Section 25(3) of Contract
Act & SECTION 18 Limitation Act INTERPLAY
An interesting issue related to interplay of
Section 18 of Limitation Act and Section 25(3) of Indian Contract Act (ICA) was
raised before Delhi High Court in a matter captioned as Rajeev Kumar Vs The State NCT Of
Delhi & Anr bearing no. CRL.L.P. 212/2021 and decided on 9th
August 2024. The issue was raised in a complaint u/s 138 of Negotiable
Instruments Act (NI Act). The Criminal Leave Petition was filed under Section
378(4) read with Section 482 of The Code of Criminal Procedure, 1973 ('CrPC')
by the appellant , thereby, seeking setting aside of order dated 31st July 2021
('impugned order') passed by ld MM/NI Act-03/Central/ Delhi in CC No.
510085/2016 titled as 'Rajeev Kumar v Satish Kumar', wherein the Trial Court had
dismissed the complaint of appellant and acquitted respondent no.2 for the
offence under section 138 of The Negotiable Instruments Act, 1881 ('NI Act'). The
Leave to appeal was granted by the Delhi High Court.
FACTS
OF THE COMPLAINT
(1 The
father of the complaint and accused were colleagues, working in the same bank
and branch, and as the accused was in need of money, the father of the
complainant had thus lent interest free loan of Rs. 3,50,000/- to the accused in
about October 2011. The accused in discharge of its liability, had issued a
cheque for a sum of Rs. 3,50,000/- in the name of the father of the complainant
in January 2014, as refund of the loan amount. However, subsequently, the
father of the complainant passed away in July 2014, before presenting the
cheque for encashment, after which accused issued a new cheque bearing No.
201465 dated 31st December 2015 for a sum of Rs. 3,50,000/- ('the cheque in
question') in the name of the complainant for repayment of the loan amount. The
cheque in question, on presentation, was dishonoured twice with the remarks "funds insufficient" vide
separate return memos dated 3rd March 2016 and 9th March
2016. Thereafter, pursuant to legal notice dated 15th March 2016,
the said complaint was lodged under section 138 of Negotiable Instruments Act. Pre-summoning evidence was led and upon
finding a prima facie case against
the accused, the accused was summoned vide order dated 27th April 2016.
(2) However,
the Metropolitan Magistrate ('MM') had dismissed the complaint vide the
impugned order and acquitted the accused of the offence under section 138 of NI
Act as it was held that in the present case, the debt was not legally
recoverable due to limitation.
(3) The
relevant observation made by the Metropolitan Magistrate, is reproduced
hereunder:
"41.
Accordingly, the Court is in agreement with the accused for by way of the
present cheque, the complainant is seeking to recover a debt which was no longer
legally recoverable on the date of issuance of cheque as it was barred by the
law of limitation and the cheque in question did not extend the period of
limitation under section 18 of the Limitation Act, 1963."
(4) The
ld Magistrate after considering the evidence on record has held that the loan
partly stood paid by accused on the date of issuance of the cheque to the
complainant, as payments of Rs. 2,55,000/- and Rs. 20,000/- from the account of
the accused, into the account of the father of the complainant (during his
lifetime) and the complainant respectively, stood proved by the accused.
(5) The
appellant had preferred the petition before the Delhi High Court against the impugned
order.
CONTENTIONS OF APPELALNT
(i)
The cheque in question was issued by
respondent no.2 to the appellant after arriving at an oral and mutual
settlement. The said settlement was arrived at after approximately Seventeen (17)
months from his father's demise and as such, respondent no.2, had, duly
accepted the legal liability on his part.
(ii)
The testimony of respondent no.2 was
inconsistent and contradictory. While notice was being framed, under section
251 of CrPC and also in application under section 145(2) of NI Act, respondent
no.2 had accepted that a loan from the father of the appellant was taken by him
and he had given a cheque of the same amount to the appellant's father. After
the demise of the appellant's father, it was duly admitted that another cheque
of the same amount was given to the appellant, in exchange for the cheque given
by him earlier to appellant's father. It was also contended that out of Rs.
3,50,000/-, respondent no.2 had already paid Rs. 2,75,000/- collectively to
appellant and his late father and only Rs. 75,000/- was left to be paid.
(iii)
The respondent no.2 failed to
establish that the record of bank transactions from 1st September
2012 to 5th June 2014 were payments towards the loan. In fact, these
transactions related to a different liability as being colleagues and working
in the same branch and bank, respondent no.2 and the late father of appellant
were good friends and appellant's father used to monetarily help respondent
no.2 on several occasions.
(iv) The
complaint was filed well within its time, as respondent no.2 himself admitted
that he issued the cheque in question to the late father of appellant five to
six months before his death i.e. in the month of January or February of
2014, which does not make it a time-barred debt as the complaint was
made on 12th April 2016.
However, just in contrast, at the time of his examination
in chief and during cross-examination, respondent no.2 had stated that he paid
the entire amount collectively to the appellant and his late father and the
cheque in question was given in exchange for the first cheque to resolve the
'family dispute' of appellant. The respondent no.2 further contended that the
cheque in question was issued in exchange of cheque already handed over to the
late father of appellant, in order to resolve a 'family dispute' in the
appellant's family at that time.
SUBMISSIONS OF
RESPONDENT NO.2
(i)
The appellant never gave any loan
amount to respondent no.2 and states that there was no agreement executed
between appellant and respondent no.2 regarding the new security cheque.
Moreover, no date, month or year has been mentioned in the complaint by the
appellant in respect of any loan given by the appellant to respondent no.2.
(ii)
The appellant in his cross-examination
admitted that respondent no.2 had not taken any amount from the appellant in respect
of the cheque in question. The photocopies of cash deposit slips that were
brought on record by respondent no.2, to show the banking transactions done by
respondent no.2 to discharge his liability towards the loan, remained
unchallenged by the appellant. These receipts dated 1st May 2012, 7th June
2012, 31st July 2012 and 3rd October 2012 are issued against the payment of Rs.
15,000/-, Rs. 10,000/-, Rs. 10,000/- and Rs. 10,000/- respectively, in favour
of Late Mr. Narain Dass, father of the appellant and by way of these receipts,
a proof of repayment of Rs. 45,000/- to the father of the appellant, during his
lifetime, is established.
(iii) The
Respondent no.2 has further brought on record statement of accounts of the
appellant w.e.f. 1st November 2012 till 28th August 2014, and of Late Mr.
Narain Dass w.e.f. 1st May 2012 till 30th June 2014 for Rs. 2,10,000/-, and
during cross-examination of respondent no.2, the said payments remained
unchallenged by the appellant.
A further plea was taken at a belated stage that
as the loan taken by respondent no.2 in the month of October 2011 from the
father of the appellant and the cheque in question is dated 31st December
2015, which makes it a time-barred debt.
ANALYSIS
The
high court upon scrutiny of evidence was of the view that the acquittal of the
accused/respondent no.2 was not merited inter
alia sue to the following reasons:
(i)
The testimony of the accused itself, ex facie was not believable and was
inherently contradictory. On the one hand the accused states in its examination
by way of chief that he had taken a loan of Rs.3,50,000/- from the father of
the complainant in October 2011 and then states that he repaid the amount of
Rs. 2,55,000/- in the period of May 2012 to June 2014 in his bank account.
(ii)
The contention of respondent no.2 is
that, this would amount to extinguishment of his debt liability to the extent
of Rs. 2,55,000/- and would leave a repayment obligation of Rs. 95,000/- at
best. However, it is again stated by him, that he gave a security cheque of Rs.
3,50,000/- as demanded by the father of the complainant due to some 'family
dispute'.
(iii)
The respondent no.2 was a bank
official and hence it is inconceivable that these transactions were happening
without any documentation and secondly, there was no reason for furnishing a
'security cheque' if the father of complainant had a 'family dispute'. Moreover,
if the respondent wanted to help his colleague i.e. the father of the
complainant, he could have stated that a temporary loan was extended by him,
having already extinguished his liability to the extent of Rs. 2,55,000/-
earlier. The circumstances in which the 'security cheque' of Rs. 3,50,000/- was
given to the father of the complainant is quite specious and unworthy of trust.
(iv)
After the demise of the father of the
complainant in July 2014, the respondent no.2 states that he transferred an
amount of Rs. 20,000/- in the account of the complainant and paid the remaining
amount by cash in installments. This is contrary to the assertion of the
respondent no.2 that he had no liability towards the father of the complainant,
except for outstanding liability of Rs. 95,000/-.
(v)
Even if it is assumed that there were
transfers of amounts to the complainant in order to extinguish the liability
towards the father, but then it is without reason as to why subsequently, a
fresh cheque (the one which got dishonoured) was again given in the sum of
Rs.3,50,000/. The assertion of respondent no.2 in his testimony that he
replaced the earlier 'security cheque to the father' with a new 'security
cheque to the complainant' seems to be a contradictory plea and ex facie untenable and inconceivable.
(vi)
Why a 'security cheque' shall be given
to a person, by somebody, who was a bank official and extremely aware of the
consequences of the same is unexplained. Moreover, in his cross-examination,
the respondent no.2 further states that he paid Rs. 75,000/- to the complainant,
post the demise of his father, in addition to Rs. 20,000/-. Assuming,
therefore, he had paid Rs. 95,000/- of the outstanding liability to the father,
there can be no conceivable reason as to why he would furnish another cheque of
Rs. 3,50,000/- to the complainant.
(vii)
That the extracts from the statement
of account in the impugned order at para 22, detailing the transfer of money to
the account of the father of Rs. 2,10,000/- and then to the complainant of Rs.
10,000/- after the death of the father cannot explain as to why a cheque of Rs.
3,50,000/- was given subsequently on 31st December 2015. The father
of the complainant having passed away, there was no way the complainant himself
could explain as to why small driblets of Rs.10,000/- and Rs.20,000/- were
being given to his father by the respondent no.2. It was submitted that due to
the friendly relationship between the appellant's father and the respondent
no.2, there could have been small advances which might have been given to each
other in times of need. However, as per the jurisprudence under Section 138 of
NI Act read with Sections 139 and 118 of the NI Act, where the presumption of
liability is on the accused and it was not for the complainant to prove the
liability. The reliance by the impugned order to the lack of proof furnished by
the complainant in respect of these amounts, is unmerited.
(viii)
In para 27 of the impugned order, the
Trial Court states, "However, the complainant has nowhere furnished any
material on record suggesting that there was another liability apart from the
present one. The complainant has not brought on record the fact of any
liability of the accused towards the complainant or his father, apart from the
present one, against which the payment by way of account transfer is supposedly
received."
(ix)
The plea of 'time bar', in that the
cheque was issued on 31st December 2015, after four years of the
disbursement of loan in October 2011, is also incorrectly analyzed by the Trial
Court. The concept relating to limitation in situations of Section 138 of NI
Act is that the furnishing of the cheque/negotiable instrument in itself invites
a presumption of liability. The liability even if of a previous period, gets
revived, due to the furnishing of the cheque, acknowledging therefore, that the
repayment is to take place.
(x)
The law relating to a time-barred debt
and the revival by virtue of furnishing a cheque by the drawer, is well
settled. This is based upon the concept that a promise to pay wholly or in part
a debt which cannot be enforced by the creditor being barred by the law of
limitation, is a valid agreement, if it is made in writing and signed by the
person. This is encapsulated in Section 25(3) of the Indian Contract Act, 1872
('the ICA') which when read along with Illustration (e), crystallizes the
concept clearly.
The Section 25(3) of Indian Contract Act is extracted
as under:
"25. Agreement without consideration void,
unless it is in writing and registered, or is a promise to compensate for
something done, or is a promise to pay a debt barred by limitation law.
--An agreement made without
consideration is void, unless—
... (3) it is a promise, made in writing and
signed by the person to be charged therewith, or by his agent generally or
specially authorised in that behalf, to pay wholly or in part a debt of which
the creditor might have enforced payment but for the law for the limitation of
suits. ...
(e) A owes B Rs. 1,000, but the debt is barred by
the Limitation Act. A signs a written promise to pay B Rs. 500 on account of
the debt. This is a contract."
The Division Bench of Kerala High Court in Dr.
K.K. Ramakrishnan v Dr. K.K. Parthasaradhy & Anr. 2003 SCC OnLine
Ker 420 in dealing with a similar issue stated as under:
“According to the appellant the Section 25(3) of
the Contract Act cannot be invoked to interpret the provisions of Section 138
of the Negotiable Instruments Act. However, the high court has held that the
said contention cannot be accepted. Section 138 provides for a penalty in a
case where a cheque is dishonoured on account of insufficiency of funds. The
cheque has to be by way of payment of a "legally enforceable debt or a liability".
The liability may arise out of a contract or otherwise. Thus, to determine as
to whether or not a liability is legally enforceable, the provisions of the
Contract Act cannot be said to be irrelevant. These can provides a cause for a
legal liability. Resultantly, when a person writes a cheque and delivers it to
a person, the drawee not only gets the civil right to present the cheque and
recover the amount, but in the event of the cheque being dishonoured the person
who has issued the cheque becomes liable for prosecution under Section 138.
To invoke Section 18 of the Limitation Act, the
acknowledgement has to be made before the expiry of the period of limitation. The
high court had observed that under Section 25(3), a promise can be made even in
a case, where the limitation for recovery of the amount has already expired.
Such a promise has to be in writing. It can be in the form of a cheque. When a
cheque is delivered to the payee, the person is entitled to present the cheque
to the bank and seek payment. In such an event, if the cheque is dishonoured,
the liability under Section 138 would arise. It would not be permissible for
the accused to contend that the liability was not legally enforceable.
Section 4 of the Negotiable Instruments Act defines “Cheque” as a "bill of exchange”
drawn on a specified banker and not expressed to be payable otherwise than on
demand". Cheque thus carries a promise implicitly, unlike a pro-note where
the promise is explicit and mandatory. Thus., limitation shall have to be
reckoned from the date the cheque and not on the fact 'whether the cheque was
honoured or dishonoured'. Under the Negotiable Instruments Act, the issuance of
cheque is to be presumed to be issued for discharge of debt. The consequence
event whether the said cheque on presentation honoured or not, is immaterial. Thus,
even if said cheque is not presented in time and become stale, but it is proved
that the cheque was issued with intention to discharge the debt or part of the
debt then, the limitation may have to be reckoned from the date of the cheque
considering the cheque as acknowledgment of debt. The cheque in the name of the
complainant gives him the cause of action to sue and suit being filed within 3
years from the date on which the cheque bear, this prima facie saves the
limitation. A plaintiff cannot be
de-suited on the plea of limitation.
A priori the cheque itself becomes a promise made
in writing signed by the person to pay wholly or in part debt, which otherwise,
may not be payable due to law of limitation. Per section 25(3) of the ICA, this
would be an agreement in itself. Section 139 presumption under the NI Act which
presumes that the cheque is in discharge in whole or part liability of any debt
or liability would therefore, actually come into play. The contrary position of
the accused that no debt or liability subsists having extinguished by the law
of limitation, would be then unmerited and untenable, since a fresh agreement
comes into operation by the tendering of the cheque. By issuing the cheque, the
drawer is acknowledging a legally enforceable liability and he ought not be
entitled to claim that the debt had become barred by limitation.
There can be an argument that even though section
25(3) of the ICA creates a contractual promise to pay, a civil suit could
subsist for enforcing that promise but a penal provision under section 138 of
NI Act cannot be invoked basis the explanation to Section 138 which restricts
"debt or liability" to "legally enforceable debt or
liability." Regarding the facts of the case in question, the presentation
of the cheque to the father was 5-6 months before the death of his father i.e.
in the months of January/February 2014. On that basis, even though the loan was
allegedly taken in 2012 as per the finding of the Trial Court, the earlier
cheque presented in 2014 would amount to an acknowledgment in writing of the
liability and therefore, a fresh period of limitation would commence as per
section 18 of The Limitation Act, 1963. Therefore, the furnishing of the cheque
in question on 31st December 2015, would still be for a legally
enforceable debt or liability. This is notwithstanding the other aspect, which
had been pleaded by the appellant, that he had an oral settlement post the
death of the father with the accused.
Mere giving a cheque, without anything more, will
not revive a barred debt, because cheque has to be given, as contemplated by
the explanatory in discharge of a legally enforceable debt. There is no doubt
that in terms of the Indian Limitation Act, 1963, a signed acknowledgment of
liability made in writing before the expiration of the period of limitation, is
enough to start a fresh period of limitation. Likewise, when a debt has become
barred by limitation, there is also section 25(3) of the Contract Act, by
which, a written promise to pay, furnishes a fresh cause of action. In other
words, what Clause (3) of section 25 of the Indian Contract Act in substance
does is not to revive a dead right, for the right is never dead at any time,
but to resuscitate the remedy to enforce payment by suit, and if the payment
could be enforced by a suit, it means that it still has the character of
legally enforceable debt as contemplated by the explanation below section 138
of the Act. As far as this aspect of the case is concerned, the learned
Division Bench observed that to determine as to whether or not a liability is
legally enforceable, the provisions of the Contract Act cannot be said to be
irrelevant. This can provide a cause for a legal liability. Although the
primary question answered by the Division Bench was that a cheque becomes a promise
to pay under section 25(3) of the Contract Act. Nevertheless, the Division
Bench Judgment is relevant to the extent that it holds that a promise to pay in
writing as per section 25(3) of the Indian Contract Act, 1872, matures into an
enforceable contract, which can be enforced by filing a Civil Suit. If a suit
could be filed pursuant to a promise made in writing and signed by the person
to be charged therewith, as contemplated by Clause (3) of section 25 of the law
of Contract, then, the high court held in Rajeev Kumar (Supra) that the debt
becomes legally enforceable and if a cheque is given in payment of such debt is
dishonoured and subsequently, the statutory notice is not complied with, then
the person making the promise in writing and issuing the cheque, would still be
liable to be punished under section 138 of the Act.".
RESURRECTION OF TIME BARRED DEBT
The furnishing of a cheque of a time-barred debt
effectively resurrects the debt itself by a fresh agreement through the deeming
provision under section 25(3) of ICA. The original debt therefore, through
section 25(3) of the ICA, becomes legally enforceable to the extent of the amount
the cheque has been given. This resonates also with practical considerations.
Persons who have chosen to escape liability, can draw a cheque, in order to
clear an earlier debt upon persuasion by the creditor. By the act of drawing a
cheque, the promisor i.e. the drawer, is effectively stating that he has a
liability to pay the drawee. Drawing of the cheque in itself, is acknowledgment
of a debt or liability. It is the resurrection or the revival of the prior debt
which would trigger the provisions under section 138 of NI Act.
It was thus held in Rajeev Kumar (Supra) that
to deny a complainant/drawee of invoking the penal provisions under section 138
of NI Act, despite the categorical premise of section 25(3) of the ICA
recognizing a fresh agreement to pay, would be an unfortunate disentitlement.
In view of above, impugned order whereby the
respondent no. 2 was acquitted was set aside by the high court.
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Anil K Khaware
Founder & Senior Associate
Societylawandjustice.com
