Stay Ahead of Payment Defaults: Utilizing Section 138 to Ensure Timely Payments

July 12, 2023, 11:21 am | Updated July 12, 2023, 11:56 am IST
Stay Ahead of Payment Defaults: Utilizing Section 138 to Ensure Timely Payments
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In today's fast-paced business world, maintaining a steady cash flow is crucial for the success and growth of any organization. However, despite diligent efforts, businesses often face the challenge of payment defaults from their clients or customers. Unpaid invoices can disrupt operations, strain relationships, and put a strain on the financial health of a company.

To tackle this issue and ensure timely payments, businesses can leverage legal remedies available to them, such as Section 138 of the Negotiable Instruments Act, 1881. Section 138 provides a mechanism for dealing with dishonored cheques, which are commonly used as a form of payment in commercial transactions.

Under Section 138, if a cheque is dishonored due to insufficient funds or other reasons, the payee (the person or entity to whom the cheque is issued) can take legal action against the issuer (the person or entity who issued the cheque). This legal recourse serves as a deterrent against defaulting on payments and provides a framework for resolving payment disputes efficiently.

How to stay ahead of payment defaults using Section 138?

Here are some key steps businesses can take to stay ahead of payment defaults using Section 138:

  1. Create a Robust Documentation System

    It is crucial to maintain accurate and detailed records of all transactions, including invoices, delivery receipts, and correspondences related to payments. A well-organized documentation system will serve as evidence in case of a payment dispute and strengthen your case under Section 138.

  2. Issue Cheques with Care

    As a business, it is essential to exercise caution while accepting post-dated cheques or issuing your own cheques. Conduct due diligence to ensure the creditworthiness and reliability of the parties involved. Additionally, clearly mention the purpose of the cheque and ensure all relevant details are correctly filled to avoid any ambiguity.

  3. Promptly Notify the Issuer

    The issuer must be notified about the situation in case a cheque is dishonored, without delay.  The payee has to send a written notice within 30 days of receiving the “Cheque Return Memo” from the bank to the issuer. The notice must demand the cheque amount within 15 days from date of receiving the notice.

  4. Initiate Legal Action

    If the issuer fails to make the payment within the stipulated 15 days, the payee can proceed with legal action. The payee can file a complaint under Section 138 in the appropriate court, usually a magistrate court or a court of equivalent jurisdiction. The complaint should include all relevant documents and evidence to support the claim.

  5. Navigate the Legal Process

    Once the complaint is filed, the court will examine the evidence presented and issue summons to the issuer. The issuer will have an opportunity to defend themselves and present their case. It is advisable to seek legal counsel to navigate the legal process effectively and ensure compliance with the procedural requirements.

  6. Recover the Dues

    If the court finds the issuer guilty under Section 138, it can pass a judgment in favor of the payee. The judgment may include the payment of the dishonored cheque amount, along with additional compensation, which can be twice the amount of the cheque or as determined by the court. The court may also order imprisonment for the issuer in case of non-compliance with the judgment.


By utilizing Section 138 of the Negotiable Instruments Act, businesses can proactively protect their financial interests and deter payment defaults. However, it is important to approach legal remedies responsibly and as a last resort after exhausting all amicable means of settlement.

Remember, prevention is always better than cure. Maintain strong relationships with clients, implement clear payment terms, and establish effective credit control measures to minimize the chances of payment defaults. Regularly reviewing and updating your payment policies and procedures can go a long way in avoiding disputes and ensuring a healthy cash flow. By staying informed about the legal provisions available and taking necessary precautions, businesses can safeguard their financial stability and maintain healthy business relationships. Utilizing Section 138 to ensure timely payments not only helps businesses thrive but also contributes to a more reliable and trustworthy business ecosystem. If you are facing any issues related to payment defaults or cheque bounce, it is advisable to contact a cheque bounce case lawyer.

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Dear Sir, You may get issue a legal notice and file a civil suit.
question markSec25 Readwith, 138 NI act 1 Response(s)
Dear Sir, Yes, Section 25 also attracts which is equivalent to Section 138 as follows: ============================================================================ Section 25 in The Payment and Settlement Systems Act, 2007 25 Dishonour of Electronic Funds Transfer for insufficiency, etc., of funds in the account. — (1) Where an electronic funds transfer initiated by a person from an account maintained by him cannot be executed on the ground that the amount of money standing to the credit of that account is insufficient to honour the transfer instruction or that it exceeds the amount arranged to be paid from that account by an agreement made with a bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the electronic funds transfer, or with both: Provided that nothing contained in this section shall apply unless— (a) the electronic funds transfer was initiated for payment of any amount of money to another person for the discharge, in whole or in part, of any debt on other liability; (b) the electronic funds transfer was initiated in accordance with the relevant procedural guidelines issued by the system provider; (c) the beneficiary makes a demand for the payment of the said amount of money by giving a notice in writing to the person initiating the electronic funds transfer within thirty days of the receipt of information by him from the bank concerned regarding the dishonour of the electronic funds transfer; and (d) the person initiating the electronic funds transfer fails to make the payment of the said money to the beneficiary within fifteen days of the receipt of the said notice. (2) It shall be presumed, unless the contrary is proved, that the electronic funds transfer was initiated for the discharge, in whole or in part, of any debt or other liability. (3) It shall not be a defence in a prosecution for an offence under sub-section (1) that the person, who initiated the electronic funds transfer through an instruction, authorization, order or agreement, did not have reason to believe at the time of such instruction, authorization, order or agreement that the credit of his account is insufficient to effect the electronic funds transfer. (4) The Court shall, in respect of every proceeding under this section, on production of a communication from the bank denoting the dishonour of electronic funds transfer, presume the fact of dishonour of such electronic funds transfer, unless and until such fact is disproved. (5) The provisions of Chapter XVII of the Negotiable Instruments Act, 1881 (26 of 1881) shall apply to the dishonour of electronic funds transfer to the extent the circumstances admit. Explanation. —For the purpose of this section, “debt or other liability” means a legally enforceable debt or other liability, as the case may be.
question markCredit card payment made be Cheque issued by third party on my behalf bounced 5 Response(s)
You are to be prosecuted under vicarious liability. Bank will issue legal notice under negotiable instruments Act before initiating proceeding under 138 NI Act. In response to legal notice you shall have opportunities to pay the demanding amount as demanded in legal notice. Some lawyers make claim of their so called fee in legal notice but you have no liability towards lawyer of bank.
question marknon payment of dues 4 Response(s)
Dear Sir, You may get issue a legal notice and then file a suit for recovery. Thanks.