Cheque Dishonour for Unlawful Debt

Source: Madras High Court 

Why in News? 

The bench of Justice K. Murali Shankar in the case of P. Kulanthaisamy v. K. Murugan and Another (2025) upheld the acquittal of the accused under Section 138 of the Negotiable Instruments Act, 1881 ruling that a cheque issued to repay money obtained for securing government employment does not discharge a legally enforceable debt. 

What was the Background of P. Kulanthaisamy v. K. Murugan and Another (2025) Case? 

• The accused, working at TNSTC depot Virudhunagar, claimed to have influence in the Transport Corporation Labour Union and promised to arrange a conductor job for the complainant in exchange for Rs. 3 lakhs. 
• The complainant paid Rs. 3 lakhs on 10.02.2016 in the presence of witness Madamuthu, but the accused failed to secure the promised job. 
• When demanded to return the money, the accused first issued a cheque dated 31.12.2016 which was declared old and invalid by the bank. 
• The accused then issued a second cheque dated 28.02.2017 for Rs. 3 lakhs, which bounced due to insufficient funds. 
• After the accused ignored the legal notice dated 14.03.2017, the complainant filed a complaint under Section 138 of the Negotiable Instruments Act. 
• The trial court acquitted the accused, holding that the cheque was not issued for a legally enforceable debt, which the complainant challenged through this appeal. 

What were the Court's Observations? 

• The Court held that payment for securing government employment constitutes bribery and is opposed to public policy, making the underlying agreement void. 
• The Court applied the legal maxim "in pari delicto potior est conditio possidentis" (in equal fault, the condition of the possessor is better), stating that when both parties are equally at fault in an immoral act, courts will not assist either party. 
• The Court relied on Section 23 of the Indian Contract Act, 1872 (ICA) specifically illustration (f), which states: "A promises to obtain for B an employment in the public service and B promises to pay 1,000 rupees to A. The agreement is void, as the consideration for it is unlawful." 
• The Court clarified that Section 65 (restitution) of the Indian Contract Act, 1872 applies only when an agreement is discovered void at a later stage, not when void ab initio (from the beginning). Since this agreement was void from inception, no restitution was available. 
• The Court concluded that since there was no legally enforceable debt or liability, Section 138 of the Negotiable Instruments Act was not applicable, and dismissed the appeal upholding the acquittal. 

What is Section 138 of NIA? 

About: 

• Section 138 creates a statutory offence for dishonour of cheques due to insufficient funds or exceeding the arranged amount.  
• The essential elements that must be satisfied for constituting an offence under this section are: 
  • Primary Requirement: A cheque drawn by a person on his account with a banker for payment of money to another person must be returned unpaid by the bank due to insufficient funds or exceeding the arranged overdraft limit. 

Three Mandatory Conditions under the Proviso: 

• The cheque must be presented to the bank within six months from the date it was drawn or within its validity period, whichever is earlier. 
• The payee or holder in due course must issue a written demand notice to the drawer within thirty days of receiving information from the bank about the cheque being returned unpaid. 
• The drawer must fail to make payment of the cheque amount within fifteen days of receiving the demand notice. 
• Penalty Provision: Upon satisfaction of these conditions, the drawer commits an offence punishable with imprisonment up to two years, or fine up to twice the cheque amount, or both. 
• Scope Limitation: The debt or liability must be legally enforceable as clarified in the Explanation to the section. 

What is Section 23 of ICA? 

• Section 23 of the Indian Contract Act, 1872 (ICA) states that for a contract to be valid, there must be the legality of object and consideration. The object is the purpose for which the parties enter a contract. The fulfillment of the object leads to the transfer of the consideration agreed from one party to the other. 
  • A agrees to sell his house to B for 10,000 rupees. Here, B’s promise to pay the sum of 10,000 rupees is the consideration for A’s promise to sell the house and A’s promise to sell the house is the consideration for B’s promise to pay the 10,000 rupees. These are lawful considerations.

What is Section 65 of ICA? 

Section 65 - Obligation of person who has received advantage under void agreement or contract that becomes void: 

• This section deals with situations where an agreement is discovered to be void or becomes void. 
• In such cases, a person who has received any advantage under the agreement is bound to restore it or to make compensation for it to the person from whom he received it.