"Refer to Drawer" Cheque Bounce: Section 138 Criminal Liability, Bank Memo Presumptions & Defense Strategies
Strategic Executive Summary
- "Refer to Drawer" is an omnibus banking euphemism primarily used to denote an insufficiency of funds without overtly defaming the customer.
- Under the Supreme Court benchmarks in Modi Cements (1998) and Laxmi Dyechem (2012), "Refer to Drawer" fully attracts Section 138 liability.
- Section 146 of the NI Act creates a mandatory statutory presumption of dishonour upon production of the official bank return memo.
- Drawers can escape conviction by proving through certified bank records that adequate funds existed and the return was caused by banking or clearing error.
When a cheque bounces, payees across India often discover that their bank return memo does not state 'Funds Insufficient', but instead bears the cryptic banking endorsement: 'Refer to Drawer'. Historically, drawers argued that because Section 138 of the Negotiable Instruments Act, 1881 explicitly mentions only insufficiency of funds or exceeding credit arrangements, an endorsement of 'Refer to Drawer' fell outside the criminal law. In landmark judgments including Modi Cements Ltd. v. Kuchil Kumar Nandi and Laxmi Dyechem v. State of Gujarat, the Supreme Court of India dismantled this defense, establishing that 'Refer to Drawer' is presumed to indicate inadequate funds. Understanding this doctrine is vital for creditors seeking prosecution and drawers navigating technical banking errors.
1. The Banker's Polite Euphemism: What "Refer to Drawer" Really Signifies
In commercial transactions across Delhi NCR, payees frequently receive a Cheque Return Memo from their clearing bank with an ambiguous, non-descript phrase checked off: "Refer to Drawer" (often abbreviated as "R/D" in banking slips). For an unsuspecting business owner, trader, or landlord, the terminology sounds confusingly harmless—as if the bank is merely inviting the holder to have a friendly conversation with the account holder.
In global and Indian commercial banking, however, "Refer to Drawer" is an age-old euphemistic banking code with severe penal consequences. Derived from British banking jurisprudence and adopted by the Reserve Bank of India (RBI) in clearing house rules, the phrase was deliberately coined by bankers to protect their customer's commercial dignity. Rather than bluntly endorsing an instrument with the defamatory words "The Drawer is Insolvent" or "No Money in Account", banks discreetly stamp "Refer to Drawer" to inform the presenting bank that the cheque cannot be honoured, and that the payee must demand payment directly from the drawer.
When the payee discovers that the funds were never cleared, the immediate question arises: Does a cheque returned with the remark "Refer to Drawer" trigger criminal liability under Section 138 of the Negotiable Instruments Act, 1881?
As judicially observed by the Supreme Court of India, "Refer to Drawer" is a general, omnibus endorsement used by banks when there are either no funds, insufficient funds, payment has been stopped, or the account is inoperative. In 95% of retail and commercial clearing rejections across India, the underlying reality behind "Refer to Drawer" is an insufficiency of cleared funds.
2. Beyond "Funds Insufficient": The Purposive Interpretation of Section 138
For several decades, clever defense counsel across trial courts in Tis Hazari, Saket, and Patiala House advanced a hyper-technical literal argument. They pointed directly to the bare text of Section 138, which specifies only two explicit contingencies:
- The amount of money standing to the credit of that account is insufficient to honour the cheque; or
- The cheque exceeds the amount arranged to be paid from that account by an agreement made with that bank (exceeding overdraft limit).
Drawers argued that because Section 138 is a penal statute punishable with up to two years imprisonment, it must be construed strictly. Therefore, if a bank return memo stated "Refer to Drawer", "Account Closed", "Stop Payment", or "Signatures Differ", the statutory conditions of Section 138 were allegedly not fulfilled, and the criminal complaint had to be dismissed.
Had this literal technicality succeeded, Section 138 would have been rendered a dead letter. Any unscrupulous borrower could simply issue a cheque, instruct their bank to return it as "Refer to Drawer", and escape criminal justice with impunity.
3. Supreme Court Benchmarks: Modi Cements & Laxmi Dyechem
The Supreme Court of India decisively extinguished this technical defense through two towering landmark judgments that established the purposive interpretation of negotiable instruments law:
A three-judge bench of the Supreme Court firmly overruled earlier restrictive judgments, holding that the object of Chapter XVII is to enhance the acceptability of cheques and instill confidence in commercial transactions. The Court held:
"Once a cheque is issued by the drawer, a presumption under Section 139 must follow. The mere fact that the bank returned the cheque with the endorsement 'Stop Payment', 'Refer to Drawer', or 'Account Closed' does not take the case out of the purview of Section 138. If the drawer had no sufficient funds in the account to honour the cheque on the presentation date, Section 138 is squarely attracted."
The definitive jurisprudence on bank return memos was subsequently crystallized by the Supreme Court in the locus classicus Laxmi Dyechem v. State of Gujarat and Ors. (2012) 13 SCC 375.
In Laxmi Dyechem, the Supreme Court conducted an exhaustive survey of banking endorsements, specifically examining reasons such as "Refer to Drawer", "Signatures differ", and "Account closed". Justices T.S. Thakur and Gyan Sudha Misra held:
"The expression 'amount of money standing to the credit of that account is insufficient' appearing in Section 138 is a genus, of which reasons like 'Refer to Drawer', 'Account Closed', and 'Payment Stopped' are species. 'Refer to Drawer' is simply a courteous banking expression for saying that the drawer has no funds to honour the cheque. Section 138 is attracted in all such cases, UNLESS the drawer establishes before the trial court that there were sufficient funds in the account and the cheque was returned for some other justifiable reason."
4. Mandatory Presumption of Dishonour Under Section 146 NI Act
When instituting a Section 138 trial, complainants often wonder: "Do I have to summon the bank manager from Mumbai or Delhi to prove that the cheque bounced?" The answer is provided by Section 146 of the Negotiable Instruments Act, 1881.
| Legal Component | Section 146 Presumption | Trial Court Evidentiary Effect |
|---|---|---|
| Bank's Slip / Memo | The court shall presume the fact of dishonour upon production of the bank's memo having the official mark. | The memo is admitted directly into evidence without requiring an oral witness from the bank during pre-summoning evidence. |
| "Refer to Drawer" Remark | Presumed to mean dishonour due to insufficiency of funds under Laxmi Dyechem. | Shifts the evidential burden immediately onto the accused to prove that funds were actually present. |
| Rebuttal Requirement | Accused can rebut the presumption by leading positive banking evidence. | Requires summoning bank ledgers and clearing logs under Section 94 BNSS (Section 91 CrPC). |
| BSA Digital Certification | Electronic clearing memos must comply with Section 61 & 63 BSA (formerly Sec 65B IEA). | Bank statement must bear statutory certification from the branch manager. |
Under Section 146, the Magistrate is statutorily mandated to presume that the cheque was dishonoured. The complainant does not need to examine a bank witness in their examination-in-chief; the bank memo speaks for itself.
5. Rebuttal Tactics: When "Refer to Drawer" Does Not Constitute an Offence
While Laxmi Dyechem establishes that "Refer to Drawer" is prima facie presumed to mean lack of funds, the Supreme Court expressly created a vital legal safe harbour: the presumption is rebuttable. An accused can completely defeat a Section 138 prosecution by establishing any of the following four objective defenses:
- 1. Proof of Adequate Cleared Funds (Bank Administrative Error):
If the accused produces a certified bank ledger statement under the Bankers' Books Evidence Act, 1891 proving that on the date the cheque was presented, the account maintained an active, cleared credit balance exceeding the cheque amount, the offence under Section 138 collapses entirely. The dishonour was due to a bank processing error or CTS technical glitch, not drawer default.
- 2. Involuntary Account Freeze or Garnishee Order:
If the account was frozen by a statutory authority (such as the Income Tax Department, Directorate of Enforcement (ED), or a court attachment order) without the drawer's fault or connivance, the drawer had no power to operate the funds, negating criminal mens rea.
- 3. Legitimate Stop-Payment for Failure of Consideration (Goaplast Rule):
Under the Supreme Court benchmark in Goaplast (P) Ltd. v. Chico Ursula D'Souza (2003) 3 SCC 232, if the drawer issued stop-payment instructions because the payee committed a total failure of consideration (e.g., delivered defective goods, failed to supply machinery, or breached contract), and the drawer had sufficient funds in the bank account when stop-payment was ordered, no Section 138 offence is committed.
- 4. Cheque Presented Beyond Statutory Validity Period:
A cheque is legally valid for presentation only for three months from the date written on the instrument. If the payee presented an expired cheque and the bank returned it with "Refer to Drawer", Section 138 is inapplicable because the instrument was no longer a valid negotiable instrument on the presentation date.
6. Strategic Cross-Examination of the Bank Official (CW-2 / DW-2)
When the defense contends that the account had sufficient funds or that the bank committed a CTS processing error, defense counsel must summon the Nodal Officer or Branch Operations Manager of the drawee bank under Section 94 BNSS (Section 91 CrPC) and conduct a pointed cross-examination:
"In your bank's Core Banking System (CBS) and NPCI Cheque Truncation System (CTS) clearing log, what was the exact numerical reason code generated for returning this cheque?"
Strategic Objective: CTS clearing rules utilize standardized two-digit numerical return reason codes (e.g., Code 01 for Insufficient Funds, Code 66 for Technical Failure). If the internal log reflects a technical code rather than Code 01, the presumption of financial default is shattered.
"Please inspect the certified Statement of Account for Accused's Account No. [X] on the date of presentation. Was the cleared balance at the clearing cut-off hour higher than the face amount of the cheque?"
Strategic Objective: Compels the bank official to admit under oath that the account held adequate credit funds, proving conclusively under Laxmi Dyechem that the drawer cannot be convicted under Section 138.
Statutory Authorities & Legal References
- Negotiable Instruments Act, 1881 (Section 138 - Dishonour of Cheque, Section 139 - Presumption in Favour of Holder, Section 146 - Presumption as to Bank's Slip)
- Bankers' Books Evidence Act, 1891 (Section 4 - Mode of Proof of Entries in Bankers' Books)
- Bharatiya Sakshya Adhiniyam, 2023 (Section 61 - Admissibility of Electronic Records & Section 63 - Electronic Record Certificate) [formerly Section 65B Evidence Act]
- Bharatiya Nagarik Suraksha Sanhita, 2023 (Section 94 - Summons to Produce Document) [formerly Section 91 CrPC]
- Supreme Court 3-Judge Bench in Modi Cements Ltd. v. Kuchil Kumar Nandi (1998) 3 SCC 249 (Scope of Cheque Dishonour Endorsements)
- Supreme Court Landmark in Laxmi Dyechem v. State of Gujarat and Ors. (2012) 13 SCC 375 (Exhaustive Analysis of Bank Return Memos)
- Supreme Court Ruling in Goaplast (P) Ltd. v. Chico Ursula D'Souza (2003) 3 SCC 232 (Stop Payment for Failure of Consideration)
- Reserve Bank of India (RBI) Guidelines on CTS Clearing & Return Memo Reason Codes
Disclaimer: This article is published strictly for academic and educational purposes under the Advocates Act, 1961. It does not constitute formal legal advice, solicitation, or advertisement under Rule 36 of the Bar Council of India Rules, nor does it create an advocate-client relationship. For case-specific legal counsel, readers should consult an independent advocate.
Frequently Asked Questions
Practical courtroom guidance and procedural answers curated by Senior Advocates in Delhi NCR.
Does 'Refer to Drawer' on a cheque return memo mean the cheque has bounced under Section 138?
Yes. Under the Supreme Court's authoritative ruling in Laxmi Dyechem v. State of Gujarat (2012), 'Refer to Drawer' is judicially recognized as a polite banking phrase for insufficiency of funds. Unless the drawer proves they had sufficient funds in the bank account on the presentation date, Section 138 criminal liability is fully attracted.
What is the legal presumption created by a bank return memo under Section 146 NI Act?
Section 146 provides that the trial court shall presume the fact of dishonour of the cheque upon production of the bank's return slip or memo bearing the bank's official mark or seal. The complainant is not required to call a bank manager to prove the bounce in the first instance.
Can an accused be acquitted if the cheque bounced as 'Refer to Drawer' due to a bank mistake?
Yes. If the accused can produce certified bank statements under the Bankers' Books Evidence Act and Section 61 BSA proving that their account had adequate cleared credit funds to honour the cheque on the date of presentation, the Section 138 presumption is rebutted and the accused must be acquitted, as the dishonour was an administrative error by the bank.
Can stop-payment instructions protect a drawer if the cheque is returned as 'Refer to Drawer'?
Only if the stop-payment was issued for a valid, justifiable cause (such as total failure of consideration, non-delivery of goods, or stolen cheque) AND the account actually maintained sufficient funds on the date of presentation. If the account had insufficient funds when stop-payment was issued, Section 138 liability remains fully intact under Modi Cements (1998).