Section 138 NI Act | Cheque Dishonoured Must Represent Legally Enforceable Debt On Date of Presentation- SC

The Bench of Justice DY Chandrachud and Justice Hima Kohli also observed that if the drawer of the cheque pays a part or whole of the sum between the period when the cheque is drawn and when it is encashed upon maturity, then the legally enforceable debt on the date of maturity would not be the sum represented on the cheque.

In this case, the Appellant had assailed the judgment of the Gujarat High Court which had dismissed the appeal against the judgment of the Additional Chief Judicial Magistrate by which the First Respondent was acquitted for the offence under Section 138 NI Act.

The Appellant had issued a statutory notice under Section 138 NI Act to the first Respondent – Accused. It was alleged that the first Respondent had borrowed a sum of Rs. 20 lakhs from the Appellant and had issued a cheque to discharge the liability for the said sum. It was further alleged that when the cheque was presented it was dishonored due to insufficient funds. The Appellant issued the notice calling the first Respondent to pay the legally enforceable debt of Rs 20 lakhs.

The Trial Court had acquitted the first Respondent of the offence on the ground that the first Respondent paid the Appellant a sum of Rs. 4,09,315 and had partly discharged the liability in respect of the sum of Rs. 20 lakhs. The Court had also observed that the Appellant had failed to prove that he was owed a legally enforceable debt of Rs. 20 lakhs.

The Appellant then filed an appeal before the Gujarat High Court which was dismissed and upheld the judgment of the Trial Court acquitting the first Respondent.

The issue dealt with by the Apex Court was –

• Whether the offence under Section 138 of the Act would deem to be committed if the cheque that is dishonored does not represent the enforceable debt at the time of encashment.

Counsel Mehmood Umar Faruqui appeared for the Appellant while Senior Counsel Nakul Dewan appeared for the first Respondent before the Court.

The Court while referring to Section 138 NI Act noted that a drawer of a cheque is deemed to have committed the offence if the following ingredients are fulfilled: A cheque drawn for the payment of any amount of money to another person; (ii) The cheque is drawn for the discharge of the 'whole or part' of any debt or other liability. 'Debt or other liability' means legally enforceable debt or other liability, and (iii) The cheque is returned by the bank unpaid because of insufficient funds.

The Court also referred to the proviso to Section 138 NI Act and noted that unless the stipulations contained therein are fulfilled the offence is not deemed to have been committed.

The Bench further placed reliance on various precedents and noted-

"Where the borrower agrees to repay the loan within a specified timeline and issues a cheque for security but defaults in repaying the loan within the timeline, the cheque matures for presentation. When the cheque is sought to be encashed by the debtor and is dishonoured, Section 138 of the Act will be attracted; However, the cardinal rule when a cheque is issued for security is that between the date on which the cheque is drawn to the date on which the cheque matures, the loan could be repaid through any other mode. It is only where the loan is not repaid through any other mode within the due date that the cheque would mature for presentation; and If the loan has been discharged before the due date or if there is an 'altered situation', then the cheque shall not be presented for encashment."

The Court observed that if there has been a material change in the circumstance such that the sum in the cheque does not represent a legally enforceable debt at the time of maturity or encashment, then the offence under Section 138 is not made out.

The Bench thus summarized the following-

"i) 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;

ii) The drawer of the cheque pays a part or whole of the sum between the period when the cheque is drawn and when it is encashed upon maturity, then the legally enforceable debt on the date of maturity would not be the sum represented on the cheque;

iii) When a part or whole of the sum represented on the cheque is paid by the drawer of the cheque, it must be endorsed on the cheque as prescribed in Section 56 of the Act. The cheque endorsed with the payment made may be used to negotiate the balance, if any. If the cheque that is endorsed is dishonoured when it is sought to be encashed upon maturity, then the offence under Section 138 will stand attracted."

Accordingly, the Court dismissed the appeal.

Cause Title - Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel & Anr.

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