138 N.I.Act | Stop Payment Due To Defective Goods Is A Valid Defence Under NI Act: Madras High Court Upholds Acquittal In Cheque Bounce Case

In a significant reaffirmation of commercial fairness within criminal proceedings, the Madras High Court upheld the acquittal of a businessman accused under Section 138 of the Negotiable Instruments Act, ruling that “the criminal law under Section 138 cannot be weaponized to coerce payment when there exists a bona fide commercial dispute regarding defective goods.”

Justice G.K. Ilanthiraiyan, while dismissing the appeal in the case of Adithya, Proprietor of SMR Electronics v. Kiran, Proprietor of Indus Technologies, highlighted the crucial distinction between criminal liability under the NI Act and civil disputes over quality of goods. Observing the factual matrix, the Court noted, “Though the respondent issued the cheque, the record clearly reveals the stoppage of payment was due to a genuine commercial grievance, not due to insufficiency of funds or fraudulent intent.”

The appellant, Adithya, had approached the Court seeking reversal of the Trial Court’s acquittal decision, alleging dishonour of a cheque for ₹4,60,389, claimed as outstanding payment for electronic goods sold to the respondent. However, the Court meticulously examined the documentary evidence and the testimony on record. It found that the respondent had “stopped payment after issuing a detailed reply notice, asserting that the goods supplied were defective and unfit for sale to end customers.”

Referring to the fundamental presumption under Section 139 of the NI Act, the Court stressed, “Presumption of liability is indeed rebuttable. The standard is not beyond reasonable doubt, but only the preponderance of probabilities. Here, the accused discharged that burden by presenting credible evidence of defective goods and timely communication of grievance.”

Crucially, the Court underscored the distinction between civil and criminal remedies, observing, “Section 138 is not designed to convert commercial disagreements into criminal prosecution. Where the debtor offers a plausible and reasonable explanation backed by evidence, criminal liability cannot be foisted merely on account of cheque dishonour.”

The High Court also noted that the respondent’s bank statement showed sufficient balance to honour the cheque at the time of presentation. This, coupled with the prior stop payment instruction and the absence of fraudulent intent, led to the conclusion that the dishonour was rooted in a genuine dispute.

Justice Ilanthiraiyan held, “Stopping payment on account of serious defects in goods strikes at the root of the legally enforceable debt itself. Once this defence stands unrebutted, Section 138 liability fails.”

Reiterating the settled principle that appellate courts must be slow to interfere with acquittals unless there is manifest perversity or legal infirmity, the Court concluded, “No perversity is found in the Trial Court’s well-reasoned acquittal. The appeal fails.”

By rejecting the appeal, the Court sent a clear message that criminal courts are not venues to enforce disputed civil claims arising from allegedly defective goods.

Date of Decision: 2nd July 2025