CHEQUE DISHONOUR UNDER SECTION 138: WHAT ARE MY LEGAL OPTIONS?

Introduction
Cheques have been an important instrument of payment in financial and commercial transactions, as they create a supporting document and evidence of a promise to pay. However, legal consequences arise from the issuance of a cheque that is returned to him unpaid by a bank. This situation has been referred to as cheque dishonour or cheque bounce. In India, cheque dishonour due to lack of sufficient funds is dealt with under Section 138 of the Negotiable Instruments Act, 1881. This provision was introduced to strengthen confidence in the transactions of banking and commercial business.

Meaning of Cheque Dishonour

A dishonoured cheque is one which is returned by a bank and has refused to pay it. The bank returns an unpaid cheque along with a memo stating the reason. Section 138 applies to a case of cheque dishonour where :
The funds in the account are insufficient; or
The payment exceeds the arrangement agreed to be made between the account holder and the bank.
The aim of Section 138 is to ensure that sufficient funds are maintained by a person who issues a cheque and that there is confidence in the commercial practice.

Essential Requirements for Section 138

For an offence under Section 138, the following conditions are to be satisfied :
Cheque issued in relation to a binding debt or liability: The cheque must have been issued to settle recoverable debt or liability. Section 138 is not applicable to a cheque issued as a gift or issued without consideration.
Validity of period: A cheque must be presented to a bank within three months from the date mentioned on the cheque.
Dishonour of cheque: A cheque shall be considered dishonoured if it is returned for exceeding the arrangements made with the bank.
Issuance of legal notice: A payee or holder of a cheque is legally bound to issue a written demand notice within thirty days of learning of the dishonour of the cheque.
Failure to make payment: The drawer is required to make the payment within fifteen days from the date of the receipt of the notice, failing which the payee or holder of the cheque is legally permitted to institute legal proceedings against the drawer.

Procedure Following Dishonour of a Cheque

The legal process prescribed under Section 138 of the Negotiable Instruments Act, 1881 is as follows :
Step 1: A cheque is presented for encashment before the bank.
Step 2: A cheque is returned unpaid to the payee with a cheque return memo.
Step 3: A legal notice is sent to the drawer by the payee demanding for the payment.
Step 4: The drawer is given a period of fifteen days to make the payment.
Step 5: If the payment is still not made, the payee has the right to file a complaint before the concerned Magistrate.
The procedures under Section 138 of the Negotiable Instruments Act, 1881 is important as it may affect the maintainability of the complaint.

Punishment under Section 138 of the Negotiable Instruments Act, 1881

The punishment for a person guilty under Section 138 of the Negotiable Instruments Act, 1881 is :
A term of imprisonment which may extend up to two years.
Fine which may extend up to two times the amount of the cheque; or
Both a term of imprisonment and fine.

Legal Options Available After Cheque Dishonour

Several legal options are available depending upon the circumstances of the case, which a dishonoured check holder can pursue:
Legal Notice: Sending a legal notice is the first step following a check's dishonour. The check drawer can respond by fixing the mistake and avoiding further legal action.
Filing a complaint under Section 138: If the payment is not made after the legal notice is issued, the complainant can file a case before the Magistrate for the offence under Section 138.
Recovery Mechanism: The complainant can also initiate a civil action for the recovery of the dishonoured check amount. where the focus is to punish the check drawer.
Mediation: To avoid the hassle and lengthy procedures of the judiciary, the Courts prefer to implement mediation or a settlement. In the case of Meters and Instruments Pvt. Ltd. v. Kanchan Mehta, the Supreme Court observed that cheque dishonour cases should be solved practically, therefore promoting efficient disposal of disputes.
Jurisdiction: Another significant legal issue has been to determine the proper court to file a complaint. Delivering an opinion in favour of the complainant in the case of Dashrath Rupsingh Rathod v. State of Maharashtra also significantly influenced an understanding of the rules of jurisdiction and the recent amendments to the law to provide clarity and avoid procedural difficulties.

Conclusion

Section 138 of the Negotiable Instruments Act, dealing with cheque dishonour, is an important instrument in the legal system that ensures the reliability of financial transactions. This provision aims to achieve a proper balance between the interest of the payee and the right of the drawer to make payment before the institution of a criminal proceeding against him/her. It is necessary to be aware of the timelines involved in such a process due to the fact that any small procedural error may impact the decision of the court.