2012 (10) TMI 1238 - HC - Indian Laws

Dishonor of Cheque u/s 138 of the Negotiable Instruments Act 1881 (Act) - legally enforceable debt or not - issuance of a cheque for repayment of a time barred debt would amount to a written promise to pay the said debt within the meaning of Section 25(3) of the Indian Contract Act 1872 or not - Rebuttable presumption u/s 118 and 139 - HELD THAT - On plain reading of Section 13 of the said Act of 1881 a negotiable instrument does contain a promise to pay the amount mentioned therein. The promise is given by the drawer. Under Section 6 of the said Act of 1881 a cheque is a bill of exchange drawn on a specified banker. The drawer of a cheque promises to the person in whose name the cheque is drawn or to whom the cheque is endorsed that the cheque on its presentation would yield the amount specified therein. Hence it will have to be held that a cheque is a promise within the meaning of Sub-section (3) of Section 25 of the Contract Act. What follows is that when a cheque is drawn to pay wholly or in part a debt which is not enforceable only by reason of bar of limitation the cheque amounts to a promise governed by the Sub-section (3) of Section 25 of the Contract Act. Such promise which is an agreement becomes exception to the general rule that an agreement without consideration is void. Though on the date of making such promise by issuing a cheque the debt which is promised to be paid may be already time barred in view of Sub-section (3) of Section 25 of the Contract Act the promise/agreement is valid and therefore the same is enforceable. The promise to pay time barred debt becomes a valid contract as held by the Apex Court in the case of A.V. Moorthy 2002 (2) TMI 1214 - SUPREME COURT . Therefore the first question will have to be answered in the affirmative. Under Section 118 there is a rebuttable presumption that every negotiable instrument was made or drawn for consideration. Section 139 creates a rebuttable presumption in favour of a holder of a cheque. The presumption is that the holder of a cheque received the cheque of the nature referred to in Section 138 for discharge in whole or in part of any debt or liability. Thus under the aforesaid two Sections there are rebuttable presumptions which extend to the existence of consideration and to the fact that the cheque was for the discharge of any debt or liability. Once it is held that a cheque drawn for discharge of a time barred debt creates a promise which becomes enforceable contract it cannot be said that the cheque is drawn in discharge of debt or liability which is not legally enforceable. The promise in the form of a cheque drawn in discharge of a time barred debt or liability becomes enforceable by virtue of Subsection (3) of Section 25 of the Contract Act. Thus such cheque becomes a cheque drawn in discharge of a legally enforceable debt as contemplated by the explanation to Section 138 of the said Act of 1881. Therefore even the second question will have to be answered in the affirmative. Therefore we answer both the questions in the affirmative. We direct that these Applications/Petitions shall be placed before the appropriate Court for disposal in accordance with law.

Summary

Issues Involved:
1. Whether the issuance of a cheque in repayment of a time-barred debt amounts to a written promise to pay the said debt within the meaning of Section 25(3) of the Indian Contract Act, 1872.
2. If it amounts to such a promise, whether such a promise creates any legally enforceable debt or other liability as contemplated by Section 138 of the Negotiable Instruments Act, 1881.

Issue-wise Detailed Analysis:

1. Issuance of a Cheque as a Written Promise under Section 25(3) of the Indian Contract Act, 1872:

The court examined whether issuing a cheque for a time-barred debt constitutes a written promise under Section 25(3) of the Indian Contract Act, 1872. The relevant provisions of the Contract Act were discussed, particularly Section 2, which defines terms such as "proposal," "promise," and "agreement." Section 25(3) was highlighted as an exception to the rule that agreements without consideration are void, allowing a written promise to pay a time-barred debt to be enforceable.

The court referenced the decision in A.V. Murthy v. B.S. Nagabasavanna, which affirmed that a promise to pay a time-barred debt is a valid contract. The court also cited National Insurance Company Limited v. Seema Malhotra, where the Supreme Court held that a cheque involves a promise that the amount specified would be paid upon presentation. Consequently, the court concluded that a cheque issued for a time-barred debt constitutes a promise under Section 25(3) of the Contract Act, making the debt enforceable. Therefore, the first question was answered affirmatively.

2. Legally Enforceable Debt under Section 138 of the Negotiable Instruments Act, 1881:

The court then addressed whether such a promise creates a legally enforceable debt under Section 138 of the Negotiable Instruments Act, 1881. Section 138 deals with the dishonor of cheques and prescribes penalties for such offenses. The explanation to Section 138 specifies that "debt or other liability" means a legally enforceable debt or liability.

Sections 118 and 139 of the Negotiable Instruments Act were discussed, which create rebuttable presumptions regarding the consideration and discharge of debt or liability through cheques. The court emphasized that for Section 138 to apply, the debt or liability must be legally enforceable, meaning it can be lawfully recovered through due process.

The court reiterated that a time-barred debt is not legally enforceable under normal circumstances. However, a cheque issued for a time-barred debt constitutes a promise under Section 25(3) of the Contract Act, making it an enforceable contract. Thus, such a cheque is considered drawn in discharge of a legally enforceable debt within the meaning of Section 138 of the Negotiable Instruments Act. Consequently, the second question was also answered affirmatively.

Conclusion:

The court concluded that both questions should be answered in the affirmative:
1. Issuing a cheque for a time-barred debt amounts to a written promise under Section 25(3) of the Indian Contract Act, 1872.
2. Such a promise creates a legally enforceable debt or liability as contemplated by Section 138 of the Negotiable Instruments Act, 1881.

The applications/petitions were directed to be placed before the appropriate court for disposal in accordance with the law.