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The buyer's cheque has come back marked "funds insufficient", and the bank that discounted your invoice has already debited your current account. Someone in the credit team says the bank will handle the case, and you are not sure whether you still can. That is the awkward middle every MSME lands in after a bill discounting cheque bounce. The answer turns on one question: after discounting, who is the holder of the cheque, you or the bank? Under the Negotiable Instruments Act, 1881, that single fact decides who may issue the demand notice and who may file a complaint under Section 138.
Discounting is a financing transaction, not a change in the sales contract. You keep the invoice, you keep the delivery proof, and the buyer's obligation to pay survives. What you give the bank is the right to be paid out of that receivable, at a price: the discount.
A cheque, though, is a negotiable instrument with its own legal life, and the paper can be transferred in more than one way. Three arrangements are common in Indian bill discounting:
The Act looks at the instrument, not at the discounting agreement. No clause in a sanction letter can convert a cheque that remains in your name into one held by the bank. That mismatch is where most disputes begin.
Section 8 defines a holder as the person entitled in his own name to the possession of the cheque and to receive the amount due on it. Section 9 goes further: a holder in due course is a person who, for consideration, became the possessor of the cheque where it is payable to bearer, or the payee or indorsee where it is payable to order, before the amount mentioned in it became payable, and without sufficient cause to believe that any defect existed in the title of the person from whom he took it.
A bank that pays you ₹17,53,900 against an ₹18,00,000 invoice has clearly given consideration. If it takes delivery of a post-dated cheque before the date written on it, it also satisfies the "before payable" test. On those facts the bank is a holder in due course, and Sections 118 and 139 of the Act raise presumptions in its favour, that the cheque was drawn for consideration and was received in discharge of a debt or liability.
Section 142(1)(a) is narrow. No court may take cognizance of an offence under Section 138 except on a written complaint by the payee or, as the case may be, the holder in due course. Nobody else has standing.
So if you endorsed the cheque in favour of the bank and delivered it, you are the endorser. You are neither the payee nor the holder in due course of that cheque any more, and you cannot file the Section 138 complaint. Your claim against the buyer survives on the invoice, but it is a civil claim. If, instead, the bank took the cheque for collection and kept it in your name, the bank is only your collecting agent. It is not the payee or holder in due course in its own right, and the complaint must come from you.
Recourse is a contract question and has nothing to do with Section 138. Most Indian discounting is with recourse. When the cheque is returned, the bank reverses the credit it gave you, debits the discounted amount along with interest for the period and penal charges, and may also recall the rest of the facility. A typical clause says that on dishonour the bank may recover the discounted value, discount charges and incidental costs, and set these off against any deposit or account you maintain with it.
That right of set-off is reinforced by the banker's general lien under Section 171 of the Indian Contract Act, 1872, which covers securities deposited with a banker. Without recourse discounting shifts the buyer's credit risk to the bank, but it is priced higher and is uncommon for a first-time MSME seller with limited financials.
One point is often missed. The bank's debit does not extinguish the buyer's debt to you; it revives your claim, because you have effectively borne the loss. What it does mean is that two parties may have a live claim on one cheque, and the buyer cannot be made to pay twice. That is why banks normally take an assignment of the receivable along with the endorsement, so that the cause of action passes cleanly.
Yes, if it holds the cheque as payee or holder in due course. The timelines are strict, and they run against the bank, not against you:
The cheque must be presented within three months of its date, or within its validity period, whichever is earlier (proviso (a) to Section 138, as amended with effect from 1 September 2018).
A written demand notice must be issued within 30 days of the bank receiving the return memo (proviso (b)).
The drawer then has 15 days from receipt of the notice to pay (proviso (c)).
The complaint must be filed within one month of the day the cause of action arises (Section 142(1)(b)).
Jurisdiction lies with the court where the branch of the bank at which the payee or holder in due course maintains the account is situated (Section 142(2)).
If the case is proved, Section 138 provides for imprisonment up to two years, or a fine up to twice the cheque amount, or both. During trial the court may order interim compensation of up to 20% of the cheque amount under Section 143A, and an appeal by a convicted drawer requires a deposit of at least 20% of the fine or compensation under Section 148. Offences under the Act are compoundable under Section 147, which is why most of these matters settle.
A cheque can also be presented more than once within its validity, and a fresh notice can be given on each dishonour. The Supreme Court settled that in MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177, which helps a bank that received a return memo on a technical ground and re-presented the cheque later.
A Coimbatore garment exporter raises invoice GT/2026/014 for ₹18,00,000 on a Chennai buyer on 5 January 2026, on 90-day credit. On 10 January he discounts it with his bank at 11% per annum for the remaining 85 days. The bank deducts about ₹46,100 and credits ₹17,53,900. Against the invoice, the buyer has issued a post-dated cheque dated 5 April 2026 for ₹18,00,000 in the seller's name, which the seller endorses in favour of the bank at the time of discounting.
The bank presents the cheque on 5 April. It returns on 7 April with the memo "funds insufficient". The bank must issue its demand notice by 7 May 2026. Suppose the notice is served on 20 April; the buyer then has until 5 May to pay. If he does not, the cause of action arises and the bank must file the complaint by 5 June 2026.
Separately, the recourse clause lets the bank debit the seller's account for ₹17,53,900 plus penal interest, which it does on 8 April, and his working capital limit is squeezed for the rest of the quarter. The seller cannot file a Section 138 complaint on that cheque, because he endorsed it away and is neither payee nor holder in due course. His remedy is a suit on the invoice, and a claim that survives the bank's own recovery, subject to the assignment he signed.
Most of these disputes are decided by two pages of a sanction letter signed in a hurry. Before you sign, and again when a cheque is returned, work through this:
Confirm on paper whether the cheque is endorsed to the bank or deposited for collection in your name.
Read the recourse clause and check whether the discounting is with or without recourse.
Diary the 30-day notice window from the date on the return memo, whoever the complainant turns out to be.
Obtain the bank's debit advice and interest computation in writing in the same week.
Ask the bank, in writing, whether it will file the Section 138 complaint and in which court.
Preserve the invoice, delivery challan, e-way bill, return memo and the endorsement record.
Record in the file who sues the buyer, so that the same debt is not claimed twice.
Treating the bank's debit as the end of the matter is the costliest one; the 30-day notice clock keeps running while the seller and the bank exchange emails. Endorsing the cheque without recording who retains the right to sue is the second. Assuming that the bank will necessarily chase the buyer is the third, because once it has debited you, its own exposure is closed and its enthusiasm usually falls. Sending a demand notice in the seller's name on a cheque already endorsed to the bank is the fourth; it hands the drawer an easy preliminary objection.
Keep the sanction letter and discounting agreement with the recourse clause, the endorsement or delivery record for the cheque, the tax invoice and delivery proof, the bank's return memo, the debit advice, copies of the demand notice with postal proof, and any assignment or letter of subrogation signed with the bank. Keep originals. Section 138 trials are fought on documents, and Section 145 permits evidence by affidavit, which makes a clean paper trail decisive.
If a cheque has already bounced, do this within the next seven days: write to the bank asking it to confirm whether it is the holder of the cheque and whether it will file the complaint, and simultaneously send the buyer a notice on the invoice that preserves your civil claim. Do not wait for the bank to decide.
This article is for general information only and is not legal advice. Consult a qualified professional for your specific facts.
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