2014 (4) TMI 464 - SC - Companies Law

Dishonour of P.D. Cheques - Cheques received as advance payment - Whether the post-dated cheques issued by the appellants as an advance payment in respect of purchase orders could be considered in discharge of legally enforceable debt or other liability - Held that - If at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchaser may have to make good the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138. For a criminal liability to be made out under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque - issuance of cheque towards advance payment at the time of signing such contract has not to be considered as subsisting liability and dishonour of such cheque amounts to an offence under Section 138 of the N.I. Act. The Delhi High Court has traveled beyond the scope of Section 138 of the N.I. Act by holding that the purpose of enacting Section 138 of the N.I. Act would stand defeated if after placing orders and giving advance payments, the instructions for stop payments are issued and orders are cancelled. If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier, in our considered view, the cheque cannot be said to have been drawn for an existing debt or liability - Decided in favour of Appellant.

Issues Involved:
1. Whether post-dated cheques issued as advance payment in respect of purchase orders can be considered in discharge of legally enforceable debt or other liability.
2. Whether the dishonour of such cheques amounts to an offence under Section 138 of the Negotiable Instruments Act, 1881.

Detailed Analysis:

1. Legally Enforceable Debt or Other Liability:
The core issue revolves around whether post-dated cheques issued by the purchasers as an advance payment for purchase orders can be deemed to discharge a legally enforceable debt or other liability. The explanation to Section 138 of the Negotiable Instruments Act, 1881, clarifies that the term "debt or other liability" refers to a legally enforceable debt or liability. For an offence under Section 138 to be constituted, the cheque must be drawn in discharge of an existing or past adjudicated liability.

In this case, the purchasers issued post-dated cheques as advance payment for aircraft parts. The purchasers later canceled the purchase orders and requested the return of the cheques, which were subsequently dishonoured upon presentation. The Supreme Court emphasized that if a cheque is issued as an advance payment and the purchase order is canceled or not fulfilled, the cheque cannot be considered drawn for an existing debt or liability. At the time of drawal, there was no existing liability, thus failing to meet the criteria for a legally enforceable debt under Section 138.

2. Offence Under Section 138 of the N.I. Act:
The Delhi High Court had held that the issuance of a cheque as advance payment at the time of signing a contract constitutes a liability, and dishonour of such a cheque amounts to an offence under Section 138. However, the Supreme Court disagreed, noting that the Delhi High Court failed to distinguish between civil liability and criminal liability under Section 138. The Supreme Court reiterated that for criminal liability to arise under Section 138, there must be a legally enforceable debt or liability subsisting on the date of the cheque's drawal.

The Supreme Court referenced several High Court judgments, including those from Andhra Pradesh, Gujarat, Madras, and Kerala, which consistently held that for Section 138 to apply, there must be an existing liability or debt on the date the cheque was delivered. The advance payment by cheque does not constitute an existing liability if the purchase order is canceled or the goods are not supplied.

Conclusion:
The Supreme Court concluded that the Delhi High Court's reasoning was flawed and set aside its judgment. The Court restored the order of the Additional Sessions Judge, which had quashed the process issued by the Additional Chief Metropolitan Magistrate. The Supreme Court affirmed that the issuance of a cheque as an advance payment does not create a legally enforceable debt or liability under Section 138 if the purchase order is canceled or not fulfilled.

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