NI Act Cheque Bounce: From Dishonour to Notice

This article provides a focused guide on the initial steps to take when a cheque is bounced, as per the Negotiable Instruments Act, 1881 (NI Act). It covers the understanding of cheque dishonour under Section 138, the critical process of issuing a legal demand notice, the obligations of the drawer post-notice, and when the cause of action to initiate further legal proceedings arises. If you’re facing a bounced cheque, understanding these preliminary stages is crucial to act wisely and protect your rights.

1. Introduction: Understanding Cheque Bounce Under the Negotiable Instruments Act, 1881

Navigating the issue of a bounced cheque involves understanding its legal implications, primarily governed by the Negotiable Instruments Act, 1881 (NI Act). This Act provides the framework for how such instruments are used and the consequences if they are not honoured.

2. The Legal Definition of a "Cheque" (As per Section 6, NI Act)

A “cheque” is a fundamental instrument in financial transactions. The NI Act defines it specifically.

According to Section 6 of the Negotiable Instruments Act, 1881,

“A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”

This definition clarifies that a cheque is essentially an order to a bank to pay a sum of money on demand. The inclusion of electronic forms shows the Act’s adaptation to modern banking practices.

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3. The Core Offence: Dishonour of Cheque for Insufficient Funds (Section 138, NI Act)

The primary aim of the NI Act is to lend credibility to negotiable instruments and to provide a swift remedy in case of their dishonour, thereby ensuring trust in commercial transactions.

Chapter XVII, which includes Section 138, specifically deals with penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts.

Section 138 of the NI Act serves as the cornerstone provision that criminalizes the act of issuing a cheque which is subsequently dishonoured due to insufficient funds or if it exceeds the arrangement made with the bank.

3.1 Text of Section 138, Negotiable Instruments Act, 1881

“138. Dishonour of cheque for insufficiency, etc., of funds in the account.—Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that 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 that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless-

the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice; in writing, to the drawer of the cheque, 3[within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation.– For the purposes of this section, debt of other liability means a legally enforceable debt or other liability.

4. What Constitutes an Offence Under Section 138?

For an act to be considered an offence under Section 138, certain conditions must be met:

4.1 Issuance of Cheque for Discharge of Debt or Other Liability

The cheque must have been drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability. This “debt or other liability” is a crucial ingredient, meaning the cheque should not be, for instance, a gift or for an unlawful consideration.

4.2 Presentation of the Cheque to the Bank

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. (This period was six months historically but has been reduced).

4.3 The Fact of Dishonour (Reasons: Insufficient Funds, Exceeds Arrangement)

The cheque must be returned by the bank unpaid, either because the amount of money standing to the credit of that 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 that bank.

4.4 Importance of Section 138: For the Complainant (Payee/Holder) – A person who will file a complaint

Section 138 provides a relatively speedy and effective legal remedy to recover the cheque amount. It acts as a deterrent against issuing cheques without sufficient funds, thereby enhancing the credibility of cheques as a mode of payment. The provision for imprisonment and a fine up to twice the cheque amount offers significant leverage to the complainant.

4.5 Importance of Section 138: For the Accused (Drawer):

Understanding Section 138 is crucial as it entails criminal liability. It’s not merely a civil dispute. The accused needs to be aware of the ingredients of the offence and the available defences, such as proving that the cheque was not issued for a legally enforceable debt or liability. The consequences can be severe, including imprisonment and a substantial fine.

5. The Indispensable Demand Notice (Proviso to Section 138, NI Act)

The payee or the holder in due course of the dishonoured cheque must make a demand for the payment of the said amount of money by giving a notice in writing to the drawer of the cheque. This notice serves as an intimation to the drawer about the dishonour and gives them an opportunity to make the payment.

5.1 Making a Demand for Payment: The Written Notice

5.2 Critical Time Limit: Sending the Notice Within 30 Days of Dishonour

This written notice must be sent to the drawer within a specific timeframe. According to Proviso (b) to Section 138 of the Negotiable Instruments Act, 1881 “the payee or the holder in due course of the cheque, as the case may be, 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 thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid;“

This means the clock starts ticking for the payee from the moment they receive information from their bank about the cheque’s dishonour.

5.3 Contents of a Valid Demand Notice

While the NI Act does not prescribe a specific format, a valid demand notice must clearly:

State that the cheque (with details like cheque number, date, amount, and drawee bank) was presented and has been dishonoured.
Specify the reason for dishonour as communicated by the bank (e.g., “insufficient funds” or “exceeds arrangement”).
Demand the payment of the cheque amount from the drawer.
State that if the drawer fails to pay the amount within 15 days of the receipt of the notice, the payee will initiate legal proceedings under Section 138 of the NI Act.

It is advisable to send this notice through registered post with acknowledgment due (RPAD) to have proof of dispatch and delivery.

5.4 Why the Demand Notice is a Crucial First Step

The demand notice is a mandatory prerequisite for initiating prosecution under Section 138.

Statutory Requirement: Failure to send a valid notice within the stipulated 30 days, or a notice that doesn’t meet the legal requirements, can be fatal to a subsequent complaint.
Opportunity to Drawer: It provides a final opportunity for the drawer to make the payment and avoid criminal prosecution.
Establishes Cause of Action: The failure of the drawer to comply with the demand notice within 15 days of its receipt forms the cause of action for filing a criminal complaint.

6. The Drawer's Obligation and Failure to Pay

Once the drawer receives the demand notice, a specific timeframe is provided under the NI Act for them to fulfill their obligation and make the payment.

6.1 The 15-Day Window for the Drawer to Make Payment

As stipulated in Proviso (c) to Section 138 of the Negotiable Instruments Act, 1881, the drawer of the cheque has fifteen days from the date of receipt of the demand notice to make the payment of the cheque amount to the payee or the holder in due course.

If the drawer makes the full payment within this 15-day period, the matter is settled, and no offence under Section 138 can be made out against them.

6.2 When Does the Right to Sue (Cause of Action) Arise?

The cause of action for filing a criminal complaint under Section 138 NI Act arises only after the drawer fails to make the payment within these 15 days. Specifically, the cause of action accrues on the 16th day after the receipt of the notice by the drawer, provided the payment has not been made. This is a critical date for calculating the limitation period for filing a complaint.

7. Initiating Legal Action: Filing the Complaint (Section 142, NI Act)

If the drawer fails to make the payment within the 15-day period after receiving the demand notice, the payee or holder in due course then acquires the right to initiate legal action by filing a criminal complaint.

Section 142(1)(b) of the Negotiable Instruments Act, 1881 specifies the timeline for this: “such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to section 138:”

This means the complaint must be filed in the appropriate Hon’ble Court within one month from the date on which the 15-day period (for the drawer to pay after receiving the notice) expires.

However, the proviso to Section 142(1)(b) of the Negotiable Instruments Act, 1881 (as per NI Act.pdf, page 29) offers a crucial exception. It states:

“Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.”

Therefore, while timely filing within the one-month window is essential, a delay in filing the complaint might be condoned by the Hon’ble Court if the complainant can demonstrate and satisfy the Court that there was a sufficient cause for not making the complaint within the prescribed period.

8. Conclusion

Understanding the initial steps following a cheque dishonour, as laid out in the Negotiable Instruments Act, 1881, is paramount for both the payee and the drawer. For the payee, correctly issuing a timely demand notice is the gateway to enforcing their rights under Section 138. For the drawer, the notice period provides a crucial opportunity to settle the dues and avoid criminal prosecution. Adherence to the procedures, especially the timelines for the demand notice and the subsequent 15-day payment window, is critical.

To summarize these crucial deadlines:

Action	Responsible Party	Deadline	Relevant NI Act Provision
Sending the Demand Notice	Payee/Holder	Within 30 days of receiving information from the bank about the cheque's dishonour.	Section 138, Proviso (b)
Payment by Drawer after receiving Notice	Drawer	Within 15 days of the receipt of the demand notice.	Section 138, Proviso (c)
Filing of Complaint if payment not made	Payee/Holder	Within one month from the date the cause of action arises (i.e., after the expiry of the 15-day notice period).	Section 142(1)(b)

If payment is not made by the drawer within the stipulated 15 days after receiving the notice, the path then leads towards initiating a formal complaint in court, a process guided by Section 142 of the NI Act. Always seeking timely legal advice is recommended to navigate these provisions effectively and ensure all legal requirements are met.

Disclaimer: In compliance with the Bar Council of India guidelines, this article is intended for informational purposes only and does not constitute legal advice or a solicitation for legal services.