S. 138 NI Act | No Enforceable Debt Exists If Cheque Is Presented Before Crystallisation Of Liability: Bombay High Court

"Unless the price of the goods supplied is crystallised, it cannot be said that the liability against the cheque was ascertained or admitted," Bombay High Court at Goa, in a significant ruling dated May 4, 2026, held that a prosecution under Section 138 of the Negotiable Instruments Act cannot be sustained if no enforceable debt or liability has crystallized on the date the cheque is presented for encashment.

A single-judge bench of Justice Ashish S. Chavan observed that where a cheque is deposited as collateral security following an alleged breach of contract, the complainant must demonstrate that a specific, enforceable liability existed at the moment of presentation.

The dispute arose from a contract for the supply of 40,000 MT of iron ore between the appellant, Kala Mines and Minerals, and the respondents. The appellant had provided a demand draft of Rs. 35 lakhs as a deposit, while a cheque for the same amount was allegedly held as security. Claiming that the respondents supplied inferior quality ore and breached the contract, the appellant deposited the security cheque, which was subsequently dishonoured, leading to the initial conviction of the respondents by the Magistrate.

The primary question before the court was whether an enforceable debt existed on the date the cheque was presented, especially since the quality analysis report was received after the presentation. The court was also called upon to determine whether the statutory presumptions under Sections 118 and 139 of the NI Act are triggered when the complainant takes contradictory stands regarding how the cheque was obtained.

Liability Must Be Enforceable At The Time Of Presentation

The Court emphasized that for a Section 138 offence to be made out, the cheque must be for an existing enforceable debt. In this case, the appellant presented the cheque on May 24, 2004, but the analyst's report certifying the "inferior quality" of the iron ore—which the appellant used as the basis for claiming a refund—was only dated July 9, 2004.

The bench noted that at the time of presentation, the appellant could not have legally known or established that the goods were sub-standard. Consequently, any potential liability for a refund had not yet been quantified or crystallized. The Court held that "no liability corresponding to the cheque amount was crystallised as on the date of presentation of the cheque."

"Unless the price of the goods supplied is crystallised, it cannot be said that the liability against the cheque was ascertained or admitted."

Foundational Facts Necessary For Statutory Presumptions

Justice Chavan observed that the statutory presumptions under Sections 118 and 139 of the NI Act are not absolute and are triggered only when the complainant establishes the necessary factual foundation. The Court found a glaring discrepancy in the appellant's narrative: in the Section 138 complaint, it was alleged the cheque was given directly by the respondents, while in a separate cheating complaint, it was alleged the cheque was handed over through a third party, Pandurang alias Bhai Naik.

The Court held that this variance "goes to the root of the matter" and raises doubts about how the appellant came into possession of the cheque. Since the third party was never examined, the Court drew an adverse inference against the appellant, concluding that they failed to raise the foundational facts required to invoke the legal presumptions of a valid debt.

"The Appellant has failed to raise the factual foundation required to trigger the statutory presumptions under Sections 118 and 139 of the N. I. Act."

Security Cheques Cannot Be Misused For Uncrystallised Claims

The Court further observed that the contract between the parties did not even mention the subject cheque as a form of security for performance. It noted that the respondents had indeed supplied over 1,300 MT of iron ore, and the dispute regarding quality was a matter for arbitration as per the contract terms.

The bench remarked that using a "false claim of inferior goods" to deposit a security cheque before the dispute is resolved or the liability is fixed constitutes a misuse of the legal process. The Court found that the reasoning of the Sessions Judge, who had acquitted the respondents by finding no existing debt, was in total consonance with the law.

High Threshold For Reversing Acquittal Orders

In dismissing the appeal, the High Court reiterated the settled law regarding appeals against acquittal, citing precedents like C. Antony vs. Raghavan Nair and State of Goa vs. Sanjay Thakran. The bench noted that an order of acquittal strengthens the presumption of innocence in favour of the accused.

The Court held that even if a different view is possible on re-appreciation of evidence, the appellate court should not interfere unless the trial court's view is "palpably wrong" or "erroneous." Finding no such infirmity in the acquittal, the High Court refused to disturb the findings of the Sessions Court.

The High Court concluded that the appellant failed to prove the existence of a legally enforceable debt at the time the cheque was presented. Finding the respondents' acquittal justified, the Court dismissed the appeal and confirmed the lower court's order.

Date of Decision: 04 May 2026