Supreme Court clarifies the ‘legally enforceable debt’ under Section 138 of the Negotiable Instruments Act in cheque dishonor cases: Dashrathbhai Trikambhai Patel vs. Hitesh Mahendrabhai Patel & Anr. (2022) INSC 497 (11 October 2022)

Date of the Judgment: 11 October 2022
Citation: (2022) INSC 497
Judges: Dr Dhananjaya Y Chandrachud, J and Hima Kohli, J
Can a cheque issued as security for a loan still be valid if part of the loan has been repaid? The Supreme Court of India recently addressed this crucial question regarding the dishonor of cheques and the ‘legally enforceable debt’ under Section 138 of the Negotiable Instruments Act, 1881. The court clarified that a cheque must represent a legally enforceable debt at the time of its encashment for an offense to be made out under Section 138. This judgment has significant implications for how part-payments affect the validity of a cheque and the legal recourse available in cases of dishonor. The judgment was delivered by a two-judge bench comprising of Dr. Dhananjaya Y Chandrachud, J and Hima Kohli, J.

Case Background

The case revolves around a financial transaction between the appellant, Dashrathbhai Trikambhai Patel, and the first respondent, Hitesh Mahendrabhai Patel. On 16 January 2012, the appellant lent ₹20,00,000 to the first respondent. The first respondent issued a cheque dated 17 March 2014 for the same amount as security. When the cheque was presented on 2 April 2014, it was dishonored due to insufficient funds. The appellant then issued a statutory notice on 10 April 2014, demanding payment of the full ₹20,00,000.

The first respondent replied to the notice on 25 April 2014, stating that he had already repaid ₹4,09,315 between 8 April 2012 and 30 December 2013. He also claimed that the cheque was given as security and misused by the appellant. The first respondent later amended his reply on 19 May 2014, acknowledging a loan of ₹20,00,000 instead of the initially claimed ₹40,00,000.

The appellant filed a criminal complaint on 12 May 2014, under Section 138 of the Negotiable Instruments Act, 1881. The Trial Court acquitted the first respondent on 30 August 2016, stating that the appellant failed to prove that a legally enforceable debt of ₹20,00,000 was owed, given the partial repayment. The High Court of Gujarat upheld this acquittal on 12 January 2022, leading to the current appeal before the Supreme Court.

Timeline:

Course of Proceedings

The Trial Court acquitted the first respondent, noting that the appellant failed to prove a legally enforceable debt of ₹20,00,000 due to the partial payments made by the first respondent. The appellant appealed this decision to the High Court of Gujarat. The High Court allowed the first respondent to place on record an amended reply to the statutory notice as additional evidence. The High Court upheld the Trial Court’s decision, stating that the statutory notice was invalid as it did not reflect the part-payment made by the first respondent and the cheque was a security for the money lent. The High Court noted that the statutory notice issued under Section 138 of the Negotiable Instruments Act, 1881 was not valid as it did not acknowledge the part-payment made by the first respondent.

Legal Framework

The core of this case revolves around Section 138 of the Negotiable Instruments Act, 1881, which deals with the dishonor of cheques. The section states:

“138. Dishonour of cheque for insufficiency, etc., of funds in the account. —Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for [a term which may be extended to two years’], or with fine which may extend to twice the amount of the cheque, or with both:”

The explanation to Section 138 of the Negotiable Instruments Act, 1881, clarifies that “debt or other liability” means a legally enforceable debt or other liability. The section also includes provisos that outline the conditions that must be met for an offense to be deemed committed, including presenting the cheque within a specific timeframe, issuing a demand notice, and the drawer failing to make payment within 15 days of the notice.

Section 56 of the Negotiable Instruments Act, 1881, is also relevant, which states:

“56. Indorsement for part of sum due. – No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount has been partly paid a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance.”

Section 15 of the Negotiable Instruments Act, 1881, defines “indorsement” as when a maker or holder of a negotiable instrument signs the same for the purpose of negotiation.

Arguments

Appellant’s Submissions:

• The appellant argued that there is no evidence to show that the payment of ₹4,09,315 was specifically towards the debt of ₹20,00,000.
• The appellant contended that the payment of ₹4,09,315 was made before the issuance of the cheque and therefore, cannot be considered as part payment for the discharge of the liability.
• The appellant asserted that the first respondent did not make any payment of the sum due after the statutory notice was served.

First Respondent’s Submissions:

• The first respondent argued that the term ‘debt or other liability’ in Section 138 of the Negotiable Instruments Act, 1881, refers to a ‘legally enforceable debt or other liability’. Therefore, the demand in the statutory notice must be for a legally enforceable sum.
• The first respondent submitted that if a debtor has made a partial payment, a statutory notice demanding the entire sum without endorsing the partial payment is not legally sustainable.
• The first respondent contended that since a part of the debt was paid, the appellant cannot initiate action if the cheque representing the principal amount, without deducting or endorsing the part payment, is dishonored.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether Section 138 of the Negotiable Instruments Act, 1881, would be attracted when the drawer of a cheque makes a part-payment towards the debt or liability after the cheque is drawn but before the cheque is encashed, for the dishonor of the cheque which represents the full sum.

Additionally, the court also considered the validity of the statutory notice issued under Section 138 of the Negotiable Instruments Act, 1881, in cases where part-payment has been made.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered several cases to arrive at its decision:

Cases:

1. Indus Airways Private Limited v. Magnum Aviation Private Limited [(2014) 12 SCC 539] – The Supreme Court held that Section 138 of the Negotiable Instruments Act, 1881, applies only when there is a legally enforceable debt on the date the cheque is drawn.
2. Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited [(2016) 10 SCC 458] – The Supreme Court clarified that the test for Section 138 is whether there was a legally enforceable debt on the date mentioned in the cheque.
3. Sripati Singh v. State of Jharkhand [2021 SCC OnLine SC 1002] – The Supreme Court observed that a cheque issued as security matures for presentation if the debt is not repaid in any other form before the due date.
4. Sunil Todi v. State of Gujarat [Criminal Appeal No. 1446 of 2021] – The Supreme Court stated that ‘debt or other liability’ includes a sum of money promised to be paid on a future day by reason of a present obligation, and Section 138 also applies when the debt is incurred after the cheque is drawn but before it is presented.
5. NEPC Micon Ltd. v. Magna Leasing Ltd. [AIR 1995 SC 1952] – The Supreme Court emphasized that Section 138 must be interpreted with reference to the legislative intent to suppress the mischief and advance the remedy.
6. Suman Sethi v. Ajay K Churiwal [(2000) 2 SCC 38] – The Supreme Court held that the demand notice must be for the ‘said amount,’ i.e., the cheque amount.
7. KR Indira v. G. Adinarayana [(2003) 8 SCC 300] – The Supreme Court held that the notice must demand the payment of the cheque amount, not the loan amount.
8. Rahul Builders v. Arihant Fertilizers & Chemicals [(2008) 2 SCC 321] – The Supreme Court reiterated that the notice must demand the ‘said amount’ and an omnibus notice without specifying the cheque amount is not valid.

Other Authorities:

1. Joseph Sartho v. Gopinathan [(2008) 3 KLJ 784] – The Kerala High Court held that if the cheque was for a sum higher than the amount due on the date of presentation, the drawer cannot be convicted under Section 138 of the Negotiable Instruments Act, 1881.
2. Alliance Infrastructure Project Ltd. v. Vinay Mittal [ILR (2010) III Delhi 459] – The Delhi High Court held that when part payment is made after the cheque is drawn, the payee has the option of taking a new cheque or endorsing the part payment on the cheque.
3. Shree Corporation v. Anilbhai Puranbhai Bansal [(2018) 2 GLH 105] – The Gujarat High Court held a similar view as Delhi High Court.

Judgment

How each authority was viewed by the Court?

• The court followed the principle laid down in Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited [(2016) 10 SCC 458]* that there must be a legally enforceable debt on the date mentioned in the cheque.
• The court relied on Sripati Singh v. State of Jharkhand [2021 SCC OnLine SC 1002]* to clarify that a cheque issued as security matures for presentation if the debt is not repaid in any other form before the due date.
• The court used Sunil Todi v. State of Gujarat [Criminal Appeal No. 1446 of 2021]* to interpret the meaning of ‘debt or other liability’ to include a sum of money promised to be paid on a future day by reason of a present obligation.
• The court referred to Suman Sethi v. Ajay K Churiwal [(2000) 2 SCC 38]*, KR Indira v. G. Adinarayana [(2003) 8 SCC 300]*, and Rahul Builders v. Arihant Fertilizers & Chemicals [(2008) 2 SCC 321]* to highlight the importance of the demand notice being for the ‘said amount,’ i.e., the cheque amount.
• The court also took note of the judgments of the Kerala High Court in Joseph Sartho v. Gopinathan [(2008) 3 KLJ 784]* and the Delhi High Court in Alliance Infrastructure Project Ltd. v. Vinay Mittal [ILR (2010) III Delhi 459]*, which held that when part payment is made after the cheque is drawn, the payee has the option of either taking a new cheque or by making an endorsement on the cheque acknowledging that a part payment was made.

What weighed in the mind of the Court?

The Supreme Court emphasized that the core principle behind Section 138 of the Negotiable Instruments Act, 1881, is to ensure that a cheque represents a legally enforceable debt at the time of its encashment. The court was concerned with the misuse of cheques issued as security, especially when partial payments have been made. The court was also mindful of the need to balance the interests of both the drawer and the drawee of the cheque. The court aimed to prevent dishonest practices by either party, ensuring that the law serves its purpose of maintaining the integrity of negotiable instruments.

Logical Reasoning:

The court considered the argument that the purpose of Section 138 of the Negotiable Instruments Act, 1881, would be defeated if the dishonor of a security cheque is not included where part-payment is made. However, it rejected this argument, stating that the law provides a mechanism for dealing with part-payments through endorsement under Section 56 of the Negotiable Instruments Act, 1881. The court also noted that the notice demanding payment must be for the ‘said amount,’ which is the legally enforceable debt at the time of encashment, not the original amount on the cheque.

The Supreme Court held that for an offense under Section 138 to be made out, the cheque must represent a legally enforceable debt at the time of encashment. If a part-payment is made after the issuance of the cheque but before its encashment, the cheque does not represent the correct amount of the debt. The court emphasized the importance of endorsing part-payments on the cheque as per Section 56 of the Negotiable Instruments Act, 1881. If the cheque is presented without such endorsement, and it is dishonored, the offense under Section 138 is not attracted.

The court’s decision was unanimous, with both judges concurring in the judgment. There were no dissenting opinions.

The Supreme Court quoted the following from the judgment:

“The object of the NI Act is to enhance the acceptability of cheques and inculcate faith in the efficiency of negotiable instruments for transaction of business.”

“A cheque is issued as security to provide the drawee of the cheque with a leverage of using the cheque in case the drawer fails to pay the debt in the future.”

“For the commission of an offence under Section 138, the cheque that is dishonoured must represent a legally enforceable debt on the date of maturity or presentation.”

Key Takeaways

• A cheque must represent a legally enforceable debt at the time of encashment for an offense under Section 138 of the Negotiable Instruments Act, 1881, to be made out.
• If a part-payment is made after the issuance of the cheque but before its encashment, the cheque does not represent the correct amount of the debt.
• Part-payments must be endorsed on the cheque as per Section 56 of the Negotiable Instruments Act, 1881. If the cheque is presented without such endorsement and is dishonored, the offense under Section 138 is not attracted.
• The demand notice must be for the ‘said amount,’ which is the legally enforceable debt at the time of encashment, not the original amount on the cheque.

Directions

The Supreme Court dismissed the appeal against the judgment of the High Court of Gujarat, thereby upholding the acquittal of the first respondent.

Development of Law

The ratio decidendi of this case is that a cheque must represent a legally enforceable debt at the time of its encashment for an offense under Section 138 of the Negotiable Instruments Act, 1881, to be made out. This clarifies the position of law regarding security cheques and part-payments. This judgment also clarifies the interpretation of the term “debt or other liability” and the importance of endorsing part-payments on the cheque as per Section 56 of the Negotiable Instruments Act, 1881.

Conclusion

The Supreme Court’s judgment in Dashrathbhai Trikambhai Patel vs. Hitesh Mahendrabhai Patel & Anr. clarifies that for a cheque dishonor case to be valid under Section 138 of the Negotiable Instruments Act, 1881, the cheque must represent a legally enforceable debt at the time of encashment. This ruling protects debtors who make partial payments and ensures that the law is not misused to prosecute individuals when the actual debt is less than the amount stated on the cheque. The judgment emphasizes the importance of proper endorsement of part-payments on the cheque and the need for the demand notice to reflect the correct amount due.

Category

Parent Category: Negotiable Instruments Act, 1881
Child Category: Section 138, Negotiable Instruments Act, 1881
Child Category: Dishonor of Cheque
Child Category: Security Cheque
Child Category: Legally Enforceable Debt
Child Category: Part Payment
Child Category: Endorsement
Child Category: Demand Notice

FAQ

Q: What does Section 138 of the Negotiable Instruments Act, 1881, deal with?
A: Section 138 of the Negotiable Instruments Act, 1881, deals with the dishonor of cheques due to insufficient funds or other reasons. It provides for criminal penalties for such dishonor.

Q: What is a ‘legally enforceable debt’ in the context of Section 138?
A: A ‘legally enforceable debt’ is a debt that can be legally claimed and recovered. In the context of Section 138, the cheque must represent the actual amount of debt owed at the time of encashment.

Q: What happens if I make a partial payment after issuing a cheque but before it is encashed?
A: If you make a partial payment after issuing a cheque but before it is encashed, the cheque no longer represents the correct amount of debt. The payee should endorse the part payment on the cheque as per Section 56 of the Negotiable Instruments Act, 1881. If the cheque is presented without such endorsement and dishonored, you cannot be prosecuted under Section 138.

Q: What is the importance of endorsing part-payments on a cheque?
A: Endorsing part-payments on a cheque, as per Section 56 of the Negotiable Instruments Act, 1881, allows the cheque to be negotiated for the remaining balance. If the cheque is presented without proper endorsement and dishonored, the offense under Section 138 is not attracted.

Q: What should a demand notice under Section 138 of the Negotiable Instruments Act, 1881, contain?
A: A demand notice under Section 138 should demand the payment of the ‘said amount of money,’ which is the legally enforceable debt at the time of encashment. It should not demand the original amount of the cheque if a partial payment has been made.

Q: What is the significance of this judgment for the public?
A: This judgment clarifies the legal position on security cheques and part-payments, ensuring that individuals are not unfairly prosecuted under Section 138 when the actual debt is less than the amount stated on the cheque. It also highlights the importance of proper endorsement of part-payments and the need for the demand notice to reflect the correct amount due.