This article talks about Dishonored Cheque and Legal Remedies. INTRODUCTION The provisions governing economic transactions involving NEGOTIABLE Instruments are included in Section 138 of the NEGOTIABLE INSTRUMENTS Act 1881. Any negotiable instrument is a written agreement or a signed document which is a recorded promise guaranteeing the payment of a specific sum on a future date to the… Read More »

This article talks about Dishonored Cheque and Legal Remedies.


The provisions governing economic transactions involving NEGOTIABLE Instruments are included in Section 138 of the NEGOTIABLE INSTRUMENTS Act 1881. Any negotiable instrument is a written agreement or a signed document which is a recorded promise guaranteeing the payment of a specific sum on a future date to the specified person. These instruments are transferable.

These negotiable instruments such as Cheques, Money or any kind of promissory notes guaranteeing payment are the cornerstones of the complex economic transactions that happen every day in the economy on a large scale. Therefore, it is important that their issuance, actual usage, exchange and stocking of these instruments be properly located within a definite legal framework and to be monitored accordingly.

The Instrument of Cheque

A Cheque can be understood as a negotiable instrument which directs the issuer’s bank to discharge the amount specified in it to the person to whom it is issued. Like all negotiable instruments cheque too is transferable. It is one of the most popular bases for business transactions. The Law defines Cheque in Section 6 of the Negotiable Instruments Act,1881 as;

“A cheque is a bill of exchange drawn upon a specified banker and not expressed to be payable otherwise than on-demand”

The provision also validates an electronic image of the cheque as legal tender. Categorically a cheque is similar to a Bill of exchange. But all Bills of Exchanges cannot be qualified as cheques because a cheque is always drawn on a specified banker and is payable immediately on demand.

Nevertheless, a cheque indeed carries within it all the necessary characteristics of a Bill of Exchange including the mandatory signature of the drawer(the person in whose name the cheque is issued), and it must include a specified order regarding the amount payable to a specified person(the ‘payee’).

Apart from the ‘payee’ and the ‘drawer’, there is a third party to this agreement and that is the ‘drawee’, the drawer’s bank which honours the cheque by making the payment as specified in it. And if the case is otherwise, we can say that the cheque is dishonoured.

Negotiable Instruments Act 1881

The Act was originally intended as an amendment to the law related to the provisions of Bills of Exchange and Promissory Notes which was further amended subsequently to accommodate the changes brought about by rapid changes in technology and increased digitalization and to safeguard public faith in the validity of these instruments.

The original Act contains detailed definitions of a variety of recognized Negotiable Instruments as well as provisions governing various aspects of the transactions based on these instruments. These include sections relating to parties involved, payment and interest, various Cheque presentment scenarios, liability and discharge; and legal remedies in case of bounced cheques.

The Act also proceed to elaborate the rules relating to evidence, the reasonable time allowed and means of protestation possible once a cheque is dishonoured. The Criteria to call a dishonoured cheque so, is also elaborately discussed. The latest update was in the year 2017 by which was added Section 143 A in addition Section 148 was also introduced. The Act came into effect on 2nd of August 2018 after obtaining Presidential Assent.

Amendment Act of 2018

The amendment introduces major changes to the original legislation with several novel provisions including the prospect of interim compensation for the affected ‘payee’. This provided for under Section 143 A of the Amended Act. And accordingly empowers the court to direct interim compensation to the complainant provided it meets two requirements regarding the drawer who pleads not guilty either to the accusations being made or at the time of framing of charge in any other cases.

The court is satisfied that the above conditions are met can then order the drawer to pay compensation not exceeding 20% of the sum specified in the dishonoured cheque within 60 days of such an order being made or within an extended period of an additional 30 days.

And if the drawer fails to comply with the order the court can classify it as fine and can retrieve the amount through means and procedures listed under Section 421 of the Criminal Procedure Code. The Section is mainly applied in the event of a cheque bouncing due to insufficient fund or the amount quoted exceed the actual sum payable by the bank as agreed upon originally.

However, if the drawer is found not guilty subsequently, then the court may ask the complainant to pay the amount back with interest. The rate of the interest will be calculated on the basis of the rate which prevailed on the start of the given financial year. Further, the final compensation which will eventually be awarded to the complainant once after the closure of case will be minus the amount already paid as interim compensation.

The next major amendment is encapsulated in Section 148 of the amendment by which is extended the protection provided under Section 143A to cover the appeal period also. Accordingly, if the Drawer proceeds to file an appeal then the appellant court as safeguard can ask the drawer to deposit a definite sum with it, which shall be at least 20% of the amount awarded by the magistrate court as compensation.

When can we say that a Cheque is Dishonored?

To establish that a drawer has violated the promise of payment as embedded in the cheque or to rephrase; that he dishonoured it the following conditions must be met, which are;

  1. The cheque bounced back for reasons of lack of sufficient funds in the account or the amount specified exceeds what that is originally agreed upon.
  2. The Cheque so dishonoured was paid for the discharge in whole or in part to finance any debt or liability.
  3. The Cheque must be presented to the banker within six months of it being drawn or within the period of validity whichever is earlier.
  4. The payee upon the return of the cheque from the drawee has issued a notice to the drawer within 15 days.
  5. The notice should be clear on the allegation of dishonouring, if the reason is insufficient to fund, in addition, it should also specify that the notice is issued under Section 138 of the Negotiable Instruments Act,1881.
  6. The Notice should bear within it the date, the serial number of the cheque, the name of the drawee bank, the amount to be drawn, and actual date of the issue in case of postdated or antedated cheque.
  7. The notice should clearly state the consequences the defaulter will be subjected to if proven guilty.
  8. Proceedings may begin if the drawer fails to make the repayment within a period of 15 days of the receipt of the notice.
  9. The complaint should have been filed within a period of one month from the expiry of 15 days after the receipt of the notice by the drawer.
  10. Such complaint is made only in due course of time strictly in writing.
  11. The complaint must be filed before at least the metropolitan magistrate or the judicial magistrate.

The procedure

It is the prerogative from the part of the drawee bank that it issue a ‘Cheque Return Memo’ to the banker of the payee mentioning the reason for the non-payment. Upon which the payee bank will forward the memo along with the cheque to the payee.

There is an option to resubmit the cheque if he believes that the cheque is still valid. After the payee exhausts all the above options the payee can revert to legal action against the drawer.

The option to legally move against the drawer is available only if the cheque so issued was to finance debt or liability that the drawer owed to the payee. If for example the cheque was awarded as a prize it is not legalizable.

Section 138 allows for the prosecution of the drawer in case of cheque bouncing and the offence is punishable with a maximum of 2 years imprisonment and is liable for the imposition of fine.

The payee then has to intimate the drawer about the legal proceedings within a 30 day period of receiving the cheque return memo wherein should be stated the demand to pay back the amount owed by the drawer.

As the Cheque Issuer defaults the fresh demand for payment the payee can then file a criminal complaint under Section 138 of the Negotiable Instruments Act. It is to be noted here that the complaint should reach the magistrate’s court within the one month window of the expiry of the notice.

Punishments and Penalties

Once the complaint is registered the court will then proceed to summon the parties to hear the matter. And if found guilty, the defaulter can then be subjected to a jail term of a maximum of 2 years or be charged with a monetary penalty of twice the defaulted amount or in some cases both.

Additionally, in the case of repeat offences, the relevant bank has the right to stop issuing chequebooks and to close the accounts of the person concerned. However, it is to be added here that if the drawer succeeds in paying the amount within a period 15 days from the date of the receipt of the notice, then he/she can be classified as an offender. Hence the actual issuance of notice can become the clinching matter if the case is taken up for hearing.

Apart from the above-mentioned consequences the history of a bounced cheque can seriously dent the financial credibility of the drawee and will have an impact on his/her CIBIL score. The CIBIL score is what which shows your financial behaviour in numerical terms based upon which the creditors be it banks or any other lenders extend your loans. It shows the potential possibilities relating to loan repayment. And a single instance of cheque bouncing may lead to the denial of loans.

However, there can be cases where a cheque was bounced due to non -malafide reasons such as minor technical errors such as spelling errors, mismatch in dates, overwriting, mismatched signatures etc. though legally prosecutable, it can be avoided if cheque is reissued within 30 days from the receipt of the Cheque Return Memo.

Legal Tangles

Under Chapter 17 of the Negotiable Instruments Act,1881 the drawer could be said to have violated the law and can, therefore, be considered an offender. Thus the Section reads-

“This clause inserts a new Chapter XVII in the Negotiable Instrument Act,1881. The provision contained in the new chapter provide that where any cheque drawn by a person for the discharge of liability is returned by the bank unpaid for the reason of insufficiency of money standing to the credit of the account on which the cheque was drawn or for the reason that it exceeds the arrangements made by the drawer of the e-cheque with the bankers for that account the drawer of such cheque shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque or both”.

The Act also therein vests upon the payee the legal recourse to take up his case in the concerned civil court to recover the amount specified in the dishonoured cheque, However, whether the drawer who dishonoured a cheque owing to lack of sufficient fund, could be considered as an offender in the eyes of law was a matter of debate up until the introduction of the above said Chapter 17 which was inserted into the 1881 law by virtue of the 1988 Amendment.

Nevertheless, there existed in the possibility to prosecute to classify the drawer of a returned cheque an offender by the Section 420, read with 415 of the Indian penal Code,1860, who could then be subjected to rigorous imprisonment which may if necessary extend up to 7 years.

However, the application of the provision was limited due to its narrow scope, which was then corrected by the introduction of the 1988 Amendment. Which was further updated and clarified by the 2017 amendment which was aimed to reaffirm public faith in such negotiable instruments which are crucial for the functioning of the entire economy.


The Negotiable Instruments Act, which is the governing legislation with regards to cheques and other related instruments of exchange was amended several times to increase the efficiency of these statutes, to ensure their proper enforcement and to further the general trust in these bases for crucial commercial activities, which thrusts the nation’s economy into motion.

The Act had the time and again proved as valuable means for the proper settlement of disputes which are bound to arise in the course of any business or trade transactions as well has been effective in checking fraudulent economic conduct.

However, there is still scope for further progress towards a more competitive trade regime provided the issue of long term pendency of cases clogging our dispute settlement bodies is properly solved and settled.


  1. Mercantile Law, Kapoor N.D
  2. Business Law,Wadhwani
  3. Instruments Act,1881)

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Updated On 18 March 2020 2:18 AM GMT
Arsha Sabu

Arsha Sabu

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