Cheque Issued on Illegal Agreement Not a Legally Enforceable Debt: Supreme Court Questions Kerala HC Ruling on Section 138 NI Act

“Even If Money Was Paid Under Illegal Promise, Dishonour of Cheque May Not Attract Section 138 NI Act”— In a significant development that may reshape the legal understanding surrounding Section 138 of the Negotiable Instruments Act, 1881, the Supreme Court of India on 18 August 2025 questioned the validity of a Kerala High Court ruling that allowed prosecution under Section 138 for a cheque issued in furtherance of an illegal agreement.

The case was heard by a Division Bench of Justice Aravind Kumar and Justice Joymalya Bagchi, who observed that “prima facie, the view taken by the Kerala High Court may not be in consonance with the statutory provisions”.

Supreme Court Skeptical of Treating Cheques from Illegal Agreements as “Legally Enforceable Debt” Under Section 138

The petitioner had relied heavily on the Kerala High Court’s judgment in C.V. Rajan v. Illikkal Ramesan (2015 SCC OnLine Ker 6780), wherein it was held that even if the underlying agreement is void or illegal under Section 23 of the Indian Contract Act, 1872, the issuance of a cheque in a compromise setting can still attract liability under Section 138 NI Act.

The Kerala High Court had essentially held that:

“The law does not prohibit a person from repaying an amount obtained on an illegal promise. The issuance of a cheque towards such repayment, even if not civilly recoverable, is still actionable under the NI Act.”

However, the Supreme Court expressed strong reservations about the correctness of this interpretation.

“Prima facie, we are of the view that the said principle would be inapplicable… and the same would not be considered as a ‘legally enforceable debt’.”

Section 138 Requires “Legally Enforceable Debt or Liability” — Void Agreements Can't Satisfy the Statute

The Court’s interim observation turns on the precise statutory language of Section 138 of the Negotiable Instruments Act, which makes it an offence when a cheque is dishonoured “for the discharge, in whole or in part, of any debt or other liability” that is legally enforceable.

By invoking Section 23 of the Indian Contract Act, which renders an agreement void if it is opposed to public policy or founded on unlawful consideration, the Court indicated that such debts lack legal enforceability and therefore cannot form the basis of criminal prosecution under the NI Act.

This clarification may significantly narrow the scope of Section 138 prosecutions, especially in cases involving settlements or compromises of illegal contracts.

Notice Issued to Respondent — Court to Examine Matter Further

The Court declined to dismiss the matter outright and instead ordered issuance of notice to the respondent, returnable in six weeks.

“For this limited purpose, we order for issuance of notice to the respondent, returnable in six weeks.”

This indicates the Court’s intent to examine the matter in greater depth, particularly to determine whether a cheque issued in furtherance of an unlawful agreement could attract penal consequences under the NI Act, despite lacking civil enforceability.

Section 138 NI Act Cannot Be Used to Enforce Void Agreements

The order reinforces the principle that criminal law cannot be used to enforce civilly void obligations, especially those declared void under Section 23 of the Indian Contract Act.

The Court signaled that where the debt is not legally enforceable, proceedings under Section 138 would not lie, which aligns with earlier precedents such as Krishna Janardhan Bhat v. Dattatraya G. Hegde (2008) 4 SCC 54, which stressed the necessity of a legally enforceable liability.

Date of Order: 18 August 2025