Cheque Dishonour under Section 138, NI Act
Conditions for an offence under Section 138 of the Negotiable Instruments Act, 1881, timelines, penalty and interim compensation.
Key points
- Section 138 makes dishonour of a cheque for insufficient funds or for exceeding the arrangement a criminal offence.
- The cheque must be presented within 3 months of its date (its validity period).
- The payee must send a written demand notice within 30 days of learning of the dishonour.
- The drawer then gets 15 days to pay; the complaint must be filed within 1 month after that.
- Punishment: imprisonment up to 2 years, or fine up to twice the cheque amount, or both.
Why this section matters to bankers
Branch staff handle returned cheques every day. The return memo the bank issues – with the exact reason – is the key evidence in a Section 138 case, so it must be accurate, complete and issued promptly.
Ingredients of the offence
- A cheque is drawn by a person on an account maintained by them with a bank.
- It is issued for discharge, in whole or part, of a legally enforceable debt or liability.
- It is presented within its period of validity (three months from its date).
- It is returned unpaid because the amount in the account is insufficient, or it exceeds the amount arranged to be paid from the account.
- The payee or holder in due course gives a written notice demanding payment within 30 days of receiving information of the dishonour from the bank.
- The drawer fails to pay within 15 days of receiving the notice.
Timeline at a glance
| Step | Time limit |
|---|---|
| Presentation of cheque | Within 3 months of the date of the cheque |
| Demand notice by payee | Within 30 days of receiving the return memo |
| Payment by drawer | Within 15 days of receiving the notice |
| Filing of complaint (Section 142) | Within 1 month from the date the cause of action arises (i.e. after the 15 days expire); the court may condone delay for sufficient cause |
Penalty and related provisions
- Section 138: imprisonment up to two years, or fine up to twice the cheque amount, or both.
- Section 139: the court presumes, unless the contrary is proved, that the holder received the cheque for discharge of a debt or liability.
- Section 141: where the drawer is a company, every person in charge of and responsible for its business at the time can also be held liable.
- Section 143A (2018 amendment): the trial court may order the drawer to pay interim compensation of up to 20% of the cheque amount.
- Section 148: in an appeal against conviction, the appellate court may order deposit of at least 20% of the fine or compensation.
- Offences under the Act are compoundable (Section 147).
Exam tip: "Account closed", "Payment stopped by drawer" and "Refer to drawer" returns can also attract Section 138 if the underlying debt is proved – courts have held that the substance of the dishonour matters, not just the words on the return memo.
What the branch must do
- Issue a return memo with the correct reason and date.
- Preserve records of the account and the returned instrument; banks are often summoned to produce them.
- Follow RBI instructions on frequent dishonour: for cheques of ₹1 crore and above dishonoured four times in a financial year, the bank should stop issuing fresh cheque books and may close the account at its discretion.