The Supreme Court has ruled that unlicensed money lenders can be prosecuted under Section 138 of the Negotiable Instruments Act for dishonoured cheques, provided there was a legally enforceable debt.
The Supreme Court has clarified that individuals engaged in unauthorised money lending remain liable under Section 138 of the Negotiable Instruments Act, 1881, for dishonour of cheques issued in discharge of loan obligations, even if the lender lacked formal licensing.
The Court ruled that the absence of a licence does not render the underlying debt void ab initio, especially when loans were granted from personal funds and not as part of a prohibited banking activity. The Bench emphasized that Section 138 liability arises where there is a legally enforceable debt, a legally enforceable relationship, and issuance of a cheque as part of that obligation.
"The nature of the lender's business does not nullify the existence of a valid debtor-creditor relationship, nor negate the criminal liability upon dishonour of a cheque issued in discharge of such liability."
Implications for Practitioners
This decision reinforces the broad scope of Section 138 and underscores that courts must look beyond formal regulatory compliance to assess the reality of financial obligations. Practitioners advising lenders or borrowers must now factor in this precedent when evaluating litigation risk, particularly in cases involving informal credit arrangements.
Citations
- M/s. Rajesh Kumar Aggarwal v. State of Haryana (2026)
