Court Rules Friendly Loans Do Not Constitute Legally Enforceable Debt Under Section 138 of the Negotiable Instruments Act
In a significant ruling, the Jharkhand High Court has upheld the acquittal of two individuals in a cheque dishonour case, reinforcing the legal position that Section 138 of the Negotiable Instruments Act does not apply to transactions that are not backed by legally enforceable contracts. The judgment, delivered by Justice Rajesh Kumar on May 7, 2026, dismissed the appeal filed by the complainant, Md. Masudul Haque Ansari, against the acquittal verdict of the Judicial Magistrate, 1st Class, Jamshedpur.
The case originated from a complaint by Ansari, who alleged that the respondents had failed to honour two cheques amounting to Rs. 2,00,000. These cheques were purportedly issued as security for a friendly loan extended by Ansari to the respondents. Upon deposit, both cheques were dishonoured due to insufficient funds, leading to legal proceedings under Section 138 of the Negotiable Instruments Act.
However, the trial court acquitted the respondents, concluding that the transaction was a friendly loan, which does not constitute a legally enforceable debt under the said provision. Ansari's subsequent appeal to the High Court argued that since the signature on the cheques was undisputed, the presumption should favor the complainant.
In its judgment, the High Court reiterated that the presumption under Section 138 is applicable only when the cheque is issued for the discharge of a legally enforceable debt or liability. It emphasized that a friendly transaction does not fulfill this requirement, as such transactions lack the essential elements of a legally enforceable contract, namely an agreement with commercial consideration.
The court also referenced the Supreme Court's decisions in similar cases, highlighting that the presumption of legality associated with cheques can be rebutted by evidence showing the absence of a legally enforceable debt. Once rebutted, the burden shifts back to the complainant to prove the existence of such a debt.
Ultimately, the High Court found no material on record that warranted interference with the trial court's decision, thereby dismissing the appeal and confirming the acquittal of the respondents.
This ruling underscores the importance of distinguishing between commercial transactions and friendly loans in the context of cheque dishonour cases, emphasizing that only the former can attract legal consequences under Section 138 of the Negotiable Instruments Act.
Bottom line:-
Section 138 of the Negotiable Instruments Act does not apply to transactions without legally enforceable contracts, as friendly transactions cannot form the basis of a legally enforceable debt.
Statutory provision(s): Section 138 of the Negotiable Instruments Act, 1881; Indian Contract Act, 1872
