BACK TO NI Act 1881
NI Act 1881
Section 138
Dishonour of Cheque for Insufficiency of Funds in the Account
THE STATUTE
Original Text
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—
(a) the cheque has been 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;
(b) 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; and
(c) 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.
Legal Commentary
Section 138 is the most litigated provision in Indian criminal law — over 35 lakh cheque bounce cases are pending in Indian courts at any given time, making up roughly a third of all criminal pendency. The section creates a specific criminal offence: drawing a cheque on an account that has insufficient funds or that exceeds the overdraft arrangement, when the cheque was given to discharge a debt or liability.
**The Five Ingredients (all must be proved):**
1. **A cheque** — the instrument must qualify under Section 6 (drawn on a specified banker, payable on demand). Post-dated cheques qualify. Demand drafts do not.
2. **Drawn for discharge of a debt or liability** — the cheque must have been given for a legally enforceable debt or liability (Section 139 presumption). Security cheques given for future debts may not qualify if no present debt exists — though courts are sceptical of this defence.
3. **Dishonoured** — the bank must return the cheque unpaid. Two valid grounds: (a) insufficient funds, or (b) exceeds overdraft/arrangement. Dishonour for other reasons (signature mismatch, account closed, 'refer to drawer') can still attract Section 138 if the underlying reason is funds insufficiency — courts look at substance, not the memo.
4. **Legal demand notice sent within 30 days** — the payee must send a written demand notice to the drawer within 30 days of receiving the bank's dishonour memo. This is jurisdictional: failure to send notice within 30 days is fatal to the complaint. Notice must demand payment of the exact cheque amount.
5. **Drawer fails to pay within 15 days of notice** — after receiving notice, the drawer has 15 days to make full payment. If payment is made in full within this window, no offence is committed. Partial payment does not cure the default — though the fine may be reduced.
**Jurisdiction:** The landmark Supreme Court decision in Dashrath Rupsingh Rathod v. State of Maharashtra (2014) restricted territorial jurisdiction to the court where the cheque was presented to the drawee bank — overturning a decade of conflicting High Court decisions. Post-amendment (2015), complaints can be filed where the cheque was delivered for collection (payee's bank branch) or where the drawee bank branch is located.
**Punishment:** Imprisonment up to 2 years OR fine up to twice the cheque amount OR both. Courts frequently impose fines calibrated to compensate the payee rather than imprisonment for first offenders. The Supreme Court in Meters and Instruments Pvt Ltd v. Kanchan Mehta (2017) recommended default bail and compensation-focused sentencing to reduce pendency.
**Key distinction — civil vs criminal:** Section 138 is a criminal provision but functions partly as a civil debt-recovery tool. The Supreme Court in Vinay Devanna Nayak v. Ryot Seva Sahakari Bank Ltd (2008) noted that the legislature's intent was to enhance confidence in the banking system — the criminal sanction is meant to deter cheque misuse and incentivise payment, not purely to punish.
Questions & Answers
Imprisonment up to 2 years, OR fine up to twice the cheque amount, OR both. Courts typically impose fines (calibrated to compensate the payee) for first-time offenders. Imprisonment is more common in cases of deliberate fraud or repeat offences. The maximum fine is not 'twice' the damage — it is twice the face value of the dishonoured cheque.
The payee must send a written legal demand notice to the drawer within 30 days of receiving the bank's dishonour memo. After receiving this notice, the drawer has 15 days to make full payment. If the drawer pays within 15 days, no criminal offence is committed. The complaint must be filed within 30 days of the cause of action arising (the day after the 15-day payment period expires).
Section 138 NI Act is a bailable offence. The accused is entitled to bail as of right — the court does not have discretion to refuse bail as it does in non-bailable offences. However, the court may impose conditions like depositing a portion of the cheque amount as a condition of bail.
No. Section 138 is a non-cognizable offence — police cannot arrest the accused without a warrant. The complainant must file a private complaint before a Magistrate. The Magistrate, after examination, may issue a summons or warrant to the accused.
The complaint must be filed within 30 days of the cause of action — which arises the day after the 15-day period for payment (after notice) expires. If the 15-day window closes on Day X, the complaint must be filed by Day X + 30. Delay beyond this is fatal unless the court condones delay under Section 142(b) for sufficient cause.
Section 138 requires the cheque to be given for 'discharge of a debt or other liability.' A cheque given as pure security for a future contingent liability may not qualify. However, the Section 139 presumption means the court assumes a legally enforceable debt existed — the accused must rebut this with cogent evidence. Undocumented 'security cheque' claims are frequently rejected.
Partial payment does not cure the offence under Section 138. The offence relates to the full cheque amount. However, partial payment may be taken into account by the court when quantifying the fine or compensation. The complainant's entitlement is to the full cheque amount.
After the 2015 amendment, the complaint can be filed at the Magistrate's court having jurisdiction over the branch where the payee's bank delivered the cheque for collection (payee's bank branch location), or where the drawee bank is located. The 2015 amendment was Parliament's response to the Supreme Court's restrictive Dashrath Rupsingh ruling.