Part Payment Before Encashment of Cheque and Liability under Section 138 of Negotiable Instruments Act, 1881

Part Payment Before Encashment of Cheque and Liability under Section 138 of Negotiable Instruments Act, 1881

In the case of Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel [2022] GCtR 1504 (SC), it was explained that "Section 138 of the N.I. Act provides that a drawer of a cheque is deemed to have committed the offence if the following ingredients are fulfilled: (i) A cheque drawn for the payment of any amount of money to another person; (ii) The cheque is drawn for the discharge of the ‘whole or part’ of any debt or other liability. ‘Debt or other liability’ means legally enforceable debt or other liability; and (iii) The cheque is returned by the bank unpaid because of insufficient funds. However, unless the stipulations in the proviso are fulfilled the offence is not deemed to be committed. The conditions in the proviso are as follows: (i) The cheque must be presented in the bank within six months from the date on which it was drawn or within the period of its validity; (ii) The holder of the cheque must make a demand for the payment of the ‘said amount of money’ by giving a notice in writing to the drawer of the cheque within thirty days from the receipt of the notice from the bank that the cheque was returned dishonoured; and (iii) The holder of the cheque fails to make the payment of the ‘said amount of money’ within fifteen days from the receipt of the notice".

The issue that was answered here was whether Section 138 of the Act would still be attracted when the drawer of the cheque makes a part payment towards the debt or liability after the cheque is drawn but before the cheque is encashed, for the dishonour of the cheque which represents the full sum. 

It was held that when a part-payment is made after the issuance of a post-dated cheque, the legally enforceable debt at the time of encashment is less than the sum represented in the cheque. A part-payment or a full payment may have been made between the date when the debt has accrued to the date when the cheque is sought to be encashed. Where the borrower agrees to repay the loan within a specified timeline and issues a cheque for security but defaults in repaying the loan within the timeline, the cheque matures for presentation. When the cheque is sought to be encashed by the debtor and is dishonoured, Section 138 of the Act will be attracted  However, the cardinal rule when a cheque is issued for security is that between the date on which the cheque is drawn to the date on which the cheque matures, the loan could be repaid through any other mode. It is only where the loan is not repaid through any other mode within the due date that the cheque would mature for presentation  If the loan has been discharged before the due date or if there is an ‘altered situation’, then the cheque shall not be presented for encashment. 

Three important principles emerge from this decision. They are as follows : 

For the commission of an offence under Section 138, the cheque that is dishonoured must represent a legally enforceable debt on the date of maturity or presentation.

If the drawer of the cheque pays a part or whole of the sum between the period when the cheque is drawn and when it is encashed upon maturity, then the legally enforceable debt on the date of maturity would not be the sum represented on the cheque.

When a part or whole of the sum represented on the cheque is paid by the drawer of the cheque, it must be endorsed on the cheque as prescribed in Section 56 of the Act. The cheque endorsed with the payment made may be used to negotiate the balance, if any. If the cheque that is endorsed is dishonoured when it is sought to be encashed upon maturity, then the offence under Section 138 will stand attracted.