Supreme Court Clarifies Security Cheque Liability Under Section 138 NI Act: Sunil Todi vs. State of Gujarat (2021)

Date of the Judgment: 3 December 2021
Citation: 2021 INSC 728
Judges: Dr. Dhananjaya Y Chandrachud, J and A. S. Bopanna, J
Can a cheque issued as security for a potential debt attract liability under Section 138 of the Negotiable Instruments Act, 1881 if it bounces? The Supreme Court of India addressed this question in a recent judgment, clarifying the scope of ‘debt or other liability’ under the Act. The case involved a dispute over a dishonored cheque issued as a security deposit in a power supply agreement. The bench, comprising Justices Dr. Dhananjaya Y Chandrachud and A. S. Bopanna, delivered the judgment.

Case Background

The case revolves around a power supply agreement between R.L. Steels & Energy Limited (the company) and a power generator (second respondent). The company issued a cheque of Rs. 2,67,84,000 as a security deposit, with an endorsement stating it was “to be deposited after confirmation only for security purpose.” The agreement stipulated that payments would be made through Letters of Credit (LCs). However, disputes arose, and the cheque was later presented and dishonored due to “payment stopped by drawer.” The power generator filed a criminal complaint under Section 138 of the Negotiable Instruments Act, 1881.

Timeline:

Course of Proceedings

The High Court of Gujarat dismissed the petitions filed by the appellants under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) to quash the criminal complaint. The High Court reasoned that the issues regarding the issuance of cheques and non-payment were questions of fact to be decided by the trial court. It also held that both civil and criminal proceedings were maintainable on the same set of facts. The appellants then appealed to the Supreme Court.

Legal Framework

The core legal provision in this case is Section 138 of the Negotiable Instruments Act, 1881, which deals with the dishonor of a cheque for insufficiency of funds. It states that if a cheque is returned unpaid for reasons such as insufficient funds or exceeding the arranged amount, the drawer is deemed to have committed an offense. The explanation to Section 138 defines “debt or other liability” as a legally enforceable debt or other liability.

The Supreme Court also considered Section 202 of the CrPC, which deals with the postponement of the issue of process. This section mandates that a Magistrate must postpone the issuance of process and conduct an inquiry or investigation if the accused resides outside the Magistrate’s jurisdiction.

Additionally, Section 141 of the NI Act, concerning offenses by companies, was examined. This section holds individuals in charge of and responsible for the company’s business liable for offenses committed by the company.

“138. Dishonour 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 honour 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 provision of this Act, be punished with imprisonment for 8 [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, 9 [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.
Explanation. —For the purposes of this section, “debt of other liability” means a legally enforceable debt or other liability.”

“202. Postponement of issue of process. —(1) Any Magistrate, on receipt of a complaint of an offence of which he is authorised to take cognizance or which has been made over to him under section 192, may, if he thinks fit, 1 [and shall, in a case where the accused is residing at a place beyond the area in which he exercises his jurisdiction,] postpone the issue of process against the accused, and either inquire into the case himself or direct an investigation to be made by a police officer or by such other person as he thinks fit, for the purpose of deciding whether or not there is sufficient ground for proceeding:
Provided that no such direction for investigation shall be made, — (a) where it appears to the Magistrate that the offence complained of is triable exclusively by the Court of Session; or (b) where the complaint has not been made by a Court, unless the complainant and the witnesses present (if any) have been examined on oath under section 200.
(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.
(3) If an investigation under sub- section (1) is made by a person not being a police officer, he shall have for that investigation all the powers conferred by this Code on an officer in charge of a police station except the power to arrest without warrant.”

“141. Offences by companies. —(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub- section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:
[Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.]
(2) Notwithstanding anything contained in sub- section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation. —For the purposes of this section, — (a) “company” means anybody corporate and includes a firm or other association of individuals; and (b) “director”, in relation to a firm, means a partner in the firm.”

Arguments

Appellants’ Arguments:

• The cheque was issued as a security for payment and not for an existing debt. This was evident from the endorsement on the cheque and the terms of the Power Supply Agreement (PSA), which stipulated payment through Letters of Credit (LCs).
• The second respondent, in its suit before the High Court of Judicature at Madras, admitted that the cheques were issued as security.
• The Magistrate did not conduct an inquiry as required under Section 202 of the CrPC, since the accused resided outside the jurisdiction of the court.
• The summoning order did not provide any reasons, demonstrating a non-application of mind by the Magistrate.
• The directors were not specifically involved in the day to day affairs of the company and hence cannot be held vicariously liable.

Second Respondent’s Arguments:

• There was no dispute regarding the company’s liability for the electricity supplied.
• The LCs provided by the company were not in the format acceptable to the second respondent’s bankers.
• Section 138 of the NI Act applies even if the cheques were initially issued as security.
• The summoning order of the Magistrate was valid, and detailed reasons are not required at this stage.
• The complaint adequately specified the role of the Directors to establish vicarious liability.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the dishonor of a cheque furnished as a ‘security’ is covered under the provisions of Section 138 of the NI Act.
2. Whether the Magistrate, in view of Section 202 CrPC, ought to have postponed the issuance of process.
3. Whether a prima facie case of vicarious liability is made out against the appellants.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court dismissed the appeals, upholding the High Court’s decision. The Court held that:

How each authority was viewed by the Court?

The Supreme Court distinguished the case of Indus Airways Private Limited v. Magnum Aviation Private Limited [(2014) 12 SCC 539]* stating that in that case the cheque was issued as advance payment for a purchase order which was cancelled, and thus there was no existing liability. In the present case, the supply of power had commenced, creating a liability. The court relied on Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited [(2016) 10 SCC 458]* to distinguish Indus Airways Private Limited v. Magnum Aviation Private Limited [(2014) 12 SCC 539]*. The court relied on HMT Watches v. MA Habida [(2015) 11 SCC 776]* and M/s Womb Laboratories Pvt Ltd v. Vijay Ahuja [Criminal Appeal Nos 1382-1383 of 2019, decided on 11 September 2019]* to state that whether the cheques were given as security is a matter of defense and a question of fact to be determined at trial. The court relied on Sripati Singh v. State of Jharkhand [2021 SCC OnLine SC 1002]* to state that a cheque issued as security can mature for presentation if the loan is not repaid, and the consequences under Section 138 of the NI Act would follow. The court relied on Vijay Dhanuka v. Najima Mamtaj [(2014) 14 SCC 638]*, Mehmood UI Rehman v. Khazir Mohammad Tunda [(2015) 12 SCC 420]*, Abhijit Pawar v. Hemant Madhukar Nimbalkar [(2017) 3 SCC 528]*, Birla Corporation Ltd. v. Adventz Investments and Holdings [(2019) 16 SCC 610]*, Krishna Lal Chawla v. State of U.P [(2021) 5 SCC 435]* and Re: Expeditious Trial of Cases under Section 138 of N.I. Act 1881 [Suo Motu Writ Petition (Crl) No. 2 of 2020, decided on 16 April 2021]* to state that the Magistrate is required to apply his mind and satisfy himself that the allegations in the complaint would prima facie constitute the offence for which the complaint is filed before issuing summons to the accused residing outside the jurisdiction of the court. The court relied on Dy. Chief Controller of Imports & Exports v. Roshanlal Agarwal [(2003) 4 SCC 139]* and Bhushan Kumar v. State (NCT of Delhi) [(2012) 5 SCC 424]* to state that the Magistrate has to be satisfied whether there is sufficient ground for proceeding and not whether there is sufficient ground for conviction. The court relied on Sunil Bharati Mittal v. CBI [(2015) 4 SCC 609]*, SMS Pharmaceuticals v. Neeta Bhalla [(2005) 8 SCC 89]* and Mainuddin Abdul Sattar Shaikh v. Vijay D Salvi [(2015) 9 SCC 622]* to state that the Managing Director or a Joint Managing Director of a company are in charge of and responsible for the conduct of the business of the company and hence are liable to be proceeded with. The court relied on Webb v. Strention [1888 QBD 518]*, Keshoram Industries v. CWT [AIR 1966 SC 1370]*, Banchharam Majumdar v. Adyanath Bhattacharjee [(1909) ILR 36 Cal 936]* and People v. Arguello [1869 37 Calif 524]* to define debt.

What weighed in the mind of the Court?

The Supreme Court emphasized that the purpose of the Negotiable Instruments Act is to enhance the acceptability of cheques and inculcate faith in the efficiency of negotiable instruments for business transactions. The Court reasoned that interpreting ‘debt or other liability’ under Section 138 to include only debts existing at the time of drawing the cheque would defeat the purpose of the provision. The court noted that the expression ‘or other liability’ has a content which is broader than ‘a debt’ and cannot be equated with the latter. The court observed that the cheque was issued in close proximity with the commencement of power supply, and to hold that the cheque was not issued in the context of a liability would be at odds with the business dealings.

Ratio Decidendi

The key legal principle established by the Supreme Court in this case is that a cheque issued as security for a potential debt or liability can attract liability under Section 138 of the Negotiable Instruments Act, 1881, if a legally enforceable debt or other liability exists when the cheque is presented. The Court clarified that the expression ‘or other liability’ has a content which is broader than ‘a debt’ and cannot be equated with the latter.

Obiter Dicta

The Supreme Court made several observations that are not directly related to the main legal issue but are important for understanding the court’s perspective:

• The court reiterated that the Magistrate is not required to record detailed reasons while issuing summons.
• The court emphasized that the scope of inquiry under Section 202 of the CrPC is limited to finding out the truth or otherwise of the allegations made in the complaint.
• The court clarified that the Managing Director or a Joint Managing Director of a company is in charge of and responsible for the conduct of the business of the company and hence are liable to be proceeded with.

Conclusion

The Supreme Court’s judgment in Sunil Todi vs. State of Gujarat clarifies that a cheque issued as security is not exempt from the provisions of Section 138 of the NI Act. The judgment underscores the importance of the commercial context in which a cheque is issued and the need to uphold the integrity of negotiable instruments. The court noted that the expression ‘or other liability’ has a content which is broader than ‘a debt’ and cannot be equated with the latter. The court observed that the cheque was issued in close proximity with the commencement of power supply, and to hold that the cheque was not issued in the context of a liability would be at odds with the business dealings. The judgment serves as a reminder that the purpose of the NI Act is to enhance the acceptability of cheques and inculcate faith in the efficiency of negotiable instruments for business transactions.

In essence, the Supreme Court’s ruling in this case reinforces the principle that a cheque, even if issued as security, can trigger liability under Section 138 of the NI Act if a legally enforceable debt or liability exists at the time of its presentation. This decision has significant implications for commercial transactions, emphasizing the importance of due diligence and clarity in agreements involving security cheques.

Flowchart of the Case