Goa Plast (P) Ltd v Chico Ursula D'Souza (2003)

Two defences are common in cheque-bounce cases: that the drawer stopped payment, so the cheque was not returned for insufficiency of funds; and that the drawer wrote a letter denying liability, so the presumption is rebutted. Goa Plast rejects both. A stop-payment instruction does not take a cheque outside s. 138; and an unproved letter that shifts liability to someone else, with the accused never entering the witness box, does not rebut the s. 139 presumption.

The respondent, formerly Managing Director of the appellant company (his services were discontinued from July 1992), issued 10 post-dated cheques of Rs. 40,000 each — Rs. 4 lakhs in all — towards the liability for an amount misappropriated from the company's funds.

By a letter of 12 February 1993 he denied liability, attributing the company's unexplained expenditure to one Rajan Kinnerkar, who he said handled its financial transactions. The company presented the first cheque; it was dishonoured because the respondent had instructed the bank to stop payment. A legal notice demanding Rs. 40,000 within 15 days went unanswered, and the company filed a complaint under s. 142 for the offence under s. 138.

The company examined its General Manager. The respondent examined no witness and did not step into the witness box; he only brought on record his letter of 12 February 1993. The company's application to examine the Bank Manager on whether the account had sufficient funds was disallowed by the Magistrate.

The Judicial Magistrate, First Class acquitted the respondent on 25 August 1995, holding that liability was not proved and the s. 139 presumption was rebutted. The Bombay High Court (Panaji Bench) dismissed the complainant's appeal, holding among other things that there was no commercial or mercantile relationship between the parties. The company appealed.

1. Is s. 138 attracted where a cheque is returned unpaid because the drawer instructed the bank to stop payment?
2. Did the respondent's letter denying liability rebut the presumption under s. 139?
3. Does s. 138 apply only to transactions involving a mercantile relationship?

The acquittal was set aside. "We hold that Section 138 of the Act will be attracted in the facts of the case and a case for punishment under the provisions is made out." The respondent was given one month to pay Rs. 80,000 — twice the amount of the cheque — to the appellant, in default simple imprisonment for six months.

The s. 139 presumption was not rebutted

"In our view, the High Court and the learned Judicial Magistrate failed to give effect to Section 139 of the Act which creates a presumption unless the contrary is proved that the holder of cheque received the cheque for discharge in whole or in part of any debt or other liability."

The letter was never proved: "Neither the said letter is proved nor its contents nor is the document produced in the proceedings of the Court." Worse for the respondent, it did not deny liability but "merely shifted it on third person". The courts below "have ignored the admission of the liability by the respondent who said that the liability did exist but he was not responsible for it." The respondent had also admitted he was the Managing Director when the liability arose.

The complainant was under no duty to answer that letter: "there is no obligation on the part of the appellant to reply to such letter as per the scheme of Section 138 of the Act."

The object of ss. 138 and 139

The courts below "have clearly misunderstood the object behind Section 138 of the Act". The Court explained: "Sections 138 and 139 of the Act were enacted in view of the fact that cheques were issued for payment of admitted liability but the drawer used to dishonour the said liability by issuing instructions to the Bank for stop payment." The High Court "has read in to Section 139 of the Act what is not contained in the Section."

Stop-payment instructions

The courts below failed to consider the stop-payment instruction properly. "It is essential that to issue stop payment instructions, there must be funds in the accounts in the first place." Refusing to let the Bank Manager be examined on the state of the account was "a serious mistake", and the proceedings "have suffered from serious infirmity going to the root of the matter."

The Court reproduced paragraph 6 of the earlier Goa Plast decision, which is the settled statement on stop payment: "by countermanding payment of post-dated cheque, a party should not be allowed to get away from the penal provision of Section 138 of the Act. A contrary view would render Section 138 a dead letter". And: "Once a cheque is issued by a drawer, a presumption under Section 139 must follow and merely because the drawer issued notice to the drawee or to the bank for stoppage of payment it will not preclude an action under Section 138 of the Act by the drawee or the holder of the cheque in due course." That passage records that Modi Cements Ltd v Kuchil Kumar Nandi (1998) 3 SCC 249 had overruled Electronics Trade & Technology Development Corpn (1996) 2 SCC 739, which had taken the contrary view.

No mercantile relationship needed

The High Court's findings that s. 138 applies only to mercantile relationships, and that liability was not proved, were "legally perverse". The liability here was a legally enforceable debt under the Explanation to s. 138, so "the relationship between the appellant and the respondent was not at all a factor germane to the proceedings for an offence under Section 138 of the Act." Put generally: "the relationship between the drawer and the drawee is not material because the liability admitted is one which can be legally enforced by way of suit."

Plea for leniency refused

The Court refused to take a lenient view on sentence, stressing that Parliament enacted these provisions "in order to restore the credibility of cheques as a trustworthy substitute for cash payment". It applied s. 138 as it stood in 1993 (imprisonment up to one year, or fine up to twice the cheque amount, or both), noting that the Amending Act of 2002 raised the maximum imprisonment to two years.

A cheque returned unpaid on the drawer's stop-payment instruction attracts s. 138; the drawer cannot escape by countermanding a post-dated cheque. Once issue of the cheque is established, s. 139 presumes it was for a debt or liability, and the presumption is not rebutted by an unproved letter that admits a liability but shifts responsibility to a third person, particularly where the accused leads no evidence. Section 138 is not confined to commercial or mercantile relationships: any legally enforceable debt or liability suffices.

• Direct question: Does dishonour of a cheque on the drawer's stop-payment instruction constitute an offence under s. 138? Answer yes: Goa Plast, relying on Modi Cements; explain why the contrary view would make s. 138 "a dead letter".
• Question on rebuttal: How is the presumption under s. 139 rebutted? Use Goa Plast for what does not suffice — a bare letter, unproved, shifting blame — and pair it with Bharat Barrel on the probable-defence standard.
• Problem question: a former employee gives post-dated cheques to his employer for misappropriated funds, then stops payment. Apply all three holdings: stop payment is no defence, the letter does not rebut s. 139, and the employer–employee relationship is irrelevant.
• Sub-point worth marks: the Court's remark that stop payment presupposes funds in the account, and the error in refusing to examine the Bank Manager.