2025 (12) TMI 357 - HC - Indian Laws

Petitions to quash S.138 NI Act complaints rejected; arbitral award confirms debt, directors liable under S.141

ALOK NANDA, MS. JYOTI SINGH MASANI, JASBIR SINGH, ANIL KUMAR SETH, INTERNATIONAL PUBLIC SCHOOL LTD., MR. ASHOK NANDA Versus FIIT JEE LTD., New Delhi, ALOK NANDA, Bhopal, MR. JASBIR NANDA, Bhopal, MS. JYOTI SINGH MASANI, Bhopal, ANIL KUMAR SETH, Noida

HC dismissed petitions seeking quashing of complaints under S.138 NI Act and the summoning order. It held that, in view of the arbitral award confirming ... Dishonour of cheque - whther the Cheque was for security and the debt did not exist - vicarious Liability of Directors - commercial relationship between the parties, which is governed by two successive and distinct Agreements. Legally Enforceable Debt - HELD THAT:- The fact that the loan of Rs. 2.5 crores became the subject matter of the second Loan Agreement, stands established by the findings of the learned Arbitral Tribunal, which by the Majority Award held the Petitioner liable to pay the remaining amount along with interest, under the Loan Agreement - It is, therefore, concluded that prima facie it cannot be said that the cheque in dispute, was not issued for a legally enforceable liability and the Complaint under S.138 NI Act, is not liable to be quashed on this ground. Liability of Directors - HELD THAT:- The liability of the Directors and officers of the Petitioner Company, International Public School Ltd. /Accused No. 1, arises from the principle of vicarious liability, as stipulated in Section 141 of the Negotiable Instruments Act, 1881 - The general principle for corporate offenses under Section 138 NI Act is that the Company is primarily liable. However, Section 141 extends this liability to include individuals within the Company who were responsible for its conduct and business of the Company at the time of commission of the offense. The Court underscored that the essence of the allegations is more important than their form. If the Complaint sufficiently indicates that the Director was actively involved in the Company’s day-to-day operations and played a role in the transactions in question, this is enough to meet the threshold for vicarious liability under Section 141(1) NI Act, even if the statutory expression “in charge of and responsible for the conduct of the business” is not quoted verbatim - In this case, the Complaint satisfies the legal requirement by naming all accused Directors/officers, with specific averments that they were all “in charge of day to day affairs and responsible for the decisions” of the Company. The Trial Court correctly found sufficient grounds to issue the Summons to all the Directors/petitioners. There is no merit in the Petitions seeking to quash the Complaints under S.138 NI Act or to set aside the Summoning Order - Petition dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the cheque in question, issued under the Loan Agreement incorporating amounts earlier advanced under a frustrated Joint Venture Agreement, was issued towards a 'legally enforceable debt or other liability' so as to attract Section 138 of the Negotiable Instruments Act, 1881, and whether the criminal complaint was liable to be quashed on this ground under Section 482 Cr.P.C. 1.2 Whether the dishonour of the cheque on account of 'payment stopped by drawer' rather than 'insufficiency of funds' rebutted the presumption under Sections 118 and 139 of the Negotiable Instruments Act and rendered the complaint under Section 138 not maintainable at the threshold. 1.3 Whether the existence of disputes allegedly of civil nature, including claims of breach of the Loan Agreement, frustration of the JVA, losses suffered, and alleged non-fulfilment of reciprocal obligations, warranted quashing of the proceedings under Section 138 NI Act as an abuse of process. 1.4 Whether the summoning of the company's Directors and officers as accused under Section 141 of the Negotiable Instruments Act was legally sustainable in the absence of detailed or verbatim averments that they were 'in charge of and responsible for the conduct of the business' of the company at the time of commission of the offence. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legally enforceable debt and maintainability of complaint under Section 138 NI Act Legal framework (as discussed): 2.1 The Court noted that Section 138 NI Act presupposes issuance of a cheque 'for the discharge, in whole or in part, of any debt or other liability' and that Sections 118 and 139 NI Act raise a statutory presumption in favour of the holder of the cheque, which is rebuttable. Interpretation and reasoning: 2.2 It was undisputed that under the original Joint Venture Agreement (JVA) Rs. 2.5 crores were advanced, that the JVA failed due to non-obtaining of CLU, and that a subsequent Loan Agreement dated 20.11.2012 was executed for Rs. 15 crores (Rs. 10 crores in the first phase and Rs. 5 crores in the second). 2.3 Clause 1(a) of the Loan Agreement, as reproduced and examined by the Court, explicitly acknowledged that the lender had already granted Rs. 2.5 crores (by two cheques of Rs. 1 crore and Rs. 1.5 crores) and that the borrower acknowledged receipt of Rs. 2.5 crores as part of the Rs. 10 crores first-phase loan. 2.4 The Court held that, from the express terms of the Loan Agreement, the amount of Rs. 2.5 crores initially paid under the JVA was clearly carried forward and treated as part of the first-phase loan under the Loan Agreement, thereby becoming governed by its terms. 2.5 Clause 6 of the Loan Agreement, as referred to by the Court, provided that if the project 'is delayed or do not happen as per the specifications/satisfaction of the lender or for any reason whatsoever,' the loan facility already granted becomes 'due and payable immediately on demand' with interest at 18% per annum. This clause governed the liability for the amounts disbursed, including the Rs. 2.5 crores. 2.6 The cheque in question for Rs. 1 crore was issued as part of the post-dated cheques aggregating to the first-phase principal and maximum interest. The petitioners pleaded that it was merely a 'security cheque' against the full Rs. 10 crores, which was never fully disbursed, and that therefore no legally enforceable liability existed on the date of presentation/dishonour. 2.7 The Court observed that the Loan Agreement was subsisting when the petitioners issued instructions to 'stop payment' of the first cheque, and that the second cheque for Rs. 1.5 crores was subsequently presented and honoured. The petitioners' contention that the second cheque was honoured 'as an endeavour for settlement' was treated as a matter of defence, not determinative at the quashing stage. 2.8 The Court held that questions whether the cheque was presented against a legally enforceable liability, whether there was breach of obligations, and whether valid defences existed for stopping payment, are all factual issues to be examined at trial and cannot be adjudicated conclusively in a Section 482 Cr.P.C. petition. 2.9 The defence that Rs. 1 crore was utilised for furniture for a Junior School at Govindpura and hence no liability subsisted, was rejected prima facie. The Court observed that such expenditure was not a part of the subsequent Loan Agreement terms and that, had the earlier amount truly stood absorbed or adjusted as claimed, it would not have been expressly carried forward and acknowledged as Rs. 2.5 crores under Clause 1(a) of the Loan Agreement. 2.10 The Court further noted the arbitral proceedings and the Majority Award, which held that: (i) the JVA was frustrated, and (ii) liability for the Rs. 2.5 crores fell under Clauses 6 and 9(c) of the Loan Agreement, rendering the borrower liable to repay the remaining Rs. 1 crore (after encashment of Rs. 1.5 crores) with 18% interest from the recall date. This finding reinforced that the Rs. 2.5 crores constituted an enforceable liability under the Loan Agreement. Conclusions: 2.11 The Court concluded that prima facie the cheque, though initially issued as 'security', had fructified into a cheque issued towards an existing liability under the subsisting Loan Agreement. 2.12 It held that it cannot be said at the threshold that the cheque was not issued for a 'legally enforceable debt or other liability'. Accordingly, the complaint under Section 138 NI Act was not liable to be quashed on the ground of non-existence of a legally enforceable debt. Issue 2: Effect of 'stop payment' and nature of dispute (civil vs. criminal) on Section 138 proceedings and presumptions under Sections 118 and 139 NI Act Legal framework (as discussed): 2.13 The Court reiterated that upon dishonour of a cheque, the statutory presumptions under Sections 118 and 139 NI Act operate in favour of the holder, subject to rebuttal by the accused. Interpretation and reasoning: 2.14 The cheque was dishonoured with the remark 'payment stopped by drawer'. The petitioners contended that this, coupled with the alleged absence of liability and the existence of civil disputes, rebuts the presumption and renders Section 138 inapplicable. 2.15 The Court held that the fact that dishonour occurred due to 'stop payment' rather than 'insufficiency of funds' does not, by itself, negate the statutory presumption or take the case out of Section 138 NI Act. Whether the stop-payment instruction was justified by any valid defence (such as non-existence of liability or breach by the complainant) is a matter of evidence at trial. 2.16 The Court observed that the petitioners' assertions of losses, non-fulfilment of reciprocal obligations, civil claims and counter-claims, and alleged frustration or breach of contractual terms raise disputed questions of fact. These are not matters that can be conclusively adjudicated in a petition for quashing under Section 482 Cr.P.C., particularly where the basic ingredients of Section 138 appear fulfilled prima facie. 2.17 It was held that the underlying commercial/contractual disputes being of a civil nature does not ipso facto bar the simultaneous operation of criminal liability under Section 138 NI Act where the statutory elements are prima facie satisfied. Conclusions: 2.18 The Court concluded that the mere fact of 'stop payment' and existence of civil disputes did not rebut, at the threshold, the presumption under Sections 118 and 139 NI Act or justify quashing of the complaint. 2.19 The pleas of absence of liability, alleged misuse of process, and civil nature of the dispute were held to be defences to be tested during trial and not grounds for quashing under Section 482 Cr.P.C. Issue 3: Vicarious liability and summoning of Directors under Section 141 NI Act Legal framework (as discussed): 2.20 The Court referred to Section 141 NI Act, which extends liability for offences under Section 138 to persons who, at the time of the offence, were in charge of and responsible to the company for the conduct of its business, as well as to those whose consent, connivance, or negligence led to the commission of the offence. 2.21 The Court relied on the principles laid down by the Supreme Court in National Small Industries Corporation Ltd. v. Harmeet Singh Paintal, particularly that where the accused is a Managing Director or Joint Managing Director, specific averments may not be necessary as their position itself indicates responsibility for the company's business. 2.22 The Court also referred to Kamalkishor Shrigopal Taparia v. India Ener-gen Private Limited and HDFC Bank Ltd. v. State of Maharashtra, where it was held that complaints under Section 138 NI Act cannot be dismissed solely for not reproducing the exact statutory language of Section 141, and that the substance and essence of the allegations are determinative. Interpretation and reasoning: 2.23 The complaint impleaded the company as Accused No. 1 and its Chairman & Managing Director and Directors as Accused Nos. 2 to 6. It specifically averred that they were in charge of and responsible for the day-to-day affairs and decisions of the company and detailed their roles, including that they were active participants in the alleged fraudulent scheme and acts leading to the dishonour. 2.24 The Court noted that the Chairman & Managing Director had signed the JVA and Loan Agreement, made representations throughout, and was directly linked to the stop-payment instruction and the company's dealings, clearly indicating involvement in the company's affairs. 2.25 For the other Directors, the Court held that they were served with separate notices of dishonour and demand, and that by virtue of their designation as Directors, they would ordinarily be responsible for financial and legal affairs. The complainant is not expected to plead internal role allocations beyond what is publicly ascertainable. 2.26 In light of the Supreme Court precedents, the Court held that the complaint contained sufficient substantive averments to attract Section 141 NI Act. Absence of verbatim reproduction of the phrase 'in charge of and responsible for the conduct of the business' did not render the complaint defective where the overall allegations showed active role and responsibility. Conclusions: 2.27 The Court held that there were adequate allegations in the complaint to prima facie fasten vicarious liability on the Managing Director and other Directors under Section 141 NI Act. 2.28 It upheld the Trial Court's order issuing summons to all the Directors and found no ground to discharge or quash the proceedings against them at the threshold. Overall outcome 2.29 The Court concluded that no ground existed for quashing the complaint under Section 138 NI Act or the summoning order under Section 482 Cr.P.C. The petitions were dismissed and all pending applications were disposed of.