Dishonoured Cheque if only towards an advance indicates that there was no existing liability #indianlaws

The payment by cheque in the nature of advance payment indicates that at the time of drawal of cheque, there was no existing liability.

The question that arose for consideration was whether the post-dated cheques issued as an advance payment in respect of purchase orders could be considered in discharge of legally enforceable debt or other liability, and, if yes, whether the dishonour of such cheques amounts to an offence under Section 138 of the Negotiable Instruments Act, 1881? In the instant matter cheques were issues after placing of purchase orders towards advance. Cheques issued got dishonoured on the ground of STOP PAYMENT. It was not in dispute that the purchaser had asked the supplier to not to present the cheques as purchase order was cancelled and supplier was aked to return the cheques.

While addressing the issue in hand, the Court took note of the explanation appended to Section 138, which explains the meaning of the expression ‘debt or other liability’ for the purpose of Section 138, which indicates that the expression means a legally enforceable debt or other liability. Accordingly, to attract an offence under Section 138, it is to checked that if a cheque is issued as an advance payment for purchase of the goods and for any reason purchase 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, the cheque cannot be held to have been drawn for an existing debt or liability. The payment by cheque in the nature of advance payment indicates that at the time of drawal of cheque, there was no existing liability.

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 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. For a criminal liability to be made out under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque.

[M/s. Indus Airways Pvt. Ltd. & Ors. vs. M/s. Magnum Aviation Pvt. Ltd. & Anr.]
(SC, 07.04.2014)