Delhi High Court: Cheque Issued for Time-Barred Debt Can Create Fresh Liability Under Section 138 NI Act

Delhi High Court: Cheque Issued for Time-Barred Debt Can Create Fresh Liability Under Section 138 NI Act

Need to defend against a cheque- bounce case based on an old loan or an allegedly time barred loan? Then you should read this Delhi High Court Judgment in Shardha Nand Bansal v. Ashok Kumar Bhalla. The issue for consideration was whether the prosecution for criminal liability under Section 138 NI Act, 1881 could lie in a case where cheques were issued by the accused in respect of a debt/assertion to which he plead limitation had already set in and become time barred.

The High Court allowed the appeal against conviction and clarified the law on interplay of Section 138 NI Act with Section 25(3) of Indian Contract Act, 1872. The Court held that in particular facts of the case, the act of issuing cheques amounted to a fresh promise which could give rise to a legally enforceable liability notwithstanding the fact that earlier debt had become time barred.

Watch out for this judgment if you are a lender, a borrower, a business facing disputes on old loans, security cheques, compensated cheques and enforceability of debts on the date of presentation.

Case Details

“Supreme Court Judgment on Bail Principles for Undertrial Accused”, concerns an unrelated subject. Using it in this cheque-bounce article would be misleading. The article therefore uses relevant terms such as Delhi High Court Section 138 judgment, cheque bounce liability, legally enforceable debt, time-barred debt, and Section 138 NI Act.

What Were the Facts of the Case?

As per complaint, respondent Ashok Kumar Bhalla had given petitioner Shardha Nand Bansal a friendly loan of ₹25 lakh towards his construction business. A mortgage deed dated 25 July 2013 was executed. Reference was also made to another mortgage deed towards repayment of loan amount. Repayment. 

The second mortgage deed recorded that the principal amount of ₹25 lakh was repayable on or before 8 August 2015 along with interest @2% per month. Reference was made to repayment of loan amount in a letter dated 10 June 2015 also.

According to complainant, accused had handed over two post-dated cheques in March 2018, namely: -

• cheque for ₹25 lakh as principal amount; and
• cheque for ₹14 lakh purportedly towards interest. 

Upon presentation, both the cheques were dishonoured on 28 August 2018 with the remark “Funds Insufficient”. Statutory legal notice was sent on 17 September 2018. Complaint under Section 138 NI Act was filed on 18 October 2018, as payment was not made within the legal time limit.

Accused admitted taking ₹25 lakh loan but denied liability. Some of his contentions were that cheques were issued only as security; loan amount was already repaid; and cheques were misused thereafter.

What Happened Before the Trial Court?

The Metropolitan Magistrate disallowed the defence and convicted the accused under Section 138 of the NI Act on 18 November 20 23. The accused was sentenced to imprisonment till the rising of the Court and to pay compensation of ₹75 lakh by an order dated 22 November 20 23. Aggrieved, the accused preferred an appeal before the Additional Sessions Judge. The ASJ dismissed the appeal upholding the conviction and sentence on 23 January 20 25.

The accused sought remedy by filing a criminal revision petition before the Delhi High Court under Sections 397 and 401 CrPC.

What Legal Issues Were Before the Delhi High Court?

The single basic question before the High Court was whether the concurrent finding suffers from material illegality or perversity for recording conviction when it was stated by the petitioner that the cheques were issued for time barred debt.

Several interlinked issues arose for consideration: 

• Was there any legally enforceable debt at the time of presentation of the cheques?
• Can the accused avoid liability under Section 138 by characterizing the cheques as security cheques only?
• If the original debt was time barred, could a subsequent cheque produce a new legally enforceable debt?
• Did the accused rebut the presumption under Section 139 of NI Act?
• Did the alleged repayment stand proved? 

What Did the Petitioner Argue?

The main submission on behalf of the petitioner was that the loan became payable many years ago and the limitation period had expired prior to presentation of the cheques in August 2018.

The argument was that for Section 138 to come into play, the cheque has to be issued for discharge of a legally enforceable debt or liability. If the underlying debt had already become time-barred, there cannot be dishonour under Section 138.

The petitioner also claimed that the cheques were handed over as security cheques and were misused by the complainant.

It was also submitted that the loan had been repaid. A receipt dated 1 November 2018 was relied upon, as also the evidence of the defence witness about the alleged payment.

What Did the Respondent Argue?

The respondent denied the petitioner's claim and submitted that cheques were issued for the discharge of an antecedent legally enforceable liability.

He submitted that he had proved the cheque dishonour due to insufficiency by producing bank return memos and compliance of the statutory conditions laid down under Section 138.

Respondent also invoked the operation of statutory presumption under Section 139 NI Act that on admission of issuance of cheques and signing of such cheques by the accused, the onus shifted on the accused to rebut the presumption that such cheques were received for discharge of a debt or liability.

What Did the Delhi High Court Say About Security Cheques?

The petitioner's argument that the cheques were given only as security when the loan was disbursed was rejected by the Court.

Notesworthy in this regard is that fact that undated blank cheques were not mentioned as being delivered in the two specific mortgage deeds. The Court also refers to inconsistencies in the accounts for when the cheques were purportedly issued.

On the facts, the Court held that the petitioner had not proven that these were "old security cheques which were misued at a later stage". The Court accepted that there was an enforceable liability pertaining to loan amount and agreed interest.

Read thus, the judgment does not imply that any cheque termed as a "security cheque" would invite application of Section 138. Liability will be dependent on the facts, including the existence of an enforceable obligation when the cheque was due and presented.

Can a Cheque for a Time-Barred Debt Attract Section 138 NI Act?

This formed the most critical legal conclusion in the judgment.

Section 138 mandates that the cheque must have been issued for discharge, or towards the discharge, wholly or partly, of a debt or other liability, which is legally enforceable.

The petitioner had argued that a time-barred debt could never meet this condition.

Rejecting this contention, the Delhi High Court referred to Section 25(3) of Indian Contract Act, 1872. This section states that an acknowledged, written and signed promise to pay wholly or in part a debt that was enforceable but for the law of limitation becomes a valid contract.

The High Court said that a cheque is an instrument that provides a written and signed promise to pay. This conclusion was arrived at based on authorities including the decisions of the Bombay High Court in Dinesh B. Chokshi v. Rahul Vasudeo Bhatt, the Supreme Court in A. V. Murthy v. B. S. Nagabasavanna and a bench coordinate to the current Delhi HC bench in Rajeev Kumar v. State NCT of Delhi & Anr.

It is this finding that took center stage in rejection of the defence of limitation.

How Did Section 25(3) of the Contract Act Affect Cheque Bounce Liability?

Section 25 is normally applicable to contracts without consideration. However, Section 25 sub-section (3) carve out a special exception with respect to promises to pay a debt barred by limitation. Finely splitting hairs, the High Court construed the issuance of the cheque as satisfying the precondition of written- and-signed promise. 

Legal consequence of this construction was that even if the original obligation would have been subject to a limitation defense, the subsequent issuance of a cheque by the debtor could itself give rise to a fresh promise enforceable at law. 

This would have the important consequence that the Explanation to Section 138 NI Act, which requires that the debt or liability on which the cheque was issued be legally enforceable. A drawer would therefore not necessarily succeed by merely proving that the transaction underlying the cheque was of old vintage. Courts would have to look if subsequent acknowledgements, compromise or cheques have revived the debt or created a fresh liability.

What Did the Court Say About the Presumption Under Section 139?

139 of NI Act enshrines a statutory rebuttable presumption in favor of the holder of cheque.

It was held by Delhi High Court that the petitioner failed to rebut that presumption. Merely pleading that the cheque was repaid/it was a security cheque misused by payee or that there was no liability cannot be sufficient as defence in the facts of the case. 

Defence has to be substantiated with material capable of proving that there was no legally enforceable liability on the part of the accused on him, on the standard of preponderance of probabilities.

The Court found pettifogging inconsistencies in repayment story here and observed there was no supporting material like bank statements etc.

Why Was the Alleged Repayment Defence Rejected?

The receipt relied upon by the petitioner was dated 1 November 2018.

The High Court noted that the complaint itself was dated and filed on 18 October 2018 which was prior to the date on the said receipt.

Further, the statement of the petitioner regarding repayment was at variance with the evidence of the defence witness. The Court also stated that it was not clear as to who had supposedly paid this amount and how cash was allegedly arranged. The petitioner himself did not give evidence from the witness box to corroborate the alleged repayment and the Court held that supporting financial evidence had not been provided. The Court agreed with the courts below that the repayment defence was not credible.

What Was the Final Decision of the Delhi High Court?

The High Court said it did not find any perversity, jurisdictional error or manifest illegality in the findings recorded by the Metropolitan Magistrate and the Additional Sessions Judge.

Key Legal Principles Emerging From the Judgment

• Section 138 NI Act obligates that the cheque should be issued in respect of a legally enforceable debt or liability.
• Labeling an instrument as security cheque is not conclusive in determining criminal liability. Circumstances under which it was issued and the existence of liability at the time it is presented for payment continue to be relevant.
• An executed written document which contains an express promise to pay a debt barred by limitation could itself become enforceable by reason of Section 25(3) of the Indian Contract Act.
• Here, the Delhi High Court considered the very act of issuing the cheque as a fresh promise which gives rise to an enforceable liability, even if the earlier liability was time barred.
• After operation of statutory presumption under Section 139, accused needs to produce sufficient evidence to rebut the same on a balance of civil probabilities.
• Bare denial of repayment or misuse of cheque without producing any credible documentary or other evidence is not sufficient to rebut the statutory presumption.

What Is the Practical Impact of the Judgment?

The judgment has significant practical ramifications in matters involving old loans and stale cheques. Borrowers/ drawers should note that the fact that the limitation period in respect of the original transaction would have lapsed does not mean that the legal analysis stops there. 

The act of drawing a new cheque can have legal implications by itself under Section 25(3) of the Contract Act. Lenders/Businesses should note the necessity to retain loan documentation, correspondence, records of repayments, mortgage documents, etc., information on when cheques were physically delivered. 

Lawyers practicing Section 138 cases should note the importance of looking not just at the date of original advance but subsequent acknowledgements/documents/promises/cheques.

Why Does This Delhi High Court Judgment Matter Today?

Cheque – bounce cases are often accompanied by the defenses raised that the cheque was issued only as security or that the underlying transaction was several years old or that there was no legal liability when the cheque was presented.

This judgment is a good one from the Delhi High Court discussing the intersection of these issues with Section 25(3) of the Contract Act and Sections 138 and 139 of the NI Act.

It is notable for its discussion that a fresh cheque can have independent legal efficacy rather than merely assuming the limitation status of the original loan upon which it was drawn.

However, cases under Section 138 will always turn on their facts. Whether the cheque was truly a fresh promise, whether it was issued voluntarily, what liability was present at the time of presentation and whether the statutory presumption has been rebutted will all have to be determined based on the facts of each case.

Frequently Asked Questions

Conclusion

The Delhi High Court in Shardha Nand Bansal v. Ashok Kumar Bhalla recently held that the phrase “legally enforceable debt or other liability” under Section 138 NI Act cannot necessarily be determined by the age of the original transaction giving rise to the liability.

The cheques drawn in 2018 were held to be a new promise which could give rise to a fresh legally enforceable liability under Section 25(3) of Indian Contract Act notwithstanding that the debt underlying such promise had become time-barred.

In the absence of the accused disproving the security- cheque and repayment defences and rebutting the presumption under Section 139 NI Act, the revision was dismissed by Delhi High Court with conviction being upheld.