DATE OF JUDGEMENT
December 3, 2021
BENCH
Justice DY Chandrachud
Justice AS Bopanna
PARTIES
Appellants- Sunil Todi & ors.
Respondents- State of Gujrat & Anr.
SUBJECT
Section 138 of the Negotiable instruments Act deals with punishment for dishonor of cheques. Here, the SC has held that this section also attracts the cases where debt is incurred after the cheques is drawn but before presentation. The court also held that in respect of the examination of witnesses on oath section 202(2) of CrPC is inapplicable when the complaints are made under Section 138.
IMPORTANT PROVISIONS
Section 138 of NI Act-Dishonor 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 honor 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 provisions of this Act, be punished with imprisonment for 19 [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, 20 [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.
Section 202(2) of CrPC-
Postponement of issue of process-
(2) In an inquiry under sub- section (1), the Magistrate may, if he thinks fit, take evidence of witnesses on oath: Provided that if it appears to the Magistrate that the offence complained of is triable exclusively by the Court of Session, he shall call upon the complainant to produce all his witnesses and examine them on oath.
OVERVIEW
A criminal complaint was filed against the appellants by the second respondent in the court of the Additional Chief Judicial Magistrate, Mundra on 2 November, 2017 seeking issuance of summons and imposition of fine of Rs. 5,35,68,000.The appellants filed a petition for quashing of the criminal complaint under Section 482 of the CrPC. At the same time, the complainant filed a Regular Civil Suit to recover dues.
The petitions for quashing the complaint were dismissed by the high court on June 24, 2019. It did, however, grant a quashing petition brought by a nominee director who was not in control of the company's day-to-day operation and by a woman non-executive Director. This appeal arose from the above facts.
The appellants argued that a complaint under Section 138 of the NI Act would be non-maintainable since the cheque for Rs 2.67 crores was issued as a security and thus does not represent a legally enforceable debt or liability. It was also argued that section 202 CrPC says that there should be the postponement of the issuance of process where the accused resides beyond the territory of the court. However, no inquiry was carried out in this case.
ISSUES
- Whether the dishonour of a cheque furnished as a ‘security’ is covered under the provisions of Section 138 of the NI Act?
- Whether the Magistrate, in view of Section 202 CrPC, ought to have postponed the issuance of process?
JUDGEMENT ANALYSIS
The purpose of the NI Act, according to the court, is to improve the acceptability of cheques and instil faith in the efficiency of negotiable instruments for business transactions and so it held that “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 noted that the term “or other liability” in the expression ‘debt or liability’ has a meaning of its own and cannot be equated with the term debt as it has a broader content.
It was held that the issuance of the cheque in the context of a commercial transaction must be understood in the context of the business dealings, and to hold that the cheque was not issued in the context of a liability that the company assumed to pay for the dues for power supplied would result in an outcome that was inconsistent 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.”, said the court.
The court observed that once the payments for electricity supply became due in terms of PSA and the company failed to pay its dues, the second respondent had the legal right to offer the cheque for payment. The fact that a check is labelled as a "security" does not change the fact that it is an instrument meant to satisfy a legally enforceable debt or responsibility.
It was observed that When a commercial arrangement between the parties has fructified as a result of the underlying purpose and the buyer fails to pay, the drawer can contemplate presentation of the cheque.
On the issue of application of Section 202 (2) of CrPC on the complaints made under Section 138 of NI Act, the court held that it is inapplicable in respect of examination of witnesses on oath.
The bench observed that "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”
The appeal was hence, dismissed.
CONCLUSION
In conclusion, the Apex court has upheld the judgement of the High court by giving various reasons as to why it is so. The court has also observed that the principal grounds on which the judgement was challenged by the appellant are all matters of defence at the trial. Hence, the court has rightly dismissed the appeal.
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