The Negotiable Instruments Act, 1881 (NI Act): Cheque bounce

Posted On : May 13, 2024
The Negotiable Instruments Act, 1881 (NI Act): Cheque bounce
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Cheques were the most common mode of financial transactions until digital modes overtook them. However, courts are still overburdened with matters of cheque bounce. Cheque bounce, also known as dishonour of a cheque, occurs when a cheque presented for payment is not processed by the bank commonly due to insufficient funds or account issues. Other than the implied financial difficulties, a cheque bounce may lead to legal consequences, resulting in stress, and damage to reputation and creditworthiness. The Negotiable Instruments Act, 1881 (commonly abbreviated as The NI Act) tells us how the holder of a bounced cheque may take action against the payee and the rules to be followed by courts in that regard. People are often confused regarding what exactly constitutes a negotiable instrument and who in the legal fraternity deals with such matters. Read on to clear such doubts. 

Cheques are the most familiar negotiable instruments in India. As lawyers or law students, it is important to understand the essence and crucial provisions of any legal statute. When it comes to cheque bounce lawyers, The NI Act and related case laws are the bible for them. One single loophole in the opposition’s case can mould the case in favour of those who might even be wrong. Cases of dishonoured cheques are in abundance in India, which also puts the legal system under pressure. That is why, separate courts and higher court benches are designated for dealing with cases of cheque bounce in India. One may understand the importance of The NI Act with this fact.

The banking lawyers near me will handle the legality of negotiable instruments on the bank's part, apart from other paperwork. But when it is a matter of dispute between two private parties, banking lawyers may not be of any help. If you want to serve a cheque bounce notice, lawyers with specific knowledge of The Negotiable Instruments Act, 1881 must be contacted.

What is The Negotiable Instruments Act, 1881?

While this codified law came into force in British India in 1881, the matters were previously governed by English laws. Hence, the major source of this law in India was the British Common law. The NI Act of 1881 came into force on March 1, 1882. It allows recognition of financial transfers through instruments other than currency or bank notes. It mainly defines and recognizes a promissory note, bill of exchange or cheque and related procedures.

Explore the New laws for cheque bounce.

The Nature and Requisites of The Negotiable Instruments Act, 1881

  • The essence of The NI Act, 1881 lies with the characteristics of negotiable instruments explained in the Act which have been enunciated below:
  • It should be written (not oral);
  • It has to be freely transferable, i.e. negotiable (before the date of maturity);
  • It should be duly signed;
  • The title of the holder must be free from any defects;
  • Has the right to sue in his/ her own name;
  • It can be transferred ‘n’ number of times before the date of maturity;
  • No notice needs to be served to any person at the time of transferring the said instrument;
  • The negotiable instrument is unconditional;
  • A negotiable instrument may be payable to the order or the bearer, or to the person possessing the cheque, or in the bank account of the person whose name is specified on such cheque;
  • The status of negotiable instruments is equivalent to cash before its maturity;
  • Validity of negotiable instrument is restricted to a certain amount of money drawn to ensure free negotiability;
  • A negotiable instrument is strictly payable in money;
  • The purpose or consideration is not mentioned on the negotiable instrument as it is presumed to be drawn for a valuable consideration.

Presumptions under The Negotiable Instruments Act, 1881

  • Before jumping to any conclusion, what is presumed as per law is crucial to understand for lawyers and law students particularly dedicated to The NI Act 1881. A negotiable instrument drawn under the Act must be:
  • Drawn in return for certain consideration unless the contrary is proved.
  • The date mentioned on a negotiable instrument is deemed to be the date on which it was drawn.
  • Acceptance of the instrument is presumed to be done at a reasonable time before its maturity.
  • The time of transfer is presumed before maturity.
  • The order of endorsement is presumed to be in the same order as mentioned unless the contrary is proved.
  • Holder of a negotiable instrument is presumed to have paid the consideration and taken in good faith unless the contrary is proved.
  • For a cheque dishonoured, or any other negotiable instrument which is proceeded with a suit in court, with sufficient evidence will be presumed to be dishonoured unless it is proved otherwise.

Understanding a Cheque as a Negotiable Instrument

The term negotiable instrument is defined in the Negotiable Instruments Act, 1881 under section 13 as “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.”

Negotiable means something that is transferable, or capable of being passed from one person to another.

Instrument can be understood as a tool used for doing a particular job or task. Here, it specifically refers to such transferable documents.

Section 6 of The NI Act, defines a cheque with the following ingredients:

  • A bill of exchange,
  • Drawn on a specified banker,
  • Not expressed to be payable otherwise than on demand,
  • Includes the electronic image of a truncated cheque,
  • Also includes a cheque in the electronic form.
  • A cheque is drawn by a person, ordering a ‘bank’ to pay the said amount of money.

Section 138 of The Negotiable Instruments Act, 1881

Section 138 of the Negotiable Instruments Act, 1881 is one of the most important and utilized provisions of The NI Act of 1881. It deals with the consequences of dishonouring a cheque due to insufficient funds or other technical reasons. It also specifies what conditions need to be fulfilled for a case of cheque bounce to be eligible for the consequences provided under Section 138 NI Act. Let's break down the key points of Section 138 Negotiable Instruments Act for better understanding:

  1. Offence: If a person issues a cheque from their bank account to pay another person for the discharge of a debt or liability, but the cheque is returned unpaid by the bank due to insufficient funds or other reasons, it is considered an offence under Section 138 NI Act.

  2. Penalties: The person who issued the bounced cheque can be punished with imprisonment for up to two (02) years, or a fine of up to twice (2x) the amount of the bounced cheque, or both. These penalties are aimed at deterring individuals from issuing cheques without ensuring that there are sufficient funds in their accounts to honour them and teach a lesson to the persons intentionally trying to commit fraud.

  3. Conditions for Application: Some conditions need to be met for Section 138 NI Act to be applicable, they are:
    • The cheque must have been presented to the bank within six (06) months from the date it was drawn or within its validity period, whichever is earlier.
    • The payee or the holder of the cheque must send a written notice to the drawer within thirty (30) days of receiving information from the bank about the bounced cheque.
    • The drawer must fail to make the payment within fifteen (15) days of receiving the notice.

NI Act 138 clarifies that the term 'debt or other liability' refers to a legally enforceable obligation. This means that the cheque must have been issued to fulfill a genuine financial obligation.

Importance of Section 138 of The Negotiable Instruments Act, 1881

Section 138 of the Negotiable Instruments Act, 1881 provides a detailed framework that holds individuals accountable for dishonoured cheques. This quality of the Act has several positive effects; they are:

  • Legal Remedy: Section 138 Negotiable Instruments Act lights up a clear path for how individuals or businesses may take legal action and recover their losses and attempts to reduce their stress and make their life easier when they are faced with the possibility of a huge loss.
  • Deterrent: Cheque bounce under NI Act 138 is considered a criminal offence, subjecting the drawer to potential imprisonment and fines. This aspect highlights the gravity of dishonouring a cheque and serves as a deterrent against fraudulent practices or negligence in financial transactions.
  • Promotes responsible behaviour: NI Act 138 encourages individuals and businesses to exercise diligence and accountability when issuing cheques. Drawers ensure cheques are properly signed, and issued only when there are sufficient funds in their bank accounts to cover the amount specified and uphold their financial commitments responsibly.
  • Saves Time: By acting as a deterrent, NI Act 138 saves the time of courts and banks from dealing with cheque bounces. In case a cheque has been dishonoured, the precise resource outlined by The NI Act, 1881 has streamlined the process of how to deal with the bounce and hence which in turn saves time.
  • Second Chances: The provision to issue a notice under Section 138 Negotiable Instruments Act provides an opportunity for individuals with genuine intentions to rectify unintentional errors or oversights. This provision acknowledges that mistakes can occur and provides a pathway for honest individuals to rectify their errors, promoting fairness and equity in the legal process. It also indirectly assists those with temporary financial constraints.
  • Appropriate Punishment for Fraudsters: The provision for imprisonment under NI Act 138 ensures that those who deceive intentionally and in a planned manner receive the deserved consequences for their actions.
  • Preserves Trust: Preserving trust in financial transactions is essential for maintaining the stability, credibility and integrity of commerce and banks. It also contributes to building trust between parties involved in commercial transactions and enhances people’s trust in the Indian legal system. This trust in turn encourages persons and businesses to engage in activities for economic growth and to seek justice.

Notice under Section 138 of The Negotiable Instruments Act, 1881

A notice under Section 138 of the Negotiable Instruments Act, 1881 typically contains the following elements:

  • Date: Date on which it is issued.
  • Details of the Parties: Identification of the parties involved, including the name and address of the drawer (the person who issued the bounced cheque), the payee or holder of the cheque and the lawyer or law firm if one is engaged by the payee.
  • Description of the Cheque: Details of the bounced cheque, including the cheque number, date of issuance, amount, and the name of the bank on which it was drawn.
  • Reason for Bounce: Reason for the dishonour of the cheque, such as insufficient funds, account closure, or any other reason provided by the bank.
  • Demand for Payment: The amount owed by the drawer as per the bounced cheque should be specified and payment within a specified timeframe should be demanded.
  • Legal Consequences: The drawer should be informed of the legal consequences of failing to make payment within the stipulated period, including potential criminal prosecution and penalties under Section 138 of The NI Act.
  • Signature: Signature of the holder of the cheque or the lawyer or law firm representing them.
  • Timeframe for Response: The time frame within which the drawer is required to respond and make payment, typically fifteen days from the receipt of the notice.

While it is not mandatory to hire a lawyer to issue this notice under Section 138 NI Act, it is a common practice to do so. Employing a lawyer may have several advantages. Firstly, legal professionals possess expertise in drafting notices that comply with the legal requirements of Section 138, thereby minimizing the risk of procedural errors or omissions. Additionally, lawyers can provide strategic advice on the content and timing of the notice, optimizing its effectiveness in prompting the drawer to comply with payment obligations. Furthermore, having legal representation instils confidence in the payee, signalling to the drawer the seriousness of the matter and the willingness to pursue legal recourse if necessary.


  1. Is there a specific format or template for drafting a notice under Section 138?

    While there is no prescribed format, the notice should include some essential facts for it to be valid. A lawyer can assist in drafting customized notices tailored to specific circumstances.

  2. Can a notice under Section 138 be sent electronically or through registered post?

    Yes, notices can be sent both electronically or through registered post. However, a registered post offers proof of delivery and receipt.

  3. Can I issue multiple notices if the drawer fails to respond to the initial notice?

    Yes, the payee can issue multiple notices if necessary, provided they comply with the legal requirements of Section 138 NI Act. However, repeated notices may have implications for the overall legal strategy, so you should take your lawyer’s advice before doing this.

  4. What can I do if I have received a notice under Section 138 NI Act?

    Upon receiving a notice, the drawer has the option to either comply with the demand for payment within the specified timeframe or contest the notice by providing valid reasons for the cheque bounce. Seeking legal advice from an experienced lawyer can help the notice assess their options and determine the most suitable course of action.

  5. The drawer has sufficient funds, still the cheque bounced. Why?

    Cheque bounce can occur due to various reasons, including insufficient funds in the drawer's account, account closure, mismatched signatures, post-dated cheques presented prematurely, or technical errors such as incorrect account details.
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