Dishonor of Cheque
Section 138 of the Negotiable Instrument Act, 1881 confers accountability on a person who issues a cheque towards discharge of a debt or liability as a whole or in part and the cheque is dishonored by the bank on presentation. This crime is punishable with imprisonment or with fine or with both.
While commission of the offense is governed by Section 138 of the Act, the prosecution is governed by Section 142 of the Act. Section 138 also provides for safeguards to protect drawers of such instruments where dishonor may occur due to reasons other than those which were consequences of dishonest intentions. The drawer of the instrument has to serve a notice calling upon him to make the payment as covered by the cheque and permits prosecution only after the expiry of the statutory period and upon failure of the drawer to make the payment within the said period.
Classification of offense
An offense committed under Section 138 is a non-cognizable offense and is a bailable offense.
The ingredients of the offense under Section 138 are:
- A cheque is drawn by the accused on an account maintained by him with a banker.
- The cheque amount is in the discharge of a debt or liability.
- The cheque is returned unpaid for insufficiency of funds or that the amount exceeds the arrangement made with the bank, the offense standing committed the moment the cheque is returned unpaid.
Steps enumerated in the proviso of Section 138 are distinct from the ingredients of the offense. Thus, an offense within the contemplation of Section 138 is complete with the dishonor of the cheque but taking cognizance of the same by any court is forbidden so long as the complainant does not have the cause of action to file a complaint in terms Section 138(c) read with Section 142. 
Conditions precedent for constituting an offense under Section 138
There are three distinct conditions which must be satisfied in order to constitute the dishonor of a cheque as an offense and make it liable for punisment.
- The cheque ought to have been presented to the bank within a period of 6 months from the date on which it is drawn or within the period of its validity, whichever is earlier.
- The payee (or the holder in due course of the cheque), must make a demand for the payment of the said amount of money by way of giving written notice to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid
- There must be a failure on the part of the drawer to make the payment of the said amount to the payee (or to the holder in due course) of the cheque within 15 days of the receipt of the said notice..
Section 138 prescribes a sentence of up to two years or fine which may extend to twice the amount or with both. Power has been conferred to the court to direct payment of compensation in addition, if a sentence of fine is not imposed. The direction to pay compensation can be enforced by default sentence and by recovery procedure  as prescribed 
Quashing of the complaint by the High Court under Section 482 CrPC [inherent powers]
Proceedings against the accused under Sections 138 and 141 may be quashed by filing a petition only if he is able to make out a case that making him stand the trial would be an abuse of process of court.
Filing a case for Section 138 offense
|Power to try the Case
|Cheque is delivered for collection through an account
|Metropolitan Magistrate or Judicial Magistrate First Class
|Local jurisdiction the branch of the bank where the payee or holder in due course maintains the account is situated.
|Cheque is presented for payment by payee or holder in due course otherwise through an account.
|Metropolitan Magistrate or Judicial Magistrate First Class.
|Local jurisdiction the branch of the drawee bank where the drawer of the cheque maintains the account is situated.
Debt or other Liability
Explanation to Section 138 states that the dishonored cheque must have been received by the complainant against a “legally enforceable debt or liability”.
Liability of a guarantor
If the cheque is given towards any liability which may have been incurred even by someone else (such as in a case of a guarantor), the person who draws the cheque is liable for prosecution in case of dishonor of the cheque.
Mens rea not required for the offense under Section 138
Commission of an offense does not require mens rea not only under Section 138 but also by virtue of the succeeding two sections. The drawer cannot take the defence that he had no reason to believe when he issued the cheque, that it would be dishonored.
Filed a case when the cheque is presented for encashment more than once
The holder or payee of the cheque is allowed to present the cheque for encashment on any number of occasions within the period of three months from the date of its issue (validity period of the cheque). A dishonor, whether based on a second or any successive presentation of a cheque for encashment, would be a dishonor within the meaning of Section 138.
The expression “amount of money … is insufficient” appearing in Section 138 of the Act includes dishonor for reasons such as “account closed” “payment stopped”  “referred to the drawer”, “signatures do not match”, and “image is not found”.
Presumption as to service of Notice
Once notice is sent by registered post by correctly addressing to the drawer of the cheque, or when such a notice is sent by registered post and is returned with a postal endorsement “refused” or “not available in the house” or “house locked” or “shop closed” or “addressee not in station” or “intimation served, addressee absent” the service of notice is deemed to have been effected. However, the drawer is at liberty to rebut this presumption.
Payment when Notice is not received but summons have been issued
Any drawer who claims that he did not receive the notice sent by post, can make payment of the cheque amount within 15 days of receipt of summons from the court in respect of the complaint, and submit to the court that he had made payment within such stipulated time.
Once the execution of cheque is admitted, a presumption is created that the holder of a cheque receives the cheque in discharge, in whole or in part, of any debt or other liability. Presumption means the presumption of consideration, the date on the instrument, etc.
A signed blank cheque, in which the amount and other particulars are filled up by the payee, will be valid if it is voluntarily handed over to the payee, towards some payment. The onus would still be on the accused to prove that the cheque was not in discharge of a debt or liability by adducing evidence. It is immaterial that the cheque may have been filled in by any person other than the drawer if the cheque is duly signed by the drawer.
Complaint by a company
If a complaint is made in the name of an incorporeal person (like a company or corporation) it is necessary that a natural person represents such juristic person in the court. There may be occasions when different persons can represent the company.
Even if initially there was no authority given by the company in favour of the de facto complainant, still the company can, at any stage, rectify that defect. At a subsequent stage, the company can send a person who is competent to represent the company.
Offense by companies/ vicarious liability of officers of the Company
Section 141 covers three categories of persons who fall within the ambit of the penal liability through the legal fiction envisaged in the section. They are:
- The company which committed the offense.
- Everyone who was in charge of and was responsible for the business of the company.
- Any other person who is a director / manager / secretary / officer of the company, with whose connivance or due to whose neglect the company has committed the offense.
Section 141 extends criminal liability on account of dishonor of cheque in case of a company to every person who at the time of the offense, was in charge of, and was responsible for the conduct of the business of the company.
The commission of the offense by the company is an essential condition to be satisfied before attracting the vicarious liability of others. The arraigning of a company as an accused is imperative for maintaining the prosecution under Section 141 of the Act. The only exception to this is where the company cannot be prosecuted against without obtaining the sanction of a court of law or other authority. However, if ingredients of Sections 138 and 141 are otherwise fulfilled, a trial against the other accused may be initiated..
Case against the Directors
Directors can be held liable for the offenses committed by the company under Section 141 only when specific averments against the directors are shown in relation to how and in what manner were they responsible for the conduct of the business of the company. These averments are not required to be made in the complaint against the Managing Director or Joint Managing Director because these persons are in charge of and responsible for the conduct of the business of the company. Therefore, they get covered under Section 141. Signatory of a cheque which is dishonored is clearly responsible for the incriminating act and will be covered under Section 141(2).
A director of a company will not be liable for a criminal offense under the provisions if he was not in charge of and was not responsible for the conduct of the business of the company at the relevant time.
Offense by a partnership firm and vicarious liability of partners
A firm comes within the ambit of a company under Section 141. Partner of a firm is liable to be convicted for an offense committed by the firm if he was in charge of and was responsible to the firm for the conduct of the business of the firm or if it is proved that the offense was committed with the consent or connivance of, or was attributable to any neglect on the part of the partner concerned.
The court can refer a criminal case for mediation as the compounding of criminal cases is permissible under section 320 of CrPC. A criminal case of cheque bounce can be referred for the mediation even by lower courts.
In cases of default by the accused with respect to settlement agreement concluded after the mediation and confirmed by the magistrate, the magistrate would pass an order to recover the amount agreed to be paid by the accused in the same manner as a fine would be recovered.’ The accused will also be punished for ‘civil contempt’.
Interim compensation to the complainant
The court is empowered to order the drawer of the cheque to pay interim compensation to the complainant [within a period of 60 days (extendable by 30 days) from the date of the order directing such compensation] which shall not be more than 20% of the amount of the cheque  similar to a fine.
However, the complainant will have to repay the same compensation amount if the drawer of the cheque is acquitted. The amount must be repaid within 60 days (extendable by 30 days) from the date of the acquittal order. Along with this, interest is also levied on such compensation amount at the bank rate as published by RBI prevalent at the beginning of the relevant financial year. In case the drawer files an appeal against his conviction, the appellate court can exercise the same power.