Section 138 of NI Act Explained: Cheque Bounce Notice, Procedure & Landmark Rulings

In the realm of commercial and personal transactions, a cheque signifies more than a mere piece of paper as it embodies trust, obligation, and assurance of payment. However, when such a cheque is dishonoured upon presentation, the consequences extend beyond financial inconvenience and enter the domain of criminal liability. Section 138 of the Negotiable Instruments Act, 1881 (‘NI Act’), criminalizes cheque dishonour arising from insufficiency of funds or closure of accounts.

The Supreme Court, in Shakti Travel & Tours v. State of Bihar, (2002) 9 SCC 415 (‘Shakti Travel case’), underscored that the foundation of any complaint under Section 138 of the NI Act lies in a properly served legal notice. This notice is more than just a procedural formality since it ensures that the drawer is given a fair opportunity to make the payment before facing prosecution.

More recently, in Dhanasingh Prabhu v. Chandrasekar, 2025 SCC OnLine SC 1419 (‘Dhanasingh Prabhu case’), the Supreme Court revisited the scope of liability under Sections 138 and 141 of the NI Act, marking a notable shift in how cheque dishonour cases involving partnerships are interpreted.

Cheque Bounce Notice: Law and its Relevance

When a cheque is dishonoured, it is not the dishonour alone that triggers criminal liability, but the failure to comply with the statutory demand notice that does. Under Section 138(b) of the NI Act, the payee or holder in due course must send a written notice to the drawer within thirty days from the date they receive intimation from the bank regarding the dishonour. The notice must clearly demand payment of the cheque amount within fifteen days of its receipt by the drawer.

If the drawer fails to make the payment within this prescribed time, the offence under Section 138 of the NI Act is deemed to be complete. It is only then that the payee can initiate criminal proceedings. Therefore, the notice acts as the legal bridge between a civil transaction and criminal liability. Without it, no prosecution can be sustained even if the dishonour itself is undeniable.

The significance of this notice was strongly laid down in the Shakti Travel case (supra), where Supreme Court held that the demand notice is a statutory safeguard intended to ensure fairness and to protect genuine drawers who might have faced an inadvertent default. The Court reiterated that the NI Act does not criminalize mere failure to pay but punishes wilful non-payment after due notice.

Further, the legislative intent behind inserting Chapter XVII (Sections 138—142) in the NI Act through the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (‘Amendment Act’) was to enhance the credibility of cheques as a negotiable instrument. Prior to this, cheque dishonour was largely treated as a civil matter, often leaving the payee with limited remedies. The statutory notice requirement thus introduced an essential element of fairness and accountability ensuring that honest businesspersons are given a fair opportunity to rectify defaults while deterring deliberate evasion.

Purpose of Cheque Bounce Notice

In essence, the cheque bounce notice serves three critical purposes-

1. It alerts the drawer about the dishonour,

2. It provides an opportunity to make the payment and avoid prosecution, and

3. It establishes compliance with the statutory condition precedent for filing a complaint under Section 138 of the NI Act.

This interplay of notice, response, and consequence ensures that the law maintains a careful balance between commercial discipline and procedural justice. This very balance sustains confidence in negotiable instruments.

Why Does a Bounced Cheque Become a Legal Issue?

At first glance, a bounced cheque may seem like a simple financial dispute between two parties. However, in law, it carries criminal consequences because it directly affects the credibility of financial transactions which is a foundation upon which commerce operates.

A cheque is a written assurance that sufficient funds are available to honour payment. When a cheque bounces due to insufficiency of funds, it shakes the trust on which business and personal transactions rely. To restore this trust, Parliament introduced Section 138 of the NI Act, through the Amendment Act.

The provision states:

“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 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 being insufficient, or that it exceeds the arrangement made with the bank, such person shall be deemed to have committed an offence…”

Simply put, the law recognises that a cheque is an implied promise backed by law. If that promise is broken, it moves beyond the ambit of just breach of contract and becomes an offence against financial reliability.

The Supreme Court has consistently observed that Section 138 of the NI Act was enacted to ensure the sanctity of cheque-based transactions. In Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249, the Court clarified that once a cheque is issued, it presupposes a legally enforceable debt or liability, and stopping payment later does not absolve the drawer of criminal responsibility.

At the same time, the law maintains a balance between deterrence and fairness. The drawer is not prosecuted automatically upon dishonour; they are given a statutory opportunity to make payment after receiving legal notice. Only when they wilfully fail to do so does the offence takes place.

Therefore, a bounced cheque becomes a legal issue because it undermines financial integrity and erodes trust in the banking system. Section 138 of the NI Act, thus acts as both a deterrent against casual dishonour and a protector of transactional faith ensuring that every cheque issued in good faith retains its commercial sanctity.

What makes a Cheque Bounce Notice valid?

Drafting a cheque bounce notice under the NI Act is a crucial legal threshold before prosecution. A well-crafted notice meets the statutory requirements and conveys all essential facts in clear, unambiguous terms. Missing out on core elements can render the subsequent complaint non-maintainable.

What does the statute demand?¹

The offence under Section 138 of the NI Act arises when

A cheque is drawn on an account and returned unpaid for reasons such as insufficient funds or exceeding the arrangement with the bank.

The payee (or holder-in-due course) gives a written notice to the drawer within 30 days of receiving knowledge of the return.

The drawer fails to pay the amount demanded within 15 days of receipt of the notice.

Thus, the notice is the legal trigger that enables a complaint under Section 138 of the NI Act.

Key components of the Notice

While drafting the notice, precision in the cheque amount is crucial. The demand made in the notice must correspond to the amount mentioned on the cheque. Even a minor deviation, such as demanding an amount inclusive of interest, penalties, or additional charges, may render the notice invalid. Courts have clarified that the statutory intent of Section 138 of the NI Act is specific, i.e., the notice must demand payment of the cheque amount alone. Therefore, any inclusion of an inflated or reduced figure could defeat the very purpose of the notice and make the subsequent complaint unsustainable.

When drafting, ensure that the notice clearly includes²:

• Details of parties: Name and address of the drawer and the payee/holder.

• Cheque particulars: Cheque number, date of issue, bank and branch, amount (in figures and words).

• Presentation and return details: Date of presentation, date of return, bank memo number and return reason (if available).

• Nature of liability: A brief statement showing an existing debt or liability or obligation for which the cheque was issued (since Section 138 of the NI Act applies only where the cheque is issued for discharge of debt or liability).

• Legal demand: A clear demand for payment of the cheque amount within 15 days of the notice, failing which criminal proceedings will be initiated under Section 138 of the NI Act.

• Mode of service: Register how the notice is being served: e.g., Registered Post A.D., speed post, courier, e-mail with proof.

• Signature and date: End the notice with the counsel or payee’s signature, date and contact details. Notices issued by legal representatives, such as advocates or authorized agents, are perfectly valid provided they act on instructions from the payee or holder in due course. What matters is the authority to issue the notice, not the person’s designation.

One of the most frequent yet overlooked errors is demanding an amount that differs from the cheque’s face value. The law mandates that the demand notice must strictly adhere to the cheque amount, i.e., neither more nor less. Including additional claims such as interest or compensation within the same notice can invalidate it, making the complaint legally defective.

The Supreme Court in Suman Sethi v. Ajay K. Churiwal, (2000) 2 SCC 380, not only emphaised this point, but also added that demand cannot be faulted if, in addition to cheque amount any other sum by way of interest, cost etc. is separately indicated³.

Also Read: Demand notice cannot be faulted if any other sum indicated in addition to said amount under S. 138(b) of NI Act: Allahabad High Court reiterates

What Happens After Sending Cheque Bounce Notice?

Once a cheque bounce notice is sent, the process under Section 138 of the NI Act enters its most crucial phase, i.e., compliance or prosecution. The law offers the drawer a fair opportunity to rectify the default before criminal liability arises.

15-day payment window

Upon receipt of the notice, the drawer is granted 15 days to make payment of the cheque amount. If the payment is made within this period, the offence is deemed not to have been committed, and no legal proceedings can be initiated. This provision reflects the remedial spirit of the law as it prioritizes recovery over punishment.

Cause of action arises after default

If the drawer fails to make payment within the prescribed 15 days, the cause of action arises on the 16th day. The payee then acquires the right to file a complaint before the Judicial Magistrate of the First Class within one month from the date of accrual of cause of action.

This timeline has been reinforced in multiple cases, including K. Bhaskaran v. Sankaran Vaidhyan Balan, (1999) 7 SCC 510, where the Supreme Court clarified that the complaint must strictly follow the statutory schedule for it to be maintainable.

Jurisdiction of the Court

The complaint can be filed before the Magistrate within whose jurisdiction either:

• the cheque was presented for collection, or

• the payee maintains their bank account.

This position was settled in Dashrath Rupsingh Rathod v. State of Maharashtra, (2014) 9 SCC 129, and later streamlined by the Negotiable Instruments (Amendment) Act 2015, which restored jurisdiction to the place of the payee’s bank.

Issuance of summons and trial process

Once the Magistrate takes cognizance, summons is issued to the accused. The procedure under Section 143 of the NI Act mandates that cheque bounce cases be tried summarily, with an aim for expeditious disposal.

In Indian Bank Association v. Union of India, (2014) 5 SCC 590, the Supreme Court issued detailed guidelines to ensure speedy trial of cheque dishonour cases, including day-to-day proceedings, use of affidavits for evidence, and encouragement of compounding at every stage.

Settlement and compounding

The NI Act allows the offence under Section 138 of the NI Act to be compoundable, meaning both parties can settle the matter at any stage of proceedings. In Meters and Instruments Pvt. Ltd. v. Kanchan Mehta, (2018) 1 SCC 560 (‘Meters and Instruments Pvt. Ltd. case’), the Supreme Court reaffirmed that the purpose of the law is not punitive but compensatory, encouraging compromise to avoid unnecessary incarceration.

Consequences of non-compliance

If no payment is made and no settlement is reached, the case proceeds to trial. Upon conviction, the drawer may face:

• Imprisonment up to two years, or

• Fine up to twice the amount of the cheque, or

• Both.

Additionally, the Court may order compensation to the complainant under Section 395 of the Nagarik Suraksha Sanhita, 2023 (Section 357 of the Criminal Procedure Code, 1973).

Another critical ingredient is the demand for payment. The notice must unequivocally call upon the drawer to make good payment of the dishonoured cheque within fifteen days of receipt. Vague or conditional demands, for example, offering settlement options or partial payments, may dilute the legal force of the notice.

In essence, sending the notice initiates a structured legal sequence, i.e., a fair chance to correct the default, followed by proportionate consequences if the default persists. The framework ensures that while the payee’s rights are protected, the drawer is also afforded by every procedural safeguard before facing prosecution.

Landmark Rulings on Section 138 NI Act

Shakti Travel & Tours v. State of Bihar, (2002) 9 SCC 415

The Supreme Court held that issuance and service of a statutory demand notice under Section 138 of the NI Act is not a procedural ritual but a mandatory precondition to maintain a complaint. It ensures that the drawer is given a fair opportunity to make payment before facing criminal prosecution.

Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd., (2000) 2 SCC 745

The Court clarified that an offence under Section 138 of the NI Act is not complete upon dishonour of the cheque alone. It arises only after the drawer fails to pay within fifteen days of receiving the statutory notice, thereby defining the procedural threshold for liability.

Meters and Instruments (P) Ltd. v. Kanchan Mehta, (2018) 1 SCC 560

The Court emphasised that the purpose of Section 138 of the NI Act is primarily compensatory and not punitive. It encouraged early settlement and compounding to promote financial discipline without unnecessary incarceration.

Dhanasingh Prabhu v. Chandrasekar, 2025 SCC OnLine SC 1419

In a path-breaking judgment, the Supreme Court ruled that complaints under Sections 138 and 141 of the NI Act are maintainable even if the partnership firm itself is not arrayed as an accused, provided the partners in charge of the business are impleaded. This marks a pragmatic shift in cheque dishonour jurisprudence.

Also Read: Stretching the Statute? Supreme Court’s Bold Take on Section 138 of the Negotiable Instruments Act, 1881

Kaveri Plastics v. Mahdoom Bawa Bahrudeen Noorul, (2025) 259 Comp Cas 658

The Supreme Court reaffirmed that strict compliance with the statutory wording of Section 138 of the NI Act is mandatory. The Court held that where the cheque amount and the demand made in the notice do not perfectly align, the notice cannot be considered valid. This ruling underscores that Section 138 of the NI Act proceedings are grounded on precise statutory adherence. Any deviation, however small, could nullify the prosecution.

Sanjabij Tari v. Kishore S. Borcar, (2025) 259 Comp Cas 685

While deciding this case, the Supreme Court stated that the accused person’s failure to reply to the statutory notice under Section 138, led to an inference that there was some merit in the charge of dishonour. The Court then went on to issue comprehensive set of guidlines address pendence of cheque bounce cases.

Evolving Jurisprudence

Over time, cheque bounce litigation under the NI Act has evolved from a rigid penal framework to a balanced mechanism promoting financial credibility and judicial efficiency. The object of Section 138 of the NI Act, as Courts have clarified, is not punishment for its own sake but preservation of trust in commercial transactions.

A major turning point came in Meters and Instruments Pvt. Ltd. case (supra), where the Supreme Court held that offences under Section 138 of the NI Act are primarily compensatory, emphasising recovery over imprisonment. This paved the way for compounding and mediation, even at later trial stages.

Recent judgments reflect adaptation to digital realities. The Bombay High Court in SBI Cards & Payments Services Pvt. Ltd. v. Rohidas Jadhav 2018 SCC OnLine Bom 1262 accepted WhatsApp acknowledgments as valid proof of notice, aligning procedure with modern business practices.

The Supreme Court’s ruling in Dhanasingh Prabhu case (supra) further refined vicarious liability under Section 141 of the NI Act, holding that a complaint remains valid even if only partners are named as accused, without arraying the firm itself.

Collectively, these developments illustrate a forward-looking jurisprudence, one that blends technology, efficiency, and fairness to uphold the sanctity of cheques and reinforce trust in financial transactions. Courts have increasingly favoured a purposive interpretation of Section 138 of the NI Act notices focusing on the intent to demand repayment rather than rigid adherence to format. This shift ensures that genuine claims are not defeated by hyper-technical objections, especially in cases where electronic communication supplements physical notice.

FAQs

1. What happens if I send the cheque bounce notice after 30 days?

If you issue the notice 30 days after the date of receiving the bank memo, the complaint under Section 138 of the NI Act will be time-barred and not maintainable. However, you may re-present the cheque (if it is still valid within its 3-month period) and reinitiate the process afresh.

2. Can I send a cheque bounce notice by email or WhatsApp?

Yes. Courts have recognised email and electronic communication as valid supplementary proof of notice. However, it is still advisable to send a registered or speed post copy to ensure statutory compliance and maintain physical evidence of service.

3. What if the drawer refuses to accept the notice?

Refusal to accept a properly sent legal notice is treated as “deemed service.” If the postal endorsement reflects “refused,” the law presumes that service has been completed, and prosecution can proceed accordingly.

4. What is the penalty for cheque bounce under Section 138 of the NI Act?

The offence is punishable with imprisonment for up to two years, or fine up to twice the cheque amount, or both. Additionally, Courts often direct payment of compensation to the complainant to ensure recovery of dues.

6. How long do I have to file a complaint after serving the notice?

You must file the complaint within one month from the expiry of 15 days after the notice is received by the drawer. Any delay beyond this requires filing an application for condonation of delay, supported by sufficient cause.