Supreme Court (03.12.2021) in Sunil Todi & Ors. Vs. State of Gujarat & Anr. [Criminal Appeal No.1446 of 2021] held that;
Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented.
Therefore, there cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque.
The true purpose of Section 138 would not be fulfilled, if ‘debt or other liability’ is interpreted to include only a debt that exists as on the date of drawing of the cheque. Moreover, Parliament has used the expression ‘debt or other liability’. The expression “or other liability’ must have a meaning of its own, the legislature having used two distinct phrases. The expression ‘or other liability’ has a content which is broader than ‘a debt’ and cannot be equated with the latter.
Excerpts of the Order;
# 17. The issues which arise for our consideration are as follows:
(i) Whether the dishonor of a cheque furnished as a ‘security’ is covered under the provisions of Section 138 of the NI Act;
(ii) Whether the Magistrate, in view of Section 202 CrPC, ought to have postponed the issuance of process; and
(iii) Whether a prima facie case of vicarious liability is made out against the appellants.
# 18. The first submission which has been urged on behalf of the appellants is that a complaint under Section 138 of the NI Act would not be maintainable since the cheque of Rs 2.67 crores was issued by way of a security and, is thus not against a legally enforceable debt or liability. The appellant has placed reliance on the judgment of a two judge Bench of this Court in Indus Airways Private Limited v. Magnum Aviation Private Limited. The issue in that case was whether the post-dated cheques which were issued by the appellants who were purchasers, as an advance payment in respect of purchase orders, could be considered to be in discharge of a legally enforceable debt or other liability and whether the dishonor of the cheques amounted to an offence under Section 138. The appellants had placed two purchase orders for the supply of aircraft parts with the first respondent and had issued two post-dated cheques as advance payment. The supplier received a letter from the purchasers cancelling the purchase and requesting the return of both the cheques. Following a notice by the suppliers, a complaint was instituted under Section 138 upon which cognizance was taken by the Magistrate and summons were issued. The High Court allowed a petition under Section 482 CrPC and set aside the order issuing process by construing the expression “discharge of any debt or other liability” in Section 138 holding that there must be a liability at the time of issuing the cheque. In appeal, Justice R M Lodha writing for a two-Judge Bench allowed the appeal observing:
“9. The Explanation appended to Section 138 explains the meaning of the expression “debt or other liability” for the purpose of Section 138. This expression means a legally enforceable debt or other liability. Section 138 treats dishonoured cheque as an offence, if the cheque has been issued in discharge of any debt or other liability. The Explanation leaves no manner of doubt that to attract an offence under Section 138, there should be a legally enforceable debt or other liability subsisting on the date of drawal of the cheque. In other words, drawal of the cheque in discharge of an existing or past adjudicated liability is sine qua non for bringing an offence under Section 138. If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise, and material or goods for which purchase order was placed is not supplied, in our considered view, the cheque cannot be held to have been drawn for an existing debt or liability. The payment by cheque in the nature of advance payment indicates that at the time of drawal of cheque, there was no existing liability.”
# 19. Drawing the distinction between civil and criminal liability, it was observed that if there is a breach in the condition of advance payment, it would not incur criminal liability under Section 138 of the NI Act since there is no legally enforceable debt or liability at the time when the cheque was drawn. The Court held that if at the time when a contract is entered into, the purchaser has to pay an advance and there was a breach of that condition, the purchaser may have to make good the loss to the seller, but this would not occasion a criminal liability under Section 138. The issuance of a cheque towards advance payment at the time of the execution of the contract would not - in the view which has adopted in Indus Airways - be considered as a subsisting liability so as to attract an offence under Section 138 upon the dishonor of the cheque.
# 20. A later judgment of a two judge Bench in Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited considered the decision in Indus Airways. In Sampelly, the appellant was the Director of a company which was engaged in power generation, while the respondent was a government enterprise engaged in renewable energy. The respondent agreed to advance a loan for setting up a power project and the agreement envisaged that post-dated cheques towards payment of installments of the loans would be given by way of security. The cheques having been dishonored, complaints were instituted under Section 138 which led to quashing petitions filed before the High Court. The submission which was urged before this Court was that dishonor of the post-dated cheques given by way of security did not amount to a legally enforceable debt or liability under Section 138 in presentia. This Court held, after adverting to the decision in Indus Airways that if on the date of the cheque, a liability or debt exists or the amount has become enforceable, Section 138 would stand attracted and not otherwise. The decision in Indus Airways was distinguished in Sampelly (supra) on the ground that in that case, the cheque had not been issued for discharge of a liability but as advance for a purchase order which was cancelled. On the other hand, in Sampelly, the cheque was for the repayment of a loan installment which had fallen due. The Court noted that though the deposit of cheques towards the repayment of installments was described as a security in the loan agreement, the true test was whether the cheque was in discharge of an existing enforceable debt or liability or whether it was towards an advance payment without there being a subsisting debt or liability.
# 21. Besides the distinguishing features which were noticed in Sampelly, there was another ground which weighed in the judgment of this Court. The Court adverted to the decision in HMT Watches v. MA Habida to hold that whether the cheques were given as security constitutes the defense of the accused and is a matter of trial. The extract from the decision in HMT Watches which is cited in the decision in Indus Airways is thus:
“10. Whether the cheques were given as security or not, or whether there was outstanding liability or not is a question of fact which could have been determined only by the trial court after recording evidence of the parties. In our opinion, the High Court should not have expressed its view on the disputed questions of fact in a petition under Section 482 of the Code of Criminal Procedure, to come to a conclusion that the offence is not made out. The High Court has erred in law in going into the factual aspects of the matter which were not admitted between the parties.
# 22. In a more recent judgment of a two judge Bench in Sripati Singh v. State of Jharkhand, an order of the Magistrate taking cognizance and issuing summons on a complaint under Section 420 IPC and Section 138 of the NI Act was challenged before the High Court. There was a transaction between the second respondent and the complainant pursuant to which the appellant had advanced sums of money. Several cheques were handed over but they were dishonored on presentation. The High Court allowed the petitions. An appeal was filed before this Court. Before this Court, the appellant urged that a cheque issued towards discharge of the loan and presented for recovery could not be construed as a security for the transaction. In appeal, this Court noted that there were four loan agreements under which the second respondent agreed to pay a total sum of Rs 2 crores and six cheques were issued as security. The High Court had held that since under the loan agreement the cheques were given by way of security, the complaint could not be maintained. Justice AS Bopanna, speaking for the two judge bench, adverted to the earlier decision in Indus Airways and the distinguishing features which were noticed in the decision in Sampelly. The Court held that where in the case of a loan transaction, the borrower agrees to repay the amount in a specified time frame and issues a cheque as a security to secure the repayment and the loan is not repaid, the cheque which is issued as security would mature for presentation. The Court observed:
“17. A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. ‘Security’ in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfilment of an obligation to which the parties to the transaction are bound. If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as security to secure such repayment; if the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque which is issued as security would mature for presentation and the drawee of the cheque would be entitled to present the same. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of N.I. Act would flow.”
Moreover, as the Court explained:
“18. When a cheque is issued and is treated as ‘security’ towards repayment of an amount with a time period being stipulated for repayment, all that it ensures is that such cheque which is issued as ‘security’ cannot be presented prior to the loan or the instalment maturing for repayment towards which such cheque is issued as security. Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. Therefore, the prior discharge of the loan or there being an altered situation due to which there would be understanding between the parties is a sine qua non to not present the cheque which was issued as security. These are only the defences that would be available to the drawer of the cheque in a proceedings initiated under Section 138 of the N.I. Act. Therefore, there cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque. If such is the understanding a cheque would also be reduced to an ‘on demand promissory note’ and in all circumstances, it would only be a civil litigation to recover the amount, which is not the intention of the statute. When a cheque is issued even though as ‘security’ the consequence flowing therefrom is also known to the drawer of the cheque and in the circumstance stated above if the cheque is presented and dishonoured, the holder of the cheque/drawee would have the option of initiating the civil proceedings for recovery or the criminal proceedings for punishment in the fact situation, but in any event, it is not for the drawer of the cheque to dictate terms with regard to the nature of litigation.”
The complaint, insofar as it invoked the provisions of Section 138 of the NI Act, was accordingly restored to the Judicial Magistrate to proceed in accordance with law.
# 24. In Sampelly and Sripati Singh, post-dated cheques were issued as a security for loan installments that were due. On the dates on which the cheques were drawn, there was an outstanding debt. In the present case, the cheques were issued on 30 June 2016. The second respondent commenced the supply of electricity immediately from the next day that is from 1 July 2016. The facts of this case are in contrast with the facts in Indus Airways. In Indus Airways, since the purchase agreement was cancelled, there was no outstanding liability incurred before the encashment of the cheque. The transaction between the parties did not go through as a result of the cancellation of the purchase orders.
# 25. The explanation to Section 138 of the NI Act provides that ‘debt or any other liability’ means a legally enforceable debt or other liability. The proviso to Section 138 stipulates that the cheque must be presented to the bank within a period of six months from the date on which it is drawn or within its period of validity. Therefore, a cheque given as a gift and not for the satisfaction of a debt or other liability, would not attract the penal consequences of the provision in the event of its being returned for insufficiency of funds. Aiyar’s Judicial Dictionary defines debt as follows: “Debt is a pecuniary liability. A sum payable or recoverable by action in respect of money demand.” Lindey L.J in Webb v. Strention defined debt as “… a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in praesenti, solvendum in futuro.” The definition was adopted by this Court in Keshoram Industries v. CWT. Justice Mookerjee writing for a Full Bench of the Calcutta High Court in Banchharam Majumdar v. Adyanath Bhattacharjee adopted the definition provided by the Supreme Court of California in People v. Arguello:
“Standing alone, the word ‘debt’ is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds: solvendum in praesenti and solvendum in future … A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt or does not become a debt until the contingency has happened.”
Thus, the term debt also includes a sum of money promised to be paid on a future day by reason of a present obligation. A post-dated cheque issued after the debt has been incurred would be covered by the definition of ‘debt’. However, if the sum payable depends on a contingent event, then it takes the color of a debt only after the contingency has occurred. Therefore, in the present case, a debt was incurred after the second respondent began supply of power for which payment was not made because of the non-acceptance of the LCs’. The issue to be determined is whether Section 138 only covers a situation where there is an outstanding debt at the time of the drawing of the cheque or includes drawing of a cheque for a debt that is incurred before the cheque is encashed.
26. The object of the NI Act is to enhance the acceptability of cheques and inculcate faith in the efficiency of negotiable instruments for transaction of business. The purpose of the provision would become otiose if the provision is interpreted to exclude cases where debt is incurred after the drawing of the cheque but before its encashment. In Indus Airways, advance payments were made but since the purchase agreement was cancelled, there was no occasion of incurring any debt. The true purpose of Section 138 would not be fulfilled, if ‘debt or other liability’ is interpreted to include only a debt that exists as on the date of drawing of the cheque. Moreover, Parliament has used the expression ‘debt or other liability’. The expression “or other liability’ must have a meaning of its own, the legislature having used two distinct phrases. The expression ‘or other liability’ has a content which is broader than ‘a debt’ and cannot be equated with the latter. In the present case, the cheque was issued in close proximity with the commencement of power supply. The issuance of the cheque in the context of a commercial transaction must be understood in the context of the business dealings. The issuance of the cheque was followed close on its heels by the supply of power. To hold that the cheque was not issued in the context of a liability which was being assumed by the company to pay for the dues towards power supplied would be to produce an outcome at odds with the business dealings. If the company were to fail to provide a satisfactory LC and yet consume power, the cheques were capable of being presented for the purpose of meeting the outstanding dues.
# 28. At this stage, it would be instructive to note the order of a two judge Bench of this Court in M/s Womb Laboratories Pvt Ltd v. Vijay Ahuja. In that case, the High Court had quashed proceedings initiated against the first respondent for offences punishable under Section 138 of the NI Act merely on the basis of the assertion in the complaint that “security cheques were demanded” in response to which the accused had issued three signed blank cheques with the assurance that if the amount was not returned, the cheques could be encashed. The High Court held that the cheques were given only by way of security and therefore not towards the discharge of a debt or liability on the basis of which the complaint was quashed. Allowing the appeal by the drawee, this Court observed:
“5. In our opinion, the High Court has muddled the entire issue. The averment in the complaint does indicate that the signed cheques were handed over by the accused to the complainant. The cheques were given by way of security, is a matter of defence. Further, it was not for the discharge of any debt or any liability is also a matter of defence. The relevant facts to countenance the defence will have to be proved - that such security could not be treated as debt or other liability of the accused. That would be a triable issue. We say so because, handing over of the cheques by way of security per se would not extricate the accused from the discharge of liability arising from such cheques.”
# 37. In this backdrop, it becomes necessary now to advert to an order dated 16 April 2021 of a Constitution Bench in Re: Expeditious Trial of Cases under Section 138 of N.I. Act 1881. The Constitution Bench notes “the gargantuan pendency of complaints filed under Section 138” and the fact that the “situation has not improved as courts continue to struggle with the humongous pendency”. The court noted that there were seven major issues which arose from the responses filed by the State Governments and the Union Territories including in relation to the applicability of Section 202 of the CrPC. Section 143 of the NI Act provides that Sections 262 to 265 of the CrPC (forming a part of Chapter XXI dealing with summary trials) shall apply to all trials for offences punishable under Section 138 of the NI Act. On the scope of the inquiry under Section 202 CrPC in cases under Section 138 of the NI Act, there was a divergence of view between the High Courts. Some High Courts had held that it was mandatory for the Magistrate to conduct an inquiry under Section 202 CrPC before issuing process in complaints filed under Section 138, while there were contrary views in the other High Courts. In that context, the Court observed:
“10. Section 202 of the Code confers jurisdiction on the Magistrate to conduct an inquiry for the purpose of deciding whether sufficient grounds justifying the issue of process are made out. The amendment to Section 202 of the Code with effect from 23.06.2006, vide Act 25 of 2005, made it mandatory for the Magistrate to conduct an inquiry before issue of process, in a case where the accused resides beyond the area of jurisdiction of the court. (See: Vijay Dhanuka & Ors. v. Najima Mamtaj & Ors. , Abhijit Pawar v. Hemant Madhukar Nimbalkar and Anr. and Birla Corporation Limited v. Adventz Investments and Holdings Limited & Ors.). There has been a divergence of opinion amongst the High Courts relating to the applicability of Section 202 in respect of complaints filed under Section 138 of the Act. Certain cases under Section 138 have been decided by the High Courts upholding the view that it is mandatory for the Magistrate to conduct an inquiry, as provided in Section 202 of the Code, before issuance of process in complaints filed under Section 138. Contrary views have been expressed in some other cases. It has been held that merely because the accused is residing outside the jurisdiction of the court, it is not necessary for the Magistrate to postpone the issuance of process in each and every case. Further, it has also been held that not conducting inquiry under Section 202 of the Code would not vitiate the issuance of process, if requisite satisfaction can be obtained from materials available on record.
11. The learned Amici Curiae referred to a judgment of this Court in K.S. Joseph v. Philips Carbon Black Ltd & Anr. where there was a discussion about the requirement of inquiry under Section 202 of the Code in relation to complaints filed under Section 138 but the question of law was left open. In view of the judgments of this Court in Vijay Dhanuka (supra), Abhijit Pawar (supra) and Birla Corporation (supra), the inquiry to be held by the Magistrate before issuance of summons to the accused residing outside the jurisdiction of the court cannot be dispensed with. The learned Amici Curiae recommended that the Magistrate should come to a conclusion after holding an inquiry that there are sufficient grounds to proceed against the accused. We are in agreement with the learned Amici.”
# 38. Section 145 of the NI Act provides that evidence of the complainant may be given by him on affidavit, which shall be read in evidence in an inquiry, trial or other proceeding notwithstanding anything contained in the CrPC. The Constitution Bench held that Section 145 has been inserted in the Act, with effect from 2003 with the laudable object of speeding up trials in complaints filed under Section 138. Hence, the Court noted that if the evidence of the complainant may be given by him on affidavit, there is no reason for insisting on the evidence of the witnesses to be taken on oath. Consequently, it was held that Section 202(2) CrPC is inapplicable to complaints under Section 138 in respect of the examination of witnesses on oath. The Court held that the evidence of witnesses on behalf of the complainant shall be permitted on affidavit. If the Magistrate holds an inquiry himself, it is not compulsory that he should examine witnesses and in suitable cases the Magistrate can examine documents to be satisfied that there are sufficient grounds for proceeding under Section 202.
# 40. The order passed by the Magistrate cannot be held to be invalid as betraying a non-application of mind. In Dy. Chief Controller of Imports & Exports v. Roshanlal Agarwal, this Court has held that in determining the question as to whether process is to be issued, the Magistrate has to be satisfied whether there is sufficient ground for proceeding and not whether there is sufficient ground for conviction. Whether the evidence is adequate for supporting the conviction can only be determined at the trial.
[See also in this context the decision in Bhushan Kumar v. State (NCT of Delhi)28].
# 44. The test to determine if the Managing Director or a Director must be charged for the offence committed by the Company is to determine if the conditions in Section 141 of the NI Act have been fulfilled i.e., whether the individual was in-charge of and responsible for the affairs of the company during the commission of the offence. However, the determination of whether the conditions stipulated in Section 141 of the MMDR Act have been fulfilled is a matter of trial. There are sufficient averments in the complaint to raise a prima facie case against them. It is only at the trial that they could take recourse to the proviso to Section 141 and not at the stage of issuance of process.
# 45. In the present case, it is evident that the principal grounds of challenge which have been set up on behalf of the appellants are all matters of defence at the trial. The Magistrate having exercised his discretion, it was not open to the High Court to substitute its discretion. The High Court has in a carefully considered judgment, analysed the submissions of the appellants and for justifiable reasons has come to the conclusion that they are lacking in substance.
# 46. For the above reasons, we have come to the conclusion that there is no merit in the appeals. The appeals shall stand dismissed.
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