There is a presumption that a negotiable instrument is supported by consideration #indianlaws

The Hon’ble Court held that there is a presumption that a negotiable instrument is supported by consideration. There was no dispute that such a consideration existed in as much as the cheques were issued in connection with the discharge of the outstanding liability against Respondent. Mentioning of date that the cheques can be presented for encashment after certain date clearly showed that the cheques issued by him were not ornamental but were meant to be presented if the amount in question was not paid within the extended period. 

The present sets of appeals were against the impugned order of the High Court whereby conviction of Respondent under Section 138 of the Negotiable Instruments Act, 1881 was set aside.

Appellant as partner of the firm had entered into an agreement for construction of a multi-storeyed building with one ‘N’ over a certain portion of land and consideration amount was also paid by the Appellant. The agreement however did not materialise in the execution of the work in question and resultantly, the same was cancelled in terms of a Promissory Note executed by ‘N’ in favour of the Appellant. The Promissory Note, apart from cancelling the agreement, promised to pay to the Appellant an amount received by ‘N’ within a period of one month from the date the Promissory Note was executed. It further stipulated that the amount in question was being refunded by the executant in terms of five post-dated cheques, the receipt whereof was acknowledged by the Appellant. The Promissory Note, at the same time, somewhat contradicted itself when it mentioned that the cheques were being issued as a security and would be returned to ‘N’ when the amount is paid by him within a period of one month. Interest at the bank rates was also promised to be paid on the said amount.

After the expiry of one month, when amount as promised was not received, cheques were presented for payment and all were dishonoured on the ground of insufficiency of funds. A second presentation also proved abortive for the same reason.

At this stage R-2 appeared on the scene and indemnified the Appellant by acknowledging that the cheques in question were actually issued by him and handed over to ‘N’. This acknowledgment was reflected in the form of an endorsement on the Promissory Note in which he agreed to the cheques being presented for payment after certain date. The Appellant accordingly once again presented the cheques for payment but the same were dishonoured by the bank for the third time.

Thereafter, statutory notice was sent by the Appellant to which R-2 replied through the lawyer denying that he had any knowledge of handing over of all the cheques to the Appellant b ‘N’ and also about the dishonour of the cheques due to insufficiency of funds. Although, in the reply, the Respondent undertook to pay the whole amount in question by some date by issuing fresh cheques.

A complaint under Section 138 of the NI Act was filed by the Appellant against both ‘N’ and R-2. Since ‘N’ had, in the meantime, passed away, proceedings against him abated but the trial court found R-2 guilty and accordingly convicted him for the offence punishable under Section 138 besides awarding compensation.

In appeal, the conviction was upheld however fine amount was modified. The High Court in further challenge, set aside the conviction, which became subject matter of challenge before the Apex Court.

The question came up before the Court was to whether the cheques issued by R-2 were meant to discharge, in whole or part, “any debt or other liability” within the meaning of Section 138.

Court answered the question in affirmative. It was observed that ‘N’ had received an amount from the Appellant in connection with the agreement executed between the two. It was also not in dispute that upon termination of the agreement, the amount paid to ‘N’ was refundable to the Appellant and ‘N’ had agreed to refund the same within one month. The promissory note contained an unequivocal acknowledgment of not only the debt/liability aforementioned but promised to liquidate the same within one month with interest at the bank rate. These cheques were to be returned but only upon payment of the amount in question.

Thus, the cheques had nothing to do with any debt or other liability. As a matter of fact, the existence of the debt or liability was never in dispute. The cheques were post-dated, only to give to the drawer the specified one month’s time to pay the amount. There was thus a direct relationship between the liability and the cheques issued in connection therewith. However, beyond this point, the only issue posing challenge was in regard to promissory note which contained the expression, “security” qua the cheques. When the amount was not paid within the period stipulated, the cheques were liable to be presented for otherwise there was no logic or reason for their having been issued and handed over in the first instance. If non-payment of the agreed debt/liability within the time specified also did not entitle the holder to present the cheques for payment, the issue and delivery of any such cheques would be meaningless and futile if not absurd. The present was not a case where no debt or liability was determined or acknowledged to be payable. If cheques were issued in relation to a continuing contract or business where no claim is made on the date of the issue nor any determinate amount payable to the holder, one could perhaps argue that the cheques cannot be presented or prosecution launched on a unilateral claim of any debt or liability. The present is, however, a case where the existence of the debt/liability was never in dispute. It was on the contrary acknowledged and a promise was made to liquidate the same within one month. Failure on the part of the debtor to do so could lead to only one result, viz. presentation of the cheques for payment and in the event of dishonour, launch of prosecution which happened in the present case.

There is a presumption that a negotiable instrument is supported by consideration. There was no dispute that such a consideration existed in as much as the cheques were issued in connection with the discharge of the outstanding liability against ‘N’.

Mentioning of date that the cheques can be presented for encashment after certain date clearly showed that the cheques issued by him were not ornamental but were meant to be presented if the amount in question was not paid within the extended period. The High Court, as held, erred in upsetting the conviction recorded by the Courts below. The appeals were accordingly allowed.

[Don Ayengia vs. The State of Assam & Anr.]

(SC, 28.01.2016) – Criminal Appeal Nos. 82-83 of 2016