Cheque liability and sick-company status do not justify quashing section 138 proceedings when the debt is undisputed.

A company's sick status under SICA does not by itself warrant quashing of section 138 Negotiable Instruments Act proceedings where the cheque liability is admitted and the transactions were entered into with knowledge of that status. The earlier cases recognising mid-stage quashing power were accepted as principles, but they were held inapplicable on the facts because the appellants continued placing orders and assured payment after the sickness declaration. In those circumstances, the debt remained undisputed and there was no basis to interfere under Article 136. The criminal proceedings were therefore not liable to be discharged and were permitted to continue.

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Issues: Whether criminal proceedings under section 138 of the Negotiable Instruments Act, 1881 could be quashed or the accused discharged on the ground that the company had been declared sick under the Sick Industrial Companies (Special Provisions) Act, 1985 and that the earlier decisions relied upon by the appellants applied to the facts of the case.

Analysis: The purchases and issue of cheques were made after the company had already been declared sick, but the appellant continued to place orders and assured payment. The cheques were issued towards an admitted liability, and the conduct of the appellants showed that the debt was undisputed. The legal principles in the earlier decisions recognising power to quash at a mid-stage were not disputed, but those decisions were held inapplicable on the peculiar facts, particularly because the appellants had knowledge of the sick-company declaration and yet proceeded with the transactions. In those circumstances, the Court found no reason to interfere in exercise of extraordinary jurisdiction under Article 136 of the Constitution of India.

Conclusion: The appellants were not entitled to quashing or discharge, and the criminal proceedings under section 138 of the Negotiable Instruments Act, 1881 were allowed to continue.

Ratio Decidendi: Where the cheque liability is undisputed and the transaction is entered into with knowledge of the company's sick status, the mere declaration under SICA does not justify quashing of proceedings under section 138 of the Negotiable Instruments Act, 1881.

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