Section 138 NI Act Attracted Even In Cases Where Debt Is Incurred After Cheque Is Drawn But Before Presentation: Supreme Court

On Friday, the Supreme Court held that Section 138 of the Negotiable Instruments Act is invoked even when debt is incurred after the cheque is drawn but before it is encashed. 

The true purpose of Section 138 would not be served if the term “debt or other liability” is interpreted to include only debts that exist on the date of the cheque’s drawing, the bench of Justices DY Chandrachud and AS Bopanna observed. 

The court went on to say that simply labelling the cheque as a security would not change its nature as an instrument designed to satisfy a legally enforceable debt or liability. 

One of the issues addressed in this appeal was whether the dishonour of a cheque furnished as a “security” is covered by Section 138 of the NI Act. 

The appellants in this case contended that a complaint under Section 138 of the NI Act would be unconstitutional because the cheque in question was issued as a security and thus is not against a legally enforceable debt or liability. 

They based their argument on a Supreme Court decision in Indus Airways Private Limited v. Magnum Aviation Private Limited (2014) 12 SCC 539. 

The court noted that subsequent decisions in Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited (2016) 10 SCC 458 and Sripati Singh v. State of Jharkhand LL 2021 SC 606 had distinguished the Indus Airways decision. 

Post-dated cheques were issued as security for overdue loan instalments in Sampelly and Sripati Singh. The court noted that there was an outstanding debt on the dates the cheques were drawn. 

In terms of the definition of debt, the court stated that a post-dated cheque issued after the debt has been incurred would be covered by the definition of ‘debt.’ 

The court noted that in the current case, a debt was incurred after the respondent began supplying power, but payment was not made due to the LCs’ non-acceptance.