Facts in Brief

The case arose out of a complaint filed by the Appellant company under Section 138 of the Negotiable Instruments Act, 1881. The Respondent had to settle a monetary liability resulting from a transaction of cement purchase from the Appellant company. In partial discharge of the said liability, the Respondent drew three cheques in favour of the Appellant company, which were returned by the bank with the endorsement “payment stopped by the drawer.”

The precise issue for consideration before the Apex Court was therefore: Whether the return of a cheque by the bank because of a stop-payment instruction amounted to dishonour of the cheque under Section 138 of the Negotiable Instruments Act, 1881.

Arguments

It was argued that since the fact that the cheque was dishonoured because the amount of money standing to the credit of that account was insufficient to honour the cheque, or that it exceeded the amount arranged to be paid from that account by an agreement made with that bank, was not made out, an offence under Section 138 of the Act was not established.

Judgment

The Supreme Court observed that if it were held that — where a cheque was issued to the payee or holder in due course, and before it was presented for encashment a notice was issued to him not to present the same for encashment, and yet the payee or holder in due course presented the cheque to the bank for payment, and it was returned on such instruction — Section 138 was not attracted, then the very object of introducing Section 138 would be defeated.

It was thus contrary to the spirit and object of Sections 138 and 139 of the Act to give instructions to the bank to stop payment immediately after issuing a cheque against a debt or liability, as it would allow the drawer to easily get rid of the penal consequences, notwithstanding the fact that a deemed offence had been committed.

For the Common Man

The judgment is of seminal importance to the commercial world, as the Court held that Section 138 of the Negotiable Instruments Act, 1881 was not based upon the presumption of dishonesty against the drawer of the cheque, and that the cheque would be considered dishonoured under the said Section if the bank refused to honour the cheque on the instruction of stop-payment, given immediately after issuing a cheque against a debt or liability.