DISHONOUR OF CHEQUE NOT AN OFFENCE IF PRESENTED FOR FULL AMOUNT WITHOUT ENDORSING PART PAYMENT

Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred as ‘the Act’) provides that dishonour of a cheque for insufficiency of funds in the account is an offence punishable with an imprisonment of 2 years or with a fine which may extend to twice the amount of the cheque. The common market practice of drawing cheques as security for a debt owed to a creditor and paying the debt in instalments after drawing the cheque has raised difficulty in deciding cases of dishonour of cheques. After making a part payment when such cheque gets dishonoured, it creates muddles both for the complainant and the drawer as the dishonoured cheque rather than representing the changed legally enforceable debt represents the original debt. A complainant may find it difficult to decide the quantum of the amount for which he should prosecute the drawer of the cheque under Section 138 and the debtor would have to defend himself for a larger sum of money inspite of making a partial payment. However, the issue still arises is whether a cheque which represents the original sum gets dishonoured after making a part payment would still attract the offence under Section 138? If no, then what recourse is available to the holder of a cheque which represents the original debt but after part payment gets dishonoured? The Supreme Court in Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel (Criminal Appeal No. 1497 of 2022) had the opportunity to address these issues and provide a remedy for holders of such cheques.

The Supreme Court while deciding the appeal has held that when a part payment of the debt is made after the cheque was drawn but before the cheque is encashed, such payment must be endorsed on the cheque as per Section 56 of the Act. The cheque cannot be presented for encashment without recording the part payment. If the unendorsed cheque is dishonoured on presentation, the offence under Section 138 would not be attracted since the cheque does not represent a legally enforceable debt at the time of encashment.

Facts of the Case

The appellant in the present case had provided a sum of Rs. 20 Lacs to the respondent in 2012 for which the respondent has drawn a post-dated cheque as security with a condition that the appellant would return the cheque to the respondent on payment of the sum in full. Till the end of 2013, the respondent paid part of the entire sum to the tune of Rs 4,09,315 to the appellant by way of instalments. The cheque when presented in 2014 for encashment of Rs 20,00,000 was dishonoured due to insufficient funds. The appellant issued a statutory notice under Section 138 to the respondent, calling to pay the legally enforceable debt of Rs. 20,00,000. The appellant later filed a criminal complaint against the first respondent for the offence under Section 138 of the Act. The trial court acquitted the respondent of the offence under Section 138 on the ground that the appellant has made the part payment which has partly discharged his liability in respect of the debt of Rs. 20 Lacs. In an appeal before the High Court of Gujarat, the High Court affirmed the finding of fact by the Trial Court holding that a part of the debt owed by the respondent to the appellant was discharged and thus, the notice of demand issued under Section 138 of the Act is not valid. The appellant then preferred the appeal against the judgement of the High Court before the Supreme Court.

Issues and Observation

The question before the Supreme Court was whether Section 138 of the Act would still be attracted when the drawer of the cheque makes a part payment towards the debt or liability after the cheque is drawn but before the cheque is encashed, for the dishonour of the cheque which represents the full sum?

The Apex Court after considering the arguments of both sides noted that making part payment after the issuance of the cheque would lessen the legally enforceable debt in comparison with the original sum mentioned in the cheque. The court took into account the law laid down in precedents including Indus Airways Private Limited v. Magnum Aviation Private Limited ((2014) 12 SCC 539), Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited ((2016) 10 SCC 458), Sripati Singh v. State of Jharkhand (4 2021 SCC OnLine SC 1002) has observed that an offence under section 138 arises if the cheque represents a legally enforceable debt on the date of maturity and such cheque is dishonoured when it is sought to be encashed. When a post-dated cheque is drawn it may mention the legally enforceable debt at the time of its drawing. But a part payment would lessen the legally enforceable debt. However, when a cheque is presented at the bank for encashment it must represent a legally enforceable debt at the time of encashment. If the cheque does not represent a legally enforceable debt at the time of maturity or encashment, then the offence under Section 138 is not made out.

In the instant case, at the time of drawing of the cheque the legally enforceable sum was Rs. 20,00,000 and the cheque mentioned the said sum. However, the respondent had paid the Rs. 4,09,315 after drawing the cheque and therefore, the new legally enforceable sum would be 15,90,685. The cheque at the time of presentation represented Rs. 20,00,000 which was not the legally enforceable sum. Therefore, dishonour of such a cheque would not amount to an offence under Section 138 of the Act.

Legal Panacea: 'Endorsement of Part Payment'

Since the dishonour of cheque representing the original cheque would not make it an offence under Section 138, then what is the recourse available to drawee of such cheque so that their rights under Section 138 do not get affected? In such a situation the part payment must be endorsed on the cheque before presentation at the time of encashment. Under Section 56 read with Section 15 of the Act, an endorsement may be made by recording the part payment of the debt in the cheque or in a note appended to the cheque. When such endorsement is made, the instrument could still be used to negotiate the balance amount. If the endorsed cheque when presented for encashment of the balance amount is dishonoured, then drawee can take the recourse to the provision of Section 138.

Conclusion

The law has been settled that dishonour of a cheque representing initial legally enforceable debt would not be an offence under Section 138 after making a part payment if the part payment is not endorsed on the cheque. It would not be incorrect to say that this judgement by the Supreme Court has made it mandatory for endorsing the part payment on the cheque before presentation for encashment so that the remedy under Section 138 can be availed in case of dishonour of cheques. A cheque after the endorsement of part payment can be presented for encashment of the balance amount.