2025 (4) TMI 505 - HC - Indian Laws

Dishonour of Cheque - discharge of a legally enforceable debt or merely as a security instrument - simultaneous invocation of SARFAESI proceedings bar the criminal complaint under Section 138 of the NI Act or not. HELD THAT - It is relevant to note that the inherent jurisdiction of the Court under Section 482 of the CrPC ought to be exercised sparingly especially when the matter is at the stage of issuance of summons as the same has the effect of scuttling the proceedings without the parties having an opportunity to adduce the relevant evidence. The Hon ble Apex Court in the case of Rathish Babu Unnikrishnan v. State (NCT of Delhi) 2022 (4) TMI 1434 - SUPREME COURT adverting to a catena of judgments had underscored the parameters for exercising inherent jurisdiction to quash the proceedings at the stage of the summoning order. In the present case Respondent No. 2 had filed a complaint under Section 138 of the NI Act. The learned MM relying upon the complaint supported by the affidavit of the complainant took cognizance under Section 138 of the NI Act and passed the summoning order dated 02.07.2018 - the allegations made in the complaint at the stage when the complaint is sought to be quashed at the outset are to be taken as correct unless evidence of unimpeachable character has been produced. Whether the subject cheque was issued in discharge of a Legally Enforceable Debt? - HELD THAT - It is well-settled law that the presumption under Section 139 of the NI Act applies once the execution of the subject cheque is undisputed. The burden is on the drawer to rebut the presumption that the cheque was issued for a legally enforceable debt or liability which is required to be established during trial. In the present case the petitioners contended that the subject cheque was in the nature of security and not against an accrued or existing liability at the time of its issuance. According to the petitioners the cheque was provided solely to secure the transfer of title deeds from Yes Bank to Respondent No. 2 and was not intended to be presented for encashment. It is further submitted that upon the successful transfer of those title deeds the underlying purpose of the cheque stood extinguished and as such its dishonour cannot attract penal consequences under Section 138 of the NI Act - In the present case no material has been placed on record to prima facie demonstrate that Respondent No. 2 had agreed not to present the cheque after receipt of the title deeds. In the absence of such evidence the liability under the subject cheque cannot be said to have been extinguished and the consequences of its dishonour must follow the mandate of law subject of course to the findings at trial. In the present case the loan account of the petitioners was declared NPA and they failed to regularize their payments prompting Respondent No. 2 to present the subject cheque for payment. Whether the subject cheque was given as security for facilitating the transfer of property documents from Yes Bank and not towards repayment of any legally enforceable liability constitutes defence of the accused and is a matter of trial. No unimpeachable material has been placed on record to indicate that the subject cheque was issued solely for securing the release of title deeds or that it was never intended to be presented for payment. The purpose behind the issuance of the cheque and whether it was connected to a subsisting liability or merely a collateral assurance is a disputed question of fact which cannot be conclusively determined while exercising power under Section 482 of the CrPC. Whether the simultaneous invocation of SARFAESI proceedings bar the criminal complaint under Section 138 of the NI Act? - HELD THAT - The loan extended by financial institutions does not become the personal asset of the borrower; rather it is disbursed in a fiduciary capacity sourced from public funds contributed by taxpayers. Recognizing the need for a swift and effective mechanism to recover non-performing assets (NPAs) the legislature enacted the SARFAESI Act. This law empowers banks and financial institutions to recover dues without court intervention ensuring financial stability - Conversely the NI Act is a codified statute governing promissory notes bills of exchange and cheques. It establishes criminal liability for dishonour of cheques to uphold the sanctity of negotiable instruments and prevent financial misconduct. The SARFAESI Act and the NI Act serve distinct legislative purposes addressing civil debt recovery and criminal liability for dishonoured cheques respectively. In the present case the petitioners are not corporate debtors nor are proceedings pending under the IBC. The SARFAESI Act contains no provision that bars or stays criminal prosecution under the NI Act. The pendency of SARFAESI proceedings therefore does not impede the continuation of proceedings under Section 138 of the NI Act. Conclusion - It is well settled that the inherent powers should be exercised sparingly with circumspection and in the rarest of rare cases when the Court is convinced on the basis of material on record that allowing the proceedings to continue would be an abuse of the process of law. The inherent powers do not confer an arbitrary jurisdiction on the Court to act according to its whim or caprice. At this stage this Court cannot go into the merits and/or come to the conclusion that there was no existing debt or liability. In the present case prima facie it is evident that the principal grounds of challenge by the petitioners are all matter of defence at the trial - there are no illegality or irregularity in the impugned order. The present petition is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

1. Whether the subject cheque was issued in discharge of a legally enforceable debt or merely as a security instrument, and whether its dishonour attracts liability under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).

2. Whether the simultaneous invocation of proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) bars the criminal complaint under Section 138 of the NI Act.

ISSUE-WISE DETAILED ANALYSIS

1. Whether the subject cheque was issued in discharge of a legally enforceable debt

Relevant legal framework and precedents: Section 138 of the NI Act stipulates that dishonour of a cheque due to insufficient funds or closure of the account constitutes an offence. Section 139 of the NI Act presumes that the cheque was issued for a legally enforceable debt unless rebutted by the drawer. The Court referenced NEPC Micon Ltd. v. Magma Leasing Ltd. and Bir Singh v. Mukesh Kumar, which establish that the presumption under Section 139 applies unless the drawer produces evidence to the contrary.

Court's interpretation and reasoning: The Court noted that the cheque was issued on the same date as the sanction letter, suggesting it was part of the financial arrangement. The argument that the cheque was merely a security instrument was not accepted at this stage, as the closure of the account and any alleged understanding regarding the cheque are matters requiring proof.

Key evidence and findings: The cheque was presented and dishonoured with the return memo stating 'Account Closed'. The Court found that this circumstance attracts Section 138 of the NI Act.

Application of law to facts: The Court held that the presumption under Section 139 applies, and the burden to rebut this presumption lies with the petitioners. The mere characterization of the cheque as a 'security cheque' does not preclude the operation of Section 138.

Treatment of competing arguments: The petitioners argued that the cheque was for security purposes and not for an enforceable debt. The Court found this argument to be a matter of defence to be adjudicated during the trial.

Conclusions: The Court concluded that the cheque was issued in the course of an ongoing financial obligation and its dishonour attracts liability under Section 138 of the NI Act.

2. Whether the simultaneous invocation of SARFAESI proceedings bars the criminal complaint under Section 138 of the NI Act

Relevant legal framework and precedents: The SARFAESI Act and the NI Act serve distinct purposes, addressing civil debt recovery and criminal liability for dishonoured cheques, respectively. The Court referenced Gurcharan Singh v. Allied Motors Ltd., which held that civil proceedings do not preclude criminal proceedings under Section 138.

Court's interpretation and reasoning: The Court reasoned that the SARFAESI Act and NI Act operate in independent legal spheres. The initiation of SARFAESI proceedings does not bar the continuation of criminal proceedings under Section 138.

Key evidence and findings: The Court found no provision in the SARFAESI Act that bars or stays criminal prosecution under the NI Act.

Application of law to facts: The Court held that the pendency of SARFAESI proceedings does not impede the continuation of proceedings under Section 138 of the NI Act.

Treatment of competing arguments: The petitioners argued that simultaneous proceedings under the SARFAESI Act and NI Act amounted to an abuse of process. The Court rejected this argument, emphasizing the distinct legislative purposes of the two Acts.

Conclusions: The Court concluded that there is no legal bar on initiating simultaneous proceedings under both the SARFAESI Act and the NI Act.

SIGNIFICANT HOLDINGS

The Court preserved the principle that the presumption under Section 139 of the NI Act applies once the execution of the cheque is undisputed, and the burden to rebut this presumption lies with the drawer. The Court emphasized that the characterization of a cheque as a 'security cheque' does not preclude liability under Section 138.

The Court held that the SARFAESI Act and the NI Act serve distinct purposes and operate in independent legal spheres, allowing for simultaneous proceedings under both statutes.

The Court dismissed the petition, finding no illegality or irregularity in the impugned order and emphasizing that the principal grounds of challenge by the petitioners are matters of defence to be adjudicated during the trial.