The Bombay High Court has clarified that Section 138 of the Negotiable Instruments Act, 1881 does not require the cheque to be drawn solely for the discharge of the drawer’s own debt or liability. Even if the cheque is issued for an 'other liability' - such as a legally enforceable obligation of a third party - the drawer remains liable for penal consequences upon dishonour. This judgment underscores the expansive scope of Section 138 and rejects narrow interpretations that limit its applicability to direct debtor-creditor relationships.
Background & Facts
The Dispute
The petitioner, Jindal Drugs Pvt. Ltd., is a family-run company embroiled in a long-standing dispute among its directors and shareholders. The complainant, another son of the family patriarch (Accused No. 3), alleged that the petitioner company and its directors failed to honour a cheque for Rs. 37 crores issued as part of a settlement agreement. The cheque was dishonoured with the remark 'payment stopped by the drawer,' leading to a complaint under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881.
Key Facts
- Family Dispute and Arbitration: Disputes among family members led to the appointment of an arbitrator. On 4 January 2017, consent terms were executed, culminating in a consent award on 11 January 2017. The complainant and his wife resigned as directors of the petitioner company and incorporated Jindal Cocoa Pvt. Ltd.
- Execution Proceedings: The complainant filed Execution Application (L) No. 1452 of 2017 to enforce the consent award, claiming entitlement to assets worth Rs. 400 crores. The petitioner company, however, filed Suit No. 314 of 2018 against the complainant and his new company.
- Additional Arrangement: In June 2018, Accused No. 3 (the patriarch) offered an additional Rs. 100 crores to settle the disputes. On 19 November 2020, he handed over a cheque for Rs. 37 crores drawn on the petitioner company’s account, along with title documents of immovable properties. The cheque was signed by Accused No. 2 (a director) and returned unpaid on 19 January 2021 with the remark 'payment stopped by the drawer.'
- Complainant’s Claim: The complainant asserted that the cheque was issued towards the discharge of a legally enforceable liability under the consent award and the additional arrangement. The petitioner, however, contended that the cheque was a 'gift' or part of a 'without prejudice' settlement that was never finalised.
Procedural History
- 4 January 2024: The Metropolitan Magistrate, 33rd Court, Ballard Pier, issued process against the petitioner and its directors under Section 138 read with Section 141 of the NI Act.
- 28 August 2025: The Additional Sessions Judge, Greater Mumbai, dismissed the petitioner’s Criminal Revision Application No. 123 of 2025, holding that the cheque appeared to have been issued for the discharge of 'other liability.'
- 22 January 2026: The present Writ Petition No. 5004 of 2025 was reserved for judgment.
- 29 April 2026: The Bombay High Court pronounced its judgment, dismissing the writ petition.
Relief Sought
The petitioner sought quashing of the order dated 4 January 2024 issuing process, contending that:
- There was no privity between the petitioner and the complainant.
- The petitioner was not a party to the consent award.
- The cheque was issued as part of a 'without prejudice' settlement or as a gift.
- No amount was due under the consent award on the date the cheque was drawn.
The Legal Issue
The central question was whether Section 138 of the Negotiable Instruments Act, 1881 applies to a cheque issued for the discharge of an 'other liability' - such as a legally enforceable obligation of a third party - even in the absence of a direct debt or liability owed by the drawer to the payee.
Arguments Presented
For the Petitioner
Mr. Rafique Dada, learned Senior Advocate, argued:
- The order issuing process was passed without application of mind, and the Sessions Judge erred in dismissing the revision.
- There was no privity between the petitioner and the complainant, as the petitioner was not a party to the consent award.
- No amount was due under the consent award on the date the cheque was drawn. The complainant was, in fact, liable to pay Rs. 99.25 crores for excess assets allotted to him.
- The cheque was issued as part of a 'without prejudice' settlement, which was never finalised. The complainant failed to acknowledge receipt of the settlement or comply with its conditions.
- The cheque was drawn as a 'gift' by the patriarch (Accused No. 3) to the complainant on the occasion of his daughter’s wedding, and stop-payment instructions were issued when the patriarch decided not to avail the loan.
For the Respondent/Complainant
Mr. Aabad Ponda, learned Senior Advocate, contended:
- The scope of interference under Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023 is limited, especially after the dismissal of the revision application.
- Section 138 of the NI Act applies not only to cheques issued for the discharge of the drawer’s own debt but also to 'other liability,' provided it is legally enforceable.
- The petitioner’s contentions - such as the cheque being a gift or part of a 'without prejudice' settlement - are matters of defence that cannot be adjudicated at this stage.
- The petitioner’s financial statements indicated its awareness of the settlement terms, and the cheque was prima facie issued for a legally enforceable liability.
The Court's Analysis
The Court examined the scope of Section 138 of the Negotiable Instruments Act, 1881, which imposes penal liability when a cheque drawn for the discharge of 'any debt or other liability' is dishonoured. The Court relied on two key Supreme Court judgments to interpret the provision:
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ICDS Ltd. v. Beena Shabeer and Anr. [(2002) 6 SCC 426]: The Supreme Court held that the expressions 'any cheque' and 'other liability' in Section 138 are expansive and cover cheques issued for the discharge of any legally enforceable liability, even if the liability is not that of the drawer. The Court emphasised that the legislature intended to include all forms of legally enforceable liabilities within the ambit of Section 138.
"The legislature has been careful enough to record not only discharge in whole or in part of any debt but the same includes other liability as well. This aspect of the matter has not been appreciated by the High Court... The language of the Statute depicts the intent of the lawmakers to the effect that wherever there is a default on the part of one in favour of another and in the event a cheque is issued in discharge of any debt or other liability there cannot be any restriction or embargo in the matter of application of the provisions of Section 138 of the Act."
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Bijoy Kumar Moni v. Paresh Manna and Anr. [2024 SCC Online SC 3833]: The Supreme Court reiterated that Section 138 does not require the cheque to be issued for the discharge of the drawer’s personal liability. The provision covers any legally enforceable debt or liability, including those assumed by the drawer on behalf of a third party.
"The expression 'of any debt or other liability' appearing in Section 138 when read with the Explanation to the provision is wide enough to bring any debt or liability which is legally enforceable within its fold. Thus, the requirement under the provision is that the debt or any other liability has to be legally enforceable and the emphasis is not on the existence of such debt or other liability between the drawer and the payee."
Applying these principles, the Court rejected the petitioner’s contention that the absence of privity between the petitioner and the complainant absolved it of liability. The Court held that the cheque was prima facie issued for the discharge of an 'other liability' under the consent award and the additional arrangement, which were legally enforceable obligations.
The Court also dismissed the petitioner’s argument that no amount was due under the consent award on the date the cheque was drawn. It noted that the petitioner’s financial statements acknowledged the settlement terms, indicating its awareness of the liability. The Court observed:
"The financial statements of Petitioner (A1) do indicate that the Petitioner (A1) was fully cognizant of the terms of settlement amongst the directors of the Petitioner (A1), on the one part, and the complainant and his family members and the proposed company, on the other part."
The Court further held that the petitioner’s defences - such as the cheque being a 'gift' or part of a 'without prejudice' settlement - were matters for trial and could not be adjudicated at this stage. The Court emphasised that the scope of inquiry under Section 528 of the BNSS is limited to determining whether a prima facie case exists, and the petitioner’s contentions did not meet this threshold.
The Verdict
The Bombay High Court dismissed the writ petition, upholding the order issuing process against the petitioner and its directors. The Court clarified that its observations were confined to the quashing proceedings and would not influence the trial court’s adjudication of the complaint on merits.
What This Means For Similar Cases
Section 138 Applies to 'Other Liability' Even Without Direct Debt
- Expansive Scope of Section 138: The judgment reaffirms that Section 138 of the NI Act is not limited to cheques issued for the discharge of the drawer’s own debt. It covers any legally enforceable 'other liability,' including obligations assumed by the drawer on behalf of a third party.
- No Privity Required: The absence of a direct debtor-creditor relationship between the drawer and the payee does not absolve the drawer of liability under Section 138. The key requirement is that the liability must be legally enforceable.
Defences Must Be Proved at Trial
- Limited Scope of Quashing Proceedings: Courts exercising jurisdiction under Section 528 of the BNSS (or Section 482 of the CrPC) cannot adjudicate contentious factual defences at the stage of quashing. Defences such as the cheque being a 'gift' or part of a 'without prejudice' settlement must be proved during trial.
- Presumptions Under Sections 118 and 139: The petitioner must rebut the statutory presumptions under Sections 118 and 139 of the NI Act at trial to dislodge the complainant’s case. These presumptions favour the holder of the cheque and place the burden on the drawer to prove otherwise.
Financial Statements and Corporate Awareness
- Corporate Knowledge of Liabilities: The judgment highlights that a company’s financial statements can be used to demonstrate its awareness of legally enforceable liabilities. Courts may consider such documents to establish prima facie knowledge of obligations, even if the company is not a direct party to the underlying agreement.
- Directors’ Liability Under Section 141: Directors of a company cannot feign ignorance of transactions involving the company. If the cheque is drawn on the company’s account, directors signing it may be held vicariously liable under Section 141 of the NI Act if they were aware of the liability.
