The Supreme Court in its judgement in Dashrathbhai Trikambhai Patel v. Hitesh Mahenrabhai Patel. (Crl. A. No. 1479/2022), dealt the issue regarding whether the offence under Section 138 of the Negotiable Instruments Act, 1881 (“the Act”) would deem to be committed if the cheque that is dishonoured does not represent the enforceable debt at the time of encashment.

Brief Facts:

1. It was alleged that the first Respondent-accused borrowed a sum of Rs. 20,00,000/- from the Appellant on January 16, 2012, and to discharge the liability, issued a cheque dated March 17, 2014 for the said sum.
2. It was further alleged that the cheque when presented on April 2, 2014 was dishonoured due to insufficient funds.
3. The Appellant on April 10, 2014 issued a statutory notice under Section 138 of the Act calling the first Respondent to pay the legally enforceable debt of Rs. 20,00,000/-.
4. On April 25, 2014, the first Respondent addressed a response to the statutory notice where he alleged inter alia the following:
   • The first Respondent and the Appellant were related to each other. The Appellant’s son married the first Respondent’s sister.
   • The Appellant lent the first respondent a loan of rupees forty lakhs. There was an oral agreement between the parties that the first respondent would pay rupees one lakh every three months by cheque and rupees eighty thousand 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.
      
5. On May 12, 2014, the Appellant filed a criminal complaint against the first Respondent for the offence under Section 138 of the Act.
6. By a judgment dated August 30, 2016, the Trial Court acquitted the first Respondent of the offence under Section 138 of the Act on the ground that the first Respondent paid the Appellant a sum of Rs. 4,09,3,015 between April 8, 2012 and December 2013 partly discharging his liability in respect of the debt of Rs. 20,00,000/-.
7. Further, the Trial Court in its judgment observed that the Appellant had failed to prove that he was owed a legally enforceable debt of Rs. 20,00,000/.
8. Thereafter, the Appellant filed an appeal against the judgment of the Trial Court before the High Court of Gujarat.
9. The High Court by its judgment dated January 2022, dismissed the Appeal, thereby upholding the judgment of 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. In the course of the analysis, the following findings were entered:
   • The Appellant has in the course of his cross-examination accepted that the first Respondent had deposited Rs.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 recognise the part-payment that was made; and
   • The cheque was a security for the money lent by the Appellant. The undated cheque was presented to the bank without recognising the part-payment that was already made.
      
10. As a result, the present Appeal was filed before the Supreme Court of India by the Appellant.

Observations by the Court:

The Supreme Court observed that the sum reflected on the cheque must be a ‘legally enforceable debt’ as per Section 138 of the Act, when it has been presented for encashment and must endorse the part-payment made by the individual. While coming to such a conclusion, the Supreme Court laid specific emphasis on the wording of Section 138 and Section 56 of the Act. The Supreme Court relied upon its decision in Sunil Today v. State of Gujarat, wherein the two-judge Bench, expounded the meaning of the phrase, “debt or other liability”, as mentioned under Section 138 of the Act. 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. The judgment indicated that much of the analysis on whether post-dated cheques issued as security would fall within the purview of Section 138 of the Act hinges on the relevance of time.

Consequently, the Supreme Court in the present Appeal observed that Sections 138 and 56 mandate that when a part-payment of the debt is made after the cheque was drawn but before the cheque is encashed, such payment must be endorsed on the cheque under Section 56 of the Act, 1881. As such, the cheque cannot be presented for encashment without recording the part payment, and such an endorsement can be made by a) recording the part payment, or b) the debt in the cheque or a note appended to the cheque. In consequence, if the unendorsed cheque is dishonoured on presentation, the offence under Section 138 would not be attracted since the cheque does not represent a legally enforceable debt at the time of encashment.

Furthermore, the Supreme Court also laid specific emphasis on the High Court of Kerela Division Bench’s case of Joseph Sartho v. Gopinathan, that since “the representation in the cheque was for a sum higher than the amount that was due on the date that it was presented for encashment, the drawer of the cheque cannot be convicted for the offence under Section 138 of the Act, 1881.”

The Court further observed that the first Respondent has made part payments after the debt was incurred and before the cheque was encashed upon maturity. The Hon’ble Court arrived at a conclusion that the sum of Rs.20,00,000/- represented on the cheque, as such, was not a legally enforceable debt on the date of the maturity.

Decision of the Court:

The Supreme Court’s findings are summarised as follows:

1. For the commission of an offence under Section 138, the cheque that is dishonoured must represent a “legally enforceable debt” on the date of the maturity or presentation;
2. 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;
3. 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, 1881. The cheque endorsed with the payment made may be used to negotiate the balance, if any.

In nutshell, the Court observed that where part-payments are made before the encashment of the cheque, the drawee must endorse the cheque and can use the endorsed cheque for negotiation of the balance, if any.

Please find a copy of the judgement, here.

This update has been contributed by Murtaza Kachwalla (Partner) and Jaisha Sabavala (Associate).

Argus Knowledge Centre is now on WhatsApp! Send us a message on +91 8433523504 to receive updates from our Knowledge Centre.