LEGAL ISSUE: Whether a summoning order and notice for an offence under Section 138 of the Negotiable Instruments Act, 1881 can be quashed based on factual defenses at a pre-trial stage.
CASE TYPE: Criminal (Cheque Dishonour)
Case Name: Rathish Babu Unnikrishnan vs. The State (Govt. of NCT of Delhi) & Anr.
Judgment Date: 26 April 2022
Date of the Judgment: 26 April 2022
Citation: 2022 INSC 423
Judges: K.M. Joseph, J. and Hrishikesh Roy, J.
Can a criminal case for cheque dishonour be dismissed before the trial based on the argument that the cheque was not for a legally enforceable debt? The Supreme Court of India recently addressed this question in a case where the accused argued that the cheque was a security and not for an existing debt. The court examined whether the High Court was correct in refusing to quash the criminal proceedings at the pre-trial stage. The judgment was delivered by a two-judge bench comprising Justice K.M. Joseph and Justice Hrishikesh Roy, with the opinion authored by Justice Hrishikesh Roy.
Case Background
The case involves a dispute between Rathish Babu Unnikrishnan (the appellant) and Satish Gupta (the complainant). The complainant had invested a substantial amount in the appellant’s company, AAT Academy. Later, a dispute arose, and they agreed that the invested money would be returned to the complainant, and the shares allotted to the complainant would be transferred back to the appellant. As part of this agreement, the appellant issued four cheques to the complainant.
When the complainant presented one of the cheques, it was dishonoured by the bank due to insufficient funds. The complainant then issued a notice stating that the appellant had failed to make the due payment. Subsequently, the complainant filed a criminal complaint under Section 138 of the Negotiable Instruments Act, 1881, which led to the summons and process against the appellant.
Timeline
| Date | Event |
|---|---|
| N/A | Complainant invests a substantial sum in the appellant’s company, AAT Academy. |
| N/A | Dispute arises between the complainant and the appellant. |
| N/A | Parties agree that the invested money would be returned to the complainant and the shares would be transferred back to the appellant. |
| N/A | Appellant issues four cheques to the complainant as part of the agreement. |
| N/A | One of the cheques is presented by the complainant and is dishonoured by the bank due to insufficient funds. |
| N/A | Complainant issues a notice stating that the appellant had failed to make the due payment. |
| N/A | Complainant files a criminal complaint under Section 138 of the Negotiable Instruments Act, 1881. |
| 01.06.2018 | Magistrate’s Court issues summoning order against the appellant. |
| 03.11.2018 | Order framing notice issued against the appellant. |
| 02.08.2019 | Delhi High Court dismisses the application under Section 482 of the Code of Criminal Procedure, 1973 for quashing of the summoning order. |
Arguments
Appellant’s Arguments:
- The appellant argued that the cheques were issued as security for the buyback of shares and not for a legally enforceable debt or liability.
- The appellant contended that the cheques should have been presented for encashment only after the transfer of the complainant’s shareholding in the appellant’s company. Since the complainant still held the shares, the appellant argued that the complainant was not entitled to receive payment at that stage.
- The appellant claimed that the essential ingredients for the offence under Section 138 of the Negotiable Instruments Act, 1881 were missing, as the dishonoured cheque was not against a legally enforceable debt.
Complainant’s Arguments:
- The complainant argued that when a cheque is issued and the signatures are admitted, a presumption of a legally enforceable debt arises in favor of the holder of the cheque.
- The complainant contended that it is the accused’s responsibility to rebut this legal presumption by providing evidence during the trial.
- The complainant relied on Section 118 of the Negotiable Instruments Act, 1881, stating that the court is obligated to raise a legal presumption against the accused when a cheque is dishonoured.
- The complainant argued that in share purchase transactions, the consideration is typically paid to the seller first, and then the share transfer formalities are completed. They cited Section 56 (1) of the Companies Act, 2013, and Form SH-4 relating to transfer of securities, to support this claim.
Submissions Table
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Cheque was not for legally enforceable debt | Cheques were issued as security for buyback of shares | Appellant |
| Cheques should have been presented only after share transfer | Appellant | |
| Presumption of legally enforceable debt | Presumption arises when cheque is issued and signatures are admitted | Complainant |
| Accused must rebut presumption with evidence during trial | Complainant | |
| Section 118 of the Negotiable Instruments Act, 1881 mandates legal presumption against the accused | Complainant | |
| Share purchase transaction practices | Consideration is paid first, then share transfer is completed | Complainant |
Issues Framed by the Supreme Court
The Supreme Court framed the following issues for consideration:
- Whether summons and trial notice should have been quashed on the basis of factual defenses?
- What should be the responsibility of the quashing Court and whether it must weigh the evidence presented by the parties, at a pre-trial stage?
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision |
|---|---|
| Whether summons and trial notice should have been quashed on the basis of factual defenses? | The Court held that the summons and trial notice should not be quashed based on factual defenses at the pre-trial stage. The court emphasized that the legal presumption under Section 139 of the Negotiable Instruments Act, 1881, favors the complainant, and the accused must rebut this presumption during the trial. |
| What should be the responsibility of the quashing Court and whether it must weigh the evidence presented by the parties, at a pre-trial stage? | The Court stated that the quashing court should not weigh the evidence at a pre-trial stage. The court’s role is limited to determining whether there is a prima facie case. It should not delve into a detailed inquiry of the facts or try to separate the wheat from the chaff. The court should allow the trial court to evaluate the evidence and reach a conclusion. |
Authorities
The Supreme Court considered the following authorities:
Cases:
- HMT Watches Limited vs. M.A. Abida & Anr [ (2015) 11 SCC 776 ] – The court referred to this case to highlight the limited scope of inquiry under Section 482 of the Code of Criminal Procedure, 1973.
- Rajiv Thapar & Ors. vs. Madan Lal Kapoor [ (2013) 3 SCC 330 ] – This case was cited to emphasize that the High Court should not negate the complainant’s case without allowing them to lead evidence, and that the High Court should not evaluate the truthfulness of the allegations or the weight of the defenses at the pre-trial stage.
- M.M.T.C. Ltd. & Anr. vs. Medchl Chemicals and Pharma (P) Ltd. & Anr. [ (2002) 1 SCC 234 ] – The court relied on this case to highlight that there is no requirement for the complainant to specifically allege a subsisting liability in the complaint. The burden of proving that there was no existing debt or liability lies on the accused, to be discharged during the trial.
- Rangappa vs. Sri Mohan [ (2010) 11 SCC 441 ] – This case was referred to emphasize that the presumption mandated by Section 139 of the Negotiable Instruments Act, 1881 includes the existence of a legally enforceable debt or liability, and that there is an initial presumption in favor of the complainant.
- Rajeshbhai Muljibhai Patel vs. State of Gujarat [ (2020) 3 SCC 794 ] – The court cited this case to reiterate that when disputed questions of fact are involved and require adjudication after the parties adduce evidence, the complaint under Section 138 of the Negotiable Instruments Act, 1881 should not be quashed by the High Court under Section 482 of the Code of Criminal Procedure, 1973.
- State of Haryana v. Bhajan Lal [ AIR 1992 SC 604 ] – This case was referred to for the principles for exercising jurisdiction to quash criminal proceedings under Section 482 of the Code of Criminal Procedure, 1973, emphasizing that such powers should be used sparingly and with circumspection.
Legal Provisions:
- Section 138 of the Negotiable Instruments Act, 1881: This provision defines the offence of dishonour of cheque for insufficiency of funds.
- Section 139 of the Negotiable Instruments Act, 1881: This section establishes a presumption in favour of the holder of a cheque that it was issued for a legally enforceable debt or liability.
- Section 118 of the Negotiable Instruments Act, 1881: This provision lays down certain presumptions as to negotiable instruments.
- Section 56 (1) of the Companies Act, 2013: This section deals with the procedure for transfer and transmission of securities of a company.
- Section 482 of the Code of Criminal Procedure, 1973: This section deals with the inherent powers of the High Court.
- Section 251 of the Code of Criminal Procedure, 1973: This section deals with the procedure for substance of accusation to be stated.
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| Appellant’s argument that the cheques were issued as security and not for a legally enforceable debt. | The Court held that this is a factual defense that needs to be proven during the trial and cannot be a basis for quashing the proceedings at the pre-trial stage. The court emphasized that the legal presumption under Section 139 of the Negotiable Instruments Act, 1881, favors the complainant, and the accused must rebut this presumption during the trial. |
| Appellant’s argument that the cheques should have been presented only after the share transfer. | The Court noted that in share transactions, payment is typically made before the transfer of shares. The court stated that the factual aspects of the share transfer agreement and the timing of the cheque presentation are matters to be considered during the trial. |
| Complainant’s argument that a presumption of a legally enforceable debt arises when a cheque is issued and the signatures are admitted. | The Court agreed with the complainant, stating that the legal presumption under Section 139 of the Negotiable Instruments Act, 1881, does indeed include the existence of a legally enforceable debt or liability. The court emphasized that the accused has the burden to rebut this presumption during the trial. |
| Complainant’s argument that the court is obligated to raise a legal presumption against the accused when a cheque is dishonoured. | The Court acknowledged the legal presumption under Section 118 of the Negotiable Instruments Act, 1881, and stated that it is obligatory for the court to raise this presumption against the accused when a cheque is dishonoured on presentation. The court noted that this presumption is rebuttable by the accused during the trial. |
| Complainant’s argument that in share purchase transactions, the consideration is typically paid to the seller first, and then the share transfer formalities are completed. | The Court accepted this argument, stating that this is the usual practice in the trade. The court also noted that the transfer of securities can take place only when a proper instrument of transfer is effectuated. The court stated that the factual aspects of the share transfer agreement and the timing of the cheque presentation are matters to be considered during the trial. |
How each authority was viewed by the Court?
- HMT Watches Limited vs. M.A. Abida & Anr [(2015) 11 SCC 776]*: The Court used this case to highlight the limited scope of inquiry under Section 482 of the Code of Criminal Procedure, 1973, emphasizing that the High Court should not negate the complainant’s case without allowing them to lead evidence.
- Rajiv Thapar & Ors. vs. Madan Lal Kapoor [(2013) 3 SCC 330]*: The Court relied on this case to emphasize that the High Court should not evaluate the truthfulness of the allegations or the weight of the defenses at the pre-trial stage.
- M.M.T.C. Ltd. & Anr. vs. Medchl Chemicals and Pharma (P) Ltd. & Anr. [(2002) 1 SCC 234]*: The Court cited this case to support the view that the complainant is not required to specifically allege a subsisting liability in the complaint and that the burden of proving no existing debt or liability lies on the accused.
- Rangappa vs. Sri Mohan [(2010) 11 SCC 441]*: The Court referred to this case to affirm that the presumption under Section 139 of the Negotiable Instruments Act, 1881 includes the existence of a legally enforceable debt or liability, and that there is an initial presumption in favor of the complainant.
- Rajeshbhai Muljibhai Patel vs. State of Gujarat [(2020) 3 SCC 794]*: The Court used this case to reiterate that when disputed questions of fact are involved, the complaint under Section 138 of the Negotiable Instruments Act, 1881 should not be quashed by the High Court under Section 482 of the Code of Criminal Procedure, 1973.
- State of Haryana v. Bhajan Lal [AIR 1992 SC 604]*: The Court referred to this case for the principles for exercising jurisdiction to quash criminal proceedings under Section 482 of the Code of Criminal Procedure, 1973, emphasizing that such powers should be used sparingly and with circumspection.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the legal presumption in favor of the complainant under Section 139 of the Negotiable Instruments Act, 1881, which includes the existence of a legally enforceable debt or liability. The court emphasized that the accused has the burden to rebut this presumption during the trial. The court also noted that the factual defenses raised by the appellant, such as the cheque being a security and the timing of the share transfer, are matters to be considered during the trial and not at the pre-trial stage. The court also highlighted that the quashing court should not weigh the evidence or conduct a detailed inquiry into the facts at the pre-trial stage, and that the trial court is the appropriate forum for evaluating the evidence and reaching a conclusion. The court also reiterated that the power to quash criminal proceedings should be exercised sparingly and with circumspection.
| Sentiment | Percentage |
|---|---|
| Legal Presumption (Section 139 NI Act) | 40% |
| Factual Defenses to be Proved in Trial | 30% |
| Limited Scope of Quashing Power | 20% |
| Trial Court as Appropriate Forum | 10% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact (Consideration of factual aspects of the case) | 30% |
| Law (Consideration of legal provisions and precedents) | 70% |
Logical Reasoning
The Court’s reasoning was based on the legal framework surrounding cheque dishonour cases, particularly the presumption under Section 139 of the Negotiable Instruments Act, 1881. The court emphasized that the burden to rebut this presumption lies on the accused during the trial. The court also considered the limited scope of the High Court’s power under Section 482 of the Code of Criminal Procedure, 1973, and noted that the High Court should not delve into factual disputes at the pre-trial stage. The court highlighted that the trial court is the appropriate forum for evaluating the evidence and reaching a conclusion. The court also noted that the factual defenses raised by the appellant, such as the cheque being a security and the timing of the share transfer, are matters to be considered during the trial. The court’s reasoning also included the principle that the power to quash criminal proceedings should be exercised sparingly and with circumspection.
The Court considered the alternative interpretation that the cheque was not for a legally enforceable debt, but rejected it, stating that this is a matter of defense that should be raised and proven during the trial. The court emphasized that the legal presumption under Section 139 of the Negotiable Instruments Act, 1881 favors the complainant, and the accused must rebut this presumption during the trial. The court also noted that the factual aspects of the share transfer agreement and the timing of the cheque presentation are matters to be considered during the trial.
The Court’s decision was to dismiss the appeals and uphold the High Court’s decision not to quash the criminal proceedings. The court stated that the summoning order and notice should not be quashed on the basis of factual defenses at the pre-trial stage. The court emphasized that the legal presumption under Section 139 of the Negotiable Instruments Act, 1881 favors the complainant, and the accused must rebut this presumption during the trial. The court also noted that the factual defenses raised by the appellant, such as the cheque being a security and the timing of the share transfer, are matters to be considered during the trial and not at the pre-trial stage.
The court provided the following reasons for its decision:
- The legal presumption under Section 139 of the Negotiable Instruments Act, 1881 favors the complainant, and the accused has the burden to rebut this presumption during the trial.
- The factual defenses raised by the appellant are matters to be considered during the trial and not at the pre-trial stage.
- The quashing court should not weigh the evidence or conduct a detailed inquiry into the facts at the pre-trial stage.
- The trial court is the appropriate forum for evaluating the evidence and reaching a conclusion.
- The power to quash criminal proceedings should be exercised sparingly and with circumspection.
“There is therefore no requirement that the complainant must specifically allege in the complaint that there was a subsisting liability. The burden of proving that there was no existing debt or liability was on the respondents. This they have to discharge in the trial.”
“… we are in agreement with the respondent claimant that the presumption mandated by Section 139 of the Act does indeed include the existence of a legally enforceable debt or liability. As noted in the citations, this is of course in the nature of a rebuttable presumption and it is open to the accused to raise a defence wherein the existence of a legally enforceable debt or liability can be contested.”
“When disputed questions of facts are involved which need to be adjudicated after the parties adduce evidence, the complaint under Section 138 of the NI Act ought not to have been quashed by the High Court by taking recourse to Section 482 CrPC.”
Key Takeaways
- In cheque dishonour cases, there is a legal presumption that the cheque was issued for a legally enforceable debt or liability.
- The burden to rebut this presumption lies on the accused during the trial.
- Factual defenses raised by the accused should be proven during the trial and cannot be a basis for quashing the proceedings at the pre-trial stage.
- The High Court should not weigh the evidence or conduct a detailed inquiry into the facts at the pre-trial stage.
- The trial court is the appropriate forum for evaluating the evidence and reaching a conclusion in cheque dishonour cases.
- The power to quash criminal proceedings should be exercised sparingly and with circumspection.
The judgment reinforces the legal position that the presumption under Section 139 of the Negotiable Instruments Act, 1881 is a significant hurdle for the accused in cheque dishonour cases. The judgment also clarifies that the High Court should not interfere with the trial process at the pre-trial stage unless there are exceptional circumstances. This decision will likely result in more cheque dishonour cases proceeding to trial, as the accused will need to prove their defenses in court.
Directions
The Supreme Court did not give any specific directions in this case, except to state that the observations made in the judgment are only for the limited purpose of this order and should not stand in the way of the trial Court to decide the case on merit.
Development of Law
The ratio decidendi of this case is that in cheque dishonour cases, the legal presumption under Section 139 of the Negotiable Instruments Act, 1881, which includes the existence of a legally enforceable debt or liability, favors the complainant and that the accused must rebut this presumption during the trial. The court also held that the High Court should not weigh the evidence or conduct a detailed inquiry into the facts at the pre-trial stage. The trial court is the appropriate forum for evaluating the evidence and reaching a conclusion. This judgment reinforces the existing legal position and does not introduce any new doctrines or legal principles. However, it clarifies and reaffirms the importance of the legal presumption under Section 139 of the Negotiable Instruments Act, 1881 and the limited scope of the High Court’s power to quash criminal proceedings at the pre-trial stage.
Conclusion
The Supreme Court dismissed the appeals, upholding the High Court’s decision not to quash the criminal proceedings against the appellant. The court reiterated that in cheque dishonour cases, the legal presumption under Section 139 of the Negotiable Instruments Act, 1881 favors the complainant, and the accused must rebut this presumption during the trial. The court emphasized that factual defenses should be proven during the trial and that the High Court should not interfere at the pre-trial stage. The trial court is the appropriate forum for evaluating the evidence and reaching a conclusion. The judgment reinforces the existing legal position and clarifies the limited scope of the High Court’s power to quash criminal proceedings at the pre-trial stage.