Dishonour of post-dated cheque given for Advance is not offence under S. 138 of Negotiable Instruments Act

If you give a cheque as an advance towards supply or purchase of certain goods and subsequently that cheque is dishonoured, then it is not an offence under Section 138 of the Negotiable Instruments Act, 1881. This is what was held by the Supreme Court in the case of Indus Airways Pvt. Ltd. v. Magnum Aviation Pvt. Ltd. in Criminal Appeal No. 830 of 2014 decided on April 7, 2014, by a bench of Justice R.M. Lodha and Justice Shiva Kirti Singh.

In the above case, the purchasers (the appellant) had issued two cheques in favour of the supplier (the respondent) as advance towards two purchase orders for supply of certain aircraft parts. One of the terms and conditions of the contract was that the entire payment would be given to the supplier in advance. The supplier said that the advance payment was made by the purchasers as it had to procure the parts from abroad. These cheques got dishonoured when they were presented, on the ground that the purchasers had stopped payment. It was not disputed that the supplier had received a letter from the purchasers cancelling the purchase orders and requesting the supplier to return both the cheques. However, the supplier had filed a case under Section 138 of the Negotiable Instruments Act.

While deciding the above case, the Supreme Court referred to the Explanation of the expression “debt or other liability” in Section 138 of the said Act, which lays down as under:

“Explanation. – For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.”

The Supreme Court held as under:

“… The explanation leaves no manner of doubt that to attract an offence under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque. In other words, drawal of the cheque in discharge of existing or past adjudicated liability is sine qua non for bringing an offence under Section 138. 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, in our considered view, the cheque cannot be held to have been drawn for an exiting 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.”

The Supreme Court, while setting aside the impugned order of the Delhi High Court, further held that the High Court failed to keep in mind the fine distinction between civil liability and criminal liability under Section 138 of the N.I. Act. 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.

Thus, the Supreme Court held 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 by the supplier, the cheque cannot be said to have been drawn for an existing debt or liability.