SC: Offence under Sec.138 NI Act made out even if Debt liablity arises post drawing of Cheque

  

Cheque Bounce Cases 

The Supreme Court of India has held that offence under Sec.138 NI Act will be made out even if debt liablity is occured post drawing of Cheque but before its presentation for encashment.

The Divisonal Bench comprising of Justice DY Chandrachud and Justice AS Bopanna ruled that the real 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 and not what incurred in the post period.

Supreme Court Observations

Addressing a slew of issues arisen for the Court's consideration, the Bench first dealt with whether the dishonor of a cheque furnished as a ‘security’ is covered under the provisions of Section 138 of the NI Act?

The appellant cited Indus Airways Private Limited v. Magnum Aviation Private Limited, 2014 Latest Caselaw 240 SC contended that a complaint under Section 138 of the NI Act would not be maintainable since the cheque in question was issued by way of a security and, is thus not against a legally enforceable debt or liability.

The Top Court observed that in the said case High Court had 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. 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.

However, in a later judgments in Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited and Sripati Singh Vs. State of Jharkhand, the SC has distinguished the judgment in Indus Airways stating that 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, the court noted.

"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."

"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."

The Court weighed on other ground and 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.

Referring to the meaning of debt, the court observed that a post-dated cheque issued after the debt has been incurred would be covered by the definition of 'debt'. It said:

"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."

Aligning the same with the NI Act, the Court stated:

"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."

 The Court interpreted legislative intention for the expression "or other liability' and reflected on the facts on present case:

"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."

 The second contention was whether the Magistrate, in view of Section 202 CrPC, ought to have postponed the issuance of process?

The Court noted that the provisions of Section 202 CrPC which mandate the Magistrate, in a case where the accused is residing at a place beyond the area of its jurisdiction, to postpone the issuance of process so as to enquire into the case himself or direct an investigation by police officer or by another person were introduced with the rationale based on the recognition by Parliament that false complaints are filed against persons residing at far off places as an instrument of harassment. (Vijay Dhanuka Etc. Vs. Najima Mamtaj Etc., 2014 Latest Caselaw 203 SC)

However, the Court added that the Magistrate is duty bound to apply his mind to the allegations in the complaint together with the statements which are recorded in the enquiry while determining whether there is a prima facie sufficient ground for proceeding. (M/S. Pepsi Foods Ltd. & ANR Vs. Special Judicial Magistrate & Ors )

"While noting that the requirement of conducting an enquiry or directing an investigation before issuing process is not an empty formality, the Court relied on the decision in Vijay Dhanuka which had held that the exercise by the Magistrate for the purpose of deciding whether or not there is sufficient ground for proceeding against the accused is nothing but an enquiry envisaged under Section 202 of the Code."

Referring 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 Court observed:

"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."

It thus concluded that the order passed by the Magistrate in the present case cannot be held to be invalid as betraying a non-application of mind. (IDy. Chief Controller of Imports & Exports v. Roshanlal Agarwal27)

"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."

Dealing with the third and last contention whether a prima facie case of vicarious liability is made out against the appellants?, the Court said that the High Court didn't quash the complaint against the appellants since it was prima facie established that they were triable for dishonour of cheque.

"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."

It mentioned S.M.S. Pharmaceuticals Ltd Vs. Neeta Bhalla & Anr wherein a three judge Bench while construing the provisions of Section 141 of the Negotiable Instruments Act 1881 noted that though there is a general presumption that the Managing Director and Joint Managing Director are responsible for the criminal act of the company, the director will not be held liable if he was not responsible for the conduct of the company at the time of the commission of the offence.

In view of the above, the Court dismissed the appeal terming it as devoid of merit.

Read Judgement Here:

 

 

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