This article delves into the critical subject of part payment security cheque scenarios and their profound impact on cheque bounce cases under the Negotiable Instruments Act, 1881 (NI Act). We will explore how a security cheque bounce NI Act matter is affected when a portion of the debt is settled before the cheque's presentation. A key consideration is whether the cheque continues to represent a legally enforceable debt, a cornerstone for an offence under S138 NI Act part payment situations. Understanding this dynamic is vital, as cheque dishonour part payment can significantly alter the outcome of a security cheque S138 impact case, potentially leading to acquittal if the remaining debt does not match the cheque amount.
This analysis is based on a significant judgment by the Hon'ble Supreme Court of India, illuminating how part-payments can render a cheque, initially issued as security, not representative of the legally enforceable debt at the time of encashment, thereby affecting the applicability of Section 138 of the NI Act.
1 Brief Facts of the Case
The case involved an appellant, Dashrathbhai Trikambhai Patel, and the first respondent, Hitesh Mahendrabhai Patel. The appellant alleged that the first respondent borrowed a sum of ₹20 lakhs on January 16, 2012, and issued a cheque dated March 17, 2014, for the said amount to discharge this liability. This cheque (No. 877828) was dishonoured due to "insufficient funds" when presented on April 2, 2014. Consequently, the appellant issued a statutory notice on April 10, 2014, demanding payment of the ₹20 lakhs.
The first respondent, in his reply dated April 25, 2014, acknowledged a loan but initially stated it was ₹40 lakhs, which he later amended to ₹20 lakhs via another reply on May 19, 2014. He claimed the cheques were given for security. A crucial element was the first respondent's assertion that he had made part payments totaling ₹4,09,315 between April 8, 2012, and December 30, 2013, towards the ₹20 lakh debt. This part payment was acknowledged by the appellant during cross-examination.
2 Timelines of the Case
- January 16, 2012: Alleged date of borrowing ₹20 lakhs by the first respondent from the appellant. (Appellant also stated in testimony that a cheque was given by the respondent on this date ).
- April 8, 2012, to December 30, 2013: Period during which the first respondent made part payments totaling ₹4,09,315 to the appellant.
- March 17, 2014: Date of the cheque (No. 877828) for ₹20 lakhs issued by the first respondent, according to the appellant. (The first respondent contended the cheque was undated ).
- April 2, 2014: Cheque presented for encashment and dishonoured due to insufficient funds.
- April 10, 2014: Appellant issued a statutory notice under Section 138 of the NI Act to the first respondent demanding ₹20,00,000.
- April 25, 2014: First respondent replied to the statutory notice.
- May 12, 2014: Appellant filed a criminal complaint under Section 138 of the NI Act.
- May 19, 2014: First respondent issued an amended reply to the legal notice, changing the acknowledged loan sum from ₹40 lakhs to ₹20 lakhs.
- August 30, 2016: The Additional Chief Judicial Magistrate (Trial Court) acquitted the first respondent.
- October 11, 2018: High Court allowed the first respondent's application to place the amended reply (dated May 19, 2014) on record as additional evidence.
- January 12, 2022: The Hon'ble High Court of Gujarat dismissed the appellant's appeal, upholding the Trial Court's acquittal.
- October 11, 2022: The Hon'ble Supreme Court of India dismissed the appeal filed by the appellant.
3 Issues before Trial Court
Issue | Appellant's (Complainant) Version | First Respondent's (Accused) Version |
Whether the cheque for ₹20 lakhs represented a legally enforceable debt at the time of presentation. | Yes, the cheque was issued for the discharge of a ₹20 lakh liability. | No, part payments amounting to ₹4,09,315 had already been made towards the ₹20 lakh loan, reducing the actual debt. The cheque was given for security. |
Whether the offence under Section 138 of the NI Act was committed. | Yes, the cheque was dishonoured for insufficient funds, and the demanded amount was not paid despite the statutory notice. | No, since the cheque amount did not reflect the actual legally enforceable debt on the date of presentation, the offence is not made out. |
The Trial Court acquitted the first respondent, finding that he had paid ₹4,09,315 towards the debt, meaning the cheque for ₹20 lakhs did not represent the legally enforceable debt at the time of its deposit.
4 Issues Before the Hon'ble High Court of Gujarat
Issue | Appellant's (Original Complainant) Version | First Respondent's (Original Accused) Version |
Whether the Trial Court erred in acquitting the first respondent. | Yes, the Trial Court failed to appreciate that the offence under Section 138 was made out as the cheque was dishonoured. The part payments were not proven to be towards this specific debt. | No, the Trial Court correctly found that part payment had been made, and thus the cheque amount did not represent the legally enforceable debt. The statutory notice was also not valid. |
Validity of the statutory notice demanding the full cheque amount despite part payment. | The notice was valid as it demanded the "cheque amount". | The notice was an omnibus notice and not valid as it did not reflect the actual debt after part payment. |
Whether the sum of ₹4,09,315 was paid towards the discharge of the debt of ₹20 lakhs. | No record to show this specific linkage; payments were before cheque issuance (as per appellant's version of cheque date). | Yes, these payments were towards the loan, and this was accepted by the appellant in cross-examination. |
Whether the cheque, issued for security, could be presented for the full amount after part payment without endorsement. | The cheque was validly presented for the amount it carried. | The cheque, being for security, should have reflected the part-payment made, or a new cheque should have been taken. The undated cheque was misused. |
The Hon'ble High Court affirmed the Trial Court's finding that a part of the debt was discharged, and therefore the notice of demand under Section 138 was not valid as it was an omnibus notice for a sum higher than what was due.
5 Question of Law Framed by Hon'ble Supreme Court
The core issue before the Hon'ble Supreme Court was whether the offence under Section 138 of the Act would be deemed to be committed if the cheque that is dishonoured does not represent the enforceable debt at the time of encashment. More specifically, the Hon'ble Court considered 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 dishonour of the cheque which represents the full sum.
6 Versions of the Parties before the Hon'ble Supreme Court
Aspect | Appellant's (Original Complainant) Version | First Respondent's (Original Accused) Version |
Nature of payment of ₹4,09,315 | Nothing on record to show it was towards discharge of the ₹20 lakh debt. Payment was before the (alleged) issuance date of the cheque. | Part-payment made towards the debt. This reduced the legally enforceable debt to less than the cheque amount. |
Legally enforceable debt at time of encashment | The cheque represented the legally enforceable debt of ₹20 lakhs. | The legally enforceable debt was less than ₹20 lakhs due to part payments. |
Validity of statutory notice | The notice demanding the "cheque amount" of ₹20 lakhs was valid. | The statutory notice demanding the entire sum in the cheque, without endorsing the part-payment, was not legally sustainable. |
Implication of part-payment on Section 138 offence | Offence under Section 138 was made out as the cheque was dishonoured for the amount mentioned therein. Purpose of S.138 would be defeated if part payment absolved the drawer. | Since the cheque amount exceeded the actual debt at encashment time due to part payment, the offence under Section 138 is not attracted. The cheque did not represent a legally enforceable debt at encashment. |
7 Cited by the Hon'ble Judges (in the Judgment):
- Indus Airways Private Limited v. Magnum Aviation Private Limited (2014) 12 SCC 539: Regarding whether dishonour of post-dated cheques for 'advance payment' falls under S.138 if the purchase order is cancelled. Held S.138 applicable if legally enforceable debt subsists on the date cheque is drawn.
- Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited (2016) 10 SCC 458: On post-dated cheques given for security; test is whether legally enforceable debt existed on the date mentioned in the cheque.
- Sripati Singh v. State of Jharkhand 2021 SCC OnLine SC 1002: If a security cheque is issued and debt isn't repaid otherwise, the cheque matures for presentation and S.138 consequences follow upon dishonour. If loan is discharged before due date or situation altered, cheque shouldn't be presented.
- Sunil Todi v. State of Gujarat Criminal Appeal No. 1446 of 2021: 'Debt or other liability' includes sum promised for future payment due to present obligation; S.138 includes debts incurred after cheque drawing but before encashment.
- NEPC Micon Ltd. v. Magna Leasing Ltd. AIR 1995 SC 1952: S.138 must be interpreted to suppress mischief and advance remedy; enhance cheque acceptability.
- Rahul Builders v. Arihant Fertilizers & Chemicals (2008) 2 SCC 321: Notice demanding an amount higher than cheque amount (if not severable) is an omnibus notice and not valid. Demand must be for "payment of the said amount of money" i.e., cheque amount.
- Suman Sethi v. Ajay K Churiwal (2000) 2 SCC 380: Demand in notice has to be for "said amount" (cheque amount). If notice demands higher sum, validity depends on language; if cheque amount is severable from other claims (interest, costs), notice may be valid.
- KR Indira v. G. Adinarayana (2003) 8 SCC 300: Notice must demand cheque amount, not loan amount, for proviso (b) of S.138.
- Joseph Sartho v. Gopinathan (2008) 3 KLJ 784 (Kerala High Court): If cheque representation is for a sum higher than amount due at presentation, drawer cannot be convicted under S.138.
- Alliance Infrastructure Project Ltd. v. Vinay Mittal ILR (2010) III Delhi 459 (Delhi High Court): When part payment is made after cheque is drawn, payee can take new cheque or endorse part payment on original cheque per S.56. Notice for whole amount despite part payment is invalid.
- Shree Corporation v. Anilbhai Puranbhai Bansal [2018 (2) GLH 105] (Gujarat High Court): Similar view to Alliance Infrastructure.
8 Hon'ble Supreme Court Findings
The Hon'ble Supreme Court made several crucial findings:
1. Legally Enforceable Debt at Encashment: For an offence under Section 138, the cheque dishonoured must represent a legally enforceable debt on the date of maturity or presentation. If there's a material change in circumstances, such that the sum in the cheque does not represent a legally enforceable debt at maturity/encashment, the offence is not made out.
2. Impact of Part Payment: If the drawer pays a part or whole of the sum between when the cheque is drawn and when it's encashed, the legally enforceable debt on the date of maturity would not be the sum represented on the cheque.
3. Cheque Given for Security: The Hon'ble Court noted that the Trial and High Courts found the cheque was issued for security when the loan was borrowed. The payments of ₹4,09,315 were made after the loan was lent and were towards partly fulfilling this debt. The appellant admitted receiving these amounts and stated they were not a 'gift or reward'.
4. Debt at Time of Encashment: At the time of encashment, the first respondent did not owe ₹20 lakhs as represented in the cheque because of the prior part payments. Thus, the cheque did not represent the legally enforceable debt at that time.
5. Endorsement under Section 56: When a part-payment of the debt is made after the cheque is drawn but before it's encashed, such payment must be endorsed on the cheque as per Section 56 of the NI Act. The instrument could then be negotiated for the balance.
6. Presentation of Unendorsed Cheque: If an unendorsed cheque (where part payment has been made) is presented and dishonoured, the offence under Section 138 would not be attracted since the cheque does not represent a legally enforceable debt at the time of encashment.
7. Validity of Notice: While discussing the notice, the Hon'ble Court referred to precedents stating the demand under proviso (b) to Section 138 must be for the 'said amount of money', meaning the cheque amount. However, since the Hon'ble Court found that the offence under Section 138 was not made out because the cheque didn't represent a legally enforceable debt at encashment, it stated the validity of the form of the notice need not be decided in this specific case. The Hon'ble Court did note the High Court's finding that the notice was omnibus because it did not represent a legally enforceable debt.
9 Final Conclusion of the Hon'ble Supreme Court
The Hon'ble Supreme Court concluded that for the commission of an offence under Section 138 of the NI Act, the cheque that is dishonoured must represent a legally enforceable debt on the date of maturity or presentation. Since the first respondent had made part-payments after the debt was incurred and before the cheque was encashed, the sum of ₹20 lakhs represented on the cheque was not the 'legally enforceable debt' on the date of maturity. Therefore, the first respondent could not be deemed to have committed an offence under Section 138 of the Act when the cheque was dishonoured for insufficient funds.
The Hon'ble Court emphasized that when part payment is made, it must be endorsed on the cheque as per Section 56 of the Act, and the cheque can then be negotiated for the balance. Presenting the cheque for the original full amount without such endorsement, when the actual debt is lesser, does not attract an offence under Section 138.
Consequently, the Hon'ble Supreme Court dismissed the appeal, upholding the judgment of the Hon'ble High Court of Gujarat which had acquitted the first respondent.
10 Takeaway/Learning for the Parties from this Judgement
10.1 For the Drawer of the Cheque (Debtor/Accused):
- Importance of Documenting Part Payments: Always ensure any part payments made towards a debt (especially one for which a security cheque has been issued) are well-documented and communicated to the payee.
- Altered Situation Defence: If part payments have reduced the liability to less than the cheque amount before its presentation, this is a strong defence, as the cheque no longer represents the legally enforceable debt.
- Insist on Endorsement or New Cheque: If making a part payment, it's advisable to have the payee endorse the payment on the existing cheque (as per Section 56 ) or issue a fresh cheque for the remaining balance and take back the old one. This prevents misuse of the original cheque for the full amount.
- Reply to Statutory Notice: Clearly state any part payments in the reply to a statutory notice if the notice demands the full original cheque amount despite such payments.
10.2 For the Payee of the Cheque (Creditor/Complainant):
- Acknowledge and Endorse Part Payments: If part payment is received for a debt against which a cheque is held (especially a security cheque), it is crucial to acknowledge it. The correct procedure is to endorse the part payment on the cheque as per Section 56 of the NI Act before presenting it for the balance amount.
- Issue Valid Statutory Notice: The statutory notice under Section 138(b) must demand the actual 'legally enforceable debt' due at that time. If part payment has been received, demanding the full original cheque amount without accounting for the part payment can render the notice invalid and jeopardize the S.138 proceedings.
- Present Cheque for Correct Amount: A cheque should only be presented for the amount that is legally enforceable at the time of encashment. If a cheque for a higher amount (due to unacknowledged part-payments) is dishonoured, a S.138 case may fail.
- Consider Taking a Fresh Cheque: After a significant part payment, it might be prudent to obtain a fresh cheque from the drawer for the actual remaining legally enforceable debt to avoid complications.
- Avoid Dishonesty: The Hon'ble Supreme Court noted the legislative intent to prevent dishonesty by the drawer but also highlighted that the interpretation of Section 138 must not permit dishonesty by the drawee either. Attempting to encash a cheque for its full original amount despite receiving part payments could be viewed unfavorably.