Elements of Section 138 of NI Act: Case analysis

IN THE SUPREME COURT OF INDIA

REKHA SHARAD USHIR 
versus
SAPTASHRUNGI MAHILA NAGARI
SAHKARI PATSANSTA LTD.

CRIMINAL APPELLATE JURISDICTION
CRIMINAL APPEAL NO. 724 OF 2025

The bench comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan

Introduction

The case under consideration, Criminal Appeal No. 724 of 2025, involves an appellant, Rekha Sharad Ushir, who faced proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) for the alleged dishonour of a cheque. The respondent, Saptashrungi Mahila Nagari Sahkari Patsansta Ltd.—a cooperative credit society—claimed that the appellant defaulted on her loan repayments, leading to the issuance of a dishonoured cheque. Central to the appeal is the contention that the respondent suppressed material facts and documents, thereby abusing the process of law. This analysis examines the factual matrix, procedural history, legal issues raised, the parties’ submissions, the Court’s judgments and reasoning, and the broader implications of the decision.

Factual and Procedural Background

The factual background of this case is multifaceted, involving two key loan transactions:

1. First Loan Transaction:
   • The appellant secured a loan from the respondent in 2006 by issuing two security cheques.
   • Owing to a repayment default, the respondent deposited the first cheque on February 10, 2007, which was dishonoured.
   • Following legal demand notices, the appellant eventually paid the cheque amount on September 23, 2016, leading to the withdrawal of prosecution and an acquittal.
2. Second Loan Transaction:
   • In the interim, the appellant allegedly secured another loan on July 25, 2008.
   • Due to another default in repayment, the respondent deposited the second cheque on October 3, 2016. This cheque was subsequently dishonoured on October 14, 2016.
   • A statutory legal notice was sent on November 11, 2016, under Section 138 of the NI Act, prompting the respondent to initiate criminal proceedings.

Procedural History

After the second cheque was dishonoured, the appellant, through her counsel, raised an issue by requesting that the respondent supply the underlying loan documents necessary for a proper response to the statutory notice. The appellant’s subsequent letters, dated November 28, 2016, and December 13, 2016, highlighted that these crucial documents were not furnished. Nonetheless, the respondent filed a complaint under Criminal Case No. 648 of 2016 before the Judicial Magistrate First Class (JMFC) at Kalwan on December 15, 2016. The JMFC then issued the process on March 2, 2017. The appellant challenged the issuance of this process by filing a Criminal Writ Petition before the High Court of Bombay, which was dismissed on December 18, 2023.

On appeal, the appellant contended that the respondent had deliberately suppressed material facts and documents—specifically, her letters dated November 28 and December 13, 2016. These communications, she argued, were essential to her defence as they evidenced her request for the necessary loan documents. The appellant maintained that this suppression amounted to an abuse of the process of law, warranting the quashing of the complaint.

Also read: A Detailed Analysis of Director Liability, Legal Provisions, and Key Takeaways under NI act

Issues for Determination

Several pivotal legal questions emerge from the dispute:

1. Whether the respondent’s alleged suppression of material documents and facts constitutes an abuse of the process of law that justifies quashing the complaint.
2. Whether all procedural requirements under Section 138 of the NI Act—including the timely issuance of the statutory notice and subsequent steps—were properly followed, and whether any lapses can be remedied or justified.
3. Whether the failure to produce the appellant’s correspondence regarding her request for loan documents prejudiced her ability to mount a defence and whether this failure should result in dismissal of the proceedings.
4. How the Court should treat instances where one party suppresses evidence that is material to establishing the facts of the case, particularly in criminal proceedings where the stakes for the accused are high.

Submissions of the Parties

Appellant’s Submissions

The appellant’s counsel advanced several key arguments:

• Repayment and Redundancy of the Claim:
  The appellant contended that she had repaid the first loan and that the complaint was erroneously predicated on the second cheque issued after that repayment. The claim was, therefore, an attempt by the respondent to enforce an already settled matter.
• Suppression of Material Evidence:
  The appellant argued that her letters dated November 28 and December 13, 2016—letters that clearly indicated her request for the relevant loan documents—had been intentionally omitted from the complaint and the supporting affidavit. This omission, she claimed, deprived her of the opportunity to challenge the statutory notice properly.
• Abuse of Process:
  By suppressing material facts and documents, the respondent, according to the appellant, abused the judicial process. This abuse was intended to circumvent the appellant’s right to a fair hearing, thus rendering the proceedings procedurally unfair.
• Procedural Fairness:
  The appellant stressed that had the suppressed documents been produced, the trial court would have been able to probe the respondent’s version of events more effectively. This could have led to an early dismissal of the complaint, thereby upholding the principles of natural justice.

Respondent’s Submissions

The respondent’s counsel presented a counterargument focusing on the following points:

• Statutory Presumption Under Section 139 of the NI Act:
  The respondent relied on the statutory presumption that a cheque is issued for the discharge of a debt, unless proven otherwise. It was argued that this presumption had not been effectively rebutted by the appellant.
• Compliance with Statutory Requirements:
  The respondent maintained that all procedural requirements under the NI Act were met, including the timely issuance of the statutory notice. The absence of the appellant’s letters in the complaint, it was argued, did not nullify the respondent’s claim.
• Materiality of the Suppressed Letters:
  The respondent contended that the appellant’s communications regarding the non-supply of the documents were not material to establishing a prima facie case under Section 138 of the NI Act. Furthermore, the respondent introduced a letter dated November 29, 2016, as evidence that some documents were indeed furnished.
• Legality of the Complaint:
  The respondent asserted that the complaint contained all the essential ingredients required under the NI Act, and that there was no suppression of material facts that would justify the dismissal of the proceedings.

Legal Analysis

Abuse of Process and Suppression of Material Facts

At the heart of this appeal lies the doctrine that litigants must come forward with all material facts and documents before the court. The Court has long held that suppressing such material evidence not only misleads the judiciary but also constitutes an abuse of the process of law. In this case, the appellant’s letters dated November 28 and December 13, 2016 were pivotal. Their omission from the respondent’s complaint was seen as a deliberate act to conceal facts that could have cast doubt on the veracity of the statutory notice. The Court referenced prior jurisprudence—most notably, the principles elucidated in S.P. Chengalvaraya Naidu v. Jagannath & Ors.—to reinforce that a litigant who bases a claim on selectively presented evidence forfeits the right to seek judicial relief.

Interpretation of Section 138 of the NI Act

The analysis under Section 138 of the NI Act involved a detailed examination of its three main conditions:

1. Timely Presentation of the Cheque:
   The Court confirmed that the cheque had been presented within the prescribed time limits.
2. Issuance of the Statutory Notice:
   Although the statutory notice was duly issued on November 11, 2016, the crux of the matter was the subsequent failure to produce the documents that substantiated the respondent’s claim.
3. Failure to Repay Post Notice:
   While the appellant had repaid the amount related to the first loan, the unresolved dispute over the second transaction persisted largely due to the absence of critical documentary evidence.

The Court noted that while the NI Act affords a presumption in favor of the cheque holder, this presumption is not absolute. It requires the respondent to prove that the cheque was issued for an outstanding debt. The failure to furnish the documents, which the appellant had expressly demanded, undermined the respondent’s ability to meet this burden of proof.

Evidentiary Impact

Criminal proceedings demand a high standard of evidence due to the serious consequences they impose on the accused. The omission of the appellant’s correspondence regarding her demand for the necessary loan documents significantly compromised her ability to defend herself. The Court held that such suppression of evidence could not be viewed as a mere procedural oversight; rather, it was a deliberate act that obstructed the discovery of the truth. The respondent’s attempt to introduce a later letter dated November 29, 2016 was also critically scrutinized. The absence of dates on the signatures of the purported account statements diminished their credibility, reinforcing the view that the respondent’s evidentiary foundation was fundamentally flawed.

Procedural Fairness and the Right to a Fair Hearing

The principles of natural justice demand that a defendant be given a full and fair opportunity to respond to the allegations leveled against them. In this case, the appellant’s inability to obtain the necessary documents severely undermined her right to a fair hearing. The Court underscored that any attempt to initiate criminal proceedings while suppressing material evidence is inherently unjust. The respondent’s failure to produce the appellant’s letters prevented the lower court from obtaining a complete picture of the factual matrix, thereby prejudicing the appellant’s ability to mount an effective defence.

Court’s Judgments

1. Quashing of the Complaint:
   The Supreme Court ultimately quashed the complaint (Criminal Case No. 648 of 2016) that had been filed by the respondent. The Court held that the suppression of the appellant’s letters dated November 28 and December 13, 2016 amounted to a material omission. This omission significantly impeded the court’s ability to determine the true nature of the dispute and denied the appellant a fair chance to respond to the statutory notice. In quashing the complaint, the Court underscored that setting criminal law in motion based on selectively presented evidence is an abuse of the process of law.
2. Reaffirmation of Procedural Norms:
   The Court’s judgment reinforced the imperative that all material documents and facts must be disclosed in court proceedings. The decision was premised on the notion that a litigant’s failure to disclose such information should render their claim untenable. This is consistent with the principle that the court must not entertain a case founded on suppressed or incomplete evidence.
3. Implications for the Statutory Framework under the NI Act:
   While Section 138 of the NI Act establishes a presumption in favor of the cheque holder, the Court clarified that this presumption is not immune from challenge. It must be supported by a complete and honest disclosure of facts. In the present case, the respondent’s inability to produce the documents that the appellant had demanded meant that the statutory notice was based on an incomplete record. Consequently, the Court found that the procedural requirements of the NI Act were not fully met.
4. Guidance for Lower Courts:
   The Supreme Court’s ruling provides clear guidance to lower courts regarding the assessment of evidentiary disclosures. Magistrates and trial courts are urged to critically examine the completeness of the evidence before proceeding with criminal cases, especially in instances involving cheque dishonour. The Court emphasized that any suppression of material facts should lead to a re-examination of the entire complaint and, where necessary, to the dismissal of the case.
5. No Preclusion of Alternative Remedies:
   The judgment also made it clear that quashing the criminal proceedings under Section 138 of the NI Act does not preclude the respondent from pursuing recovery of the disputed amount through other legal avenues. The respondent retains the right to file civil proceedings or explore other statutory remedies to recover the debt, provided that such proceedings adhere to the principles of full disclosure and procedural fairness.

Implications for Future Litigation

For Creditors and Financial Institutions

The decision sends a strong signal to financial institutions and cooperative societies: the pursuit of recovery through criminal proceedings under the NI Act requires scrupulous adherence to procedural norms. Creditors must ensure that all material documents and communications are promptly disclosed and incorporated into their pleadings. Failure to do so may jeopardize the enforceability of their claims and result in the dismissal of proceedings.

For Defendants

Defendants, particularly in cases involving cheque dishonour, are reminded of their procedural rights. Promptly demanding the production of all underlying documents can be crucial to mounting a defense. As demonstrated in this case, preserving and emphasizing such communications in the record can be decisive in contesting a claim that relies on incomplete or suppressed evidence.

For the Judiciary

The ruling reinforces the need for trial courts to scrutinize the evidentiary record rigorously. Lower courts are urged to verify that complaints are based on full and transparent disclosure of material facts. This approach ensures that criminal proceedings are not initiated on a flawed evidentiary foundation, thereby upholding the integrity of the judicial process.

Conclusion

Criminal Appeal No. 724 of 2025 stands as a significant precedent in the realm of cheque dishonour litigation under the NI Act. The Supreme Court’s judgment, is a robust reaffirmation of the principles of procedural fairness and full disclosure. The decision underscores that:

• A litigant’s suppression of material evidence constitutes an abuse of the process of law.
• The statutory presumptions under the NI Act are subject to the overarching requirement of complete and honest disclosure.
• Defendants are entitled to a fair hearing, which includes access to all documents necessary for an adequate response.
• Lower courts must critically evaluate the completeness of the evidence before initiating or continuing criminal proceedings.

By quashing the complaint, the Supreme Court not only addressed the deficiencies in the respondent’s case but also provided a clear directive to litigants: the court process must not be exploited through selective evidence presentation. This decision is expected to have far-reaching implications for future litigation, serving as a deterrent against the abuse of criminal procedures and reinforcing the importance of transparency in legal proceedings.

In conclusion, the comprehensive analysis of Criminal Appeal No. 724 of 2025—now featuring a dedicated discussion under “Court’s Judgments”—illustrates the complex interplay between statutory mandates and the fundamental principles of natural justice. The ruling ensures that while creditors have a legitimate interest in enforcing their claims, they must do so within the bounds of complete procedural fairness. This balance is essential for maintaining the integrity of the legal system and ensuring that the rights of both creditors and debtors are safeguarded in judicial proceedings.

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