Recently, the Supreme Court set aside orders of the Sessions Court and the Bombay High Court, holding that a complaint under Section 138 of the Negotiable Instruments Act, 1881 cannot be quashed at the pre-trial stage merely on the ground that the cheque was allegedly not issued towards a legally enforceable debt. The Court emphatically reiterated that once the statutory ingredients are satisfied, the presumption under Section 139 must operate, observing that such presumption “cannot be dislodged in a summary manner at the stage of issuance of process.”
Brief Facts:
The dispute arose out of a matrimonial and commercial settlement between the appellant and her husband concerning alleged fraudulent transfer of shares in certain companies. As part of negotiations, a settlement agreement was drafted on 12 January 2022, under which the husband agreed to transfer immovable properties and pay Rs.50 crores upon execution of a Declaration cum Indemnity by the appellant. To secure this obligation, the second respondent, a close associate of the husband, issued a cheque of Rs.50 crores in favour of the appellant while acting as a mediator/guarantor.
Upon alleged breach of the settlement and sale of shares contrary to its terms, the appellant presented the cheque, which was dishonoured with the remark “payment stopped by drawer.” Following statutory notice under Section 138 of the NI Act and failure to pay, a complaint was filed. While the Metropolitan Magistrate issued process upon finding a prima facie case, the Sessions Court set aside the order, holding absence of legally enforceable debt, a view later affirmed by the High Court under Article 227.
Contentions of the Appellant:
The counsel for the appellant contended that the Sessions Court had grossly erred in examining the existence of a legally enforceable debt at the threshold stage. It was argued that once the foundational requirements under Section 138, issuance of cheque, its dishonour, service of statutory notice, and non-payment, were satisfied, the statutory presumption under Section 139 automatically operated in favour of the complainant. Relying on Sunil Todi v. State of Gujarat, it was submitted that such presumption could only be rebutted during trial through evidence and not at the stage of issuance of process. The premature quashing of proceedings, it was urged, amounted to stifling a legitimate prosecution.
Contentions of the Respondent:
The counsel for the respondent supported the impugned orders, contending that the cheque was not issued in discharge of any legally enforceable debt as the underlying settlement agreement was neither concluded nor signed by the respondent. It was argued that liability, if any, was contingent upon completion of the agreement, which never materialised. Placing reliance on Sunil Todi, it was submitted that where payment depends on an event that does not occur, no enforceable liability arises. Continuing the prosecution, therefore, would amount to abuse of process.
Observations of the Court:
The Court undertook a detailed examination of the statutory scheme under Sections 138 and 139 of the NI Act and held that the approach adopted by the Sessions Court and the High Court was fundamentally flawed. It emphasised that at the stage of issuance of process, the Magistrate is only required to ascertain whether the basic ingredients of the offence are satisfied, namely, issuance of cheque, its dishonour, issuance of statutory notice, and non-payment within the prescribed period. Once these elements are present, the statutory presumption under Section 139 is triggered, shifting the burden onto the accused.
In a significant observation, the Court held that “the statutory presumption under Section 139 of the N.I. Act cannot be dislodged in a summary manner merely by contending that the cheque issued was not for any legally enforceable debt or liability.” It reiterated that such rebuttal is a matter of evidence and must be adjudicated during trial.
Drawing strength from precedents such as Rangappa v. Sri Mohan and Rajesh Jain v. Ajay Singh, the Court reaffirmed that Section 139 embodies a reverse onus clause, mandating courts to presume that the cheque was issued for discharge of a debt unless proved otherwise. The Court further criticised the Sessions Court for placing undue reliance on the unsigned settlement agreement and the matrimonial nature of the dispute, observing that this led to a “misdirection” by ignoring the statutory presumption.
Importantly, the Court noted that the respondent did not dispute issuance or signature on the cheque, nor the factum of dishonour and statutory notice. In such circumstances, the premature conclusion that no legally enforceable debt existed effectively “washed away” the statutory presumption even before trial, which was impermissible. The Court also clarified that disputed questions regarding existence of liability are matters of fact that must be tested through evidence at trial.
The decision of the Court:
The Supreme Court allowed the appeal, set aside the orders of the Sessions Court and the High Court, and restored the complaint for trial on merits. The Court held that once the foundational ingredients of Section 138 are established, the presumption under Section 139 must operate, and any challenge to the existence of legally enforceable debt can only be adjudicated during trial. The ratio decisively affirms that pre-trial quashing of cheque dishonour complaints on disputed questions of liability is impermissible, as the statutory presumption cannot be rebutted without evidence.
Case Title: Renuka Vs. The State of Maharashtra and Anr
Case No.: SLP (CRL.) No.7829 of 2023
Coram: Hon’ble Mr. Justice J.K. Maheshwari, Hon’ble Mr. Justice Atul S. Chandurkar
Advocate for the Petitioner: Sr. Adv. Mukul Rohatgi, Sr. Adv. Siddharth Bhatnagar, AOR Ranjeeta Rohatgi, Adv. Gaurav Srivastava, Adv. Shrika Gautam, Adv. Yuvraj Kashyap
Advocate for the Respondent: AOR Aaditya Aniruddha Pande, AOR E. C. Agrawala, Sr. Adv. A.M. Singhvi, Sr. Adv. Kavin Gulati, Adv. C.d. Mehta, Adv. Mahesh Agarwal, Adv. Ankur Saigal, Adv. Bhavik Mehta, Adv. Kajal Dalal, Adv.Deepshika Mishra, Adv. Prakruti
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