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Your buyer's company owes you ₹23 lakh. You took a personal cheque from one of its directors as security, and when you presented it the bank returned it marked “funds insufficient”. The director now says the cheque was only a guarantee and the company is the real debtor. That argument is weaker than it sounds. A cheque signed by a guarantor is drawn by the guarantor on his own account, and if the guarantee obligation was alive on the date of presentation, guarantor cheque bounced liability under Section 138 of the Negotiable Instruments Act, 1881 is judged on the guarantor's own account, not on the company's.
Section 138 does not carve out a separate rule for personal guarantees. A cheque is a bill of exchange drawn on a specified banker, and the drawer is the person who signed it. When a director signs his own cheque from his own savings account to cover his company's unpaid invoices, he is the drawer. The company is not. That single fact decides who gets prosecuted and who does not.
Seven conditions have to be met. The cheque must be drawn on an account maintained by the drawer and presented within its validity period, which banks currently set at three months. It must come back unpaid for insufficiency of funds or because it exceeds the arrangement. It must have been issued to discharge a legally enforceable debt or other liability. The payee then has to give written notice under Section 138 within 30 days of receiving the bank's return memo, the drawer gets 15 days to pay, and the complaint must be filed within one month after that window closes.
Once the drawer admits his signature, Section 139 presumes the cheque was given to discharge a debt. The director who says “this was only security” is raising a defence he must prove. Courts have also read “insufficiency of funds” widely enough to cover stop-payment instructions and closed accounts, so a guarantor cannot escape simply by calling his bank and asking it to stop the cheque.
Section 138 fails if there is no legally enforceable debt. So the question becomes whether a guarantee creates one against the guarantor personally. It does. Section 128 of the Indian Contract Act, 1872 says the liability of the surety is co-extensive with that of the principal debtor unless the contract provides otherwise. Co-extensive means you can demand payment from the guarantor without first suing the company. Section 126 allows a guarantee to be oral or written, and Section 127 treats anything done for the benefit of the principal debtor as sufficient consideration, so no separate payment to the guarantor is required.
In Sripati Singh v. State of Jharkhand (Supreme Court, 2021), the Court dealt with a cheque handed over as security. It held that the label does not decide the case. If a legally enforceable debt exists on the date the cheque is presented, and the cheque is dishonoured, Section 138 applies. A security cheque is not a dead letter.
Timing still matters. A cheque issued before any debt arose, or held until the underlying claim became time-barred, will not support a prosecution. And a guarantor can be discharged. Sections 133 to 135 of the Contract Act release the surety if the creditor varies the contract without consent, releases the principal debtor, or agrees to give time to or not to sue the principal debtor. Suppliers do this constantly, granting a company six more months and a fresh payment schedule. Take the guarantor's written consent to any such extension or you may lose him as a defendant.
Anand Fasteners, a proprietorship in Nashik, supplies machined parts to a Pune company. Invoices raised between April and August 2025 total ₹23,60,000 and remain unpaid. In September 2025 the company's managing director hands over his personal cheque for ₹23,60,000, drawn on his own savings account, with a covering letter stating that it is given “as security for the outstanding dues of the company”. He signs the letter.
Anand presents the cheque on 10 December 2025. It is returned on 12 December with the memo “funds insufficient”. The 30-day window for notice runs to 11 January 2026. Anand sends a notice by registered post and email on 5 January 2026, addressed to the managing director at his home address, describing him as the drawer of the cheque and the company as the principal debtor. A copy goes to the company's registered office. No payment comes within 15 days, so the cause of action arises in late January 2026.
Anand files a Section 138 complaint in the court covering the branch where his own bank account is maintained, before the one-month deadline. He can seek interim compensation under Section 143A, which lets the magistrate order up to 20% of the cheque amount, here up to ₹4,72,000, within 60 days of the order. If the director appeals a conviction, Section 148 requires a deposit of at least 20% of the fine or compensation awarded. Alongside the criminal case, Anand files a civil recovery suit against both the director and the company, using the summary procedure under Order XXXVII of the Code of Civil Procedure, 1908 where a negotiable instrument or written contract supports it, and he adjusts amounts recovered in one forum against the other so there is no double recovery.
The demand notice is where most guarantor cases are won or lost. Section 138 requires it to be given to the drawer within 30 days of the bank's return memo. If the guarantor signed the cheque, the notice must be addressed to the guarantor and must identify him as the drawer. A notice that addresses the company, mentions the director only in passing as a signatory, and demands payment from the company does not give you a cause of action against the director personally. He will say so before the magistrate, and he will usually succeed.
The cheque number, date and amount, and the bank and branch on which it was drawn.
The date of the return memo and the reason printed on it.
A clear statement that the cheque was issued towards the debt of the named principal debtor, for which the addressee stands as surety.
A demand for payment within 15 days of receipt.
The correct address, despatched by registered post or speed post with acknowledgement, and copied by email.
Where both the company's cheque and the director's personal cheque have bounced, send two notices. Bundle them into a single envelope and one defective notice can infect both. Service is presumed when a notice is correctly addressed and sent by registered post, so keep the postal receipt and the tracking record, and download the delivery confirmation while it is still available.
You have two relationships and two remedies. The guarantor is the drawer of the dishonoured cheque, so the Section 138 complaint lies against him. The company owes the underlying debt, so a civil suit lies against the company and, as surety, against the guarantor.
Who goes into the criminal complaint? If the cheque is the director's personal cheque on his personal account, the company is not the drawer and cannot be convicted of the Section 138 offence merely because it took the benefit. If instead the cheque is the company's cheque signed by a director as authorised signatory, the company is the drawer, and the settled position is that the company must be arraigned as an accused before the directors can be held vicariously liable under Section 141. That is the rule in Aneeta Hada v. Godfather Travels & Tours (P) Ltd. Confusing these two structures is the most common drafting error in these complaints.
Jurisdiction after the 2015 amendment sits with the court where the branch of the bank in which the payee maintains the account is located, under Section 142(2). Anand, sitting in Nashik, therefore files in Nashik and not in Pune. The complaint must be filed within one month of the cause of action. Delay can be condoned for sufficient cause, but no supplier should build a case around that indulgence.
Answered by Sripati Singh. The reason for handing over the cheque does not matter if a legally enforceable debt existed on the date of presentation.
This is the strongest defence, and Section 128 answers it only if the guarantee is unconditional. Read your own paperwork. If the covering letter says the cheque will be presented only after the company's account is reconciled, or only if the company fails to pay by a stated date, the guarantee is conditional and the condition must be satisfied before the cheque is used.
Sections 133 to 135 of the Contract Act are the battleground. Any material change in payment terms agreed with the company without the guarantor's consent can release him. Once released, the cheque has no debt behind it and Section 138 collapses.
A material alteration renders the instrument void under Section 87 of the Negotiable Instruments Act unless it was made with consent. A guarantor who admits signing a blank cheque but denies the amount later filled in will push the matter into trial and handwriting evidence.
Service is presumed where the notice is correctly addressed and despatched by registered post. An address taken from the cheque itself, or from the covering letter, is normally enough to hold the drawer to it.
The Section 139 presumption rests on an admitted signature. If the guarantor denies it, expect a longer trial and a possible examination by a handwriting expert.
Most of these cases turn on paper you already hold. Pull it together before the notice goes out, not after the complaint is filed.
Keep the original cheque, the bank return memo and the statement showing the date of presentation.
Preserve the covering letter, email or message that links the cheque to the company's dues.
Send the demand notice to the guarantor's personal address within 30 days of the return memo.
Name the guarantor as drawer and the company as principal debtor in that notice.
Do not extend time to the company without the guarantor's written consent.
File the complaint within one month after the 15-day notice period expires.
Run the civil recovery suit against the company in parallel and reconcile amounts recovered.
If a guarantor's cheque has bounced and the 30-day notice window is still open, send the demand notice this week: one to the guarantor at his personal address naming him as drawer, one to the company as principal debtor, both by registered post with proof of despatch retained.
This article is for general information only and is not legal advice. Consult a qualified professional for your specific facts.
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