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The bench of Dr. DY Chandrachud and Hima Kohli, JJ. in Dasrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel (Criminal Appeal No. 1497 of 2022) held that for the commission of an offence under Section 138 of the Negotiable Instruments Act of 1881 , the cheque that is dishonoured must represent a legally enforceable debt on the date of maturity or presentation in the case where the Supreme Court was asked to decide whether the offence under Section 138 of the Negotiable Instruments Act of 1881 would be deemed to have been committed if the cheque that is dishonoured does not represent the enforceable debt at the time of maturity or presentation.

Facts of the case

This appeal is based on a decision made by the High Court of Gujarat on January 12, 2022. The first respondent was acquitted of the offence under Section 138 of the Negotiable Instruments Act of 1881 [the Act] by the judgement of the Additional Chief Judicial Magistrate on August 30, 2016, which was the subject of the appeal that was filed against it. The appeal was dismissed by the High Court. The fundamental question is whether the Act’s Section 138 the Negotiable Instrument Acts of 1881 offence would be considered committed if the dishonoured check did not represent the enforceable debt at the time of encashment.

The appellant sent the first respondent-accused a statutory notice on April 10, 2014, in accordance with Section 138 of the Negotiable Instrument Acts of 1881 Act. It was alleged that on January 16, 2012, the first respondent borrowed twenty lakh rupees from the appellant and issued a check dated March 17, 2014, with check number 877828 for that amount. In addition, it was alleged that the check was declined due to insufficient funds when presented on April 2, 2014.

The first respondent sent a response to the statutory notice on April 25, 2014, in which he claimed the following:

(i) There is a connection between the appellant and the first respondent. The appellant’s son married the sister of the first respondent;

1. The first respondent received a loan from the appellant totaling forty lakh rupees. The parties agreed in writing that the first respondent would pay the appellant eighty thousand rupees in cash and one lakh rupees in checks every three months. The appellant received two checks as security. When the entire amount of the loan was paid in full, it was agreed that the appellant would return both checks;

iii) Divorce proceedings against the respondent’s sister were initiated by the appellant’s son. However, the appellant still possesses the dowry that was given to her at the time of their marriage;(iv) The appellant has abused the security checks that were issued to him.

Under Section 138 of the Negotiable Instrument Acts of 1881, the appellant filed a criminal complaint against the first respondent on May 12, 2014, for the offense. The first respondent responded to the legal notice once more on May 19, 2014. The aforementioned response sought to amend the previous response to the legal notice by changing the acknowledgment of receiving a loan of forty lakh rupees to twenty lakh rupees.

The Trial Court found the first respondent not guilty of the crime under Section 138 of the Negotiable Instrument Acts of 1881 on the grounds that the first respondent paid the appellant a sum of rupees 4,09,3015 between April 8, 2012 and December 30, 2013, partially releasing him from his responsibility for the debt of twenty lakh rupees.

The appellant presented an appeal to the High Court of Gujarat challenging the verdict of the trial court. The first respondent filed an application with the High Court of Gujarat on October 10, 2019, to record the amended response from May 19, 2014. The High Court granted the request to record the additional evidence in an order dated October 11, 2018. By dismissing the appeal on January 12, 2022, the High Court upheld the Trial Court’s decision to acquit the first respondent. The High Court upheld the Trial Court’s finding of fact that the notice of demand issued under Section 138 of the Negotiable Instrument Acts of 1881 was invalid because a portion of the debt owed by the first respondent to the appellant was discharged. The following findings were entered during the analysis:

(i) During cross-examination, the appellant admitted that the first respondent had deposited Rs. 4,09,315 into his bank account.

(ii) According to the law, the amount drawn on a cheque is presumed to be a debt or liability owed by the drawee to the drawer. The appellant’s statutory notice ought to have mentioned the part-payment made by the first respondent. The amount in the check is higher than what the appellant was supposed to get. As a result, Section 138’s statutory notice is invalid. Because it did not recognise the partial payment that was made, it is an omnibus notice. (iii) The check served as collateral for the money that the appellant had loaned. The bank received the undated check without acknowledging the partial payment that had already been made.

The arguments of counsel for the appellant, Mr. Mehmood Umar Faruqui, asserted that:

(i) There is no evidence to suggest that the payment of Rs. 4,09,315 was made to clear the debt of Rs. 20,00,000.

(ii) The payment of Rs. 4,09,315 occurred prior to the cheque’s issuance;(iii) Since the statutory notice was served on the first respondent on April 15, 2014, no payment of the due amount has been made.

On behalf of the first respondent, senior counsel Mr. Nakul Dewan made the following statements:

(i) The Explanation clause provides a definition of the term “legally enforceable debt or other liability” used in Section 138 of the Act. As a result, the statutory notice’s monetary demand must be legally enforceable.

(ii) If the debtor has paid a portion of the debt, a statutory notice seeking payment of the entire amount in the cheque without any endorsement under Section 56 of the part-payment made would not be legally enforceable; (iii) The appellant cannot take legal action if the cheque that represented the principal amount without deducting or endorsing a part payment has been dishonoured because the first respondent has paid a portion of the debt.

Judgement

The Court went on to say that the legally enforceable debt on the date of maturity would not be the amount represented on the cheque if the cheque’s drawer paid part or all of the amount between when the cheque was drawn and when it was cashed at maturity.

According to the requirements of Section 56 of the Act, the check must be endorsed with the payment, whether a portion or the entire amount represented on the check is paid by the drawer. When negotiating the remaining balance, if any, the check endorsed with the payment may be utilized. The violation of Section 138 will be committed if the endorsed check is rejected when it is requested to be cashed at maturity.

An endorsement can be made in accordance with Section 56 and Section 15 of the Negotiable Instrument Acts of 1881 by recording the partial payment of the debt on the cheque or in a note attached to the cheque. The instrument could still be used to negotiate the balance amount when such an endorsement is made. The drawee has recourse to Section 138 of the Negotiable Instrument Acts of 1881 in the event that the endorsed check presented for encashment of the balance amount is dishonoured. According to Section 56 of the Negotiable Instrument Acts of 1881, a partial payment of the debt must be endorsed on the check when it is made after the check has been drawn but before it is cashed. The cheque cannot be presented for cash without recording the part payment. Since the unendorsed check does not represent a debt that is legally enforceable at the time of encashment, the offence under Section 138 of the Negotiable Instrument Acts of 1881 would not apply if it is dishonoured upon presentation.

The respondent had made partial payments after the debt was incurred but before the check was cashed at maturity, and the court was deciding the case. On the date of maturity, the “legally enforceable debt” represented on the check was not the sum of twenty lakh rupees. As a result, it was decided that the respondent could not be considered to have broken the Act’s Section 138 of the Negotiable Instrument Acts of 1881 when the check was rejected because there were insufficient funds.

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JUDGEMENT REVIEWED BY ROLI NAYAN.

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