Booklet on Dishonor of Cheque & Default in electronic payment

War Against NPA

3. Dishonour of Cheque &

Default in electronic payment
LKMC/SASTRA

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 Booklet on Dishonor of Cheque & Default in electronic payment

Disclaimer
The information in this book is for the reference and
guidance of staff working for recovery. While every effort
has been made to prepare this booklet keeping in view the
internal circulars/book of instructions on the subject up to
31.12.2021, the contents are subject to change from time to
time. Therefore, in case of any mismatch/difference
between this booklet and Bank’s internal circulars/book of
instructions, the latter shall prevail.

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 Booklet on Dishonor of Cheque & Default in electronic payment

Contents
Process Flow of action to be taken against dishonour of cheque and step by step instructions for
initiation of action ................................................................................................................................... 4
Introduction .................................................................................................................................... 4
Important Points : A complaint by the Bank can be also filed in the following circumstances: . 7
Flowchart: Action against cheque bounce. ................................................................................. 9
Checklist - Action u/s 138 of NI Act........................................................................................... 10
Dos and Don’ts .......................................................................................................................... 11
Annexures ............................................................................................................................................. 12
Annexure I- to be issued in case if the Drawer is a Firm/Company .................................................. 12
Annexure II- in case if the Drawer is an Individual. .......................................................................... 14
Annexure III- in case Bank is holder in due course ........................................................................... 15

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 Booklet on Dishonor of Cheque & Default in electronic payment

Process Flow of action to be taken against dishonour of cheque and

step by step instructions for initiation of action

Introduction
In order to encourage usage and acceptability of cheques and to enhance the creditability of the
instrument, specific provisions were incorporated in the Negotiable Instruments Act, 1881 under
Sections 138 to 148.

What are the grounds for
initiating an action against
Bouncing of cheque / u/s 138 of NI Act, 1881 provided the cheque must have been
dishonour of cheque?
In case of dishonour of a cheque, a Criminal action may be
initiated by the Bank against drawer by filing a complaint
returned by the drawee bank unpaid for the reason:
i. Either because of the amount of money standing to the
credit of drawer’s account is insufficient to honor the
cheque i.e. for the reason of ―insufficient funds; or
ii. The amount of cheque exceeds the amount arranged to be
paid from the drawer’s account by an agreement with the
bank.

Against whom action for Anyone who is a drawer of the cheque.

Dishonour / bouncing of
Exception –
cheques may be taken?
As per the proviso to Section 141 of the N.I. Act where a
person is nominated as a Director of a company by virtue of
his holding any office or employment in the Central
Government or State Government or Financial Corporation,
owned or controlled by Central or State Government, he
shall not be liable for prosecution.

What is the Procedure to be
followed for initiating an
action against Dishonour /
bouncing of cheque?
The offence under Section 138 of the Act can be said to be
committed only on the culmination of a number of acts and
the below mentioned five aspects are sine qua non (an
essential condition) for the commission of offence.
i. The cheque must have been issued for the discharge,
in whole or in part, of any debt or other liability.
ii. Presentation of the cheque within the validity period
(at present three months)
iii. Returning the cheque unpaid by the drawee bank;
iv. Giving notice (within 30 days of receipt of
information regarding the return of cheque as
unpaid) in writing to the drawer of the cheque
demanding payment of the cheque amount;

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What is the impact and what
prayers shall be made in the
complaint filed for taking an
action against Dishonour /
bouncing of cheques?
Who is the competent Financials Powers are as per Law Division Circular no.
authority to permit for an 03/LAW/2021 dated 31.03.2021.
action to be taken in
Dishonour / bouncing of
cheques?
How to initiate action against After receiving the information that the Cheque has been
Dishonour / bouncing of bounced/dishonoured following steps are to be taken to
cheques?
Booklet on Dishonor of Cheque & Default in electronic payment
v. Failure of the drawer to make payment within 15
days from the date of receipt of notice.
1) The Act provides for punishment with
imprisonment for a term which may extend to two
years or with fine which may extend to twice the
amount of cheque or with both.
2) As such, while filing a complaint it should be
ensured that a prayer is made for awarding
compensation along with punishment of
imprisonment. If such a prayer is not made, court
may not allow compensation/relief to the Bank.
3) Prayer for interim compensation may also be made
u/s 143A for 20% of the amount of the cheque in the
Complaint.
4) U/s 148, on the appeal filed by convicted
person/drawer, the Bank may pray before the
appellate court to direct the convicted
person/drawer/appellant to deposit minimum 20%
of the compensation or fine awarded by the trial
court.
5) In addition, the Bank may also pray for the release
of amount deposited by the convicted
person/drawer/appellant to the Bank at any time
during the pendency of the appeal.
6) Such compensation shall be in addition to any
interim compensation paid under section 143A of
the NI Act, 1881
safeguard the interest of the Bank.
(1) Issue a 15 days demand notice to the drawer of the
cheque within 30 days from the date of receipt of
the information that the cheque has been returned.
( Annexure I/II/III )
 Annexure I in case of Firms/Companies
 Annexure II in case of Individuals
 Annexure III in case Bank is holder in due course.
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 Booklet on Dishonor of Cheque & Default in electronic payment

(2) If the drawer fails to deposit the amount within 15

Applicability of Section 138
of NI Act to NACH – Electronic
Fund Transfer
days from the receipt of the notice, Bank may within
one month of the expiry of fifteen days’ notice file
complaint u/s 138 before the Metropolitan
Magistrate or a Judicial Magistrate of the first class.
It is clarified that Section 25 of Payment and Settlement Act,
2007 accords same rights and remedies to the payee
(beneficiary) against dishonour of electronic fund transfer
instructions under insufficiency of funds as are available
under Section 138 of the Negotiable Instruments Act, 1881.

Whether an action can be Yes. A criminal compliant can be filed against the borrower
taken under s. 138 NI Act, in case of dishonor of such cheque given for the purposes of
1881 in case of deposit of OTS.
cheque for OTS purposes?

Whether criminal and civil Yes. Bank may take both the actions simultaneously against
action can be taken against the borrower once the account turns NPA and dishonor of
the borrower simultaneously? cheque occurs thereon.

Whether criminal action Yes.

under section 138 NI Act,
1881 shall be taken in case of 1)
pendency of civil suit for
recovery of outstanding dues
and vice versa? 2)
A criminal action under section 138 may be taken in
case of dishonor of cheque irrespective of pendency
of civil suit.
A civil suit may also be filed for recovery of
outstanding dues even if any criminal action for
dishonor of cheque is pending against the borrower.

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 Booklet on Dishonor of Cheque & Default in electronic payment

Important Points: A complaint by the Bank can be also filed in the

following circumstances:
1 When Account is Closed When the cheque is returned by a Bank with an
endorsement 'account closed', it would amount to
returning the cheque unpaid because "the amount of
money standing to the credit of drawer’s account is
insufficient to honor the cheque" as envisaged in Section
138 of the Act.
2 Stop Payment Merely because the drawer issued notice to the drawee or
Instruction to the bank for stoppage of payment it will not bar an
action under Section 138 of the Act by the drawee or the
holder of the cheque in due course.
However, an accused can prove that 'stop payment' was
not due to insufficiency or paucity of funds but payment
was stopped because of other valid causes including that
there was no existing debt or liability at the time of
presentation of cheque then offence u/s 138 is not made
out.
3 Post Dated Cheques / A complaint is maintainable, if other
Change in authorized ingredients/conditions are satisfied as per the provisions
signatories / Change in of NI Act, 1881.
signature of the
drawer/ refer to
drawer
4 Successive Presentation So long as the cheque is presented within the validity
of Cheque / Issue of period and it is dishonoured upon presentation to the
notice bank, even if a notice is issued by the payee/holder to the
drawer but complaint is not filed, the Bank’s right to
prosecute the drawer for the default committed by him
remains valid and exercisable by reason of a
fresh/successive presentation of a cheque followed by a
fresh notice of fifteen days by the Bank to the drawer).
Such fresh cause of action is also permissible on the basis
of second or successive dishonour of the same cheque and
the Bank is free to present the cheque repeatedly within
its validity period and that every subsequent
representation and dishonour gives rise to fresh cause of
action for filing complaint.

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 Booklet on Dishonor of Cheque & Default in electronic payment

5 Filling of Single If series of cheques are presented at one time as per their
Complaint for Number validity and on being returned unpaid for insufficiency of
of Cheques funds. Then single demand may be made and one
complaint may be filed.
6 Jurisdiction The offence under section 138 shall be inquired into and
tried only by a court within whose local jurisdiction,--
(a) if the cheque is delivered for collection through an
account, the branch of the bank where the payee or
holder in due course, as the case may be, maintains the
account, is situated; or
(b) If the cheque is presented for payment by the payee
or holder in due course, otherwise through an account,
the branch of the drawee bank where the drawer
maintains the account, is situated.
Explanation. -- For the purposes of clause (a), where a
cheque is delivered for collection at any branch of the bank
of the payee or holder in due course, then, the cheque shall
be deemed to have been delivered to the branch of the
bank in which the payee or holder in due course, as the
case may be, maintains the account.

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 Booklet on Dishonor of Cheque & Default in electronic payment

Flowchart: Action against cheque bounce.

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 Booklet on Dishonor of Cheque & Default in electronic payment

Check List
Checklist - Action u/s 138 of NI Act
S No. Action completed Yes/ No
Whether the cheque presented within the validity period i.e., 3
1
months?
Whether the cheque returned with any of the following
reasons-
2
a- Insufficient funds
b- Amount of cheque exceeds the arrangement.
The Original Dishonoured cheque and Returning Memo are to
3
be held in file.
Whether the 15 days demand notice (Annexure I/ II/ III LAW
3/2015 dt 14.07.2015) issued to the drawer by Registered
4
Post with AD within 30 days of receipt of the information that
the cheque has been dishonoured. ?
Delivery of the 15 days demand notice and delivery report/
5
acknowledgement kept in record?
Whether the drawer failed to make payment within 15 days of
6
receipt of the notice?
Moved for administrative sanction for filing of complaint u/s
7
138 of NI Act?
8 Move for filing of complaint.

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 Booklet on Dishonor of Cheque & Default in electronic payment

Do’s & Don’ts

Dos and Don’ts

Dos Don’t
The offence under Section 138 of the Act can Exception in section under 138 – As per the
be said to be committed only on the proviso to Section 141 of the N.I. Act where a
culmination of a number of acts and the below person is nominated as a Director of a
mentioned five aspects are sine qua non (an company by virtue of his holding any office or
essential condition) for the commission of employment in the Central Government or
offence. State Government or Financial Corporation,
owned or controlled by Central or State
(i) The cheque must have been issued
Government, he shall not be liable for
for the discharge, in whole or in
prosecution.
part, of any debt or other liability.
(ii) Presentation of the cheque within
the validity period of three months
(iii) Returning the cheque unpaid by
the drawee bank;
(iv) Giving notice of fifteen days in
writing to the drawer of the
cheque demanding payment of the
cheque amount;
(v) Failure of the drawer to make
payment within 15 days of receipt
of notice.
Original Cheque should be preserved along-
with returning memo.
Original notice should be a part of the
documents at the time of initiation of action
under Section 138 of NI Act, 1881.
Original speed post/registered post along
with A.D., and acknowledgment received by
the Bank, if any, be also preserved.
Delivery report to be obtained from the
website of Indiapost and the same be made a
part of the complaint.

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 Booklet on Dishonor of Cheque & Default in electronic payment

Annexures

Annexure I- to be issued in case if the Drawer is a Firm/Company

Please Note: - Draft notice be suitably modified having regard to the facts of each case. (All the
Partners/Directors, In-charge of the business of the company and responsible to the
company/Firm for the conduct of business along with Company/Firm be issued the notice)

Branch Office Contact No. Email :

Notice regarding dishonour of Cheque in case of Firms/Companies

Registered AD/U.P.C.

Date ____________

Name of the company/firm Partners/ Directors/ In-charge

_______________________

Registered address of the Sh/ Smt _________________

company/firm
Address _______________________
_______________________
_______________________________
_______________________
_______________________________
_______________________

Sub: Dishonour of Cheque.

Notice is hereby given to you (noticees) under section 138 of the Negotiable Instruments Act,
1881 (the Act) read with Section 141of the Act on the following grounds:

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 Booklet on Dishonor of Cheque & Default in electronic payment

You noticee number 1 of which you noticee number 2 ______ are directors/ partners* and In-
Charge and responsible to the company/firm for the conduct of the business of the company /
firm You notice number 1 have availed credit facilities from the bank by way of (give brief
description of the facility account number etc.). For liquidating part of liability under the said
credit facilities you have issued Cheque bearing No. ________ dated _________ for Rs. _________ drawn
on _______________________ . The cheque was signed as ____________________ by you noticee number
_____ and you noticee number ____ have full knowledge about issuance of such cheque and
consented thereto for issuance thereof.

That the said cheque was presented by the bank to ______________ (name of the Bank) on which
it was drawn and the same has been returned ― “unpaid” with the reason “_______________” . The
information regarding returning of the cheque has been received by the bank on ________________.

That by dishonour of the cheque as aforesaid, you noticee(s) have made yourself liable, to be
prosecuted under the provisions of the Negotiable Instruments Act 1881 and you are hereby
to take notice under the said Act to pay the aforesaid amount within 15 days of the receipt of
this notice by you, failing which the Bank shall be proceeding under the Act against you under
which you may be punished by imprisonment for a term of two years and with fine which may
be to the extent of twice the amount of the cheque or with both.

You are also required to pay for the legal costs incurred by the Bank in the matter.

Copy retained.

*Strike out which ever inapplicable.

Yours faithfully

BRANCH MANAGER

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Annexure II- in case if the Drawer is an Individual.

Branch Office Contact No. Email :

Notice regarding Dishonour of Cheque in case of Individuals

Registered AD/U.P.C.

Date _______

Shri ________ __________

S/O Shri _______________
Resident of ____ ________
______________________

Sub: Dishonour of Cheque.

Notice is hereby given to you under section 138 of the Negotiable Instruments Act, 1881 (the
Act) read with Section 141of the Act on the following grounds:
You have availed credit facilities from the bank by way of (give brief description of the facility
account number etc.). For liquidating part of liability under the said credit facilities, you have
issued Cheque bearing No. ________ dated _________ for Rs. _________ drawn on _______________________
.That the said cheque was presented by the bank to M/s _____________ (Name of the Bank) the
bank on which it was drawn and the same has been returned ―unpaid with the reasons
―_____________________ ― . The information regarding returning of the cheque has been received
by the bank on ________________.
That you are required to take a notice of demand under section 138 of the Negotiable
Instruments Act, 1881 and to pay the whole amount of the cheque within a period of 15 days
from the receipt of this notice failing which you shall become liable to be prosecuted under the
penal provisions of the said Act.
You are further required to note that if you fail to make the payment, you shall do so at your
own responsibility and shall be liable for legal action both under the civil as well as under the
criminal law applicable as on date. You are further liable for the cost & expenses of this notice.

Copy retained.

Yours faithfully

BRANCH MANAGER

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Annexure III- in case Bank is holder in due course

Please Note: (All the partners/directors, In-charge of the business of the company and
responsible to the company/firm for the conduct of business along with company/firm be issued
notice)

Branch Office Contact No. Email :

Notice regarding dishonour of Cheque in case Bank is Holder in Due Course

Registered AD/U.P.C.
Date ___________

1.Name of the company/firm* 2.Name of Partners/ Directors/ In- charge

____________________ Address
Registered Address ________________________
______________________ ________________________
______________________ ________________________

Sub : Dishonour of Cheque.

Notice is hereby given to you (noticees) under section 138 of the Negotiable Instruments Act,
1881 (the Act) read with Section 141of the Act on the following grounds:
You noticee number 1 of which you noticee number 2 _________ are directors/partners and In-
Charge and responsible to the company/firm for the conduct of the business of the
company/firm.
You noticee number 1 has issued Cheque bearing No. ________ dated _________ for Rs. _________
drawn on __________ in favour of _______ for valuable consideration. The cheque was signed as
__________ by you noticee number _____ and you noticee number ____ have full knowledge about
issuance of such cheque and consented thereto for issuance thereof.
That the said cheque was endorsed in favour of the bank by the payee of the cheque ________ for
liquidating its liability due to the bank in the account of ____________ (give details).
That the said cheque was presented by the bank to M/s ________ (Name of the bank) the bank on
which it was drawn and the same has been returned “unpaid” with the reason ___________ . The
information regarding returning of the cheque has been received by the bank on ___________.
That you are required to take a notice of demand under section 138 of the Negotiable
Instruments Act, 1881 and to pay the whole amount of the cheque within a period of 15 days
from the receipt of this notice failing which you shall become liable to be prosecuted under the
penal provisions of the said Act.

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You are further required to note that if you fail to make the payment, you shall do so at your
own responsibility and shall be liable for legal action both under the civil as well as under the
criminal law applicable as on date. You are further liable for the cost & expenses of this notice.
Copy retained.
*Strike out which ever inapplicable.

Yours faithfully
BRANCH MANAGER

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 Booklet on Dishonor of Cheque & Default in electronic payment

War Against NPA

3. Dishonour of Cheque & Default
in electronic payment

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