Section 138 of the Negotiable Instruments Act was inserted to enhance commercial confidence by criminalizing the act of issuing cheques that bounce due to insufficient funds.
1. Essential Ingredients to Constitute an Offense
To establish criminal liability under Section 138, the following conditions must be met:
- The cheque must have been issued for the discharge, in whole or in part, of a legally enforceable debt or liability (guarantees or gifts are generally excluded).
- The cheque must be presented to the bank within its validity period of three months.
- The cheque is returned unpaid by the bank due to insufficiency of funds or exceeding the arranged account limit.
- The payee must send a written notice demanding payment to the drawer within 30 days of receiving the bounce memo from the bank.
- The drawer must fail to make the payment within 15 days of receiving the notice.
If the drawer fails to pay, the cause of action arises on the 16th day, and the payee must file a criminal complaint before a Magistrate within 30 days.
2. Penalties and Liabilities
The offense is punishable with:
- Imprisonment for a term which may extend to two years.
- A fine which may extend to twice the amount of the cheque, or both.