Strengthening Negotiable Instruments: SC holds rebuttal of Section 139 must await trial

In a significant judgment concerning the scope and application of Section 138 of the Negotiable Instruments Act, 1881, (“Act”) the Supreme Court reiterated that at the stage of issuance of process, the Court is only required to examine whether the basic ingredients of Section 138 of the Act are prima facie satisfied. The Supreme Court held that once the issuance and signature of the cheque are admitted, the statutory presumption under Section 139 of the Act comes into operation and such presumption cannot be rebutted at the pre-trial stage merely on the basis of disputed defences regarding the existence of legally enforceable debt or liability.

Renuka (“Appellant”) had disputes with her husband, Mr. Ashwin Sheth, regarding the alleged illegal and fraudulent transfer of shares of Sheth Developers and Realtors (India) Limited and Sheth Developers Private Limited, pursuant to which she filed various complaints against him. To amicably resolve the dispute, the parties negotiated and a draft settlement agreement dated January 12, 2022 was prepared, under which Mr. Sheth agreed to transfer certain immovable properties and pay Rs. 50 crores to the Appellant upon execution of a Declaration-cum-Indemnity for withdrawal of the complaints.

To secure the Appellant’s interest, the second Respondent, a close friend of Mr. Sheth, agreed to act as mediator and issued a cheque of Rs. 50 crores in favour of the Appellant, following which the Appellant executed the Declaration-cum-Indemnity on January 13, 2022. Subsequently, the Appellant learnt that the shares had been sold contrary to the settlement agreement and that her husband had received the sale consideration. The Appellant therefore deposited the cheque for encashment, but it was dishonoured with the remark “payment stopped by drawer.” She thereafter issued a statutory notice under Section 138 of the Act and, upon failure of payment by the second Respondent, filed a complaint.

The learned Metropolitan Magistrate, being prima facie satisfied that the ingredients of Section 138 were made out, issued process against the second Respondent. Aggrieved thereby, the second Respondent challenged the order before the Sessions Court in revision, which set aside the issuance of process holding that no legally enforceable debt existed on the date of the cheque. The said order was upheld by the Bombay High Court in proceedings under Article 227 of the Constitution of India. Aggrieved by the High Court’s order, the Appellant approached the Hon’ble Supreme Court.

• Whether at the stage of issuance of process under Section 138 of the Act, the Court can examine and conclude that there existed no legally enforceable debt or liability?

• Whether the statutory presumption under Section 139 of the Act can be rebutted at the pre-trial stage?

At the outset, the Supreme Court observed that at the stage of issuance of process under Section 138 of the Act, the Court is only required to examine whether the following foundational requirements are prima facie satisfied, i.e. a) issuance of cheque by the drawer in favour of complainant, b) dishonour of the cheque upon presentation, c) issuance of statutory notice under Section 138 of the Act and d) filing of complaint within the prescribed statutory period.

The Supreme Court further observed that once the drawer does not dispute the issuance of the cheque or the signature appearing thereon, the statutory presumption contemplated under Section 139 of the Act comes into operation. Consequently, the burden shifts upon the drawer to establish that the cheque was not issued towards discharge of any legally enforceable debt or liability.

The Supreme Court held that such rebuttal of statutory presumption can only be undertaken during trial either through cross-examination of the complainant or by leading evidence in rebuttal. The Hon’ble Supreme Court observed that the statutory presumption under Section 139 of the Act cannot be dislodged in a summary manner at the pre-trial stage merely on the basis of a defence that no legally enforceable debt existed.

The Supreme Court relied upon the judgments in the case of Rangappa Vs. Sri Mohan and Rajesh Jain Vs. Ajay Singh and reiterated that the presumption under Section 139 includes a presumption regarding the existence of a legally enforceable debt or liability. The Supreme Court further reiterated that Section 139 is a reverse onus clause enacted to improve the credibility of negotiable instruments and that the burden to rebut the presumption lies upon the accused.

Thereafter, the Court observed that the Sessions Court has misdirected itself by placing excessive reliance on fact that the settlement agreement dated January 12^th 2022 was not signed by second Respondent and accordingly holding that the issuance of cheque by second Respondent was not for any enforceable debt and ignoring the fact that the basic ingredients for attracting Section 138 of the Act was duly satisfied by the Appellant for issuance of process. 

The Supreme Court further held that by setting aside the order of issuing process at the pre-trial stage, the Sessions Court had washed away the statutory presumption under Section 139 of the Act even before commencement of trial and without any evidence being led by the second Respondent. The Supreme Court observed that such an approach was legally unsustainable.

Accordingly, the Supreme Court set aside the orders passed by the Sessions Court and the Bombay High Court and restored the complaint filed by the Appellant under Section 138 of the Act for adjudication on merits.

This Judgement reinforces that a complaint under Section 138 of the Negotiable Instruments (NI) Act cannot be summarily dismissed at the pre-trial stage. The statutory presumption of a legally enforceable debt can only be rebutted during a full trial

The judgment upholds the settled position that at the stage of issuance of process under Section 138 of the Act, the Court is only required to examine whether the foundational statutory requirements are prima facie fulfilled and not whether the defence of the accused ultimately succeeds on merits and hence would appear premature.

The Supreme Court has clarified that once issuance and execution of the cheque are admitted, the statutory presumption under Section 139 regarding existence of legally enforceable debt immediately operates in favour of the complainant and such presumption can only be rebutted during trial upon appreciation of evidence.

The judgment further safeguards the legislative object underlying Section 138 of the Act by preventing premature dismissal of complaints on disputed factual defences at the pre-trial stage. The decision therefore strengthens the evidentiary value and commercial credibility of negotiable instruments while reaffirming the limited scope of judicial scrutiny at the stage of issuance of process.

About the authors: Faranaaz Karbhari is a Counsel and Khushboo Rupani is an Associate Partner at HSA Advocates.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.