Friendly Loan Without Commercial Consideration Not A 'Legally Enforceable Debt' Under Section 138 NI Act: Jharkhand High Court

"Friendship cannot be a consideration to form a contract. Thus, if no contract has been formed, then the transaction cannot be legally enforced and it does not come under the definition of legally enforceable debt and the jurisdiction of Section 138 of N.I Act is not applicable," Jharkhand High Court, in a significant ruling, held that a purely friendly transaction devoid of commercial consideration does not constitute a "legally enforceable debt" for the purposes of Section 138 of the Negotiable Instruments Act (NI Act).

A single-judge bench of Justice Rajesh Kumar observed that for a transaction to fall under the penal provisions of the NI Act, it must stem from a legally enforceable contract where "consideration" is a basic ingredient. The court noted that "the friendship cannot be a consideration to form a contract."

The appellant filed a complaint alleging he provided a friendly loan of ₹2,00,000 to the respondent to assist his business, partly via cheque and partly in cash. In return, the respondent issued two post-dated cheques as security, which were subsequently dishonoured due to "insufficient funds." Following a trial, the Judicial Magistrate, 1st Class, Jamshedpur, acquitted the accused, prompting the complainant to approach the High Court in appeal.

The primary question before the court was whether a friendly loan, given without a commercial contract or valid consideration under the Indian Contract Act, qualifies as a "legally enforceable debt" under Section 138 of the NI Act. The court also examined whether the presumption in favour of the holder of the cheque stands rebutted if the transaction is found to be non-contractual.

Scope of Section 138 NI Act In Commercial Transactions

The court began by emphasizing the legislative intent behind Section 138 of the NI Act, noting that the provision was enacted to operate primarily within the realm of commercial transactions. It observed that the explanation to Section 138 explicitly defines "debt or other liability" as a legally enforceable debt or liability. The bench noted that the penal consequences of the Act are triggered only when a cheque is issued for the discharge of such a specific legal obligation.

Presumption Under Section 139 And The Onus Of Proof

Justice Rajesh Kumar discussed the statutory presumption that exists in favour of the cheque holder, which assumes the cheque was issued for the discharge of a debt. However, the court clarified that this presumption is not absolute and vanishes if the materials on record suggest the absence of a legally enforceable debt. The court noted that if the transaction is merely a "friendly transaction" that does not form a contract, the presumption "goes and the court has to decide the matter, as per the material available on record."

Accused Must Meet The Standard Of Preponderance Of Probabilities

Citing the Supreme Court’s precedent in Rajesh Jain Vs. Ajay Singh (2023), the High Court reiterated that the standard of proof required for an accused to discharge their evidential burden is not "beyond reasonable doubt." Instead, the accused must meet the standard of "preponderance of probabilities," similar to a defendant in a civil proceeding. Once the accused adduces evidence suggesting no debt exists in the manner pleaded, the burden shifts back to the complainant to prove the debt as a matter of fact.

"The accused is not expected to prove the non-existence of the presumed fact beyond reasonable doubt. The accused must meet the standard of 'preponderance of probabilities', similar to a defendant in a civil proceeding."

Friendship Not Recognized As Valid Consideration Under Contract Act

A pivotal part of the judgment focused on the interplay between the NI Act and the Indian Contract Act, 1872. The court observed that for a contract to be legally enforceable, there must be an agreement supported by "consideration." The bench held that such consideration must be "commercial" in nature. It explicitly stated that friendship does not satisfy the legal requirement of consideration to form a binding contract.

"The friendship cannot be a consideration to form a contract. Thus, if no contract has been formed, then the transaction cannot be legally enforced and it does not come under the definition of legally enforceable debt."

Absence Of Legally Enforceable Debt Ousts NI Act Jurisdiction

The court concluded that since the transaction between the parties was a personal, friendly loan without commercial consideration, it failed to meet the criteria of a legally enforceable contract. Consequently, the dishonour of cheques issued in such a context does not attract the criminal jurisdiction of Section 138 of the NI Act. Finding no merit in the appeal, the court upheld the trial court's order of acquittal.

The High Court dismissed the acquittal appeal, affirming that the complainant failed to prove the existence of a legally enforceable debt. The ruling clarifies that personal loans based solely on friendship, without commercial underpinnings or valid legal consideration, cannot be recovered through the rigours of criminal prosecution under the Negotiable Instruments Act.

Date of Decision: 07 May 2026