The original reason for a cheque to be returned unpaid could be many, but it is safe to say that every bank memo is not an automatic cheque bounce case under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The right cheque bounce case type could depend on the reason for return by the bank, the underlying transaction, the person or business who wrote it, and whether or not the cheque was a legally enforceable debt on the date when it was actually presented.
In my experience, this simple aspect is where most disputes start. One party looks at the bank memo and expects a conviction. The other party assumes that writing a single word “security cheque” or “stop payment” in the memo reply means the case will go away. Both parties are usually wrong.
Section 138 of the NI Act applies where the cheque was issued towards discharge of a legally enforceable debt or liability, was presented within its validity, was dishonoured by the bank and the statutory requirements relating to presentation, notice and non-payment were also met. The provision allows punishment with imprisonment for up to two years, a fine extending to twice the cheque amount or both.
A cheque bounce case typically arises when a cheque is presented to the bank for payment, but is returned unpaid by the bank. The bank issues a cheque return memo indicating the reason for dishonour.
The return memo, while important, is not the entire case. In a court of law, the following may also be relevant:
Section 139 creates a statutory presumption that the cheque was received for discharge of a legally enforceable debt or liability. It is a rebuttable presumption, which means that the accused can always raise a probable defence with the available evidence.
This is the most common cheque bounce case type and happens when the account in question does not have sufficient funds to honour the cheque.
For instance, assume a borrower issues a cheque for Rs. 2,00,000, but there are only Rs. 25,000 in his account when the cheque is presented. If the cheque was given towards a legally enforceable liability and the legal requirements are met, then proceedings under Section 138 may be initiated.
Ordinarily, the drawer cannot avoid the case by simply claiming that he did not know that sufficient funds were unavailable. Section 140 restricts such a defence.
A cheque may be returned because its amount exceeds the agreed overdraft or other payment arrangement between the drawer and the bank.
This situation is specifically covered under Section 138. It may happen in business accounts, cash-credit accounts and overdraft facilities when the drawer issues a cheque beyond the agreed limits.
In some cases, the drawer closes his account after issuing the cheque. The cheque is then returned with the remark “account closed”.
Closing the account does not automatically absolve the drawer from the cheque bounce legal action. The Supreme Court has held that dishonour on account of closure of the account can also attract Section 138 when the remaining legal conditions are met.
The cheque holder still has to prove that the cheque was received towards discharge of a legally enforceable debt or liability and the statutory notice and limitation requirements were also complied with.
The bank may also return a cheque because the drawer himself directed it to stop payment.
Stop-payment direction does not by itself defeat a complaint under Section 138. Otherwise, one could issue a cheque and then easily stop its payment and avoid legal consequences of dishonour. The drawer, however, can raise a defence to show that no legally enforceable liability existed at all or that the stop-payment direction was genuine and can be proved with evidence.
This cheque bounce case type is quite common in cancelled business transactions, disputed supplies, property deals and loan settlements.
The cheque may be returned because the signature is not similar to the specimen available with the bank, the signature is incomplete or the cheque is irregular or not genuine.
A signature mismatch case requires a detailed examination. The court may look at whether the cheque was genuinely signed by the drawer, whether the drawer fraudulently changed his signature on the cheque, whether the cheque was misused and whether the remaining ingredients of Section 138 are otherwise proved.
The bank memo, the admitted signatures, the account-opening records, correspondence and expert evidence may all become relevant. It is not always safe to assume that every signature mismatch return is necessarily outside cheque bounce law.
A cheque presented after its validity is time-barred or stale. RBI directions have also reduced the validity of cheques, drafts, pay orders and banker’s cheques to three months from the date of the instrument.
If a cheque is presented after the validity period, a Section 138 case may be doomed to fail because timely presentation is one of the basic statutory requirements. The holder should therefore not keep the cheque until the last few days of validity.
A post-dated cheque has a future date. It cannot ordinarily be presented as a cheque before that date. Once the written date arrives, it can then be presented within its validity period.
Post-dated cheques are commonly used for loan instalments, rents, property payments, business supplies and settlement obligations. Dishonour can also attract Section 138 if an enforceable liability exists on the date of presentation and all statutory requirements are met.
The Supreme Court has clarified that the cheque must represent a legally enforceable debt when it is encashed or presented, and not merely when it was initially given or handed over.
A borrower can issue a cheque for repayment of a personal loan, business loan or private loan. The lender must be able to establish the loan transaction and the amount legally outstanding on the date of cheque presentation.
Helpful records may include a loan agreement, bank transfer statement, promissory note, written acknowledgement, repayment schedule, messages or emails and the account statement. The borrower can always challenge the complaint by raising defences such as the non-existence of a loan, or the amount, the lender’s financial capacity or legally enforceable debt. A simple denial may not be enough if the signature and the cheque are already admitted.
Friendly loan is an amount which one person or entity allegedly advanced to another as a loan between relatives, friends, colleagues or acquaintances, without formal banking documentation.
These cases can be factually complex. Courts will look at how the money was paid, when it was promised to be repaid, whether the lender had the financial capacity to advance that amount and whether the transaction appears in any bank or tax records.
Written proof is not always the only form of evidence, but informal lenders should appreciate that a large claim of cash-loan without supporting records may face a serious credibility test.
Cheque bounce complaints are quite common from unpaid invoices, supply contracts, distributorship arrangements, consultancy fees and service agreements.
The main issue often is whether the cheque represented an admitted payment obligation, or there was a genuine dispute regarding defective goods, incomplete services, cancellation, adjustment or returned material.
Purchase orders, invoices, delivery receipts, transport records, account ledgers, emails and tax documents can help in determining whether the claimed liability existed or not.
A tenant may issue cheques towards rent, arrears, maintenance charges or settlement of tenancy dues. If such a cheque is dishonoured, the landlord may also consider action under Section 138, depending on the existence of legally enforceable liability.
The rent agreement, rent receipts, possession records and payment history may help in establishing the claim.
The words “security cheque” are no magic mantra for absolute protection from legal action.
A cheque which was originally issued as security may still attract Section 138 if the liability has matured and remains legally enforceable when the cheque is presented. The Supreme Court has held that proceedings can be initiated even where the cheque was initially given as security, depending on whether there is a liability existing in favour of the holder at the relevant time.
However, a security cheque should not ordinarily be used towards an amount that has not yet become due. If the underlying condition never happened, the debt was discharged or the amount reduced, the drawer may have a legitimate defence.
It is common for people to sign a blank cheque and let the payee fill in the date and amount later. This happens in many cases like loans, business credit or security arrangements.
Ordinarily, the drawer cannot necessarily escape liability by simply saying that he had signed a blank cheque. The Supreme Court has held that where a signed blank cheque is voluntarily delivered towards payment, the payee can fill in the particulars and the statutory presumption may arise if the cheque is otherwise valid.
The drawer can still rebut that presumption by showing misuse, no legally enforceable liability, unauthorised possession or an amount that is inconsistent with the actual transaction.
Where an individual signs a cheque from his personal account, the complaint is usually filed against that drawer.
The complainant must, however, correctly identify the drawer. One who did not maintain the account or sign the cheque cannot ordinarily be made liable just because he was involved in the transaction.
A sole proprietorship is not distinct from the proprietor in the same way as a company. Proceedings are therefore generally directed against the proprietor who owns the account and issued the cheque.
Careful description of the proprietorship and proprietor in the complaint can avoid unnecessary technical objections later.
Under Section 141, the expression “company” includes a firm and a partner can be treated as a director for the purpose of that provision. The liability, however, depends on the firm’s role, the signatory and the responsibility of the accused partner for the conduct of the business.
Where a company issues the cheque, the company is normally an essential accused. Persons who were in charge of and responsible for the conduct of its business at the relevant time may also be added under Section 141.
Merely because a person was designated as a director does not automatically make him liable. The complaint should contain specific allegations to show how the director was in charge of and responsible for the company’s business when the offence was committed. The Supreme Court has also repeatedly clarified that liability cannot be imposed merely because a person held the title of director.
A Section 138 cheque bounce complaint is a statutory criminal proceeding, even though its central purpose is very much connected with payment and recovery. A separate civil remedy for recovery of money may also be available, depending on the documents, limitation period and nature of the transaction.
The two remedies are different:
Section 147 expressly makes offences under the NI Act compoundable, allowing the parties to settle the dispute subject to the court’s order.
In general, a cheque bounce complaint typically requires the following broad conditions:
The complaint is tried by a Metropolitan Magistrate or Judicial Magistrate First Class having jurisdiction under Section 142. Where the cheque is deposited in the payee’s account, jurisdiction generally follows the branch where the payee maintains that account.
The Supreme Court has held that all statutory conditions must be satisfied before the offence is treated as complete. The court has also confirmed that a cheque may be presented more than once during its validity period, but limitation and notice consequences require careful attention.
A complainant should generally preserve the following:
Section 146 treats a bank slip or memo bearing the official dishonour mark as a prima facie evidence of dishonour unless disproved.
During the trial, the court may also direct the drawer to pay interim compensation under Section 143A. This amount cannot exceed 20 percent of the cheque amount. This power is, however, exercised by the court according to the facts and circumstances of each case.
If the convicted drawer files an appeal, the appellate court may also order a deposit of at least 20 percent of the fine or compensation awarded by the trial court, in addition to any interim compensation already paid.
A drawer can always raise a defence that:
A particularly important issue arises where part payment is made after issuance but before presentation. The Supreme Court has held that the dishonoured cheque must represent the legally enforceable debt on the date of presentation. If the cheque amount no longer matches the outstanding legal liability because of a recorded part payment, Section 138 may not apply in the same manner.
A borrower takes Rs. 5,00,000 from a lender and issues a signed security cheque. The loan becomes due, the borrower makes no repayment and the lender presents the cheque for the exact outstanding amount.
The mere fact that it was called or described as a security cheque may not defeat the complaint because the liability had already matured before presentation.
A drawer issues a cheque for Rs. 3,00,000 but makes a payment of Rs. 1,00,000 through bank transfer before the cheque is presented. The holder still presents the original cheque for Rs. 3,00,000 without accounting for the part payment.
The drawer may argue that the cheque no longer represented the actual legally enforceable liability on the date of presentation.
A company cheque is dishonoured and every director is named as an accused, including a non-executive director who had resigned earlier.
That director may challenge the case, especially where the complaint lacks specific allegations to show his responsibility for the company’s business at the relevant time.
A responsible cheque bounce lawyer should examine both the cheque and the underlying transaction. A cheque bounce lawyer should check:
Avoid anyone who guarantees conviction, acquittal or immediate recovery. Cheque bounce cases can depend heavily on documents, dates, presumptions and conduct of both the complainant and the drawer.
No. A Section 138 case requires a legally enforceable debt, timely presentation, a valid demand notice, failure to pay within 15 days and timely filing of the complaint.
Yes. A security cheque may attract Section 138 when the liability has matured and is legally enforceable on the date of presentation.
No. Stop-payment instructions do not automatically prevent a complaint under Section 138. The drawer must establish a legally sustainable defence.
A voluntarily signed and delivered blank cheque may create a statutory presumption after its particulars are filled. The drawer may rebut that presumption with credible evidence.
Cheques are generally valid for three months from the date written on them under RBI directions.
The payee or holder in due course must generally issue the written demand notice within 30 days of receiving information from the bank that the cheque was returned unpaid.
Yes. Offences under the Negotiable Instruments Act are compoundable, so the parties may settle the matter subject to appropriate court proceedings.
Cheque Bounce Case Type:
Different Types of Cheque Bounce Cases in India
WHAT IS A CHEQUE BOUNCE CASE?
DIFFERENT TYPES OF CHEQUE BOUNCE CASES BASED ON BANK RETURN REASONS
1
INSUFFICIENT FUNDS CHEQUE BOUNCE CASE
2
CHEQUE AMOUNT EXCEEDS THE BANKING ARRANGEMENT
3
ACCOUNT CLOSED CHEQUE BOUNCE CASE
4
PAYMENT STOPPED BY DRAWER
5
SIGNATURE MISMATCH CHEQUE BOUNCE
6
STALE OR EXPIRED CHEQUE
7
POST-DATED CHEQUE BOUNCE CASE
DIFFERENT TYPES OF CHEQUE BOUNCE CASES BASED ON THE UNDERLYING TRANSACTION
LOAN REPAYMENT CHEQUE BOUNCE
FRIENDLY LOAN CHEQUE BOUNCE CASE
BUSINESS TRANSACTION CHEQUE BOUNCE
RENT CHEQUE BOUNCE CASE
SECURITY CHEQUE BOUNCE CASE
BLANK SIGNED CHEQUE CASE
CASES AGAINST INDIVIDUALS, FIRMS AND COMPANIES
CHEQUE ISSUED BY AN INDIVIDUAL
CHEQUE ISSUED BY A SOLE PROPRIETORSHIP
CHEQUE ISSUED BY A PARTNERSHIP FIRM
CHEQUE ISSUED BY A COMPANY
IS A CHEQUE BOUNCE CASE CRIMINAL OR CIVIL?
BASIC LEGAL REQUIREMENTS OF A SECTION 138 CASE
EVIDENCE COMMONLY REQUIRED
INTERIM COMPENSATION AND APPEAL DEPOSIT
COMMON DEFENCES IN A CHEQUE BOUNCE CASE
PRACTICAL EXAMPLES
EXAMPLE 1: SECURITY CHEQUE AFTER LOAN DEFAULT
EXAMPLE 2: CHEQUE PRESENTED AFTER PART PAYMENT
EXAMPLE 3: COMPANY DIRECTOR NAMED WITHOUT SPECIFIC ROLE
HOW TO CHOOSE A CHEQUE BOUNCE LAWYER
FAQs
Is every bounced cheque a criminal case?
Can a security cheque result in a cheque bounce case?
Does stop payment prevent Section 138 action?
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How much time is available to send a cheque bounce notice?
Can the drawer settle a cheque bounce case?
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