Exploring Section 138 of the Negotiable Instrument Act: Unveiling the Dynamics of Time-Barred Debt in Relation to Legally Enforceable Obligations – By Shivam Agrawal and Harshal Chhabra

Exploring Section 138 of the Negotiable Instrument Act: Unveiling the Dynamics of Time-Barred Debt in Relation to Legally Enforceable Obligations

Shivam Agrawal, 3rd Year student, Gujarat National Law University
Harshal Chhabra, 2nd Year student, Gujarat National Law University

In January 2023, the Guwahati High Court made a significant ruling, stating that it is incorrect to dismiss proceedings on the grounds of a debt or liability being time-barred, thereby rendering it legally unenforceable[1]. This decision is noteworthy as the law of limitation typically bars liability after a period of three years, if not acknowledged.

Section 138 of the Negotiable Instrument Act serves as a protective provision, enabling creditors to recover losses arising from dishonoured cheques issued by debtors. There are various ingredients of the section to attract the penal liability, such as a returned cheque due to insufficient balance, presentation of the cheque within three months from the date of it’s issuance, a notice demanding payment within 30 days, failure of payment, and the crucial requirement of a legally enforceable debt.

The term ‘legally enforceable debt’ refers to the legal obligation of an individual to repay a debt or liability within a specified period, either as mutually agreed upon by the parties involved or as mandated by the laws outlined in the Limitations Act, which typically sets the time limit at three years.

Section 29 of the Limitations Act includes a saving clause, stipulating that ‘Nothing in this Act shall affect Section 25 of the Indian Contract Act, 1872.’ Pursuant to Section 25(3) of the Contracts Act (The Act), a promise may remain enforceable even after the limitation period for recovering the amount has expired.

This blog delves into the provisions of Section 138 of the Negotiable Instrument Act, focusing on the concept of time-barred debt and its relationship with legally enforceable debt by analysing relevant case law, statutory provisions, and scholarly perspectives. Furthermore, it answers the various contentions coming in dispute in the real life.

Overview of Legal Provisions

The steady increase in the number of dishonour of cheques has led to the increase in the number of specially assigned courts dealing with NIA and dishonour of cheque.

In Section 139 of the N.I. Act, there is a specific phrase that states, “the cheque of the nature referred to in Section 138 for the discharge in whole or in part, of any debt or other liability.” This particular description of a cheque is unique within the N.I. Act and not found elsewhere in a significant manner. It is essential to bear in mind that Section 138 of the Act establishes an offence, and therefore, the legal provisions relating to penalties must be strictly observed to prevent any possibility of ingenious, insidious, guileful, or strategic prosecution.

The purpose of Section 138 is to regulate financial promises in the expanding business, trade, and industrial operations of the country. It aims to promote vigilance and ensure accountability in the matters it addresses. Allowing the accused to assert the defence of having no reason to believe that the cheque would be dishonoured undermines the intent of Section 138 of the Negotiable Instruments Act, 1881.

Controversial Issues Unfolding in Everyday Contexts:

1. In some cases, the person on trial admits that the cheque that bounced is his and that he signed it. But he says that the cheque should have been written to pay off a legally binding debt or duty for it to meet the requirements of Section 138 of the Negotiable Instruments Act. Since the cheque was given to pay off a debt that cannot be recovered legally anymore, he claims that it cannot be considered as issued to discharge a legally enforceable debt or obligation.
2. In addition to that, the accused person also claims that his promise to repay the time-barred debt should be considered void since it lacks consideration, as required by the Act. This section states that such a promise should be in writing and signed by the accused person.
3. Furthermore, one more contention that needs to be taken care of is when the accused says that he hasn’t acknowledged the debt in writing, as Section 18 of the Limitation Act requires, nor has he made a partial payment to start the clock over to restart the time stipulated under the limitation act in order to get the cheque susceptible to litigation, as Section 19 of the Limitation Act says he should do.

While answering all these contentions, the broad idea that needs to be considered is whether the cheque issued to discharge the time barred debt attracts the liability and raises any presumptions or not?  To answer this question, it is pertinent to analyse how the courts have interpreted the term “legally enforceable debt”.

What is a legally enforceable debt?

A legally enforceable debt refers to a sum of money that is owed by a person drawing the cheque to another person holding the cheque, which is enforceable through legal means. The debt must exist at the time the cheque is cashed and can take the shape of a current obligation or a promise to pay a specific amount of money at a later date.

In the case of Sunil Todi v. State of Gujarat, a Bench consisting of two Judges provided an interpretation of the expression “debt or other liability.” According to their observation, this phrase encompasses a “sum of money that is promised to be paid at a later date due to an existing obligation.” The Court stated that a post-dated cheque issued after the debt was accrued would fall under the definition of “debt.” Concluding, that Section 138 of the law would also encompass situations where the debt is incurred after the cheque is written but before it is presented for encashing.

The court ruled that if a promise to pay a certain amount is broken and a claim for recovery is not filed within the set time frame, the promise becomes unenforceable. However, if the debtor, after the expiry of the limitation period, makes a written promise signed by them to pay the debt, such a promise falls under Section 25(3) of the Act.

If a partial payment towards a debt is made after the cheque has been written but before it is cashed, the payment must be noted on the cheque according to Section 56 of the Negotiable Instruments Act. This means that the cheque cannot be encashed unless the partial payment is recorded. If the cheque is presented without an endorsement and is dishonoured, it would constitute no offence under Section 138 of the Negotiable Instruments Act because at the time of encashing, a legally enforceable debt is not rendered by a cheque.

Legal perspectives of time barred debt

The Limitation Act sets out the time limits within which a legal action can be initiated for various types of claims. Section 18 of the Limitation Act deals with the acknowledgment of a debt in writing, while Section 19 deals with the effect of a partial payment on the limitation period. There have been various instances where different courts, including the apex court of India, have interpreted the provisions of time-barred debts in relation to the limitation period differently and sometimes in contrast to each other:

Cheque as a document creating legally enforceable debt: SC of India while upholding the decision of the Kerala High Court in Sasseriyil Joseph V. Devassia declared that the time barred debt cannot be said to be a legally enforceable debt. However, on the contrary, the division bench of the Kerala HC itself in the case of K.K. Ramakrishnan Vs. K.K. Parthasaradhy and Ors. held to make it a valid claim as against the time barred debt.

The court held that the drawing of the cheque is itself creating a legally enforceable debt. It held that mere writing, signing, and delivery of a cheque is an acknowledgement of a legally enforceable debt.

Separate agreement required creating legally enforceable debt: In Saman Dharman vs. S. Natarajan High Court of Madras held that Section 25(3) of the Contract Act addresses debts that are time barred. Upon careful examination of this section, it becomes clear that for the payment of a time-barred debt to be valid, there must be a clear and separate promise to pay, either in full or in part. Moreover, this promise must be in writing and signed by the person or their authorised representative. In simpler terms, unless there is a specific contractual agreement, known as ‘novation’, regarding the payment of a time-barred debt, Section 25(3) cannot be invoked. It is crucial for the court to distinguish between a “promise to pay” and an “acknowledgment of debt” as defined in the Limitation Act.

Fresh period for limitation: In J.C. Budhraja v. Chairman, Orissa Mining Corporation Ltd. and Others, a three-judge bench of the Supreme Court held, “Subsection (1) of Section 18 states that if a written acknowledgement of liability regarding a particular right is made by the party against whom the right is asserted before the prescribed period for a lawsuit expires, a new period of limitation will be calculated from the time the acknowledgement was signed.”

The section’s explanation clarifies that an acknowledgment is legitimate even if:

• It fails to define the way the Right is enforced
• States that the due date for repayment has yet to arrive
• Refuses to make the requested payment
• Claims a setoff, or
• Is directed to someone who does not have any entitled to the claim.

Acknowledgement mere renewal of debt: The court further interpreted Section 19 of the Limitation Act, 1908 by relying on the judgement in Shapur Freedom Mazda v. Durga Prasad Chamaria, and held that “ The acknowledgement under section 19 merely renews the debt. It does not create a new actionable right. It need not be accompanied by either an explicit or implied promise to pay. The statement upon which a plea of acknowledgement is based must relate to a present, subsisting liability, even if the precise nature or specific character of said liability is not specified.”

What the ratio simply means is that the words used in the recognition must show that there is a legal relationship between the parties, such as between a debtor and a creditor, and it must be clear that the statement is made to admit that such a legal relationship exists.

It is therefore, pertinent to consider that the act only applies to debts that are not recoverable solely due to the limitation period. Therefore, the promise cannot validate a debt that is unenforceable for reasons other than the limitation period.

Hence, if a cheque is issued to pay a debt that is not enforceable solely due to the limitation period, the cheque is considered a promise under the act. Therefore, it must be noted that, “such a promise, being an agreement, becomes an exception to the general rule that agreements without consideration are void.” Even though the debt to be paid is already time-barred at the time the cheque is issued, the promise/agreement remains valid and enforceable, in turn making a promise to pay a time-barred debt through a cheque, a valid contract. Hence, a cheque issued to discharge a debt that is barred by the limitation period is itself considered a promise under Section 25(3) of the Act.

Cheque as presumption under 139: The same has been reiterated in the judgement of Bir Singh v. Mukesh Kumar where the court held that “Even a blank cheque leaf, voluntarily signed and handed over by the accused, which is towards some payment, would attract presumption under Section 139 of the NI Act, in the absence of any cogent evidence to show that the cheque was not issued in discharge of a debt“.

Being time barred not only a right to quash the proceeding: The High Court of Guwahati in the case of Prabhat Gogoi vs The State of Assam and ors[2]. held that it is incorrect to interpret and quash the proceedings only on the grounds that the debt or liability was time barred by the limitation and therefore it did not become legally enforceable. All decisions need to consider it
as a mixed question of law and facts.

Based on the aforementioned court references, it becomes evident that the positions taken by various courts are marked by distinct contradictions, leading to a conspicuous lack of clarity in this domain. The Supreme Court has held that a written acknowledgment of liability regarding a particular right made by the party against whom the right is asserted before the prescribed period for a lawsuit expires will create a new period of limitation. The High Court of  Guwahati, too has held that it is incorrect to interpret and quash the proceedings only on the grounds that the debt or liability was time-barred by the limitation and therefore did not become legally enforceable.

Therefore, it is crucial for the court to distinguish between a “promise to pay” and an “acknowledgment of debt” as defined in the Limitation Act. A cheque issued to discharge a debt that is barred by the limitation period is itself considered a promise under Section 25(3) of the Act, and it is a valid contract.

Conclusion

There lies a lot of ambiguity in interpreting the provisions of NI Act, Limitation Act and Contract act in relation to the settlement of time barred debt. The terminology in the statute for the “legally enforceable debt” is very broad and has been put very openly for the interpretation, in regards to make it a valid claim. The Supreme Court needs to interpret it as a distinct provision with regards to the time barred debt and its enforceability. The claim for the enforceability of the cheque should not be rejected solely on the grounds barred by the limitations act. The clarification for post-dated cheque, security cheque and for the transactions where the payment itself is paid in instalments lasting more than three ears should be made by the apex court. The cheque which is already written, signed, and delivered for the payment of the debt should itself work as an agreement between the parties to discharge the legally enforceable debt and the claim should not be merely rejected for it being time barred.

 Reference:

[1] Prabhat Gogoi vs The State of Assam and ors.

[2] Prabhat Gogoi vs The State of Assam and ors, MANU/GH/0195/2023.

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws. The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.