Author: Abhishek Srinivasan

Court: Supreme Court Of India

Bench: M.K. Mukherjee, S.P. Kurdukar, K.T. Thomas

Date of Judgement: March 2, 1998

Relevant Provisions/Statutes: Section 138 N.I. Act, Section 139, Section 142

 Brief Facts:

The case M/S.  Modi Cements Ltd. Vs. Shri Kuchil Nandi (decided on March 2, 1998) arose from a commercial dispute where the respondent had purchased cement on credit from the appellant company, incurring a liability of over Rs. 1.10 crore. To partially discharge this debt, the respondent issued three cheques of Rs. 2,00,000 each. However, when the appellant presented these cheques for encashment, they were returned by the bank unpaid with the endorsement “payment stopped by the drawer”.

Issue:

Whether mere endorsement of the Bank “payment stopped” is sufficient to entertain the complaint u/s 138 of NI Act?

PROVISIONS INVOLVED:

Section 138 of Negotiable Instruments Act, 1881

Section 13 of the Negotiable Instruments Act defines negotiable instruments as “a promissory note, bills of exchange or cheque payable either to order or to bearer”.

A negotiable instrument is a kind of document that guarantees its bearer a sum of money to be payable on demand or at any future date.

Section 138 of the NI Act is a penal provision that deals with the punishment of dishonour of cheque.

Dishonour of cheque is not an offence in itself but to become an offence, the following ingredients should be there:

1. There should be a drawer that draws the cheque.
2. The cheque drawn should be in discharge of some liability.
3. Presentation of the cheque to the drawee bank.
4. The cheque returned by the bank unpaid on account of insufficient funds.
5. The cheque should be presented within six months from the date on which it was drawn or within the period of its validity, whichever is earlier.
6. Within thirty days of receiving a memo of return from the bank, a notice should be served to demand the payment of the said money.
7. The drawer fails to pay the said money within 15 days of the receipt of the said notice.

It is to be noted here that if the drawer pays the debt within 15 days, there would be no offence.

The offence is said to be committed under Section 138 of the NI Act, only when he fails to pay the debt within 15 days and such person shall be punishable with imprisonment for a term which may be extended to two years, or with a fine which may extend to twice the amount of the cheque, or with both.

Section 142 of the Negotiable Instruments Act, 1881 states that the cognizance of offences.

It states that without regarding anything contained in the CPC, 1973-

It states that no Court shall take any notice of any offence which is regarded punishable under the provisions mentioned in Section 138 of the Negotiable Instruments Act, 1881 unless in a complaint which is in writing made by the holder of the cheque.

It states that any such complaint which is made within 30 days of the date on which the cause of such action arises under the provisions contained in Section 138 of the Negotiable Instruments Act, 1881.

It further sates that no Court which is inferior to the Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence which is punishable under the provisions laid down in Section 138 of the Negotiable Instruments Act, 1881.

SECTION 482 OF CRIMINAL PROCEDURE CODE:

482. Saving of inherent powers of High Court. Nothing in this Code shall be deemed to limit or affect the inherent powers of the High Court to make such orders as may be necessary to give effect to any order under this Code, or to prevent abuse of the process of any Court or otherwise to secure the ends of justice.

Arguments by the Appellant (Payee/Complainant) 

• Defeat of Legislative Intent: The appellant argued that accepting “stop payment” as valid defence would render Section 138 a “dead letter”. If drawers could simply instruct their banks to stop payment immediately after issuing a cheque, they could easily evade penal consequences for genuine debts.
• Broad Definition of Dishonour:  It was submitted that the term “dishonour” in the Act should encompass any refusal by the bank to pay the cheque when presented by the holder, regardless of whether the reason is  insufficient funds or a stop-payment instruction.
• Presumption of Debt: The appellant relied on Section 139, arguing that once a cheque is issued, there is statutory presumption it was for a debt or liability. The burden lies on the drawer to prove otherwise, and a unilateral stop-payment notice does not automatically rebut this presumption.

Arguments by the Respondent (Drawer/Accused)

• Literal Interpretation Of Section 138: The respondent contended that Section 138 specifically penalizes dishonour due to “insufficiency of funds” or when the amount “exceeds the arrangement” with the bank. Since the cheques were returned due to a voluntary “stop payment” instruction, the specific ingredients of the offence were not met. 
• Absence of Insufficiency Allegation: It was argued that the complaints filed by the appellant did not explicitly allege that were insufficient funds in the account at the time of presentation. The sole reason for dishonour was the drawer’s instruction to the bank.
• Civil Dispute Defence: The respondent claimed there was a pre-existing commercial dispute, alleging that the appellant company owed him significant dues (approx. Rs 75 lakhs) for service charges and commission. He argued that stopping payment was a protective measure against these unpaid dues, making purely civil in nature rather than criminal.

The Supreme Court’s Reasoning and Conclusion

The three-judge bench rejected the respondent’s arguments and upheld the appellants’ contentions:

• Rejection of Technical Defence: The court held that a distinction between dishonour due to “insufficient funds” and “stop payment” is artificial in the context of Section 138. Once a cheque is issues for a debt, the drawer is obligated to ensure it is honoured.
• Prevention of Abuse: The Court emphasized that allowing a drawer to escape liability by issuing a stop-payment instruction would defeat the very object of the Act, which is to inculcate faith in the efficacy of banking operations and credibility in negotiable instruments.
• Final Ruling: It was conclusively held that if a cheque is dishonoured with the endorsement “payment stopped by the drawer,” it constitutes an offence under Section 138, provided the other procedural requirements (notice, failure to pay within 15 days) are met. The drawer must prove the absence of a legally enforceable debt during the trial to avoid conviction; they cannot get the complaint quashed at the threshold merely on the ground of stop payment.