2013 (2) TMI 36 - HC - Companies Law

Cheque issued by the Client (the borrower) in a Factoring Agreement - Whether is towards liability or security? - Petitioner Company approached Respondent No.2 IFCI Factors Limited to grant it domestic factoring facilities who by an Agreement dated 18.02.2010 allowed it to the maximum pre-payment amount of Rs.5 crores. M/s. Koutons Retails India Limited (Koutons) was approved as debtor in terms of Clause 4 (i) of the Agreement & cheques for this sum of Rs. 3 crores issued by the debtors (Koutons) were dishonoured - Held that - The tanner of the Agreement was that the amount was advanced by Respondent No.2 to the Petitioners, thus, the amount was borrowed by the Petitioners and it was at Petitioners behest and on their undertaking that cheques issued by the Petitioners debtor i.e. Koutons were accepted on the condition that it will be honoured on presentation. It was the term of the factoring agreement that in case the Petitioners debtor was unable to pay, the Petitioners would pay the amount (which obviously had been received by Petitioner No.1 from Respondent No.2). A personal guarantee for payment of all the amounts payable by the obligatee in respect of purchase of receivables was also given by Petitioner No.2 (Alok Aggarwal). Petitioner No.2 on behalf of Petitioner No.1 also undertook the payment of the outstanding pre-payments or for values of reassigned. He, further, undertook to keep sufficient balance in the account and to honour the cheques on presentation. Thus, factoring agreement along with undertaking and the Bond of guarantee clearly indicates that the cheques had not been given by the Petitioners as security but towards the liability which was co-extensive with that of the debtor. See Shree Bhagwati Apparels India Limited & Ors. v. M/s. Bibby Financial Services India Pvt. Ltd. 2013 (2) TMI 28 - PUNJAB AND HARYANA HIGH COURT Thus a cheque issued towards debt which is due but whose only payment is postponed would attract Section 138 of the N.I. Act.

Summary

Issues Involved:
1. Whether the cheque issued by the Client (the borrower) in a Factoring Agreement is towards liability or security.
2. Whether the Petitioners were misrepresented as borrowers in the Complaint.
3. Whether the cheques given by the Petitioners were by way of security and thus did not attract criminal liability under Section 138 of the Negotiable Instruments Act, 1881.

Issue-wise Detailed Analysis:

1. Whether the cheque issued by the Client (the borrower) in a Factoring Agreement is towards liability or security:
The Court examined the nature of the cheques issued by the Petitioners. The Petitioners argued that the cheques were given as security and thus did not attract Section 138 of the Negotiable Instruments Act, 1881. The Court referred to the Factoring Agreement dated 18.02.2010 and noted that the Petitioners were liable to make the payment in case of non-performance by Koutons. The personal undertaking by Petitioner No.2 supported this liability. The Court highlighted that the cheques were issued towards the Petitioners' liability, which was co-extensive with that of the debtor, Koutons. The Court cited the judgment in ICDS Ltd. v. Beena Shabeer & Anr. (2002) 6 SCC 426, which clarified that a cheque issued by a guarantor would be deemed to be issued against any other liability. The Court concluded that the cheques were not given as security but towards the liability.

2. Whether the Petitioners were misrepresented as borrowers in the Complaint:
The Petitioners contended that they were wrongly described as borrowers in the Complaint. The Court found that Respondent No.2 had not concealed the Factoring Agreement and had clearly stated in the Complaint that it had made available the factoring facilities to the Petitioners. The Court held that there was no misrepresentation or fraud by Respondent No.2 in obtaining the summoning order from the learned Metropolitan Magistrate (MM).

3. Whether the cheques given by the Petitioners were by way of security and thus did not attract criminal liability under Section 138 of the Negotiable Instruments Act, 1881:
The Court referred to several judgments, including M/s. Collage Culture & Ors. v. Apparel Export Promotion Council & Anr. 2007 (4) JCC (NI) 388, which distinguished between cheques issued for a debt in present but payable in future and those issued for a debt that may become payable in future upon a contingent event. The Court noted that the cheques issued by the Petitioners were towards an existing liability and not merely as security. The Court also referred to the judgment in Shree Bhagwati Apparels India Limited & Ors. v. M/s. Bibby Financial Services India Pvt. Ltd., which supported the view that cheques issued under similar circumstances were towards liability and not security. The Court concluded that the cheques issued by the Petitioners were towards their liability, making them criminally liable under Section 138 of the Act.

Conclusion:
The Court dismissed the Petitions, holding that the cheques issued by the Petitioners were towards their liability and not merely as security. The Court found no merit in the Petitioners' arguments regarding misrepresentation and the nature of the cheques. The observations made were necessary for the disposal of the Petitions and would not influence the merits of the case pending before the learned MM.