The recent ruling by the Punjab and Haryana High Court in a case concerning the application of Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) to a dishonoured cheque issued in connection with a bribe payment has generated significant discussion regarding the limits of legally enforceable liabilities under Indian law. The court’s decision establishes that a bribe, being illegal, does not constitute a “legally enforceable debt or liability” under the NI Act, thus marking a crucial distinction in the interpretation of Section 138.
Section 138 of the Negotiable Instruments Act, 1881, is a provision aimed at ensuring accountability in the use of cheques as a mode of payment. When a cheque is dishonoured, the person who issued the cheque, known as the “drawer”, is required to face legal consequences.
The present case involved a complainant who alleged that a public servant had issued a cheque in return for a bribe payment. Upon dishonour of the cheque due to insufficient funds, the complainant sought to recover the bribe amount by filing a complaint under Section 138 of the NI Act, which penalises the dishonour of cheques issued for the discharge of debts or liabilities. The defence argued that the cheque was issued for an illegal consideration (a bribe) and did not qualify as a legally enforceable debt or liability, rendering the case untenable under the NI Act.
Section 138 of the Negotiable Instruments Act, 1881
It is a pivotal provision that governs the criminal liability arising from the dishonor of cheques. This section was introduced to ensure the credibility of negotiable instruments, particularly cheques, and to safeguard commercial transactions. It stipulates that where a cheque is drawn by an individual, in discharge of a liability, is returned unpaid due to insufficiency of funds or exceeds the arrangement made by the drawer with the bank, the drawer shall be deemed to have committed an offence. The key element for the invocation of Section 138 is the issuance of a demand notice by the payee or holder in due course, demanding payment within 30 days from the receipt of information of the cheque’s dishonor. If the drawer fails to make the payment within 15 days of receiving such notice, the drawer becomes liable for prosecution under this section.
Analysis on Judgment
The Punjab and Haryana High Court’s ruling, which clarifies that bribe payments do not give rise to a legally enforceable debt or liability, stands in line with the objectives and the scope of Section 138 of the Negotiable Instruments Act, 1881. Section 138 aims to penalise dishonoured cheques issued in discharge of a legally enforceable debt or liability, reinforcing trust in financial transactions. The jurisprudential underpinning of this provision is that cheques represent an acknowledgement of a valid debt or liability, the dishonour of which undermines commercial reliability and economic integrity. However, when viewed in light of transactions involving illegal payments such as bribes, the legal framework fundamentally alters.
Bribes, being illegal under Indian law and falling foul of the Prevention of Corruption Act, 1988, cannot form the basis of any legally enforceable contract or obligation. The Supreme Court, in Sita Ram v. Radhey Shyam, (1968) , recognised that agreements founded on illegal considerations are void ab initio and unenforceable under Section 23 of the Indian Contract Act, 1872. This principle becomes particularly relevant when juxtaposed against the provisions of the Negotiable Instruments Act, which mandates that the dishonoured cheque must have been issued for a valid debt or liability. In cases where the underlying transaction is illegal, such as the payment of a bribe, no valid debt or liability can be said to exist.
This principle was further underscored by the Supreme Court in Lillykutty v. Lawrance, (2003), wherein it held that the presumption under Section 139 of the Negotiable Instruments Act applies only when there is a legally enforceable debt. If the cheque is issued for an unlawful purpose, such as bribery, the statutory presumption does not hold. This is based on the principle that an illegal or immoral act cannot form the basis for legal action, as per the legal maxim ex turpi causa non oritur actio (no action arises from an illegal act). Therefore, a cheque issued for an unlawful consideration, such as a bribe, is not covered under Section 138 of the Act.
The Punjab and Haryana High Court’s position aligns with established legal principles and reflects the judiciary’s reluctance to enforce or recognize obligations stemming from illegal transactions. Further, this interpretation also resonates with the public policy enshrined in Indian law, which vehemently opposes the enforcement of illegal contracts.
As for the broader impact, this ruling could pave the way for further clarification on the intersection of financial laws, such as the NI Act, and criminal laws dealing with corruption, as seen under the Prevention of Corruption Act, 1988. It could also encourage a more thorough examination of transactions involving dishonoured cheques, ensuring that the underlying debts or liabilities are legal and enforceable under Indian law.
In essence, while the ruling specifically addresses the issue of bribery, its implications extend beyond this case and could influence the enforcement of anti-corruption measures and the application of Section 138 in future cases, ensuring that the law upholds ethical standards in financial transactions
Implications of Judgement
The implications arising from the ruling of the Punjab and Haryana High Court, which unequivocally declares that bribe payments do not constitute a legally enforceable debt or liability under Section 138 of the Negotiable Instruments Act, are far-reaching and multifaceted, both in terms of jurisprudential consistency and policy-oriented objectives.
Firstly, this ruling crystallizes the judicial doctrine that the scope of debt or liability under Section 138 must be construed narrowly, confined to legitimate financial obligations that are consonant with public law and policy. The foundational principle of pacta sunt servanda, which governs the enforceability of contracts, is inherently inapplicable to transactions tainted with illegality, such as those involving bribes. By ruling that cheques issued in pursuance of corrupt payments fall outside the statutory remit of Section 138, the court affirms that no lawful claim can be derived from an inherently unlawful act. This upholds the sanctity of contractual obligations, as recognized in Gherulal Parakh v. Mahadeodas Maiya, wherein the Supreme Court held that contracts founded on illegal consideration are void ab initio and unenforceable in the courts of law.
Secondly, this judgment establishes a critical precedent that reinforces the separation between public and private wrongs in the enforcement of negotiable instruments. The ruling ensures that criminal liability under Section 138, which is primarily designed to secure the prompt discharge of lawful liabilities, cannot be expanded to provide legal sanctity to transactions arising out of corruption or illegality. This doctrinal delineation prevents the erosion of public trust in the financial system by disallowing the misuse of criminal law to enforce void obligations, aligning with the maxim ex dolo malo non oritur actio—no right of action arises from fraud. As elucidated in S.P. Chengalvaraya Naidu v. Jagannath, any conduct based on fraudulent or corrupt actions cannot receive judicial endorsement.
Moreover, this ruling could be seen as having a deterrent effect, disincentivising the use of cheques in transactions that are illegal or involve malfeasance. By categorically excluding bribes from the definition of legally enforceable debt, the court affirms that participants in illegal activities cannot rely on the formalities of financial instruments to legitimise or facilitate their unlawful dealings. The exclusionary stance taken by the court promotes the integrity of Section 138 as a mechanism designed to enhance the credibility of negotiable instruments within the framework of lawful commercial transactions.
The ruling also underscores a critical limitation in the evidentiary presumptions under Section 139 of the Act. While the statute imposes a presumption that a cheque has been issued in discharge of a lawful debt or liability, this presumption is rebuttable, particularly where the underlying transaction itself is illegal. The High Court’s decision affirms that the presumption under Section 139 cannot operate in a vacuum and must be contingent upon the lawful character of the underlying obligation. In the case of cheques issued as bribes, the presumption stands nullified, as held in Krishna Janardhan Bhat v. Dattatraya G. Hegde, where the Supreme Court clarified that the accused is not required to discharge an onerous burden of proof but merely establish a probable defense that negates the presumption of a valid debt or liability.
Further, this decision raises consequential implications in the intersection of criminal law and anti-corruption statutes. By negating the enforceability of cheques tied to bribes under Section 138, the court reinforces the primacy of anti-corruption statutes such as the Prevention of Corruption Act, 1988. The ruling harmonises the interpretation of the Negotiable Instruments Act with overarching principles of statutory morality, ensuring that no legal instrument, including a cheque, can be used to circumvent or dilute the objectives of anti-corruption laws. This legal coherence is necessary to avoid the anomalous situation where corrupt payments, which are explicitly illegal under anti-bribery laws, could paradoxically be enforced under the framework of negotiable instruments legislation.
Conclusion
The ruling of the Punjab and Haryana High Court injects a robust layer of public policy consideration into the application of Section 138, ensuring that the statute’s remedial scope is confined to the enforcement of lawful obligations while precluding its application to transactions that contravene statutory or moral legality. By disentangling the enforcement of cheques from illegal payments, the court not only preserves the integrity of the financial system but also fortifies the inviolability of public law principles in the adjudication of negotiable instruments cases.
This blog is written by Seetaiah K, BTech, MS, LLB (pursuing).