A Legally Enforceable Debt I

A person is deemed to have committed an offence, within the meaning of Section 138 of the Negotiable Instruments Act, 1881 (“Act”) when any cheque drawn by him, on an account maintained by him with a banker, for payment of any amount of money to another person, in whole or partial discharge of a legally enforceable debt or other liability, is returned by the bank unpaid for insufficiency of funds etc. The Hon’ble Supreme Court of India has considered an interesting question, in this regard, in the matter of M/s. Indus Airways Pvt. Ltd. & Ors. vs. M/s. Magnum Aviation Pvt. Ltd., 2014 (4) SCALE 645 (“Indus Airways”): “whether post-dated cheques issued as an advance payment in respect of purchase orders could be considered in discharge of a legally enforceable debt or other liability, and, if so, whether the dishonour of such cheques amounts to an offence under Section 138 of Act”?

The SC has reasoned that one of the condition precedents for attracting the penalty prescribed under Section 138 is that, “there should be a legally enforceable debt or other liability subsisting on the date of drawal of the cheque“. If the cheque is issued in advance payment for the purchase of goods and in all eventualities the purchase order is not carried to its “logical conclusion”, because of cancellation; non-delivery of goods; or otherwise, the “cheque cannot be held to have been drawn for an existing debt or liability”. This is a fine example of retrospective reasoning by the SC where the “nature of something is reasoned out retrospectively from the perspective of where it ends up rather than prospectively from the perspective of where it was headed”.

If therefore one orders for goods and issues a cheque for an advance payment, in pursuance of such a condition in the contract, and subsequently cancels the contract, before any delivery, and directs the relevant bank to stop payment on the cheque, which remains un-presented, though he/she may be liable to make good to the seller the losses occasioned by breach of contract, there shall be no criminal liability assessed off them as and when that cheque, for which they have stopped payment, is presented to the bank nevertheless, by the seller, for encashment or in a deep rooted contemplation of filing a criminal case under the Act.

In Indus Airways, notably, the Appellant-Purchasers had issued two post-dated cheques. The said cheques were issued by way of advance payment for certain purchase orders. The purchase orders were later cancelled and the Respondent-Sellers were informed of the same. It was requested that the post-dated cheques be returned. The Respondent-Sellers nonetheless presented the cheques to the concerned bank. Obviously, stop payment instructions had already been issued on those cheques. The post-dated cheques were returned unpaid – prompting the present litigation.