Dishonour of Cheques — Overview

A cheque is a negotiable instrument. When someone issues a cheque to pay a debt or other liability and that cheque is returned unpaid by the bank, the law provides both civil remedies (money recovery) and criminal consequences (punishment under Section 138 NI Act) for the drawer in appropriate cases. The NI Act transformed certain cheque dishonours from only a civil matter into a penal offence to protect the credibility of cheque transactions.

Key statutory tools to look at are Section 138 (the penal provision for dishonour) and Section 139 (statutory presumption in favour of the holder). For reference, the official Act text is available on IndiaCode. (India Code)

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Essential statutory ingredients (what must be proved for Section 138)

Section 138 creates criminal liability when a cheque is dishonoured for certain bank endorsements and the statutory procedure is followed. In short, the main ingredients are:

1. Cheque drawn by accused — The accused must have drawn and issued the cheque (or the cheque must bear the accused’s signature).

2. Cheque drawn for payment of money to another — The cheque must be drawn on the accused’s account and payable to a person (payee/holder).

3. Cheque presented and dishonoured — The cheque must be presented to the bank within its validity and it should be returned unpaid with an endorsement like “insufficient funds”, “exceeds arrangement”, or similar. (Stop-payment has also been held to attract Section 138 in several decisions — see MMTC). (CaseMine)

4. Notice — After receiving the bank’s return memo, the payee/holder must send a written demand notice to the drawer within 30 days (counted from the date of the bank’s return memo). The notice must demand payment of the exact cheque amount. (S3Waas)

5. Failure to pay within 15 days — The drawer must fail to make payment within 15 days of receipt of that notice. If the drawer pays within 15 days, the offence does not arise. (S3Waas)

6. Filing complaint in time — If payment is not made, the complainant must file the complaint before a Magistrate within 30 days of the expiry of the 15-day period (i.e., generally within 45 days of the bank memo), otherwise the criminal remedy may be barred. (sanlegalsolutionslpo.com)

(These procedural timelines are crucial — missing them often defeats a Section 138 prosecution or requires reliance on delay-condonation case law.)

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Exact words (short quotes) — Sections (paraphrased for clarity)

• Section 138 (short paraphrase): Where a cheque drawn by a person is returned unpaid for insufficiency of funds or because it exceeds the arranged amount, and the payee gives notice within the prescribed time and the drawer does not pay within 15 days, the drawer shall be deemed guilty of an offence. (See the NI Act text for exact statutory language.) (India Code)

• Section 139 (short paraphrase): Once the complainant proves the cheque and that it was presented and returned, the court shall presume, unless the contrary is proved, that the cheque was issued for discharge of a debt or other liability (i.e., a rebuttable presumption in favour of the holder). (A Lawyers Reference)

(Where you use these quotes in academic text, cite the exact section of the Act; above are paraphrases to keep the language accessible.)

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Criminal liability (Section 138) — penalties and nature of offence

• Punishment: On conviction the drawer can 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 both.

• Nature of offence: Section 138 is treated as a statutory/regulatory criminal offence intended to deter misuse of cheques and protect commercial credit. Courts treat it seriously but also insist on strict compliance with procedural requirements.

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Civil remedies (alongside criminal prosecution)

Even when a criminal case under Section 138 proceeds, the payee (or holder) still has standard civil remedies:

1. Money recovery suit / summary suit — File a civil suit or summary suit for recovery of the cheque amount (if the criminal route fails on procedural grounds or is inappropriate).

2. Execution of decree — If a civil decree is obtained, execute it for recovery.

3. Alternative remedies — Arbitration, compromise agreements, or other contractual remedies if available.

Courts often encourage settlement and compromise; a valid compromise deed executed between parties can lead to quashing of criminal proceedings in appropriate cases. Recent decisions emphasize that a signed compromise can avoid jail. (The Economic Times)

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Important points of law and how courts treat them (with cases)

Below are the classical and later Supreme Court rulings that shape how Section 138 cases are decided. I list the principle and then the case(s) that established or clarified it.

1. Presumption in favour of the holder — Section 139 (rebuttable)

• Principle: Once the complainant proves the cheque, its presentation, and dishonour, the court must raise a presumption under Section 139 that the cheque was issued for discharge of a debt or liability. This presumption is rebuttable, but the accused must produce credible evidence to discharge it.

• Leading case: Rangappa v. Sri Mohan — the Supreme Court explained that the Section 139 presumption is not absolute; once raised, the accused must rebut it by preponderance of probability (i.e., cogent evidence is needed to create reasonable doubt). (Supreme Today)

2. Ingredients and concatenation of acts (procedure matters)

• Principle: The offence under Section 138 is completed only after a sequence of acts — drawing cheque, presentation, dishonour, notice, failure to pay within 15 days, and filing complaint in time. Each link matters. The complainant must establish the chain.

• Leading case: K. Bhaskaran v. Sankaran Vaidhyan Balan — an early Supreme Court decision that explained how these component acts make up the offence. (Note: some parts of Bhaskaran have been revisited later on territorial-jurisdiction questions, but it remains often-cited on the structure of the offence.) (Jajharkhand)

3. Stop-payment / instruction to bank — can attract Section 138

• Principle: A cheque dishonoured because the drawer gave a stop-payment instruction can still constitute a dishonour under Section 138, subject to evidence. Courts have held that dishonour with endorsements such as “stop payment” or “exceeds arrangement” may attract Section 138 if the drawer’s defence is not acceptable.

• Leading case: M.M.T.C. Ltd. v. Medchl Chemicals & Pharma (P) Ltd. (2002) — the Supreme Court held that even when the cheque is dishonoured due to stop-payment, Section 138 may apply; however, facts and evidence can negate the offence if there is sufficient explanation. (CaseMine)

4. Standard of proof to rebut Section 139 presumption

• Principle: Mere denial of liability by the drawer is insufficient to rebut Section 139. The accused must put forward clear, cogent evidence showing that the cheque was not issued in discharge of a debt (e.g., proof of payment, evidence that cheque was stolen, or material contradictions in complainant’s case).

• Leading cases: Kishan Rao v. Shankargouda (Supreme Court, 2018) — held that a simple denial is not enough and that the accused must provide material to negate presumption. Rangappa also guides the standard (preponderance of probability). (IBCLaw)

5. Time-limit / notice issues — strict compliance required

• Principle: The statutory timeline for notice (within 30 days of memo), the 15-day cure period, and filing the complaint within 30 days after expiry of the 15-day period are treated seriously. Courts may condone certain delays where justifiable, but statutory limits are important. Many High Courts and the Supreme Court have examined condonation depending on facts. (S3Waas)

6. Proof of bank endorsement and presentation

• Principle: The prosecution must produce the cheque, return memo (bank’s dishonour slip), and bank officer’s evidence or certified copy to show the cheque was presented and returned. The court usually expects bank evidence or record to prove return reason.

• Supporting authorities: Numerous decisions emphasize the need to prove presentation and the bank's endorsement; see standard texts and case compilations. (India Code)

7. Compromise and outcome after settlement

• Principle: If parties enter a bona-fide compromise and the complainant withdraws or agrees to settle, courts may not insist on jail or may quash proceedings; a valid compromise deed has weight. Recent Supreme Court directions indicate a compromise can lead to non-sustenance of conviction. (The Economic Times)

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Step-by-step practical procedure (what a payee/holder must do)

1. Get bank memo — When the presenting bank returns the cheque, obtain the bank’s return memo showing the endorsement (e.g., “insufficient funds”). Keep originals and copies. (Proof of dishonour is the first ingredient.) (IBCLaw)

2. Send demand notice within 30 days — Serve the drawer a legal notice (usually by registered post AD / speed post / courier / personal service with proof) within 30 days from the date of the bank memo. The notice should demand payment of the exact amount written on the cheque and give 15 days to pay. Ensure the notice is strictly drafted (exact cheque details, bank memo particulars, demand clause). (S3Waas)

3. Wait 15 days — If the drawer pays within 15 days of receiving the notice, no offence; otherwise proceed. Keep proof of service (postal receipt, delivery acknowledgment). (S3Waas)

4. File complaint — If no payment, file a complaint under Section 138 before the competent Magistrate within 30 days from the expiry of the 15-day period. Include cheque, bank memo, proof of notice service, and other supporting documents. (sanlegalsolutionslpo.com)

5. Civil options — In parallel, consider a civil suit/summary suit for recovery (sometimes quicker or necessary if the criminal case is barred on technical grounds).

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Defences commonly raised by drawers and how courts view them

1. Cheque issued as security or blank cheque misused — Drawer may say cheque was given as security or blank cheque and filled fraudulently. Courts examine surrounding facts and evidence. If established, this may defeat Section 138. Cases require corroboration. (Supreme Today)

2. Cheque stolen / forged — Drawer may claim forgery or theft; must be proved satisfactorily. Mere allegation without evidence will not rebut Section 139 presumption. (IBCLaw)

3. No legally enforceable debt — If the original transaction is illegal (e.g., black money cash loan exceeding statutory limits) or not legally enforceable, Section 138 may not apply; courts have recognized that a debt originating from an illegal contract may not be recoverable under Section 138. Recent high court rulings reflect this principle. (The Times of India)

4. Stop-payment valid reason — If stop-payment was for a lawful reason (e.g., cheque already paid, or cheque issued in discharge of debt but subsequently set off), drawer may succeed — but the burden of proof is on drawer. MMTC shows stop-payment can be within Section 138 facts if not properly explained. (CaseMine)

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Selected case-law summaries (short, citable notes)

• K. Bhaskaran v. Sankaran Vaidhyan Balan, (1999) 7 SCC 510 (AIR 1999 SC 3762) — Set out the components of the offence under Section 138 and the requirement of a concatenation of acts (drawing, presentation, dishonour, notice, non-payment). Frequently cited on structure and territorial-competent-court issues though later benches have clarified some aspects. (Jajharkhand)

• M.M.T.C. Ltd. v. Medchl Chemicals & Pharma (P) Ltd., (2002) 1 SCC 234 — Held that dishonour due to stop-payment or similar endorsements can fall within Section 138; the court examined the evidence and noted that a proper explanation may negate criminality. Useful on stop-payment discussion. (CaseMine)

• Rangappa v. Sri Mohan, (2010) 11 SCC 441 (often cited) — Clarified that Section 139 presumption is rebuttable and the accused must produce evidence to show non-existence of legally enforceable debt. Sets out standard of proof required to rebut statutory presumptions. (Supreme Today)

• Kishan Rao v. Shankargouda (Supreme Court, 2018/2019) — Reiterated that mere denial by accused is not sufficient; accused must lead acceptable evidence to create reasonable doubt and rebut presumption under Section 139. (Used widely in later convictions.) (IBCLaw)

• Rajesh Jain v. Ajay Singh (Supreme Court, 2023) — Recent Supreme Court ruling reaffirming how courts should handle evidence and raising presumption under Section 139; it restated that courts must not mechanically convict but must examine whether accused successfully rebutted presumption. (Use when discussing contemporary trends — see reporting of the case.) (Live Law)

• Recent high-court and Supreme Court trends (2023–2025) — Several decisions emphasize speedy disposal, strict scrutiny of evidence, the importance of proof of notice, and that genuine compromises should be respected (recent SC guidance allowing avoiding jail where a valid compromise exists). See summary reports. (The Economic Times)

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Practical drafting tips for notice / complaint (short checklist)

• Mention cheque number, date, amount (in words and figures), payer bank and branch, and the bank memo reason.

• Demand only the cheque amount — do not include extra claims (interest or other heads) in the notice if you wish to rely solely on Section 138. Courts have held that demanding an amount different from cheque amount may be a defect. (ClearTax)

• Keep proof of service (postal AD receipt, tracking info, courier POD, offline proof). Registered post with AD is common.

• Attach copies of cheque and bank return memo to the notice and to the complaint.

• File complaint within statutory time limits after the 15-day cure period expires.

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Interaction between civil and criminal remedies — strategic points

• A criminal Section 138 prosecution is not the only remedy. A civil suit might be more appropriate where the payee wants recovery and not punishment.

• Criminal proceedings require strict compliance with procedure; sometimes civil route is used if criminal case may be defeated on technical grounds.

• Courts sometimes stay criminal proceedings where there is an identical civil suit pending, or vice versa, to avoid multiplicity of litigation — look at the facts of the case and strategic choice of forum.

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Recent developments / practical trends (brief)

• Courts continue to insist on strict proof (presentation; bank memo; notice; proof of service) but also balance the need to protect cheque credibility and avoid misuse of Section 138.

• There is judicial encouragement for settlement and compromise (recent SC observations allow compromise to avoid jail). (The Economic Times)

• Stop-payment cases and post-dated cheques keep being litigated; Supreme Court and High Courts have clarified in each factual matrix whether such dishonour attracts Section 138. See MMTC and subsequent cases. (CaseMine)