top of page

Merely labelling the cheque as a security would not obviate its character laid down in NI Act, 1881

The Supreme Court bench comprising of Justices Dr. Dhananjaya Y. Chandrachud and A. S. Bopanna was hearing a criminal Appeal on the Negotiable Instruments Act, 1881 (NI Act) and held that merely labelling the cheque as a security would not obviate its character as an instrument designed to meet a legally enforceable debt or liability.

A Single Judge of the High Court of Gujarat dismissed the petitions under Section 482 of the Code of Criminal Procedure, 1973, instituted by the appellants to quash the criminal complaint instituted by the second respondent for offences punishable under Section 138 of the Negotiable Instruments Act, 1881.

On 19 December 2015, a Letter of Intent was issued by the company to the second respondent for providing an uninterrupted power supply at the plant of the company situated at Aurangabad in Maharashtra. Clause (k) of the Letter of Intent envisages that all payments would be made within sixty days through a Letter of Credit to be opened by the company. On 29 April 2016, an email was addressed by the company stating that payment security would be by cheque for an amount equivalent to the quantum of energy to be scheduled for forty-five days. Payments for monthly billing were to be made by LC within seven days of the receipt of bills. This was agreed upon in a communication dated 30 April 2016 addressed on behalf of the second respondent. On 30 June 2016, the company addressed a communication to the second respondent that it was issuing two cheques “only for security deposit” and that the cheques were to be deposited “after getting confirmation only”.

On 20 October 2016, the company terminated its agreement with the second respondent. The cheque which was issued by the company was deposited on 28 August 2017. On 18 September 2017, a legal notice was issued by the second respondent to the appellants alleging the commission of offences under Section 138 of the NI Act. It was alleged in the notice that according to the ledger maintained by the second respondent in its books of account, a sum of Rs.6,02,91,089/- remained outstanding. The notice alleged that the appellants had issued a cheque dated 28 August 2017 drawn on Karur Vysya Bank, Aurangabad which had been dishonoured for the reason of ‘payment stopped by drawer’. A reply dated 5 October 2017, was addressed in response to the legal notice. It was stated that the cheque that was issued was only for the purpose of Security and not for encashment.

On 2 November 2017, a criminal complaint was filed by the second respondent in the court of the Additional Chief Judicial Magistrate, Mundra against the appellants seeking issuance of summons and imposition of a fine of Rs. 5,35,68,000. An affidavit was filed on 3 November 2017, in support of the complaint. On 6 November 2017, the Magistrate issued summons to the appellants.

The appellants instituted petitions under Section 482 of the CrPC for quashing of the criminal complaint. Simultaneously, the complainant filed a Regular Civil Suit for recovery of dues. By the impugned judgment and order dated 24 June 2019, the High Court has dismissed the petitions for quashing the complaint.

Mr. Sidharth Luthra, learned senior counsel has urged three submissions in support of the appeals:

  1. The cheques which were issued to the second respondent were intended at all material times to be security towards payment. This is evident from the endorsement made on the reverse of the cheque in the amount of Rs.2,67,84,000/- dated 28 August 2017, and is buttressed by the stipulation under PSA that payment was to take place by means of LC. Consequently, since the cheques have been issued by way of security and were not intended to be deposited, the institution of a complaint under Section 138 is an abuse of the process. Therefore, the invocation of the jurisdiction under Section 482 CrPC is justified;

  2. Section 202 CrPC envisages the postponement of the issuance of the process where the accused resides beyond the jurisdiction of the territory of the court. Despite the clear provisions of Section 202, no inquiry was carried out by the Magistrate; and

  3. The summoning order shows non-application of mind inasmuch as no reasons have been adduced by the Magistrate.

On the basis of the above sequence of events, it has been submitted that recourse to the filing of a complaint under Section 138 of the NI Act is an abuse of the process. In the course of evaluating the submissions, the line of precedent to which a reference has been made would be considered. Ms. Meenakshi Arora, learned senior counsel submitted that a clear case for the invocation of the jurisdiction under Section 482 CrPC was established.

On the other hand, Mr. Mohit Mathur and Ms. Rebecca John, learned senior counsel appearing on behalf of the second respondent has submitted that there was no reason for this Court, to interfere with the judgment of the High Court since detailed reasons have been furnished by the High Court for rejecting the petitions under Section 482 of the CrPC.

After considering entire facts and circumstances, the Supreme Court bench observed that the object of the NI Act is to enhance the acceptability of cheques and inculcate faith in the efficiency of negotiable instruments for the 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 has used two distinct phrases. The expression ‘or other liability’ has a content that 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 the 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 that 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 Supreme Court bench held that "merely labelling the cheque as a security would not obviate its character as an instrument designed to meet a legally enforceable debt or liability, once the supply of power had been provided for which there were monies due and payable. There is no inflexible rule which precludes the drawee of a cheque issued as security from presenting it for payment in terms of the contract."

View Judgment

bottom of page