Section 138 NI Act Attracted Even In Cases Where Debt Is Incurred After Cheque Is Drawn But Before Presentation: Supreme Court

The Supreme Court observed that Section 138 of Negotiable Instruments Act is attracted in cases where debt is incurred after the drawing of the cheque but before its encashment.

The true purpose of Section 138 would not be fulfilled, if 'debt or other liability' is interpreted to include only a debt that exists as on the date of drawing of the cheque, the bench comprising Justices DY Chandrachud and AS Bopanna observed.

The court added that merely labelling the cheque as a security would not obviate its character as an instrument designed to meet a legally enforceable debt or liability.

One of the issues considered in this appeal was whether the dishonor of a cheque furnished as a 'security' is covered under the provisions of Section 138 of the NI Act? The appellants in this case contended that a complaint under Section 138 of the NI Act would not be maintainable since the cheque in question was issued by way of a security and, is thus not against a legally enforceable debt or liability. ? They relied on a Supreme Court judgment in Indus Airways Private Limited v. Magnum Aviation Private Limited (2014) 12 SCC 539.

The court noticed that a later judgments in Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited (2016) 10 SCC 458 and Sripati Singh v. State of Jharkhand LL 2021 SC 606 has distinguished the judgment in Indus Airways.  In Sampelly and Sripati Singh, post-dated cheques were issued as a security for loan installments that were due. On the dates on which the cheques were drawn, there was an outstanding debt, the court noted.

Referring to the meaning of debt, the court observed that a post-dated cheque issued after the debt has been incurred would be covered by the definition of 'debt'. It said:

26. The object of the NI Act is to enhance the acceptability of cheques and inculcate faith in the efficiency of negotiable instruments for transaction of business. The purpose of the provision would become otiose if the provision is interpreted to exclude cases where debt is incurred after the drawing of the cheque but before its encashment. In Indus Airways, advance payments were made but since the purchase agreement was cancelled, there was no occasion of incurring any debt. The true purpose of Section 138 would not be fulfilled, if 'debt or other liability' is interpreted to include only a debt that exists as on the date of drawing of the cheque. Moreover, Parliament has used the expression 'debt or other liability'. The expression "or other liability' must have a meaning of its own, the legislature having used two distinct phrases. The expression 'or other liability' has a content which is broader than 'a debt' and cannot be equated with the latter. In the present case, the cheque was issued in close proximity with the commencement of power supply. The issuance of the cheque in the context of a commercial transaction must be understood in the context of the business dealings. The issuance of the cheque was followed close on its heels by the supply of power. To hold that the cheque was not issued in the context of a liability which was being assumed by the company to pay for the dues towards power supplied would be to produce an outcome at odds with the business dealings. If the company were to fail to provide a satisfactory LC and yet consume power, the cheques were capable of being presented for the purpose of meeting the outstanding dues."

The court noted that, in the present case, a debt was incurred after the respondent began supply of power for which payment was not made because of the non-acceptance of the LCs'.

"A cheque may be issued to facilitate a commercial transaction between the parties. Where, acting upon the underlying purpose, a commercial arrangement between the parties has fructified, as in the present case by the supply of electricity under a PSA, the presentation of the cheque upon the failure of the buyer to pay is a consequence which would be within the contemplation of the drawer. The cheque, in other words, would in such an instance mature for presentation and, in substance and in effect, is towards a legally enforceable debt or liability.", the court added while dismissing the appeal.

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