DISHONOR OF CHEQUE FOR ADVANCE PAYMENT

[Mr. M. GOVINDARAJAN]

Section 138 of the Negotiable Instruments Act provides that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or any other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both.

This section shall not apply unless-

• the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validation, whichever is earlier;
• the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque, as unpaid; and
• the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within 15 days of the receipt of the said notice.

The explanation to this section provides that for the purposes of this section ‘debt or other liability’ means legally enforceable debt or other liability.

The explanation appended to Section 138 explains the meaning of the expression ‘debt or other liability’.  It means a legally enforceable debt or other liability.   Dishonor of cheque is an offence under Section138, if the cheque has been issued in discharge of any debt or other liability.   Therefore to attract an offence under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque.  In ‘Balaji Seafoods (India) Limited V. Mac Industries Limited’ – 1998 (10) TMI 528 - MADRAS HIGH COURT, the Madras High Court held that Section 138 of the Negotiable Instruments Act, makes it clear that where the cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account by an arrangement made with that bank, such person shall be deemed to have committed an offence under Section 138 of the Act.   The Explanation reads that for the purposes of this section, ‘debt or liability’ means a legally enforceable debt or liability.

If a cheque is issued as an advance payment for purchase of the goods and for any reason the purchase order is cancelled or not able to be carried out for any logical conclusion and the material or goods for which purchase orders was placed is not supplied the cheque cannot be held to have been drawn for an existing debt or liability.

The Gujarat High Court in ‘Shanka Concretes (P) Limited V. State of Gujarat’ – 1999 (11) TMI 859 - GUJARAT HIGH COURT  held that to attract Section138 of the Negotiable Instrument Act there must be subsisting liability or debt on the date when the cheque was delivered.   The very fact that the payment was agreed to some future date and there was no debt or liability on the date of delivery of the cheques would take the case out the purview of Section 138 of the Act.

In ‘Supply House, represented by Managing Partner V. Ullas, Proprietor Bright Agencies’ – 2006 (5) TMI 471 - KERALA HIGH COURT  the post dated cheque was issued by the accused along with the order for supply of goods.   The supply of goods was not made by the complainant.   The accused first instructed the bank to stop payment against the cheque and then requested the complainant not to present the cheque as he had not supplied the goods.   The cheque was dishonored.   The Kerala High Court held that the cheque cannot be stated to be one issued in discharge of the liability to the tune of the amount covered by it, which was really issued, as the price amount for 28 numbers of mixies, which the complainant had not supplied.

In ‘Indus Airways (P) Limited and others V.  Magnum Aviation (P) Limited and another’ – 2014 (4) TMI 464 - SUPREME COURT the purchaser put purchase orders on 19.02.2007 and 26.02.2007 for the supply of certain aircraft parts with Magnum Aviation (P) Limited.  One of the terms and conditions of the contract was that the entire payment would be given to the supplier in advance.   The purchaser issued two cheques on 15.03.2007 for ₹ 34,57,164 and on 20.03.2007 for ₹ 15,91,820/- as advance payment for the two purchase orders.

The purchaser cancelled the purchase order and the same was received by the supplier on 22.03.2007 and asked the   supplier to return the above two cheques.  The supplier presented the cheque for payment as it had to procure the parts from abroad.   The said cheques were dishonored on the ground that the purchasers had stopped payment.

On 23.03.2007 the supplier issued a letter asking the purchasers as to when the supplier could collect the payment.   On 12.04.2007 the supplier sent a notice to the purchasers and then filed a complaint before the Additional Chief Metropolitan Magistrate, New Delhi against the purchaser under Section 138 of the Negotiable Instruments Act.  The court issued summons to the purchaser.  The purchaser challenged the same before the Court in a revision petition.  The  revision petition was allowed quashing the process issued.

The supplier challenged the said order before the High Court under Section 482 of the Code of Criminal Procedure.   The Delhi High Court allowed the petition of the supplier.  The reasoning of the High Court is  as follows:

• If at the time of entering into a contract it is one of the conditions of the contract that the purchaser has to pay the amount in advance then advance payment is a liability of the purchaser;
• The seller of the items would not have entered into contract unless the advance payment was made to him;
• A condition of advance payment is normally put by the seller for the reason that the purchaser may not later on retract and refuse to take the goods either manufactured for him or procured for him;
• Payment of cost of the goods in advance being one of the conditions of the contract becomes liability of the purchaser;
• The issuance of a cheque at the time of signing such contract has to be considered against a liability as the amount written in the cheque is payable by the person on the date mentioned in the cheque;
• If for reason the seller fails to manufacture the goods or procure the goods it is only under those circumstances that no liability is created;
• However where the goods or raw material has been procured for the purchaser by seller or goods have been manufactured by the seller, it cannot be said that the cheques were not issued against the liability;
• The purpose of making or enacting section 138 of the Act was to enhance the acceptability of cheque in settlement of commercial transactions, to infuse trust into commercial transactions and to make a cheque as a reliable negotiable instrument and to see that the cheques of business transactions are not dishonored;
• The purpose of the Act would stand defeated if after placing orders and giving advance payments, the stop payments are issued and orders are cancelled on the ground of pricing of the goods as was done in this case.

The purchaser filed an appeal before the Supreme Court against the order of High Court.  The Supreme Court held that the reasoning of the Delhi High Court is clearly flawed inasmuch as it failed to keep in mind the fine distinction between civil liability and criminal liability under Section 138 of the Act.   If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition, then the purchaser may have to make good the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138.

The Supreme Court further held that for a criminal liability there should be legally enforceable debt or other liability subsisting on the date of the drawal of the cheque.  The Supreme Court did not accept the reasoning given by the Delhi High Court that the issuance of cheque towards advance payment at the time of signing such contract has to be considered as subsisting liability and dishonor of such cheque amounts to be an offence under Section138 of the Act.  The Delhi High Court traveled beyond the scope of Section 138 of the Act.

The Supreme Court held that if a cheque is issued as an advance payment for purchase of the goods and for any reason purchaser order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier,  the cheque cannot be said to have been drawn for an existing debt or liability.

The Supreme Court allowed the appeal and set aside the impugned order of Delhi High Court.

Discussions to this article

[S Sivakumar, Director S3 Solutions Pvt Ltd, Bangalore]

Very useful article. My thanks to Mr Govindarajan for this. I am amazed to see that Mr Govindarajan is an expert on many matters and whenever I have a doubt on any issue, his articles provide a ready made solution.

My best wishes to him.

S Sivakumar

​Advocate, Bangalore

[MARIAPPAN GOVINDARAJAN]

Thank you, Sir,

Dr. M. Govindarajan