Bank's Negligence Killed Cheque Bounce Case Before It Could Begin: Supreme Court Rules Section 138 Remedy Lost Due to Stale Cheques

Supreme Court has ruled that a bank's negligence in allowing cheques to become stale can extinguish a depositor's right to prosecute the cheque drawer under Section 138 of the Negotiable Instruments Act, 1881 — a remedy that acquires special significance when the drawer company is already undergoing corporate insolvency and civil recovery is practically unavailable.

At the same time, the Court clarified that even if the cheques had been dishonoured upon timely presentment, an offence under Section 138 would not have been made out automatically. Two further conditions — service of demand notice and non-payment within 15 days — would still have needed to be satisfied, making the ultimate outcome of any such proceeding entirely speculative.

A bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan delivered the ruling in appeals preferred by Canara Bank against an order of the National Consumer Disputes Redressal Commission.

Kavita Chowdhary had deposited two CTS cheques totalling Rs. 1,06,10,768 — issued by Assotech Limited and drawn on Vijaya Bank, Noida — into her savings account at Canara Bank's Maharani Bagh Branch, New Delhi on 29.05.2018. Due to the bank's failure to re-present the cheques before their expiry on 02.06.2018, both instruments became stale. At the time of deposit, Assotech Limited was already undergoing corporate insolvency resolution proceedings. The respondent contended that Section 138 of the NI Act — enabling prosecution of the cheque drawer — was her only effective legal remedy, and the bank's negligence had permanently extinguished it. The National Commission upheld the complaint and awarded 10% of the cheque amount as compensation. Canara Bank challenged this before the Supreme Court.

The Court was required to examine: whether the bank's deficiency in service had legally extinguished the respondent's right to proceed under Section 138 NI Act; whether the pendency of insolvency proceedings against Assotech Limited under the IBC would have barred a Section 138 prosecution in any event; whether the directors of the drawer company continued to face personal criminal liability under Section 138 despite the company being in insolvency; and what the appropriate compensation would be given the speculative nature of the lost remedy.

The Extinguished Remedy — What Section 138 Required

The Court began by mapping the precise legal pathway that the bank's negligence had closed off. Referring to the three-Judge Bench ruling in MSR Leathers v. S. Palaniappan, the Court set out the three cumulative conditions that must be satisfied before a cheque dishonour can constitute a punishable offence under Section 138:

First, the cheque must be presented to the bank within six months from the date of issue or within its validity period, whichever is earlier. Second, the payee must issue a written demand notice to the drawer within 30 days of receiving information from the bank about the return of the cheque. Third, the drawer must fail to make payment within 15 days of receipt of that demand notice.

"It is only upon the satisfaction of all the three conditions mentioned above that an offence under Section 138 can be said to have been committed by the person issuing the cheque."

By allowing the cheques to become stale, the bank had made the first condition impossible to fulfil — collapsing the entire chain before it could even begin.

Dishonour Alone Does Not Make an Offence

The Court firmly rejected any assumption that timely presentment and dishonour would have automatically led to a successful prosecution. The bench drew upon the two-Judge Bench ruling in Vishnoo Mittal v. M/s Shakti Trading Company to emphasise that the return of a dishonoured cheque simpliciter does not create an offence under Section 138. The cause of action arises only when the demand notice is served and the drawer fails to pay within the stipulated 15-day period.

"Even if the cheques were presented within time and would have been dishonoured, that would not have ipso facto led to commission of an offence under Section 138 of the NI Act. Respondent would have had to complete the other two conditions before an offence could be said to have been committed."

The Court therefore held that the loss suffered by the respondent — while real and attributable to the bank's negligence — was indeterminate in nature. What was extinguished was not a certain recovery, but a right to pursue a remedy whose outcome itself was uncertain.

IBC Moratorium Does Not Shield Directors from Section 138

A critical dimension of the case was that Assotech Limited was under corporate insolvency resolution, making civil recovery from the company through ordinary means effectively impossible. The bank had argued that since the company was in liquidation, no recovery outside the IBC mechanism was permissible in any event, and therefore the respondent had suffered no actual loss.

The Court rejected this contention by drawing a clear line between the company's insolvency proceedings and the personal criminal liability of its directors.

Referring to the three-Judge Bench decision in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited, the Court reiterated that Section 14 of the IBC — which imposes a moratorium on proceedings against the corporate debtor — does not stay criminal proceedings. Section 138 NI Act proceedings are penal in character and are not recovery proceedings. They are directed at the individual who issued or signed the cheque, not merely at the company.

"The nature of proceedings which have to be kept in abeyance under Section 14 IBC do not include criminal proceedings, which is the nature of proceedings under Section 138 of the NI Act. Section 138 of the NI Act proceedings are not recovery proceedings. They are penal in character."

The Court further noted that where a company issues a cheque signed by its Managing Director or Promoter, those individuals continue to face personal criminal exposure under Section 138 even as the company undergoes insolvency. The IBC process — whether it results in a resolution plan or liquidation — cannot extinguish the personal criminal liability built around the principle of not honouring a negotiable instrument.

The respondent's right to proceed against the directors of Assotech Limited under Section 138 was thus a live and valuable remedy — and it was this remedy that the bank's deficiency had permanently foreclosed.

Compensation Must Reflect the Speculative Nature of the Lost Remedy

Having established that the extinguished remedy was real but its outcome uncertain, the Court turned to what compensation was appropriate. The Commission had awarded 10% of the face value of the cheques as "token compensation," itself acknowledging the imponderability of the outcome. The Court agreed with this characterisation but found 10% excessive.

The bench observed that even if a Section 138 complaint had been filed, the final outcome would have depended on multiple uncertain variables — whether the demand notice would have been properly served, whether the directors would have paid within 15 days, and what sentence or fine a court would have eventually imposed. All of this lay within the realm of imponderability.

"It would be difficult to foretell with any degree of certainty the outcome of such a proceeding. All these are within the realm of imponderability."

Applying the standard that compensation under consumer protection law must be fair, reasonable and commensurate to the actual loss or injury — as laid down in Chief Administrator, Haryana Urban Development Authority v. Shakuntla Devi and Charan Singh v. Healing Touch Hospital — the Court reduced the compensation from 10% to 6% of the total cheque amount of Rs. 1,06,10,768 to each complainant, with interest at 6% per annum from the date of filing of the complaints.

The Supreme Court upheld the finding of deficiency in service against Canara Bank and confirmed that the bank's negligence had extinguished the respondent's Section 138 NI Act remedy against the directors of the insolvent drawer company. Compensation was reduced from 10% to 6% of the total cheque amount with interest at 6% per annum from the date of filing of complaints. No order as to costs.

Date of Decision: April 15, 2026