Cheque not an existing debt or liability for advance payments: SC

In an important ruling, the Supreme Court of India held that if a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion, the cheque cannot be said to have been drawn for an existing debt or liability under Section 138 Negotiable Instruments Act.

“If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier, in our considered view, the cheque cannot be said to have been drawn for an existing debt or liability”, the Court said.

The Court further added, “If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchaser may have to make good the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138. For a criminal liability to be made out under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque.”

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