Section 138 Applicable When Debt Incurred After Cheque Drawn But Prior To Encashment: SC

KEY TAKEAWAYS

• The Supreme Court recently ruled that Section 138 of the Negotiable Instruments Act shall apply in cases where a debt is accrued after a check is drawn but before it is cashed.
• The appellants contended that a cheque issued as security is not legally enforceable.

DETAILS

• The Supreme Court was dealing with the issue of whether a cheque, which was issued as a security, is covered under Section 138.
• The Court observed that the wording of the section - “debt or other liability” – implies that Section 138 also covers such debts which arise after the cheque is drawn but prior to its encashment. The Court held that if debt under Section 138 is interpreted to mean only such debt which exists on the date of drawing if cheque, then such a narrow definition would defeat the purpose of the legislation.
• Furthermore, the Court held that the purpose of a cheque is to meet a legal debt or liability and hence the cheque which is issued as a security would also be legally enforceable.
• The Court also pointed out that only where a cheque is issued as a gift or it drawn for purpose other than the discharge of a liability, the penal consequences of Section 138 would not be applicable if the cheque defaults.

QUESTIONS

• Do you think the Court was right in its observation?
• Do you think that Section 138 has substantially increased the caseload in the Indian Judiciary?