments Act, 1881, which treats cheque dishonour not merely as a private breach, but as a criminal offence.

This article breaks down everything you need to know — from what constitutes cheque bounce to the procedure, timelines, penalties, and key court rulings — so you know exactly what steps to take.

What Is a Cheque Bounce?

A cheque is said to “bounce” or be dishonoured when it is returned unpaid by the bank. Common reasons include:

• Insufficient funds in the drawer’s account

• Signature mismatch

• Account closed or payment stopped

• Cheque validity expired (stale cheque)

• Mismatch in amount or figures

While not all these scenarios attract criminal liability, dishonour due to insufficiency of funds or exceeding the arrangement with the bank is specifically penalized under Section 138.

Legal Framework: Section 138 of the Negotiable Instruments Act, 1881

Section 138 makes it a criminal offence to issue a cheque that is dishonoured for want of funds. To establish guilt, the following conditions must be satisfied:

1. The cheque must be drawn for discharge of a legally enforceable debt or liability.

2. It must be presented within 3 months (or its validity period, whichever is earlier).

3. The bank must return it unpaid due to insufficient funds or exceeding arrangement.

4. The payee must issue a written demand notice within 30 days of receiving the return memo.

5. The drawer fails to make payment within 15 days of receiving the notice.

6. Only then can the complaint be filed within 30 days after the 15-day period.

Failure to adhere to these timelines can invalidate the complaint — which is why precision and professional drafting matter.

The Cheque Bounce Timeline

Action	Time Limit
Cheque presented to the bank	Within 3 months of issue
Bank returns cheque unpaid	—
Payee sends legal notice demanding payment	Within 30 days of dishonour
Drawer’s response window	15 days from receipt of notice
Complaint filed in Magistrate Court	Within 30 days from expiry of notice period

If payment is made within 15 days, no offence is deemed to have been committed.

Legal Notice for Cheque Bounce: First and Crucial Step

A demand notice is the legal foundation of any cheque bounce prosecution. It must include:

• The details of the cheque (number, date, bank, amount)

• The reason for dishonour

• A clear demand for payment within 15 days

• The consequence of non-payment (criminal prosecution under Section 138)

Many cases fail because of defective notices or incorrect timelines. Apar Law regularly assists clients in drafting demand notices that strictly comply with legal requirements — often preventing disputes from escalating to litigation.

Jurisdiction: Where Should You File the Case?

Following the landmark judgment in Dashrath Rupsingh Rathod v. State of Maharashtra (2014) and the subsequent legislative amendment, the place of presentation determines jurisdiction.

➡️ The court within whose jurisdiction the payee’s bank (where the cheque was presented) is located has authority to try the case.For instance, if your bank account is in New Delhi, even if the cheque was issued in Mumbai, you can file the complaint in a Delhi court.

Common Defences in Cheque Bounce Cases

While the presumption under Section 139 favours the complainant (that the cheque was issued for a debt), the accused may rebut it by showing:

• The cheque was issued as a security, not for actual liability.

• The debt itself was not legally enforceable.

• The cheque was stolen, forged, or misused.

• The complainant did not follow statutory timelines.

Each defence must be substantiated by evidence, and courts have increasingly insisted on strong documentation to rebut statutory presumptions.

Penalties and Punishment

Upon conviction under Section 138:

• The drawer can face imprisonment up to 2 years, or

• A fine up to twice the cheque amount, or both.

However, courts encourage compounding and settlement at any stage of proceedings. The Supreme Court in Meters & Instruments Pvt. Ltd. v. Kanchan Mehta (2017) emphasized a pragmatic approach — allowing cases to be closed upon payment, saving judicial time.

Corporate Cheques and Director Liability (Section 141)

When a company issues a bounced cheque, not only the company but also every person in charge of its affairs at the time can be prosecuted.

However, liability is not automatic — the complaint must specifically allege the role of each accused director. The Supreme Court has repeatedly quashed vague complaints against non-executive directors.

Key cases:

• SMS Pharmaceuticals Ltd. v. Neeta Bhalla (2005)

• National Small Industries Corp. v. Harmeet Singh Paintal (2010)

Recent Developments & Trends

• Digital Presentation of Cheques: With e-cheque systems, Section 138 applies equally to electronic presentations.

• Decriminalization Debate: The Government had floated a proposal to decriminalize cheque bounce offences, but courts continue to treat them as economic offences affecting business confidence.

• SC Directions (2024): Encouragement of pre-litigation mediation and online settlement mechanisms to unclog courts.

Settlement and Compounding

Cheque bounce offences are compoundable, meaning they can be settled even after conviction. The parties can file a joint compounding application before the trial or appellate court.This flexibility has made Section 138 a powerful recovery tool — balancing criminal deterrence with commercial settlement.