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WHETHER DISHONOR OF POST DATED CHEQUE ISSUED AS SECURITY WILL BE COVERED UNDER THE NEGOTIABLE INSTRUMENTS ACT, 1881?

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WHETHER DISHONOR OF POST DATED CHEQUE ISSUED AS SECURITY WILL BE COVERED UNDER THE NEGOTIABLE INSTRUMENTS ACT, 1881?
Mr. M. GOVINDARAJAN By: Mr. M. GOVINDARAJAN
November 24, 2022
All Articles by: Mr. M. GOVINDARAJAN       View Profile
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Dishonor of cheque

Section 138 of the Negotiable Instruments Act, 1881 (‘Act’ for short) provides 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.
  • 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.
  • The cheque is returned by the bank unpaid because of insufficient funds.

 The offence under Section 138 of the Act is not deemed to be committed if the following conditions are fulfilled-

  • The cheque must be presented in the bank within six months from the date on which it was drawn or within the period of its validity;
  • The holder of the cheque must make a demand for the payment of the ‘said amount of money’ by giving a notice in writing to the drawer of the cheque within thirty days from the receipt of the notice from the bank that the cheque was returned dishonored; and
  • The holder of the cheque fails to make the payment of the ‘said amount of money’ within fifteen days from the receipt of the notice.

Legally enforceable debt

In M/S. INDUS AIRWAYS PVT. LTD. & OTHERS VERSUS M/S. MAGNUM AVIATION PVT. LTD. & ANOTHER - 2014 (4) TMI 464 - SUPREME COURT, the issue before a two-Judge Bench of the Supreme  Court was whether dishonor of post-dated cheques which were issued by the purchasers towards ‘advance payment’ would be covered by Section 138 of the Act if the purchase order was cancelled subsequently. It was held that Section 138 would only be applicable where there is a legally enforceable debt subsisting on the date when the cheque is drawn.

In SAMPELLY SATYANARAYANA RAO VERSUS INDIAN RENEWABLE ENERGY DEVELOPMENT AGENCY LIMITED - 2016 (9) TMI 867 - SUPREME COURT, the respondent advanced a loan for setting up a power project and post-dated cheques were given for security. The cheques were dishonored and a complaint was instituted under Section 138. Distinguishing Indus Airways (supra), it was held that the test for the application of Section 138 is whether there was a legally enforceable debt on the date mentioned in the cheque. It was held that if the answer is in the affirmative, then the provisions of Section 138 would be attracted.

Debt or other liability

In SUNIL TODI & ORS. VERSUS STATE OF GUJARAT & ANR. - 2021 (12) TMI 175 - SUPREME COURT, a two judge Bench of the Supreme  Court expounded the meaning of the phrase ‘debt or other liability’. It was observed that the phrase takes within its meaning a ‘sum of money promised to be paid on a future day by reason of a present obligation’. The court observed that a post-dated cheque issued after the debt was incurred would be covered within the meaning of ‘debt’. The court held that Section 138 would also include cases where the debt is incurred after the cheque is drawn but before it is presented for encashment.

Security

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. Therefore, cheques are issued and received as security with the contemplation that a part or the full sum that is addressed in the cheque may be paid before the cheque is encashed.

In SRIPATI SINGH (SINCE DECEASED) THROUGH HIS SON GAURAV SINGH VERSUS THE STATE OF JHARKHAND & ANR. - 2021 (11) TMI 66 - SUPREME COURT, the Supreme Court held as below-

  • 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 dishonored, Section 138 of the Act will be attracted.
  •  However, the cardinal rule when a cheque is issued for security is that between the dates 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.
  • 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.

In DASHRATHBHAI TRIKAMBHAI PATEL VERSUS HITESH MAHENDRABHAI PATEL & ANR. - 2022 (10) TMI 424 - SUPREME COURT, the first respondent borrowed a sum of Rs.20 lakhs from the appellant on 16 January 2012.  To discharge the liability the first respondent issued a cheque dated 17.03.2014 bearing cheque No. 877828 for the said sum.   The cheque when presented on 02.04.2014 was dishonored due to insufficient funds.  The appellant issued the notice calling the first respondent to pay the legally enforceable debt of Rs. 20,00,000/-    The first respondent addressed a response to the statutory notice on 25.04.2014.  In his reply the first respondent indicated-

  • The first respondent and the appellant are related to each other. The appellant’s son married the first respondent’s sister.
  • The appellant lent the first respondent a loan of Rs.40 lakhs. There was an oral agreement between the parties that the first respondent would pay Rs.1 lakh every 3 months by cheque and Rs.80,000/- in cash to the appellant. Two cheques were given to the appellant for security. It was agreed that the appellant would return both the cheques when the sum lent was paid in full.
  •  The appellant’s son-initiated divorce proceedings against the respondent’s sister. However, the dowry that was given at the time of marriage is still in the possession of the appellant; and
  • The cheques that were issued for security have been misused by the appellant.

The appellant filed a criminal complaint against the first respondent for the offence under Section 138 of the Act on 12.05.2014.  On 19.05.2014, the first respondent issued another reply to the legal notice in which the earlier reply to the legal notice was sought to be amended by replacing the acknowledgment of having received a loan of Rs.40 lakhs to Rs.20 lakhs.

The Trial Court acquitted the first respondent on the ground that the first respondent paid the appellant a sum of Rs. 4,09,3015 between 08.04.2012 and 30.12.2013 partly discharging his liability in respect of the debt of Rs.20 lakhs.  The Trial Court observed that the appellant has failed to prove that he was owed a legally enforceable debt of Rs.20 lakhs. 

The appellant filed an appeal against the judgment of the Trial Court before the High Court of Gujarat.   The High Court by its judgment dated 12.01.2022 dismissed the appeal upholding the judgment of the Trial Court acquitting the first respondent. The High Court affirmed the finding of fact by the Trial Court that a part of the debt owed by the first respondent to the appellant was discharged and thus the notice of demand issued under Section 138 of the Act is not valid.  The High Court found the following-

  • The appellant has in the course of his cross-examination accepted that the first respondent had deposited rupees 4,09,315 in his account.
  • There is a statutory presumption that the sum drawn in the cheque is a debt or liability that is owed by the drawer of the cheque to the drawee. The part payment made by the first respondent ought to have been reflected in the statutory notice issued by the appellant. The sum in the cheque is higher than the amount that was due to the appellant. Thus, the statutory notice issued under Section 138 is not valid. It is an omnibus notice since it did not recognize the part-payment that was made.
  • The cheque was a security for the money lent by the appellant. The undated cheque was presented to the bank without recognizing the part- payment that was already made.

Against this order the appellant filed the present appeal before the Supreme Court. 

The appellant submitted the following before the Supreme Court-

  • There is nothing on record to show that the payment of Rs.4,09,315/- was made towards the discharge of the debt of Rs.20 lakhs.
  • The payment of Rs.4,09,315/- was before the issuance of the cheque.
  • The first respondent did not make any payment of the sum that was due since the statutory notice that was served upon him on 15.04.2014.
  • The purpose of Section 138 of the Act would be defeated if the dishonor of the cheque issued for security is not included within the purview of Section 138 where the payment of a part of the cheque amount is made.
  •  It would lead to a possibility where the drawer of the cheque could evade prosecution under Section 138 by paying a small amount of the debt while defaulting on the remaining payment.

The first respondent submitted the following before the Supreme Court-

  • The term ‘debt or other liability’ used in Section 138 of the Act has been defined in the Explanation clause to mean a ‘legally enforceable debt or other liability’. Thus, the demand made in the statutory notice must be for a sum that is legally enforceable;
  • If the debtor has paid a part of the debt, a statutory notice seeking the payment of the entire sum in the cheque without any endorsement under Section 56 of the part-payment made would not be legally sustainable.
  • Since the first respondent has paid off a part of the debt, the appellant cannot initiate action if the cheque which represented the principal amount without deducting or endorsing a part payment has been dishonored.
  • The offence under Section 138 was not committed since the amount that was payable to the appellant, as on the date the cheque was presented for encashment, was less than the amount that was represented in the cheque.

The Supreme Court considered the submissions made by the parties to the present appeal.  The question  before the Supreme Court is  whether Section 138 of the Act would still be attracted when the drawer of the 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.

The Supreme Court observed that the appellant in his cross examination conducted on 17.02.2016 has categorically mentioned that he did not take any receipt on lending Rs. 20 lakhs to the first respondent. The appellant stated that a ‘cheque against the cheque’ was given.  Further the appellant stated that the amount that was paid by the first respondent was not paid as a reward or gift.  It was conclusively held that the cheque was issued by the first respondent for security on the date when the loan was borrowed. It was also categorically recorded by the Courts below that a sum of rupees 4,09,315 that was paid by the first respondent was paid to partly fulfill the debt of rupees twenty lakhs.  The Supreme Court held that at the time of the encashment of the cheque, the first respondent did not owe a sum of Rs.20 lakhs as represented in the cheque at the time of encashment of the cheque that was issued for security.

The Supreme Court summarized its findings as below-

  • For the commission of an offence under Section 138, the cheque that is dishonored must represent a legally enforceable debt on the date of maturity or presentation.
  • 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.
  • 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 dishonored when it is sought to be encashed upon maturity, then the offence under Section 138 will stand attracted.
  • The first respondent has made part-payments after the debt was incurred and before the cheque was encashed upon maturity. The sum of rupees twenty lakhs represented on the cheque was not the ‘legally enforceable debt’ on the date of maturity. Thus, the first respondent cannot be deemed to have committed an offence under Section 138 of the Act when the cheque was dishonored for insufficient funds.
  • The notice demanding the payment of the ‘said amount of money’ has been interpreted by judgments of this Court to mean the cheque amount. The conditions stipulated in the provisos to Section 138 need to be fulfilled in addition to the ingredients in the substantive part of Section 138. Since in this case, the first respondent has not committed an offence under Section 138, the validity of the form of the notice need not be decided.

The Supreme Court dismissed the appeal.

 

By: Mr. M. GOVINDARAJAN - November 24, 2022

 

 

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