2021 (12) TMI 175 - SC - Indian Laws

Supreme Court upholds Section 138 NI Act proceedings for cheque dishonor, confirms debt includes enforceable obligations

Sunil Todi & Ors. Versus State of Gujarat & Anr.

The SC dismissed an appeal challenging proceedings under Section 138 of the NI Act for cheque dishonor. The Court held that debt includes legally ... Dishonor of Cheque - vicarious liability against the appellants - legally enforceable debt or other liability - furnishing of ‘security’ is covered under the provisions of Section 138 of the NI Act - Magistrate in view of Section 202 CrPC - postponment the issuance of process - HELD THAT:- The explanation to Section 138 of the NI Act provides that ‘debt or any other liability’ means a legally enforceable debt or other liability. The proviso to Section 138 stipulates that the cheque must be presented to the bank within a period of six months from the date on which it is drawn or within its period of validity. Therefore, a cheque given as a gift and not for the satisfaction of a debt or other liability, would not attract the penal consequences of the provision in the event of its being returned for insufficiency of funds - the term debt also includes a sum of money promised to be paid on a future day by reason of a present obligation. A post-dated cheque issued after the debt has been incurred would be covered by the definition of ‘debt’. However, if the sum payable depends on a contingent event, then it takes the color of a debt only after the contingency has occurred. Therefore, in the present case, a debt was incurred after the second respondent began supply of power for which payment was not made because of the non-acceptance of the LCs’. The issue to be determined is whether Section 138 only covers a situation where there is an outstanding debt at the time of the drawing of the cheque or includes drawing of a cheque for a debt that is incurred before the cheque is encashed. Under Sub-Section (1) of Section 202, a Magistrate upon the receipt of a complaint of an offence of which he/she is authorized to take cognizance is empowered to postpone the issuance of process against the accused and either (i) enquire into the case; or (ii) direct an investigation to be made by a police officer or by such other person as he thinks fit. The purpose of postponing the issuance of process for the purposes of an enquiry or an investigation is to determine whether or not there is sufficient ground for proceeding - The requirement of recording reasons which is specifically incorporated in Section 203 does not find place in Section 202. Section 204 which deals with the issuance of process stipulates that if in the opinion of the Magistrate taking cognizance of an offence, there is sufficient ground for proceeding, he may issue (a) in a summons case, a summons for attendance of the accused; (b) in a warrant case, a warrant or if he thinks fit a summons for the appearance of the accused. These proceedings have been interpreted in several judgments of this Court. For the purpose of the present case, some of them form the subject matter of the submissions by the appellants and the second respondent. Section 145 of the NI Act provides that evidence of the complainant may be given by him on affidavit, which shall be read in evidence in an inquiry, trial or other proceeding notwithstanding anything contained in the CrPC. The Constitution Bench held that Section 145 has been inserted in the Act, with effect from 2003 with the laudable object of speeding up trials in complaints filed under Section 138. Hence, the Court noted that if the evidence of the complainant may be given by him on affidavit, there is no reason for insisting on the evidence of the witnesses to be taken on oath - Section 202(2) CrPC is inapplicable to complaints under Section 138 in respect of the examination of witnesses on oath. The Court held that the evidence of witnesses on behalf of the complainant shall be permitted on affidavit. If the Magistrate holds an inquiry himself, it is not compulsory that he should examine witnesses and in suitable cases the Magistrate can examine documents to be satisfied that there are sufficient grounds for proceeding under Section 202. The test to determine if the Managing Director or a Director must be charged for the offence committed by the Company is to determine if the conditions in Section 141 of the NI Act have been fulfilled i.e., whether the individual was in-charge of and responsible for the affairs of the company during the commission of the offence. However, the determination of whether the conditions stipulated in Section 141 of the MMDR Act have been fulfilled is a matter of trial. There are sufficient averments in the complaint to raise a prima facie case against them. It is only at the trial that they could take recourse to the proviso to Section 141 and not at the stage of issuance of process - In the present case, it is evident that the principal grounds of challenge which have been set up on behalf of the appellants are all matters of defence at the trial. The Magistrate having exercised his discretion, it was not open to the High Court to substitute its discretion. Appeal dismissed - decided against appellant. Issues Involved1. 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.Detailed Analysis1. Dishonor of a Cheque Furnished as 'Security'The appellants argued that the cheques issued were intended to be a security and not for the discharge of a legally enforceable debt or liability. They relied on the judgment in Indus Airways Private Limited v. Magnum Aviation Private Limited where it was held that a cheque issued as advance payment for a purchase order, which was later canceled, did not constitute a legally enforceable debt. However, the court distinguished this case from Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited, where post-dated cheques issued for loan installments due were considered as issued for an existing debt. The court also referred to Sripati Singh v. State of Jharkhand, which held that a cheque issued as security for a loan transaction matures for presentation if the loan is not repaid. The court concluded that the cheques in question were issued in the context of a commercial transaction and were intended to meet a legally enforceable debt or liability once the power supply was provided and consumed by the company.2. Postponement of Issuance of Process under Section 202 CrPCThe appellants contended that the Magistrate failed to comply with the mandatory requirement under Section 202 CrPC to postpone the issuance of process and conduct an inquiry since the accused resided outside the jurisdiction of the court. The court referred to Vijay Dhanuka v. Najima Mamtaj and Mehmood UI Rehman v. Khazir Mohammad Tunda, which emphasized the mandatory nature of the inquiry under Section 202 when the accused resides outside the jurisdiction. The court also considered the Constitution Bench's observations in Re: Expeditious Trial of Cases under Section 138 of N.I. Act 1881, which reiterated the necessity of such an inquiry. The court found that the Magistrate had considered the complaint, affidavit, evidence list, and submissions, and thus, the order could not be invalidated for non-application of mind.3. Prima Facie Case of Vicarious LiabilityThe appellants argued that there were no specific allegations against the Directors to invoke vicarious liability under Section 141 of the NI Act. The court referred to Sunil Bharati Mittal v. CBI and SMS Pharmaceuticals v. Neeta Bhalla, which clarified that vicarious liability under Section 141 requires that the individual was in charge of and responsible for the conduct of the business of the company at the time of the offence. The court noted that the complaint contained sufficient averments to raise a prima facie case against the appellants, and the determination of their liability was a matter for trial.ConclusionThe court dismissed the appeals, holding that the issues raised by the appellants were matters of defense to be addressed at trial. The Magistrate's order was found to be valid, and the High Court's decision to not quash the complaint was upheld.