transaction

The High Court of Kerala has held that the presumption under section 139 of the Negotiable Instruments Act, 1881 (NI Act) applies even to a cheque issued by a guarantor, as it is being issued in discharge of legally enforceable debt.

In the case of AK Bhaskaran v KG Sheeba & Ors, a complaint was filed by Bhaskaran in the trial court against KG Sheeba, alleging an offence under section 138 of the NI Act.

In the complaint, it was alleged that Sheeba, who was the wife of the complainant’s friend, had borrowed ₹130,000 (US$1,825) from the complainant at the end of November 2003, agreeing to return the amount within a month. She then issued a cheque dated 13 February 2004 in favour of the complainant for the amount borrowed, which was not honoured by the bank due to insufficient funds.

The trial court ordered acquittal of the accused, since the complainant failed to prove that Sheeba had any financial transaction with him, and that the disputed transaction was only between the complainant and his friend, who was Sheeba’s husband.

The issue, which arose before Kerala High Court, was whether the drawer of a cheque should have had transaction or dealing with the payee in whose name the cheque was drawn.

The high court held that a cheque issued by a guarantor is also a cheque regarded by section 138 of the NI Act as one being issued in discharge of legally enforceable debt. The act does not provide that the cheque drawn should be in discharge of a drawer’s liability alone. It could be in discharge of “any debt or other liability”.

In other words, the presumption of consideration under section 139 of the NI Act applies to guarantor cheques also. A holder of the cheque, as per section 8 of the NI Act, is entitled to the benefit of legal presumption under section 118(g) of the act that he/she came into possession of the instrument in due course, unless it is shown to have come to the custody of the possessor by means of an offence, fraud or other unlawful means.

It was also held that the definition of payee as per section 7 of NI Act does not stipulate that he/she should necessarily be a person having direct dealing or financial transaction with the drawer. The payee is a person to whom or to whose order money is made payable by the instrument. Most importantly, section 138 of NI Act does not demand that the drawer should have had transactions with the payee in whose name the cheque was drawn.

The dispute digest is compiled by Bhasin & Co, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.