Step-by-Step Guide to Legal Action for Bounced Cheques in India

In the complex web of commercial and personal transactions in India, cheques remain a widely accepted and convenient mode of payment.

Despite the rise of digital payments and real-time bank transfers, cheques are still trusted for their formal recognition and traceability. However, one persistent challenge associated with this traditional payment method is the issue of dishonored or bounced cheques. 

A bounced cheque is not merely a financial setback; it carries legal consequences, especially under Section 138 of the Negotiable Instruments Act, 1881. This provision aims to deter individuals and businesses from issuing cheques without ensuring sufficient funds in their accounts. As per the statute, the dishonour of a cheque due to insufficient funds, or if it exceeds the amount arranged to be paid by the drawer’s account, can attract penal liability, including imprisonment up to two years, or with fine up to twice the amount of the cheque, or both. 

This issue is particularly relevant for MSMEs, startups, service providers, and suppliers, who operate on tight financial margins. For them, even a single bounced cheque can cause cash flow disruption, delay in operations, or loss of trust. Unfortunately, many businesses shy away from pursuing legal recourse, either due to lack of awareness or fear of legal expenses and complexity.  

This blog seeks to address that gap by providing a comprehensive, step-by-step legal guide to initiating action against a bounced cheque in India. 

This blog, offers a simple, step-by-step legal guide to help you: 

• Understand your rights as a payee 

• Follow proper legal timelines 

• Initiate recovery through appropriate legal channels 

What is a Bounced Cheque? 

In India’s commercial and professional ecosystem, cheques continue to be a widely used mode of payment, whether between businesses, professionals, or individuals. But what happens when that cheque is returned unpaid by the bank? This situation, commonly known as a 'cheque bounce', is more than just an inconvenience.  

A cheque is considered to be bounced or dishonoured when the bank refuses to process the cheque payment due to any of the following reasons: 

1. Insufficient funds in the drawer’s account 

2. Signature mismatch 

3. Account closure 

4. Cheque expired (stale cheque) 

5. Stop payment instructions issued by the drawer 

6. Overwriting or discrepancies in the cheque details 

While many of these reasons can lead to the return of a cheque, only dishonour due to insufficient funds or where the amount exceeds the arrangement made with the bank gives rise to criminal liability under Section 138 of the Negotiable Instruments Act. 

Business Impact: 

A single dishonoured cheque can: 

• Disrupt your cash flow 

• Affect employee payments 

• Lead to credit issues 

• Stall your operations 

Proactive legal action is not just about punishment, it’s about safeguarding your business. 

Why Is This Important? 

Cheque bounce cases are not rare. In fact, they account for a large number of cases in Indian courts. But the sad reality is that many businesses, especially MSMEs, startups, freelancers, and suppliers, don’t take action due to: 

• Lack of awareness of the legal process 

• Hesitation over court procedures 

• Concerns about legal costs 

Key Legal Backing: Section 138 of the Negotiable Instruments Act, 1881- 

Section 138 criminalises the act of dishonouring a cheque for insufficiency of funds. To constitute an offence under this section, the following conditions must be fulfilled: 

1. The cheque must be drawn for the discharge of a legally enforceable debt or liability. 

2. The cheque must be presented within three months from the date of its issue or within its validity period. 

3. The cheque must be returned by the bank unpaid due to insufficient funds or the amount exceeding the arrangement with the bank. 

4. The payee must issue a legal notice within 30 days from the date of receipt of the cheque return memo. 

5. The drawer fails to make the payment within 15 days of receiving the notice. 

6. The complaint must be filed within 30 days after the expiry of the 15-day notice period. 

Step-by-Step Guide to Legal Action for a Bounced Cheque:  

Step 1: Preserve All Relevant Documents 

The first and most critical step is to gather and safeguard all documentary evidence related to the transaction and the cheque. This includes: 

• Original Cheque: Retain the bounced cheque issued by the drawer. 

• Bank Return Memo: This document is issued by the bank and states the specific reason for cheque dishonour, such as “Insufficient Funds” or “Payment Stopped by Drawer.” 

• Invoices or Agreements: These should clearly show the liability or debt owed by the drawer to the payee. 

• Communication Trail: Emails, WhatsApp messages, or letters exchanged between the parties establishing the transaction and the promise to pay. 

Why it matters:  

These documents will be required at various stages of the legal process, including notice drafting, filing a complaint, and presenting evidence in court. 

Step 2: Present the Cheque Within Validity Period 

The cheque must be presented to the bank within three months from the date mentioned on it (or within its validity period if shorter). 

Pro Tip- Even if you suspect that the cheque might bounce, present it. This step is necessary to trigger legal remedies. 

If the cheque is dishonoured, you will receive a Cheque Return Memo from your bank stating the reason for the dishonour. This document is vital for initiating legal action. 

Step 3: Send a Legal Notice 

• A legal notice must be sent within 30 days of receiving the cheque return memo. 

• It must demand payment within 15 days of receipt. 

• It should include cheque details, reasons for dishonour, and a clear demand for payment. 

Pro Tip: If drafting or sending the notice feels overwhelming, consult a lawyer or leverage legal funding partners who support such recovery. 

Step 4: Wait for 15 Days 

• If the drawer pays within this period, the matter is resolved. 

• If not, you are eligible to file a criminal complaint. 

 Step 5: File a Complaint Under Section 138 

• The complaint must be filed within 30 days from the expiry of the 15-day notice period. 

• File it in the Magistrate’s Court that has jurisdiction where the cheque was presented or where the payee's bank is located. 

• Attach: 

• Copy of the cheque and return memo 

• Copy of the legal notice and delivery proof 

• Affidavit and supporting documents 

 Step 6: Attend Hearings and Court Proceedings 

• If the court finds merit, it issues summons to the drawer. 

• Legal proceedings follow with evidence and arguments. 

• Upon conviction, the drawer can face: 

• Up to 2 years imprisonment 

• Fine up to twice the cheque amount 

Step 7: Civil Suit for Recovery (Optional but Recommended) 

In addition to criminal action, you can file a civil summary suit under Order XXXVII of the Civil Procedure Code (CPC) for recovery of the cheque amount along with interest and damages. 

Why file both? 

• Criminal action ensures punitive consequences 

• Civil suit helps recover the actual dues with interest 

Civil Court Reliefs: 

• Principal amount 

• Interest (as per agreement or standard commercial rate) 

• Legal costs 

Step 8: Enforcement of Court Order 

If the court convicts the drawer and awards compensation or fine, ensure prompt enforcement. If the accused fails to comply with the judgment: 

• You can apply for execution of the order under the Code of Criminal Procedure or CPC (for civil suits) 

• Court may issue attachment of property, arrest warrants, or other recovery mechanisms 

By following this structured legal roadmap, businesses and individuals can hold defaulters accountable and protect their financial interests effectively.  

Let’s consider a real-world example: 

A logistics company provided transportation services worth ₹5 lakhs to a client. The client issued a cheque, which bounced due to insufficient funds. The company sent a legal notice within the prescribed time. The client didn’t respond. The company then filed a complaint under Section 138 in the magistrate’s court and a summary civil suit for recovery. With legal support, they not only secured a conviction but also recovered the full amount with interest. 

Cheque Bounce Laws in International Regimes: A Comparative Glance 

While India treats cheque bounce as a criminal offence under Section 138 of the Negotiable Instruments Act, 1881, many countries approach the issue differently, often focusing more on civil remedies than criminal prosecution. 

In the United States, laws related to cheque dishonour vary from state to state. Generally, cheque bounce is treated as a civil offence, allowing the aggrieved party to initiate legal proceedings for recovery. However, if intent to defraud is established, some states permit criminal charges. Many U.S. jurisdictions also allow offenders to avoid prosecution by repaying the cheque amount within a statutory grace period, typically 30 days. 

The United Kingdom has decriminalized most cheque-related offences since 1982. A bounced cheque is considered a breach of contract and is dealt with exclusively through civil litigation. Creditors can pursue unpaid amounts in civil courts and, in certain cases, initiate insolvency proceedings. As digital payments dominate the UK economy, cheque usage has declined, making such disputes rare. 

In contrast, the United Arab Emirates (UAE) historically enforced strict penal consequences for cheque bounce, including imprisonment. However, with the introduction of Federal Decree Law No. 14 of 2020, the UAE has significantly reformed its legal approach. Bounced cheques no longer trigger automatic criminal liability in most cases. Instead, administrative fines are imposed based on the cheque amount, while civil suits remain a valid recovery option.  

Singapore adopts a mixed regime. While most cheque bounce cases are resolved through civil litigation in small claims courts, criminal prosecution is possible if fraudulent intent is proven. Additionally, companies may be held liable for breach of directors’ duties if they issue dishonoured cheques in the course of business.  

Conclusion 

Bounced cheques are more than just financial inconveniences, they are legal violations under Section 138 of the Negotiable Instruments Act, 1881. Thankfully, the law provides a clear and enforceable process to help victims recover their dues. From preserving documents and sending a legal notice, to filing a complaint before the Magistrate and seeking both criminal and civil remedies, every step is important and time-bound. 

Acting swiftly, within the prescribed legal timelines, is crucial to ensure your case is not dismissed on technical grounds. While the process may seem complex, following it carefully or taking help from legal experts can significantly improve your chances of success. 

At the same time, legal action can be expensive and time-consuming.  

This is where LegalPay plays a pivotal role, offering litigation funding and strategic support so that individuals and businesses can fight cheque bounce cases without financial strain. By removing the financial burden, LegalPay empowers businesses to enforce their rights and recover dues. 

Whether you're a business owner, professional, or service provider, knowing your rights and enforcing them is essential. By combining legal awareness with timely action and the right support, you can protect your interests and hold defaulters accountable. 

Frequently Asked Questions (FAQs) 

Q1. Can I take legal action if the cheque was given as a gift or donation?  

No. Action under Section 138 can only be taken when the cheque was issued against a legally enforceable debt or liability. 

Q2. What if the cheque was post-dated? 

You can present a post-dated cheque on or after the date written. If it bounces, the same legal procedure applies. 

Q3. Can I file a case in my city if the drawer is located elsewhere?  

Yes. As per the amended law, jurisdiction lies where the cheque was presented for payment (i.e., your bank branch). 

Q4. What happens if the drawer does not respond to court summons?  

The court may issue a bailable warrant, and later, a non-bailable warrant to secure the drawer’s presence. 

Q5. Is there a time limit to present the cheque and file a case? 

Yes. The cheque must be presented within 3 months of its date, and the complaint must be filed within 30 days after the 15-day notice period expires. 

Q6. Can LegalPay help me even if the cheque amount is small?  

Yes. LegalPay evaluates claims based on their merit and legal recoverability, not just the size. MSME cases with recurring payment issues are given special attention.