Module 1 of 5 — Negotiable Instruments Act & Section 138

The Negotiable Instruments Act: Cheques and Dishonour

Reading module · approx 12 min

The Negotiable Instruments Act, 1881 governs the creation, transfer, and enforcement of three primary instruments in Indian commercial life: promissory notes, bills of exchange, and cheques. Understanding the statutory architecture is the foundation for any Section 138 practice.

What is a cheque under the NI Act?

Section 6 of the NI Act defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. A cheque must therefore be:

In writing and signed by the drawer
An unconditional order to the bank (drawee) to pay a specified sum
Payable on demand (not at a future date, except for post-dated cheques where the presentment is made after the date on the cheque)

Post-dated cheques are valid and commonly used in India for EMIs, security deposits, and deferred payment arrangements. A post-dated cheque is a valid instrument and its dishonour on or after the date on the cheque attracts Section 138 liability.

The validity period of a cheque

A cheque is valid for 3 months from the date on the cheque. This was reduced from 6 months by an RBI directive effective April 2012. Presenting a cheque after the 3-month validity period will result in the bank returning it as "stale", and this return does not attract Section 138 liability because the dishonour must be on presentation within the validity period.

What constitutes dishonour

A cheque is returned dishonoured when the bank refuses to pay it. The reasons that attract Section 138 liability are:

Insufficient funds in the account
Account closure
Exceeding the amount of the arranged overdraft facility

Dishonour for technical reasons does NOT attract Section 138 liability:

Signature mismatch
Overwriting without authentication
Account frozen by court order
Payment stopped by order of court (though a stop payment instruction given by the drawer may attract liability)
Post-dated cheque presented before date

Stop payment instructions Where the drawer has issued a stop payment instruction to the bank, the cheque is returned as "payment stopped by drawer." The Supreme Court has held that this also attracts Section 138 liability — it is equivalent to saying that insufficient funds exist in the account. A drawer who stops payment cannot escape Section 138 liability by claiming a genuine dispute with the payee (the dispute is a defence to the merits, not to the Section 138 offence).

The cheque bounce memo

When a cheque is dishonoured, the bank issues a cheque return memo (CRM) to the payee/holder specifying the reason for dishonour. The CRM is the starting document for the Section 138 process — the 30-day notice period starts running from receipt of the CRM. The CRM should be retained in original as it is evidence in the eventual complaint.

Multiple presentations

A payee can present a dishonoured cheque multiple times within the validity period. Each presentation can give rise to a fresh cause of action if dishonoured again. After the validity period, re-presentation requires the drawer to issue a new cheque. The payee must send a demand notice within 30 days of each dishonour they wish to make the basis of a complaint.

Module 2 covers the specific ingredients of the Section 138 offence.