Compliance
Section 138 creates a criminal remedy when a cheque bounces, imposing up to two years’ imprisonment, a fine of twice the cheque amount, and possible interim compensation of 20% while the case is pending, making non‑compliance costly for small businesses.
Check your DPDP readiness — free More on the blogSection 138 of the Negotiable Instruments Act deals with the dishonour of a cheque that is drawn to discharge a debt or liability. If the cheque is returned unpaid because of insufficient funds or because it exceeds the bank’s arrangement, the drawer commits an offence. The provision turns a simple payment failure into a criminal matter, adding a legal layer that many small enterprises overlook.
The offence is complete only when the payee follows the three‑step timeline. The 30‑day notice must start from the bank’s return memo, not from the date the cheque was written. Missing this window extinguishes the criminal remedy for that particular cheque, even if the drawer later pays the amount.
When the conditions are met, the court may impose imprisonment for up to two years, a fine of up to twice the cheque amount, or both. Since 2018, the trial court can also order interim compensation of up to 20 % of the cheque value while the case is ongoing, adding an immediate financial burden before any final verdict. An appellate court, under a later amendment, can require the drawer to deposit at least 20 % of the cheque amount as security. This ensures that the payee receives some compensation even if the trial drags on, further increasing the cost of non‑compliance for businesses that ignore the procedural deadlines.
Many small enterprises fail to issue the written demand within the 30‑day period, assuming the bank’s notice is enough. Others treat a fresh presentation of the same cheque as a fresh start, but the original notice period does not reset. Filing the case in the wrong jurisdiction is another error; the appropriate court is where the payee’s collecting bank branch is located. Another misconception is that an acquittal under Section 138 wipes out the underlying debt. The criminal provision only addresses the dishonour; the civil liability for the amount remains enforceable. Businesses must therefore pursue separate civil recovery even if the criminal case does not result in conviction.
The possibility of a two‑year jail term or a fine double the cheque amount can deter owners from taking shortcuts with payments. Interim compensation of up to 20 % can strain cash flow during litigation, while the requirement to deposit a similar percentage at appeal adds further liquidity pressure. Understanding these costs helps businesses plan better risk management around cheque transactions. To mitigate risk, maintain accurate records of bank return memos, send demand notices promptly, and ensure the demand reaches the drawer within the statutory window. Consulting a legal professional early can also prevent costly procedural mistakes and protect the business from severe criminal penalties.
The notice must be sent in writing within thirty days of receiving the bank’s return memo that the cheque was dishonoured. The period starts from the memo, and missing it removes the Section 138 remedy for that cheque.
A court may order imprisonment for up to two years, a fine of up to twice the cheque amount, or both. Additionally, it can direct interim compensation of up to 20 % of the cheque value while the trial is pending.
Yes, the offence is compoundable under Section 147, allowing the parties to reach a settlement at any stage. Most matters are resolved by compromise rather than proceeding to conviction.
Jurisdiction lies with the court where the payee’s collecting bank branch is situated, as prescribed by Section 142(2). Filing elsewhere can lead to dismissal or delay.
Founder & CEO at VidhiSar. I have watched four companies pay for the same mistake, and it was never the mistake anyone expected. VidhiSar is software, not a law firm: every answer names the section it relies on so you can check it, and anything turning on your specific facts is worth putting to a professional. More about who builds this