Answer By law4u team
When a cheque is returned unpaid by the bank, it creates a serious legal situation under Indian law, primarily governed by the Negotiable Instruments Act, 1881 (NI Act). Specifically, Section 138 of the NI Act deals with the dishonour of cheques for insufficiency of funds or because the amount exceeds the arrangement made with the bank. When this happens, it is not merely a civil breach of contract or a simple payment failure, but it triggers a potential criminal liability that can lead to imprisonment, a heavy monetary fine, or both. 1. The process begins when the holder of the cheque or the payee presents it to their bank within its validity period, which is generally three months from the date mentioned on the cheque. If the drawer's bank refuses to clear the payment and returns the cheque unpaid, the bank issues a formal document known as a return memo. This memo explicitly states the reason for the dishonour, such as funds insufficient, account closed, signatures do not match, or payment stopped by the drawer. 2. Upon receiving the return memo and the dishonoured cheque, the payee or holder in due course must act promptly within the timelines prescribed by law. Under Section 138 of the NI Act, the payee must issue a formal legal notice in writing to the drawer of the cheque within 30 days from the date of receiving information about the dishonour from the bank. This legal notice must explicitly demand the payment of the cheque amount and inform the drawer that failing to make the payment within the stipulated statutory period will result in criminal prosecution. 3. Once the drawer receives this legal notice, the law provides them a specific window of 15 days from the date of receipt to clear the full payment of the cheque. If the drawer pays the entire amount within this 15-day window, no legal action can be taken further, and the matter is successfully resolved. However, if the drawer fails or neglects to make the payment within 15 days of receiving the notice, the cause of action arises, and the payee acquires the legal right to file a criminal complaint. 4. The payee must file this criminal complaint for cheque dishonour in the appropriate Magistrate court having jurisdiction within 30 days from the date on which the 15-day period for payment expired. The complaint is filed under Section 138 read with Section 142 of the NI Act. Along with the complaint, the payee must submit original documents including the dishonoured cheque, the bank return memo, a copy of the legal notice, postal receipts or tracking reports proving delivery of the notice, and an affidavit supporting the claims. 5. Upon examining the complaint and the accompanying documents, the Magistrate takes cognizance of the offence and issues summons to the accused drawer to appear before the court. During the court proceedings, the court examines the evidence to verify if the cheque was issued for the discharge, in whole or in part, of any legally enforceable debt or other liability, which is a fundamental requirement for Section 138 of the NI Act to apply. The law also includes a statutory presumption under Section 139 of the NI Act, which presumes that the holder of the cheque received it for the discharge of such debt or liability, placing the burden of proof on the accused drawer to rebut this presumption. 6. If the court finds the accused drawer guilty after a trial, the legal consequences can be severe. Under Section 138 of the NI Act, the punishment may include imprisonment for a term that can extend up to two years, or a fine that may extend to twice the amount of the cheque, or both. Furthermore, the court can also order interim compensation to be paid by the drawer to the complainant during the pendency of the proceedings under Section 143A of the NI Act, up to twenty percent of the cheque amount, to provide immediate relief to the payee.
