In a landmark ruling, the Supreme Court has provided clarity on the application of Section 138 of the Negotiable Instruments Act, 1881. The judgment asserts that at the time of issuing process, the court must only determine whether the prima facie requirements under Section 138 are met. Specifically, the court emphasized that once a cheque’s issuance and signature are acknowledged, the statutory presumption under Section 139 becomes effective and cannot be contested before trial based on disputed defenses regarding a legally enforceable debt or liability.
Case Background
The case involved Renuka (“Appellant”), who had disputes with her husband, Mr. Ashwin Sheth, over the alleged illegal transfer of shares in Sheth Developers and Realtors (India) Limited and Sheth Developers Private Limited. To resolve the matter, a settlement agreement was drafted on January 12, 2022, wherein Mr. Sheth agreed to transfer certain properties and pay Rs. 50 crores to the Appellant. To secure this arrangement, Mr. Sheth’s close associate, the second Respondent, issued a cheque for Rs. 50 crores to Renuka.
Upon executing a Declaration-cum-Indemnity on January 13, 2022, Renuka later discovered that the shares had been sold contrary to the agreement, and her husband had received the proceeds. She deposited the cheque, which was dishonored with “payment stopped by drawer” as the reason. Renuka subsequently issued a statutory notice under Section 138 and, after the second Respondent failed to pay, filed a complaint.
Legal Proceedings
The Metropolitan Magistrate found that the conditions under Section 138 were met and issued a process against the second Respondent. However, the Sessions Court set aside this order, arguing that no enforceable debt existed when the cheque was issued. This decision was upheld by the Bombay High Court under Article 227 of the Constitution of India, prompting the Appellant to approach the Supreme Court.
Supreme Court’s Decision
The Supreme Court outlined that during the issuance of process, the court’s role is limited to verifying whether the essential elements of Section 138 are prima facie satisfied: issuance of the cheque, its dishonor, issuance of statutory notice, and filing of a complaint within the statutory period. Once the cheque’s issuance and signature are undisputed, the Section 139 presumption applies, shifting the burden to the drawer to prove the cheque was not for a legally enforceable debt.
The Court emphasized that this presumption can only be contested during trial through cross-examination or rebuttal evidence, not at the pre-trial stage. The Supreme Court criticized the Sessions Court for prematurely dismissing the statutory presumption under Section 139 without allowing evidence to be presented by the second Respondent. The judgment cited precedents from Rangappa Vs. Sri Mohan and Rajesh Jain Vs. Ajay Singh, underscoring that Section 139 includes a presumption of a legally enforceable debt.
Consequently, the Supreme Court overturned the decisions of the Sessions Court and the Bombay High Court, reinstating the complaint under Section 138 for trial on its merits.
Author’s Analysis
This ruling affirms that a Section 138 complaint cannot be dismissed prematurely without a full trial. The judgment reinforces that the court’s role at the issuance stage is solely to assess whether the statutory prerequisites are met, rather than evaluating the defense’s merits. It highlights the legislative intent to uphold the integrity of negotiable instruments by preventing summary dismissals based on disputed factual defenses before trial.
About the authors: Faranaaz Karbhari is a Counsel, and Khushboo Rupani is an Associate Partner at HSA Advocates.
Disclaimer: The views expressed are those of the authors and do not necessarily reflect Bar & Bench’s perspectives.
