The Negotiable Instruments Act, 1881, is one of the most important laws governing financial transactions in India. Section 138 of this Act deals specifically with cases related to cheque bounce, which is a common issue in business and personal financial dealings. This provision ensures that cheque dishonor is treated as a criminal offense to protect the credibility of financial transactions.
This article explores Section 138 of the NI Act, including the legal process, penalties, and remedies available to the affected parties.
What is Section 138 of the NI Act?
Section 138 of the Negotiable Instruments Act, 1881, makes it a criminal offense if a cheque issued by a person is dishonored due to insufficient funds or if the account is closed. The objective of this provision is to ensure that cheques remain a trusted mode of payment.
Key Elements of Section 138:
- Drawer Issues a Cheque: A person (drawer) issues a cheque to another person (payee) for a payment obligation.
- Cheque is Presented for Payment: The payee deposits the cheque in their bank.
- Cheque is Dishonored: The bank returns the cheque unpaid due to insufficient funds or other reasons.
- Legal Notice is Sent: The payee must send a legal notice to the drawer within 30 days of receiving the cheque bounce memo from the bank.
- Payment Not Made: If the drawer fails to pay the amount within 15 days of receiving the notice, the payee can file a complaint under Section 138.
Punishment Under Section 138
If a person is found guilty of an offense under Section 138, they can face the following consequences:
- Imprisonment up to 2 years or Fine up to twice the amount of the cheque, or both.
- The court may also order compensation to the complainant.
- If the drawer is a company, the directors and responsible officers can also be held liable.
- In severe cases, the defaulter’s bank account may be frozen.
Legal Procedure for Filing a Cheque Bounce Case
If your cheque has bounced, follow these steps to take legal action under Section 138:
Step 1: Send a Legal Notice
- A demand notice must be sent to the drawer within 30 days of the cheque bounce.
- The notice should clearly mention the cheque amount, reason for dishonor, and demand for payment within 15 days.
Step 2: File a Complaint in Court
- If the drawer fails to pay within 15 days, the payee can file a complaint in a Magistrate Court within 30 days.
- The complaint should include the cheque copy, dishonor memo, legal notice, and proof of service of notice.
Step 3: Court Proceedings and Trial
- The court examines the complaint and issues summons to the drawer.
- The drawer gets an opportunity to present their defense.
- If found guilty, the court imposes a penalty as per Section 138.
Defenses Available for the Drawer (Accused)
If you are accused under Section 138, you may defend yourself on the following grounds:
- No legal liability: If the cheque was issued as a gift or loan and not against a legal debt.
- Forgery or Stolen Cheque: If the cheque was stolen or forged.
- Technical Errors: If the cheque was dishonored due to a signature mismatch or other banking errors.
- Non-Compliance with Legal Procedure: If the complainant did not follow the correct timeline for notice and complaint filing.
Recent Amendments and Judicial Rulings
To reduce the burden on courts, the Negotiable Instruments (Amendment) Act, 2018, introduced provisions for interim compensation. The Supreme Court has also ruled that courts should prioritize cheque bounce cases and aim for a swift resolution.
Key Judicial Decisions:
- The Supreme Court has ruled that Section 138 applies even if the cheque was issued as a security deposit.
- The High Courts have directed banks to take strict action against habitual offenders.
Preventive Measures to Avoid Cheque Bounce Issues
- Always ensure sufficient funds in your bank account before issuing a cheque.
- Keep records of all issued cheques and payments.
- Verify the signature and account details before issuing a cheque.
- If a cheque bounce occurs, try to settle the issue amicably before taking legal action.
- Use alternative digital payment methods for secure transactions.
Conclusion
Section 138 of the Negotiable Instruments Act, 1881, serves as a strong legal deterrent against cheque bounce fraud. It ensures that financial transactions via cheques remain reliable and that defaulters face strict consequences. However, both payees and drawers must understand their legal rights and responsibilities to avoid unnecessary litigation.
If you are dealing with a cheque bounce case, consulting a legal expert can help you navigate the legal process effectively.
Have you ever faced a cheque bounce issue? Share your experience in the comments!