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TaxTMI 
Cheque dishonor
Section 138 of the Negotiable Instruments Act, 1881 provides that 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 provision of this Act, be punished with imprisonment for 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.
As per this section criminal case may be initiated against the person who issued cheque and which is dishonored on presentation by the person who received the cheque.
Arbitration
Arbitration is the dispute resolution process alternate to the resolution process in civil cases. There shall be an agreement between the parties for the reference to settle the disputes by means of arbitration. The arbitration proceedings shall be conducted as per the provisions of the Arbitration and Conciliation Act. It is a summary procedure and reduces the cost and time that involved in civil litigations.
Issue
The issue to be discussed in this article is as to whether arbitration proceedings and criminal complaint under Section 138 of the Negotiable Instruments Act can be proceeded simultaneously with reference to decided case law.
Case law
The proceedings under the Arbitration Act are of civil nature and the proceedings under Section 138 of the Negotiable Instruments Act are of criminal nature. One may doubt as to whether both the proceedings can be maintained simultaneously.
The Delhi High Court in NEWTON ENGINEERING AND CHEMICALS LIMITED AND ORS. VERSUS UEM INDIA PVT LTD - 2024 (4) TMI 1 - DELHI HIGH COURT held that both the proceedings can be maintained simultaneously. In this case a Memorandum of Understanding was signed by the petitioners and the respondents in the present petition on 19.06.2014. The project of the said agreement was for Modernization of ETP Plant at the ONGC Urban Plant. The respondent company was to participate as a technical collaborator and provide its expertise to the petitioner, if the bid and contract of the aforesaid work was awarded by ONGC to the petitioner in pursuance of a tender. The said contract was awarded by ONGC to the petitioners. The petitioners, for this purpose, gave a post dated cheque dated 07.06.2017 for Rs. 7 lakhs.
ONCG terminated the contract. The petitioner requested the respondent not to present its post dated cheque given to it. But the respondent presented the same which was dishonored. Therefore the respondent filed a complaint under Section 138 of the Negotiable Instruments Act. The Magistrate also issued notice to the petitioner. The petitioner filed the present petition before the High Court with the prayer to quash the criminal complaint filed against him.
The petitioner submitted the following before the High Court=
- The Memorandum of Understanding between the parties contained an arbitration clause, pursuant to which arbitration proceedings have been initiated, the complaint under Section 138 of the Negotiable Instruments Act is not maintainable.
- The amount due from the petitioners to the respondent company will be crystallized only upon conclusion of the arbitration proceedings
- The deposit of the cheque by the respondent company was premature.
The respondent relied on some judgments and submitted before the High Court-
- The arbitration proceedings and proceedings under Section 138 of the Negotiable Instruments Act are separate and independent proceedings and both can proceed simultaneously.
- When the cheques were dishonored, a separate liability arose in terms of Section 138 of the Negotiable Instruments Act, whereas the arbitration proceedings were under the agreement signed between the parties.
- The commencement and the continuance of the arbitration proceedings could in no way affect the criminal proceedings taken separately.
- Merely because arbitration proceedings have been undertaken, the criminal proceedings could not be thwarted.
The High Court considered the submissions of both the parties. The High Court was of the view that that there can be no bar to the simultaneous continuance of a criminal proceeding and a civil proceeding if the two arise from separate causes of action. The High Court also analyzed the judgments relied on by the respondent. The High Court held that the arbitration proceedings as well as the proceedings under Section 138 of the NI Act arise from separate causes of action and the pendency of the arbitration proceedings would not affect the proceedings under Section 138 of the NI Act. There is no merit in the contention of the petitioners that the complaint under Section 138 of the NI Act is not maintainable in view of the ongoing arbitration proceedings between the parties. Additionally, whether the aforesaid cheque was given as a security or not is something which can only be proved as a matter of defence during trial. The High Court dismissed the petition.