A cheque issued for a contingent contract without a subsisting legally enforceable debt does not attract Section 138 liability.

The petitioners (partners in M/s. Builtman Realty and Infrastructure LLP) sought to quash a complaint under Section 138 of the Negotiable Instruments Act (NI Act).

The complainant (Respondent No. 2) had purchased land from a third party and entered into an agreement with the petitioners’ firm to construct a villa.

Due to project delays, the parties executed a Memorandum of Understanding (MoU) dated 02.01.2018, wherein the firm agreed to "repurchase" the land/cancel the contract for ₹14,17,000/-.

A cheque issued for this purpose was dishonored with the remark "Payment Stopped by Drawer".

The petitioners argued that as the complainant still held title to the land, there was no subsisting "legally enforceable debt" when the cheque was issued.

1. Whether a cheque issued for the repurchase of property under a contingent cancelled contract constitutes a discharge of a "legally enforceable debt or liability" under Section 138 of the NI Act.

2. Whether the partners of an LLP can be held vicariously liable under Section 141 of the NI Act when the debt itself is not established as legally enforceable at the time of issuance.

Section 138 of the Negotiable Instruments Act, 1881, which requires that a cheque be issued for the discharge, in whole or in part, of any debt or other liability.

Indus Airways Private Limited v. Magnum Aviation Private Limited (2014), which establishes that if there is no legally enforceable debt or liability subsisting on the date the cheque is drawn (such as in the case of advance payments for unexecuted contracts), Section 138 is not attracted.

Section 27 of the Limited Liability Partnership Act, 2008, regarding the liabilities of partners.

The court reasoned that the transaction was a contingent contract. The MoU stipulated that the complainant would transfer the land title to the LLP only after receiving the refund.

Since the land remained in the name and possession of the complainant at the time the cheque was presented, the LLP did not owe a "debt" in the legal sense; rather, the situation represented a breach of a reciprocal promise.

The court found no evidence that the complainant had paid the firm for the construction, meaning the cheque was issued for a "repurchase" that had not yet occurred. Consequently, there was no past adjudicated or existing liability at the time of issuance.

The court allowed the petition and quashed Criminal Complaint No. 59095 of 2019 pending before the Additional Chief Metropolitan Magistrate, Ahmedabad.