Creditor Not Required to Prove Financial Capacity to Extend Loan: Supreme Court Slaps ₹32 Lakh Fine on Defaulter in S.138 NI Act Case [Read Order]

In a notable ruling, the Supreme Court of India has held that a creditor is not required to prove their financial capacity at the outset to establish a legally enforceable debt under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).

The Appellant Ashok Singh, filed a Criminal Appeal before the Supreme Court against the State of Uttar Pradesh and Ravindra Pratap Singh - the debtor who availed a loan from the appellant and rendered a cheque in lieu of repayment of loan.

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However, upon presenting the cheque, it was dishonored due to insufficient funds. Despite issuing a statutory notice as mandated under Section 138 of the NI Act, the appellant failed to secure payment, prompting him to initiate criminal proceedings against the accused. The trial court found the respondent guilty, affirming that the dishonored cheque constituted a legal liability. However, the Allahabad High Court subsequently acquitted the accused, citing the complainant’s failure to demonstrate his financial capacity to extend the loan.

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The Appellant, represented by Pinaki Addy argued that the High Court had erroneously shifted the burden of proof onto him, disregarding the statutory presumption under Section 139 of the NI Act. He further contended that once the cheque was signed and issued by the respondent, a legal presumption of debt arose, and the onus to rebut this presumption rested with the accused.

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Conversely, Shadan Farasat, counsel for the accused adverted to the impugned ruling by the Allahabad High Court, claiming that the entire complaint is fictitious and that the complainant had failed to prove the circumstances in which the cheque was handed over and on the existence of any business relations between the disputing parties.

Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah found fault with the reasoning relied upon by the Allahabad High Court in the preceding stage. The Apex Court reaffirmed the principle that once the execution of a cheque is admitted, a presumption of a legally enforceable debt arises under Section 139 of the NI Act. The Court ruled that a complainant is not initially required to prove financial capacity unless the accused raises a specific objection in their defense.

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The Bench referred to the Supreme Court decision in Tedhi Singh v. Narayan Dass Mahant (2022), where the Court clarified that cheque bounce cases under Section 138 NI Act do not necessitate the complainant to demonstrate their financial standing at the outset.

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Observing that the Respondent had failed to adduce substantial evidence rebutting the statutory presumption of liability and also failed to respond to the statutory notice challenging the claim, thereby reinforcing the presumption of debt.

In light of the observations made, the Supreme Court proceeded to impose a fine of ₹32,00,000 on the Accused which is to be paid within four months failing which the sentence imposed by the trial court in the prior stage would be upheld by the Supreme Court.

To Read the full text of the Order CLICK HERE

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