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You sold your shares, the buyer handed over a cheque, and the cheque came back unpaid. A cheque bounce in a share purchase leaves the seller in an awkward position: the shares have usually already moved into the buyer's name, while the money has not arrived. The Negotiable Instruments Act, 1881 gives you a criminal remedy; the share purchase agreement gives you a contractual one. They run on different clocks and produce different results. What follows is how each route works for a seller in 2026, and where they trip over each other.
Two transactions get confused constantly, and the distinction decides your remedy.
In the first, a company issues fresh shares to an investor. That is a subscription, governed by the Companies Act, 2013, usually as a private placement under Section 42. Money must come through banking channels, allotment must be made within 60 days of receipt of the application money, and if the company fails to allot, Section 42(6) requires a refund within 15 days, failing which interest at 12% per annum applies.
In the second, an existing shareholder sells shares to a buyer. That is a transfer, not an allotment. Section 42 has nothing to do with it. The consideration is a private debt owed by the buyer to the seller, and the company is only the record-keeper.
Most founders who write to us are in the second situation. The Negotiable Instruments Act, 1881 treats their claim as a debt like any other. Section 138 applies when a cheque drawn on an account maintained by the drawer is returned unpaid, and the cheque was issued to discharge, in whole or in part, a legally enforceable debt or other liability. Share sale consideration fits that description exactly.
Once the seller proves the cheque, the signature and the dishonour, Section 139 presumes that the cheque was received for discharge of a debt. That presumption is rebuttable but it shifts the burden to the drawer — see Rangappa v. Sri Mohan, (2010) 11 SCC 441. Expect the buyer to argue that the cheque was handed over as security before any liability crystallised. The question that matters is whether a legally enforceable liability existed on the date the cheque was presented, not the date it was signed.
A transfer of shares in a private company becomes effective against the company when the board registers it. Section 56 requires a proper instrument of transfer in Form SH-4, and Section 88 requires the company to maintain a register of members. Until the board passes the resolution and updates the register, the seller remains the member.
That single fact is worth more than any legal notice. If you have not yet handed over the executed SH-4 and the original share certificate, you still control the timing. Hold them until the cheque clears, or place them in escrow with a lawyer. If the SPA is already signed and the buyer is pressing for delivery, ask for a board resolution recording that registration will follow only on realisation of the cheque.
Once registration happens, the company cannot unwind it because you were not paid. The buyer is a member. Section 58 lets a company refuse to register a transfer for sufficient cause, with notice to the transferor and the transferee, but the company is not a party to your consideration arrangement, and a refusal grounded in the buyer's unpaid cheque is unlikely to survive scrutiny. Section 59 lets a person aggrieved by an entry or omission in the register apply to the Tribunal for rectification. It is not a mechanism for a seller to reclaim shares from a defaulting buyer.
Where the deal was a subscription agreement rather than a transfer, the risk sits with the company's board. Allotment against a cheque that later bounces leaves the share capital unpaid and raises questions under Section 42 and the Companies (Prospectus and Allotment of Securities) Rules, 2014.
The clock starts when the bank returns the cheque. Send a written demand within 30 days of receiving the bank's return memo, giving the drawer 15 days from receipt of the notice to pay. If those 15 days pass without payment, the cause of action arises and a complaint must be filed within one month.
A notice drafted in a hurry is the most common reason cases fail at the threshold. It should identify the cheque by number, date, bank and amount; record the presentation and the reason for dishonour; refer to the SPA and the shares transferred; demand the exact sum; and state that failure to pay within 15 days will lead to prosecution under Section 138. Send it by registered post and email, and preserve the postal receipt and the tracking record.
Jurisdiction was simplified by the 2015 amendment. Under Section 142(2), the complaint is filed in the court within whose local jurisdiction the payee's bank branch — the branch where the cheque was presented — is situated.
If the cheque was issued by a company rather than an individual, Section 141 makes the company and the officers in charge of its business liable. The company must be arrayed as an accused; a complaint against directors alone is defective.
Two provisions make the criminal route less hollow than it once was. Section 143A allows the magistrate to order interim compensation of up to 20% of the cheque amount during trial. Section 148 requires an appellate court to direct a deposit of at least 20% of the fine or compensation before an appeal is heard. Section 147 makes the offence compoundable, which is how most of these cases actually end.
Meera holds 40,000 equity shares of Rs 10 each in a Pune private limited company. In August 2025 she signs an SPA to sell 4,000 shares to an angel investor at Rs 2,500 per share — Rs 1,00,00,000. The buyer pays by two cheques: Rs 60,00,000 dated 15 November 2025 and Rs 40,00,000 dated 15 February 2026. No escrow, no deferment of registration.
Meera delivers the SH-4 in September. The board registers the transfer on 20 September 2025 and the buyer's name enters the register of members. The first cheque is presented on 18 November, returned on 19 November for insufficient funds, and the memo reaches her on 21 November. She issues notice on 12 December, inside the 30-day window, and it is served on 16 December. The 15-day period closes on 31 December with no payment. She files a complaint in the magistrate court where her bank branch sits, in January 2026, and applies under Section 143A for interim compensation of up to Rs 12,00,000.
The second cheque is presented in February 2026 and also returns unpaid. That is a fresh dishonour, a fresh 30-day notice and a fresh cause of action. In parallel, Meera invokes the arbitration clause in the SPA for the full Rs 1,00,00,000 with contractual interest. What she cannot do is ask the company to strike the buyer's name off the register.
Rarely, and never by sending a notice.
Once registered, the transfer is complete. Rescission is a discretionary remedy under Section 27 of the Specific Relief Act, 1963, and courts are slow to rescind a completed share transfer when money can compensate the seller. Fraud in the SPA, a forged instrument or a cheque obtained by deception is a different matter and must be pleaded specifically, with evidence.
Reversal in practice happens in only three ways: the buyer voluntarily executes a fresh transfer back, which attracts fresh stamp duty; a court orders cancellation or rectification; or the transfer was never registered and the seller simply withholds the instrument. The strongest position belongs to the seller who has not yet parted with the SH-4. If you are still negotiating, make registration conditional on realisation, or split the deal so that a tranche of shares moves only against cleared funds.
The Section 138 case punishes the dishonour; it does not, by itself, put Rs 1 crore in your account. Compensation ordered by a criminal court still has to be executed. The recovery track is civil.
File a suit for recovery of the unpaid consideration with contractual interest, or invoke arbitration if the SPA provides for it, along with an application for interim measures under Section 9 of the Arbitration and Conciliation Act, 1996. Where the claim rests on a written contract and the court is one where Order XXXVII of the Code of Civil Procedure, 1908 applies, a summary suit shifts the burden onto the buyer to seek leave to defend.
Consequential losses — interest you paid on a bridge loan taken because the money did not arrive, for instance — must be pleaded with documents and proved. They are not assumed.
One caution on tax. A transfer of shares is generally taxable in the year of transfer, and a bounced cheque does not automatically defer the capital gains computation. Confirm the position with your chartered accountant before filing the return for the year of transfer.
Collect the original cheque, the bank return memo and the statement showing presentation.
Note the exact date the memo reached you and diarise the thirtieth day from it.
Pull out the SPA and mark the interest clause, the arbitration clause and any escrow terms.
Send the Section 138 notice by registered post and email, to the drawer's address in the SPA and on the cheque.
Inform the board in writing that consideration is unpaid, so the record shows you objected before the buyer transfers the shares onward.
Preserve email and messaging threads where the buyer acknowledged the dues.
Decide, with counsel, whether to file the complaint, start arbitration, or run both together.
Keep the signed SPA and all schedules, the board resolution approving the transfer, the SH-4, the original share certificate, a certified extract of the register of members, the cheque and return memo, the notice with postal proof, and every written acknowledgement of the debt. In a summary suit or an arbitration, this file decides how quickly you get a decree. Buyers who know the paperwork is complete tend to settle.
Start with the SPA and the board file today: confirm whether the transfer has been registered, and if it has not, do not deliver the SH-4 until the cheque is realised. If it has, move on the Section 138 notice within the 30-day window and take a decision on arbitration in the same week.
This article is for general information only and is not legal advice. Consult a qualified professional for your specific facts.
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