The Aspect of Financial Capacity of The Complainant in NI Act Proceedings

Proceedings in NI act cases begins with a private complaint to the magistrate and submitting pre-summoning evidence in order to satisfy the magistrate, a genuine prosecution, towards the accused. Following the course of trial, accused is then asked to take a defence for the same. One of the defences. That an accused can take is to question the financial capacity of the complainant to ascertain whether in towards the transaction of the loan, the complainant had the financial capacity to extend such loan or not? With this we shall first determine the presumptions that are made against the accused in these proceedings

?

Presumptions against the accused:

To enhance the acceptability of cheques as well as to provide for adequate safeguards to prevent harassment of honest drawers through painting the liability arising out of dishonour of a cheque with a punitive brush, an amendment to the NI Act 1881 was brought about by introducing Chapter VIII. Thence, seeking to promote credibility in transactions through the medium of banking channels and operations as well as their efficacy. Section 138 of the NI Act 1881 is reproduced below as:

“138. Dishonour of cheque for insufficiency, etc., of funds in the account. Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years’, or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless— (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice; in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. Explanation.—For the purposes of this section, “debt of other liability” means a legally enforceable debt or other liability.”

“118. Presumptions as to negotiable instruments Until the contrary is proved, the following presumptions shall be made:— (a) of consideration:—that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration; (b) as to date:—that every negotiable instrument bearing a date was made or drawn on such date; (c) as to time of acceptance:—that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; (d) as to time of transfer: —that every transfer of a negotiable instrument was made before its maturity; (e) as to order of indorsements:—that the indorsements appearing upon a negotiable instrument were made in the order in which they appear then on; (f) as to stamp:— that a lost promissory note, bill of exchange or cheque was duly stamped; (g) that holder is a holder in due course:—that the holder of a negotiable instrument is a holder in due course: provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him.”

“139. Presumption in favour of holder—It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.”

?

Financial capacity of the complainant as the defence:

The financial capacity of the complainant as a defence in cases under the Negotiable Instruments Act, 1881 (NI Act) was significantly recognized in the landmark Supreme Court case of "John K. Abraham v. Simon C. Abraham" [(2014) 2 SCC 236]. This judgment introduced the idea that the financial capacity of the complainant can be a valid defense in cases involving dishonour of cheques under Section 138 of the NI Act.

?What is the "financial capacity" defense?

• This defense involves questioning whether the complainant had the means or capacity to lend the money or that led to the issuance of the cheque. The defense is based on the argument that if the complainant did not have sufficient financial resources, then the story of a loan or monetary transaction may be fabricated, and the cheque may not have been issued in discharge of any debt or liability, there is also the element of using black money which is not justiciable in a court of law as per the provisions of the Income Tax act, specifically Section 269SS – Restrictions on Cash Loans, Section 269SS prohibits taking or accepting loans, deposits, or specified sums of ?20,000 or more in cash. The transaction must be conducted through banking channels (such as account payee cheque, account payee bank draft, or electronic transfer). Penalty under Section 271D: If this provision is violated (i.e., if a loan of ?20,000 or more is extended in cash), a penalty equal to the loan amount is levied under Section 271D. Relation to black money: Cash transactions are a common way to circulate black money. This provision curtails the use of unaccounted cash in loans by enforcing penalties for large cash transactions.

?Burden of Proof and Rebuttal:

• Initial Burden on Complainant: Under Section 139 of the NI Act, the law presumes that the cheque was issued for a valid debt or liability. However, this is a rebuttable presumption.
• Shift of Burden to Accused: The accused has the right to challenge this by showing, through probabilities or evidence, that the transaction is doubtful. One way to do this is to question the complainant’s ability to provide the funds (financial capacity).
• Return to Complainant: Once the accused presents a plausible defense, the burden shifts back to the complainant to prove their financial capacity.

?

Key Supreme Court Judgments on the Financial Capacity Defense:

John K. Abraham v. Simon C. Abraham (2014 In this case, the accused (Simon C. Abraham) argued that the complainant (John K. Abraham) did not have the financial capacity to lend the amount mentioned in the dishonored cheque. The Supreme Court, while acquitting the accused, ruled that the complainant must prove that he had the financial capacity to lend such a large sum. The court emphasized that The complainant must prove that the loan or financial transaction took place as claimed and that they had the financial means to advance the loan amount, The accused can raise a valid defense by questioning the complainant’s financial capacity, thereby casting doubt on the genuineness of the transaction. While the presumption under Section 139 of the NI Act is that the cheque was issued for a legally enforceable debt or liability, this presumption is rebuttable. The accused can present evidence to rebut the presumption, such as questioning the complainant's financial capacity.

?

Basalingappa v. Mudibasappa [(2019) 5 SCC 418]**: In this case, the Supreme Court reiterated that while the statutory presumption under Section 139 NI Act favors the complainant, the accused can rebut this presumption by questioning the complainant’s financial capacity. If the accused can raise a reasonable doubt about the existence of the debt or liability, the presumption is nullified, and the complainant must then establish the existence of a legally enforceable debt. The court emphasized that:

• The standard of proof for the accused is preponderance of probabilities, not beyond reasonable doubt.
• If the accused successfully questions the financial capacity, the complainant must provide proof to substantiate the loan.

?

Kumar Exports v. Sharma Carpets [(2009) 2 SCC 513]**: The court held that once the accused raises a probable defense, such as questioning the complainant's financial capacity, the presumption under Section 139 is no longer absolute. The court observed that in the absence of credible evidence to support the financial capacity of the complainant, the accused can succeed in rebutting the statutory presumption.