The Ambit of Section 138 of the NI Act: Dashrathbhai Trikambhai Patel Versus Hitesh Mahendrabhai Patel & Ors

17th January, 2023 - 6:35 am Categories: Legal Issues 0 Comments

Introduction

In general sense if the payee is unable to deposit the payer’s cheque, the cheque is considered to be dishonoured. Mismatch of signature, insufficient funds, date on the cheque, damaged cheque, overwriting are some of the common reasons that lead to dishonour of cheque. The principal conception behind the incorporation of section 138 of the NI Act, 1881 was to enhance the banking sector’s efficiency and ensuring the legitimacy of the cheques employed in banking transactions but the extent of the application of this section has never been a cake walk for the courts. A bench comprising Justice DY Chandrachud and Justice Hima Kohli made a remarkable decision in a recent case of Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel and others[1] basing on some notable points:

1. The dishonoured cheque must reflect a legally enforceable debt on the date of maturity or presentation, for it to constitute a violation of Section 138.
2. If the drawer pays whole or a part of the sum within the time when the cheque is drawn and when it is encashed upon maturity, then the sum represented on the cheque would not be same as the legally enforceable debt on the date of maturity.
3. In case a whole or a part of the sum represented on the cheque is already paid by the drawer, then it must be endorsed on the cheque as per section 56 of the NI act. If the endorsed cheque is dishonoured when encashed on maturity only then section 138 of NI Act will come to light.

Facts

In the case at hand, the accused made a part payment before the cheque was presented for encashment and after the debt was incurred. The cheque represented Rupees 20 lakhs which was not the legally enforceable debt on the date of maturity as the borrower made a part payment of Rs. 4,09,315/- to the drawer of the cheque, thereby not attracting an offence under section 138 of the NI Act.

Decision

The Hon’ble Supreme Court dismissed the appeal filed against the judgement of the Hon’ble Gujarat High Court. The court further noted that in such context, the complaint under section 138 of NI Act is not sustainable even when the cheque gets dishonoured after presenting for the full amount because the legally enforceable debt is not represented at the time of encashment.

Analysis

The court relied upon the judgement of the case Indus Airways Private Limited v Magnum Aviation Private Limited[2] which talks about the dishonour of the post-dated cheques. This case elucidates the fact that section 138 of the NI Act is only applicable in a circumstance where a legally enforceable debt persists on the date when the cheque is drawn. In another case of Sampelly Satyanarayana Rao v. India Renewable Energy Development Agency Limited[3], the respondent took a loan for setting up a power project and gave post-dated cheques for security. The cheques were then dishonoured and a complaint was instituted under section 138 of the NI Act. In contrast with the Indus Airways case, it was held that the yardstick for the application of section 138 is whether there was a legally enforceable debt on the date mentioned in the cheque or not. If yes, then Section 138 would be attracted. Moreover, in case of a loan if the borrower agrees to pay it back within a certain period of time and issues a cheque as security to secure that repayment provided the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque issued as security would mature for presentation and the drawee of the cheque would be entitled to present the cheque.

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It is evident to understand that a cheque which is issued as a security can never be repaid before the instalment matures for repayment towards which the cheque is issued. The borrower would also have the option of paying back the loan balance or the financial obligation in any other way, and in that case, if the loan balance has been paid off in full within the specified time frame, the cheque issued as security cannot afterwards be submitted. As a result, in order to avoid presenting the cheque that was issued as security, the loan must have already been paid off or the circumstances must have changed enough so that the parties may come to an agreement.

The court went on to apply the mischief rule of interpretation as per held in the case NEPC Micon Ltd. v. Magna Leasing Ltd.[4] The court in this case stressed on the fact that section 138 of the NI Act must be interpreted with reference to the legislative intent to supress the mischief and advance the remedy. Moreover, the purpose of the Act in general and Section 138 in particular is to increase the acceptance of cheques and foster belief in the viability of negotiable instruments for business transactions.

Conclusion

Hence, the court after looking at the entire matter in detail landed at such a landmark judgment that says that a cheque may be endorsed in accordance with Sections 56 and 15 of the NI Act by noting the partial payment of a debt on the cheque itself or in a note that is attached to the cheque. The instrument may still be utilised to negotiate the balance amount after such an endorsement is made. The drawee may use the provisions of Section 138 if the endorsed cheque is dishonoured when it is offered for payment of the remaining sum. As a result, Section 56 of the NI Act requires that a part-payment of the debt that is made after the cheque was drawn but before the cheque is encashed such payments if made be endorsed on the cheque. Without registering the partial payment, the cheque cannot be presented for encashment. The offence under Section 138 would not be incurred if the unendorsed cheque is dishonoured when presented. 

Author: Abhipsa Mohapatra, KIIT School of Law, Bhubaneswar, 4^th Year BA LLB,  in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

REFERENCES:

1. Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel and Ors., AIR 2022 SC 4961
2. Indus Airways Private Limited v Magnum Aviation Private Limited (2014) 12 SCC 539
3. Sampelly Satyanarayana Rao v. India Renewable Energy Development Agency Limited (2016) 10 SCC 458
4. NEPC Micon Ltd. v. Magna Leasing Ltd. AIR 1999 SC 1952
5. https://www.livelaw.in/top-stories/no-offence-under-section-138-ni-act-if-cheque-is-presented-for-full-amount-without-endorsing-part-payment-made-by-borrower-supreme-court-211341?infinitescroll=1# (Accessed on 7^th January 2023)
6. https://www.scconline.com/blog/post/2022/10/12/dishonour-cheques-section-138-ni-act-legally-enforceable-debt-encashment-supreme-court-legal-research-updates-news/ (Accessed on 7^th January 2023)

[1] AIR 2022 SC 4961

[2] (2014) 12 SCC 539

[3] (2016) 10 SCC 458

[4] AIR 1999 SC 1952