Stop Payment, Account Closed, Signature Mismatch: Which Cheque Returns Attract Section 138

What does Section 138 actually say about the reason for return?

Section 138 makes it an offence when a cheque drawn on an account to discharge a debt is returned unpaid 'either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank'. Read literally, only those two reasons count. Banks, however, use dozens of return reasons, and drawers soon learned that a stop payment instruction or a closed account produced a different remark on the memo.

The Supreme Court closed that gap over a series of decisions. It treats the two reasons in the section as examples of a broader idea: the cheque failed because of something in the drawer's control, whether the state of the account or an instruction the drawer gave. If the drawer caused the return, the offence can be made out even if the memo does not say 'Funds insufficient'. If the return was caused by the payee, by a defect in the cheque, or by an error of the bank, it is not.

So the right question is not 'what words are on the memo' but 'why was the cheque not paid'. The memo is the starting point. The drawer's bank statement, the date of any stop payment instruction, and the history of the account fill in the rest.

Common return reasons and whether Section 138 applies

Banks in the cheque truncation system use a standard list of return reasons. The ones below come up most often in practice.

The table gives the general position. A few of these, especially frozen accounts and signature mismatch, turn on facts that the trial court examines.

Is 'payment stopped by drawer' a Section 138 offence?

Yes. In Modi Cements Ltd v Kuchil Kumar Nandi (1998), the Supreme Court held that a cheque returned because the drawer instructed the bank to stop payment falls within Section 138. Any other view would let every drawer escape by sending a stop payment letter the day before the cheque was presented. The court later confirmed this in MMTC Ltd v Medchl Chemicals and Pharma (2002), adding that a complaint cannot be thrown out at the start merely because the memo says 'payment stopped'.

That does not mean every stop payment ends in conviction. A drawer who had enough money in the account and stopped payment for a reason that shows no debt was due, such as goods never delivered, a cancelled deal or a cheque handed over by mistake, can prove that at trial and rebut the presumption under section 139 of the NI Act. What the drawer cannot do is rely on the stop payment instruction alone. The reason has to be shown with evidence, and the account balance on the date of presentation matters.

For the payee, the practical point is that a stop payment return is treated like a funds return for deadlines. The 30-day notice period runs from the date you receive the memo. Do not wait for the drawer's explanation before sending notice.

Does closing the account protect the drawer?

No. In NEPC Micon Ltd v Magma Leasing Ltd (1999), the Supreme Court held that a cheque returned with the remark 'account closed' attracts Section 138. Closing an account is the clearest case of there being no money in it to pay the cheque. A drawer who issues post-dated cheques and then closes the account before they fall due is in the same position as one who simply let the balance run down.

Drawers sometimes argue that the bank closed the account, not them, for example for non-maintenance of minimum balance or a KYC lapse. That may be relevant if the drawer had no notice and the closure came after the cheque was issued. Courts generally expect an account holder to know the state of the account on which cheques are outstanding, so this argument works only on strong facts and is decided at trial.

If you receive an 'account closed' return, ask your own bank for the return memo and keep the cheque. The memo, with the bank's slip, is enough to prove the fact of dishonour. The drawer's closing date can be brought out later through the drawer's bank if it becomes relevant.

Signature mismatch: when is 'drawer's signature differs' an offence?

In Laxmi Dyechem v State of Gujarat (2012), the Supreme Court held that a return for signature mismatch or an incomplete signature can attract Section 138. The reasoning is the same as for stop payment: a drawer who deliberately signs differently, or changes the account mandate after issuing cheques so that they will not be honoured, has caused the return as surely as by emptying the account. The court said the presumption under section 139 applies, and it is for the drawer to show at trial that the mismatch was innocent.

This comes up often with companies and firms. A company issues post-dated cheques signed by one director, then changes the authorised signatories with the bank before the cheques are presented. The cheques return 'drawer's signature differs' or 'not as per mandate'. Courts look at the timing of the change and whether the company made any arrangement to honour the cheques already issued. The question of which directors are then liable is covered in director liability for a company cheque.

A drawer whose signature genuinely varies, or who made an honest slip, can show that at trial, for example with other cheques from the same period that were paid, or the bank's specimen signature card. Where the drawer says the signature was forged, the cheque itself becomes evidence and can be sent for the opinion of a handwriting examiner under section 39 of the Bharatiya Sakshya Adhiniyam 2023. A drawer who claims forgery but never complained to the bank or the police at the time will find the claim hard to sustain.

What does 'refer to drawer' mean on a return memo?

'Refer to drawer' is a polite banking phrase. It tells the payee to take the matter up with the drawer, and in practice it is most often used when funds are insufficient and the bank does not wish to say so outright. Courts have generally treated a 'refer to drawer' return as covered by Section 138, but because the words are vague, the drawer can argue that the real reason was something else.

If your memo says only 'refer to drawer', ask your bank, or through it the drawer's bank, for a letter stating the actual reason. Send your legal notice within 30 days of the original memo regardless; do not let the inquiry eat into the deadline. At trial, the drawer's bank statement for the date of presentation usually settles the question.

Similar vague remarks, such as 'contact drawer' or 'payment countermanded', are handled the same way. Countermanding is a stop payment by another name and falls under the Modi Cements line of cases.

What if the drawer's account was frozen or attached?

This is the hardest category, and the answer depends on who froze the account and why. The general approach is that Section 138 punishes a drawer who causes the return. If the account was frozen by a court order, an income tax attachment, a debit freeze by a cyber police station, or an attachment by an agency, after the cheque was issued and without the drawer's fault, the drawer has a real defence. The drawer did not cause the return; an outside authority did.

The picture changes if the drawer knew the account was frozen and issued or allowed the cheque to be presented anyway, or if the freeze arose from the drawer's own fraud or default. A freeze for an unpaid loan with the same bank, or a KYC block the drawer ignored for months, is closer to an 'account closed' case. Courts look at the dates: when the cheque was issued, when the freeze was imposed, and what the drawer did about the outstanding cheques. If your own account has been frozen after a cyber complaint, our post on getting a frozen bank account released explains the steps.

Where the drawer is a company that has gone into insolvency, a different rule applies. The Supreme Court held in P. Mohanraj v Shah Brothers Ispat (2021) that the moratorium under section 14 of the Insolvency and Bankruptcy Code covers Section 138 proceedings against the company itself, though not against its directors. A payee holding a cheque from a company in insolvency should file a claim with the resolution professional as well as considering the criminal case against the directors.

Technical returns: stale, post-dated, altered and mismatched cheques

A cheque presented after its validity has expired is not a Section 138 cheque. Since April 2012, the Reserve Bank of India has fixed cheque validity at three months from the date on the cheque, and Section 138 itself requires presentation within the validity period. A payee who deposits a cheque in month four has lost the criminal remedy on that cheque, though not the debt, which can still be claimed in a civil suit if limitation permits.

A post-dated cheque presented before its date will be returned as post-dated. That is not dishonour. Present it again on or after the date. Cheques with corrections in the payee's name or amount are returned under the cheque truncation system standard, which does not allow such alterations, and a cheque where the amount in words and figures differs is returned for the same kind of reason. In each case the cheque was not refused for want of funds or because of an instruction; it was refused because it was defective. Ask the drawer for a fresh cheque.

Returns caused by the payee's side, such as the payee's name not matching the account into which it was deposited, an irregular endorsement, or a cheque crossed to a different account, are also not offences. Correct the deposit and present it again. The same is true of 'image not clear' or 'mutilated', which are processing problems.

Can I present the cheque again after it bounces?

Yes, as many times as you like within its validity. In MSR Leathers v S. Palaniappan (2013), the Supreme Court held that a payee who presents a cheque again after a first dishonour, and sends a notice after the later dishonour, can prosecute on the later one. The earlier dishonour, even if a notice was sent and not followed up, does not bar a complaint on the later return. What the payee cannot do is prosecute twice on the same cheque.

Re-presenting makes sense after a technical return, or when the drawer asks for time and promises funds by a date. It does not make sense to keep re-presenting a cheque that has bounced for insufficient funds while the three-month validity runs out. A cheque that returns 'Funds insufficient' in the third month, with no notice sent on earlier returns, leaves the payee only one chance.

When Advocate B.K. Singh reads a return memo, the first thing he checks is the remark against the date on the cheque: how much of the validity period remains, and whether this is the first or a later return. Those two facts decide whether to re-present, send notice, or both.

What the return memo must show, and why it matters

Section 146 of the NI Act says the court shall presume the fact of dishonour when the bank's slip or memo bearing the official mark and showing the dishonour is produced, unless the contrary is proved. In practice, the memo plus the original cheque is how the payee proves the return. Keep both. Your bank will usually return the original cheque with the memo, or send the memo separately in the cheque truncation system.

Check that the memo shows the cheque number, the amount, the drawer's bank, the date of return and the reason. If the memo is unclear or the reason is missing, ask your bank for a fresh memo or a letter. Note the date on which you actually received the memo or learned of the dishonour, because the 30-day notice period runs from that date, not from the date printed on the memo.

The reason on the memo should be stated in your legal notice and in the complaint. A notice that says the cheque returned for 'insufficient funds' when the memo says 'payment stopped' is not fatal, but it hands the drawer an easy point in cross-examination.

What to do on the day a cheque comes back

For the payee, these steps apply to every return, whatever the reason.

1. Read the memo and note the reason

   Look up the reason against the table above. Decide whether it is a drawer-caused return, a technical return or one that needs facts checked, such as a frozen account.

2. Write down the date you received the memo

   This date starts the 30-day period for the legal notice. Keep the envelope, the bank SMS or the email that told you about the return.

3. Check how much validity is left

   Count three months from the date on the cheque. If a technical return leaves time, re-present after correcting the problem. If validity is about to end, do not gamble on re-presenting.

4. Send the legal notice within 30 days

   For drawer-caused returns, send a notice demanding the cheque amount within 15 days of receipt. State the cheque details and the reason on the memo accurately.

5. Wait 15 days from delivery, then file within a month

   If the drawer does not pay within 15 days of receiving the notice, the complaint must be filed within one month after that, in the court where your bank branch is. Our post on where to file explains the court.

6. Keep the papers together

   Original cheque, memo, notice, postal receipts, tracking report and the documents behind the debt. The complaint needs all of them.

Defences a drawer can raise based on the return reason

Section 140 of the NI Act shuts out one defence completely: a drawer cannot say he had no reason to believe the cheque would be dishonoured. Beyond that, the return reason opens some routes. If the bank returned the cheque in error when funds were available, the drawer's bank statement and, if needed, a bank officer as a witness can prove it. If the account was frozen by an authority after the cheque was issued, the order freezing it is the key document.

Where payment was stopped, the defence lies in the reason for stopping and proof that funds were available, not in the instruction itself. Where the signature differs, the defence is that the mismatch was innocent or the cheque was forged, supported by the bank's specimen card, other cheques and, where needed, a handwriting examiner's opinion. Where the cheque was technically defective, the drawer can simply point out that the return was not one Section 138 covers.

All of these are trial defences. A drawer who receives a legal notice should reply setting out the reason briefly. That reply is often the first thing the court sees of the defence, and a reply that says nothing makes later explanations look like afterthoughts. The full sequence of a trial is in our post on how a Section 138 case runs in Delhi.

Check the memo before you send the notice

• The memo shows the cheque number, amount, drawer's bank and date of return
• The reason for return is legible and matches the cheque
• The return is drawer-caused, not technical or payee-side
• The cheque was presented within three months of its date
• You have noted the date you received the memo
• You still hold the original cheque
• The notice will state the same reason as the memo
• If the account was frozen, you know who froze it and when

Mistakes payees make with return reasons

• Sending notice on a technical return. A cheque returned for an alteration or a post-date is not dishonoured under Section 138. Re-present or ask for a fresh cheque.
• Re-presenting until validity runs out. Each re-presentation uses time. A last return in the final week of validity, without a notice on any earlier return, leaves no margin for error.
• Waiting for the drawer's explanation. The 30 days run from receipt of the memo, whatever the drawer says on the phone.
• Misstating the reason in the notice. State the remark exactly as the memo gives it.
• Losing the original cheque. The court needs it, and in a signature dispute it is the main exhibit.
• Ignoring insolvency. If the drawer company is under a moratorium, the case against the company cannot proceed. File your claim with the resolution professional and take advice on the directors.

When to get the memo checked

If the remark on your memo is one of the clear ones, 'Funds insufficient' or 'Exceeds arrangement', the path is straightforward and the only danger is delay. If it is 'refer to drawer', a frozen account, a signature mismatch, or a company cheque where the signatories changed, get advice before you send the notice. The notice is the foundation of the case, and a notice drafted around the wrong theory is hard to fix later.

Drawers who receive a notice on a return they believe was not their fault should also act quickly: a short, factual reply with documents is worth more than a long one sent late. If you want an advocate to read the memo and the cheque before the deadline, the team of Advocate B.K. Singh at B.K. Singh & Associates can look at the papers and tell you which route applies; use our online enquiry form. Disputes with your own bank over a wrong return are covered on our banking law page.