In the instant case the Court considered whether s. 138 of the Negotiable Instruments Act, 1881 would be attracted when post dated cheques were issued as a “security”

Date of judgement: 19 September, 2016

Composition of the bench: Division bench of Hon’ble Justice Dipak Misra and Hon’ble Justice Adarsh Kumar Goel, the latter authored the judgement. 

Facts in brief: The appellant approached the High Court to seek quashing of the complaints under s. 482 CrPC.

Complaints were arising out of 18 post-dated cheques of the value of about Rs.10.3 crores that had bounced. 

Contention of the appellant in support of his case was that the cheques were given by way of security as mentioned in the agreement and that on the date of issuance, no debt or liability was due. 

The appellant contented that dishonour of post-dated cheques given by way of security did not fall under Section 138 of the Act. Reliance was placed on clause 3.1 (iii) of the agreement to the effect that deposit of post-dated cheques toward repayment of installments was by way of “security”. 

(Clause 3.1(iii) of the agreement enumerated:-

“ 3.1 SECURITY FOR THE LOAN The loan together with the interest, interest tax, liquidated damages, commitment fee, up front fee prima on repayment or on redemption, costs, expenses and other monies shall be secured by deposit of Post dated cheques towards repayment of installments of principal of loan amount in accordance with agreed repayment schedule and installments of interest payable thereon)

The appellant contended that even though the first installment as per the agreement became due subsequent to the handing over of the post- dated cheque, it was not towards discharge of debt or liability in presenti but for the amount payable in future. 

The High Court did not accept the above contention.

Hence, the present Special leave petition under article 136 of the Constitution. 

Issue/Question of law: Whether in the facts of the present case, the dishonour of a post-dated cheque given for repayment of loan installment described as “security” in the loan agreement will be covered by Section 138 of the Negotiable Instruments Act, 1881 (“the Act”) 

Judgement

Whether post-dated cheque issued by way of advance payment for a purchase order could be considered for discharge of legally enforceable debt

The Court had considered this aspect of law in Indus Airways on which the counsel for the appellant in the present case had placed strong reliance. 

In the case, the cheque was issued by way of advance payment for the purchase order, but the purchase order was cancelled and payment of the cheque was stopped.

The Supreme Court held that while the purchaser may be liable for breach of the contract, when a contract provides that the purchaser has to pay in advance and cheque towards advance payment is dishonoured, it will not give rise to criminal liability under Section 138 of the Act. 

Therefore, issuance of cheque towards advance payment could not be considered as discharge of any subsisting liability

However, the Court in the present case delineated a distinction between the judgement in Indus Airways and the present case. 

In the present case, on the date of the cheque there was a debt/liability in presenti according to the terms of the loan agreement, as against the case of Indus Airways where the purchase order had been cancelled and cheque issued towards advance payment for the purchase order was dishonoured. 

In that case, it was found that the cheque had not been issued for discharge of liability but as advance for the purchase order which was cancelled.

Whether a post-dated cheque is for “discharge of debt or liability”

The court opined if on the date of the cheque, liability or debt exists or the amount has become legally recoverable, s. 138 of the Negotiable Instruments Act is attracted and not otherwise.

In the present case, loan was duly disbursed on 28th February, 2002 which was prior to the date of the cheques. Dishonour of such a cheques would thus fall under Section 138 of the Act in the instant case since the cheques undoubtedly represent the outstanding liability.

Whether the proceedings under Section 138 were liable to be quashed as the cheques were given as “security”

In HMT Watches Ltd. versus M.A. Abida, the Supreme Court dealt with the contention that the proceedings under Section 138 were liable to be quashed as the cheques were given as “security” as per defence of the accused. 

Whether the cheques were given as security or not, or whether there was outstanding liability or not is a question of fact which could have been determined only by the trial court after recording evidence of the parties. In our opinion, the High Court should not have expressed its view on the disputed questions of fact in a petition under Section 482 of the Code of Criminal Procedure, to come to a conclusion that the offence is not made out. 

The Court conceded that it was not stating that documents of “unimpeachable character” should not be taken into consideration at any cost being alive to the fact that a large number of disputes that should ordinarily be determined only by the civil courts, were filed as criminal cases only to force the accused to pay the amount due to the complainant. 

However, the Supreme Court opined that while using its inherent powers under s. 482 of CrPC, courts should not encourage filing of frivolous complaints; but, on the other hand, the Courts cannot also travel beyond its jurisdiction to interfere with the proceeding which is otherwise genuine.

Therefore, it is well settled that while dealing with a quashing petition, the Court have to proceed on the basis of averments in the complaint. The defence of the accused cannot be considered at this stage. The court considering the prayer for quashing does not adjudicate upon a disputed question of fact.

In Rangappa versus Sri Mohan, the Supreme Court held that once issuance of a cheque and signature thereon are admitted, presumption of a legally enforceable debt in favour of the holder of the cheque arises. It is for the accused to rebut the said presumption.

However, the Court adverted that mere statements of the accused may not be sufficient to rebut the said presumption. A post dated cheque is a well recognized mode of payment, hence, a presumption against the appellant in the instant case was made out. 

Ratio Decidendi 

The opinion of the Supreme Court was in consonance with that of the lower Courts. 

The Court opined that dishonour of a post-dated cheque given for repayment of loan installment would attract s. 138 of the Act if on the date of issuance of the cheque, a legally enforceable debt existed. The presence of a legally enforceable debt in presenti would also obviate the defense of cheques being merely “security” against advanced payments.

On a perusal of the facts in the instant case, it was evident that the cheques were issued for discharge of existing liability which existed prior to the date of issuance of the cheques, hence, the offence was deemed to be under the ambit of Section 138 of the Negotiable Instruments Act. 

Hence, the Court opined that a case for quashing of the complaint was not deemed to be made out and the present appeal was dismissed, leaving the litigants to continue the matter in the trial court.