This colonial-era law governs promissory notes, bills of exchange and cheques in India, and remains highly relevant today primarily because of Section 138, which criminalises cheque bounce due to insufficient funds, giving cheques legal weight as a payment instrument backed by criminal consequence.
Section 138 makes it an offence when a cheque is dishonoured due to insufficient funds or exceeding the arranged limit, provided the cheque was issued for a legally enforceable debt. The payee must issue a demand notice within 30 days of receiving the bank’s dishonour memo, and the drawer gets 15 days to pay after receiving the notice.
If payment isn’t made within that window, a criminal complaint can be filed under Section 138, with punishment extending to imprisonment up to 2 years, or a fine up to twice the cheque amount, or both. Courts have increasingly encouraged compounding (settlement) of such cases given the volume of cheque bounce litigation in India.
The Act also defines and regulates other negotiable instruments including promissory notes and bills of exchange, establishing rules for endorsement, negotiation and holder-in-due-course rights that underpin much of India’s commercial paper transactions.