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TMI Blog2021 (12) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... pends on a contingent event, then it takes the color of a debt only after the contingency has occurred. Therefore, in the present case, a debt was incurred after the second respondent began supply of power for which payment was not made because of the non-acceptance of the LCs . The issue to be determined is whether Section 138 only covers a situation where there is an outstanding debt at the time of the drawing of the cheque or includes drawing of a cheque for a debt that is incurred before the cheque is encashed. Under Sub-Section (1) of Section 202, a Magistrate upon the receipt of a complaint of an offence of which he/she is authorized to take cognizance is empowered to postpone the issuance of process against the accused and either (i) enquire into the case; or (ii) direct an investigation to be made by a police officer or by such other person as he thinks fit. The purpose of postponing the issuance of process for the purposes of an enquiry or an investigation is to determine whether or not there is sufficient ground for proceeding - The requirement of recording reasons which is specifically incorporated in Section 203 does not find place in Section 202. Section 204 which d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up on behalf of the appellants are all matters of defence at the trial. The Magistrate having exercised his discretion, it was not open to the High Court to substitute its discretion. Appeal dismissed - decided against appellant. - Criminal Appeal No.1446 of 2021 Criminal Appeal No.1447 of 2021 - - - Dated:- 3-12-2021 - Dr Dhananjaya Y Chandrachud And A S Bopanna , JJ. For the Appellant : M/s. Karanjawala Co. For the Respondent : Ms. Aastha Mehta, Adv. Ms. Deepanwita Priyanka, AOR Mr. Aman Gupta, AOR JUDGMENT Dr Dhananjaya Y Chandrachud, J 1. A Single Judge of the High Court of Gujarat dismissed the petitions under Section 482 of the Code of Criminal Procedure, 1973 CrPC , instituted by the appellants to quash the criminal complaint CC No. 1220 of 2017 instituted by the second respondent for offences punishable under Section 138 of the Negotiable Instruments Act, 1881 NI Act , and challenge an order of summons dated 3 November 2017 of the JMFC Mundra on the complaint. The complaint arises from the dishonour of a cheque in the amount of ₹ 2,67,84,000/-. In the two appeals which arose from the order of the High Court, the appellants are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Generator, for an amount equal to energy charge payable for the Contracted Capacity, from any Indian Bank acceptable to the Generator. 4. The relevant terms of the Power Supply Agreement were as follows: (a) Letter of Credit - Under Clause 2.5, the company was required to make payments for the power supply through LCs . Clause 2.6 envisages that the Company would issue a LC in accordance with the requirements of the second respondent s Bank; (b) Payment Date and Delay Penalty Under Clause 2.7, the Company was required to make payment on the tenth day of every month; in default of which a late payment charge of fifteen per cent per annum would be payable; (c) Default in Payments Clause 8.2 provided that parties would be bound by the obligations even in the case of a dispute, unless there was a failure of payment without justification; and (d) Entire Agreement Clause 14 provided that the PSA shall represent the entire agreement, and supersede and extinguish any previous drafts, agreements or understandings. 5. On 10 August 2016, 12 September 2016 and 27 September 2016, three LCs favouring the second respondent were issued by Punjab National Bank at the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r quashing the complaint. However, it allowed a petition for quashing filed by a nominee director who was not in-charge of the day-to-day management of the company and by a woman non-executive Director. The reasons that guided the High Court for dismissing the petition are as follows: (i) The issues pertaining to the issuance of cheques, non-payment of electricity charges, issuance of LCs, among others, are questions of fact. They will have to be decided by the trial court; (ii) The complaint appears to be genuine. The High Court cannot exercise its jurisdiction under Section 482 CrPC unless it is established that there was an ulterior motive behind the initiation of criminal proceedings; and (iii) Both civil and criminal proceedings are maintainable on the same set of facts, as in this case. 11. Mr. Sidharth Luthra and Ms. Meenakshi Arora, learned senior counsel have appeared on behalf of the appellants in support of the appeals. Mr. Mohit Mathur and Ms Rebecca John, learned senior counsel have appeared on behalf of the second respondent. Ms. Aastha Mehta, learned counsel appeared on behalf of the State of Gujarat. 12. Mr. Sidharth Luthra, learned senior counsel has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Despite the clear provisions of Section 202, no inquiry was carried out by the Magistrate; and (iii) The summoning order shows non-application of mind inasmuch as no reasons have been adduced by the Magistrate. In this backdrop, the following sequence of events was emphasized in the course of the submissions: 10 August 2016 : issuance of LC; 30 September 2016: complainant stopped the supply of power; 20 October 2016: termination of the PSA by the company; 30 June 2017: instructions issued to the bankers to stop payment; 31 August 2017: presentation of the cheques; 2 November 2017: complaint under Section 138 filed; 3 November 2017: affidavit filed in support of the complaint; and 6 November 2017: summoning order issued. 13. On the basis of the above sequence of events, it has been submitted that recourse to the filing of a complaint under Section 138 of NI Act is an abuse of the process. In the course of evaluating the submissions, the line of precedent to which a reference has been made would be considered. 14. Ms. Meenakshi Arora, learned senior counsel submitted that a clear case for the invocation of the jurisdiction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court for rejecting the petitions under Section 482 of the CrPC. 16. Ms. Aastha Mehta, learned counsel for the State of Gujarat has submitted that the trial has not proceeded since 2017 due to the pendency of the proceedings before the High Court and this Court. Learned counsel urged that there is no ground to interfere with the order of the High Court. 17. The issues which arise for our consideration are as follows: (i) Whether the dishonor of a cheque furnished as a security is covered under the provisions of Section 138 of the NI Act; (ii) Whether the Magistrate, in view of Section 202 CrPC, ought to have postponed the issuance of process; and (iii) Whether a prima facie case of vicarious liability is made out against the appellants. 18. The first submission which has been urged on behalf of the appellants is that a complaint under Section 138 of the NI Act would not be maintainable since the cheque of ₹ 2.67 crores was issued by way of a security and, is thus not against a legally enforceable debt or liability. The appellant has placed reliance on the judgment of a two judge Bench of this Court in Indus Airways Private Limited v. Magnum Aviation Privat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of information by him from the bank regarding the return of the cheque as unpaid; and (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. Explanation.-For the purposes of this section, debt of other liability means a legally enforceable debt or other liability. In appeal, Justice R M Lodha writing for a two-Judge Bench allowed the appeal 11 It was held that the view taken by the Andhra Pradesh High Court in Swastik Coaters v. Deepak Bros, 1997 Cri LJ 1942 (AP), the Gujarat High Court in Shanku Concreates v. State of Gujarat, 2000 Cro LJ 1988 (Guj), the Madras High Court in Balaji Seafoods Exports v. Mac Industries, (1999) 1 CTC 6 (Mad). observing: 9. The Explanation appended to Section 138 explains the meaning of the expression debt or other liability for the purpose of Section 138. This expression means a legally enforceable debt or other liability. Section 138 treats dishonoured cheque as an offence, if the cheque has been issued in discharge of any debt or other liability. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed before the High Court. The submission which was urged before this Court was that dishonor of the post-dated cheques given by way of security did not amount to a legally enforceable debt or liability under Section 138 in presentia. This Court held, after adverting to the decision in Indus Airways that if on the date of the cheque, a liability or debt exists or the amount has become enforceable, Section 138 would stand attracted and not otherwise. The decision in Indus Airways was distinguished in Sampelly (supra) on the ground that in that case, the cheque had not been issued for discharge of a liability but as advance for a purchase order which was cancelled. On the other hand, in Sampelly, the cheque was for the repayment of a loan installment which had fallen due. The Court noted that though the deposit of cheques towards the repayment of installments was described as a security in the loan agreement, the true test was whether the cheque was in discharge of an existing enforceable debt or liability or whether it was towards an advance payment without there being a subsisting debt or liability. 21. Besides the distinguishing features which were noticed in Sampelly, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he loan is not repaid, the cheque which is issued as security would mature for presentation. The Court observed: 17. A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. Security in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfilment of an obligation to which the parties to the transaction are bound. If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as security to secure such repayment; if the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque which is issued as security would mature for presentation and the drawee of the cheque would be entitled to present the same. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of N.I. Act would flow. Moreover, as the Court explained: 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e second respondent. The appellants do not dispute that prior to the termination of the agreement, power was supplied for a period of three months to the company. In other words, the agreement for the supply of power was acted upon and power was supplied to by the second respondent and consumed by the company. 24. In Sampelly and Sripati Singh, post-dated cheques were issued as a security for loan installments that were due. On the dates on which the cheques were drawn, there was an outstanding debt. In the present case, the cheques were issued on 30 June 2016. The second respondent commenced the supply of electricity immediately from the next day that is from 1 July 2016. The facts of this case are in contrast with the facts in Indus Airways. In Indus Airways, since the purchase agreement was cancelled, there was no outstanding liability incurred before the encashment of the cheque. The transaction between the parties did not go through as a result of the cancellation of the purchase orders. 25. The explanation to Section 138 of the NI Act provides that debt or any other liability means a legally enforceable debt or other liability. The proviso to Section 138 stipulates th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udes drawing of a cheque for a debt that is incurred before the cheque is encashed. 26. The object of the NI Act is to enhance the acceptability of cheques and inculcate faith in the efficiency of negotiable instruments for transaction of business. The purpose of the provision would become otiose if the provision is interpreted to exclude cases where debt is incurred after the drawing of the cheque but before its encashment. In Indus Airways, advance payments were made but since the purchase agreement was cancelled, there was no occasion of incurring any debt. The true purpose of Section 138 would not be fulfilled, if debt or other liability is interpreted to include only a debt that exists as on the date of drawing of the cheque. Moreover, Parliament has used the expression debt or other liability . The expression or other liability must have a meaning of its own, the legislature having used two distinct phrases. The expression or other liability has a content which is broader than a debt and cannot be equated with the latter. In the present case, the cheque was issued in close proximity with the commencement of power supply. The issuance of the cheque in the context o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurity and therefore not towards the discharge of a debt or liability on the basis of which the complaint was quashed. Allowing the appeal by the drawee, this Court observed: 5. In our opinion, the High Court has muddled the entire issue. The averment in the complaint does indicate that the signed cheques were handed over by the accused to the complainant. The cheques were given by way of security, is a matter of defence. Further, it was not for the discharge of any debt or any liability is also a matter of defence. The relevant facts to countenance the defence will have to be proved - that such security could not be treated as debt or other liability of the accused. That would be a triable issue. We say so because, handing over of the cheques by way of security per se would not extricate the accused from the discharge of liability arising from such cheques. 29. The order of this Court in Womb Laboratories holds that the issue as to whether the cheques were given by way of security is a matter of defence. This line of reasoning in Womb Laboratories is on the same plane as the observations in HMT Watches, where it was held that whether a set of cheques has been given towa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able exclusively by the Court of Session; or (b) where the complaint has not been made by a Court, unless the complainant and the witnesses present (if any) have been examined on oath under section 200. (2) In an inquiry under sub-section (1), the Magistrate may, if he thinks fit, take evidence of witnesses on oath: Provided that if it appears to the Magistrate that the offence complained of is triable exclusively by the Court of Session, he shall call upon the complainant to produce all his witnesses and examine them on oath. (3) If an investigation under sub-section (1) is made by a person not being a police officer, he shall have for that investigation all the powers conferred by this Code on an officer in charge of a police station except the power to arrest without warrant. 32. Under Sub-Section (1) of Section 202, a Magistrate upon the receipt of a complaint of an offence of which he/she is authorized to take cognizance is empowered to postpone the issuance of process against the accused and either (i) enquire into the case; or (ii) direct an investigation to be made by a police officer or by such other person as he thinks fit. The purpose of postponing the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 202, observing: 11. Section 202 of the Code, inter alia, contemplates postponement of the issue of the process in a case where the accused is residing at a place beyond the area in which he exercises his jurisdiction and thereafter to either inquire into the case by himself or direct an investigation to be made by a police officer or by such other person as he thinks fit. In the face of it, what needs our determination is as to whether in a case where the accused is residing at a place beyond the area in which the Magistrate exercises his jurisdiction, inquiry is mandatory or not. 12. The words and shall, in a case where the accused is residing at a place beyond the area in which he exercises his jurisdiction were inserted by Section 19 of the Code of Criminal Procedure (Amendment) Act (Central Act 25 of 2005) w.e.f. 23-6-2006. The aforesaid amendment, in the opinion of the legislature, was essential as false complaints are filed against persons residing at far-off places in order to harass them. The note for the amendment reads as follows: False complaints are filed against persons residing at far-off places simply to harass them. In order to see that innoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allegations in the complaint, when considered along with the statements recorded or the inquiry conducted thereon, would constitute violation of law so as to call a person to appear before the criminal court. It is not a mechanical process or matter of course. As held by this Court in Pepsi Foods Ltd. v. Judicial Magistrate [Pepsi Foods Ltd. v. Judicial Magistrate, (1998) 5 SCC 749 : 1998 SCC (Cri) 1400] to set in motion the process of criminal law against a person is a serious matter. *** 22. The steps taken by the Magistrate under Section 190(1)(a) CrPC followed by Section 204 CrPC should reflect that the Magistrate has applied his mind to the facts and the statements and he is satisfied that there is ground for proceeding further in the matter by asking the person against whom the violation of law is alleged, to appear before the court. The satisfaction on the ground for proceeding would mean that the facts alleged in the complaint would constitute an offence, and when considered along with the statements recorded, would, prima facie, make the accused answerable before the court. No doubt, no formal order or a speaking order is required to be passed at that stage. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeding against the accused is nothing but an enquiry envisaged under Section 202 of the Code. 36. In Birla Corporation Ltd. v. Adventz Investments and Holdings (2019) 16 SCC 610, the earlier decisions which have been referred to above were cited in the course of the judgment. The Court noted: 26. The scope of enquiry under this section is extremely restricted only to finding out the truth or otherwise of the allegations made in the complaint in order to determine whether process should be issued or not under Section 204 CrPC or whether the complaint should be dismissed by resorting to Section 203 CrPC on the footing that there is no sufficient ground for proceeding on the basis of the statements of the complainant and of his witnesses, if any. At the stage of enquiry under Section 202 CrPC, the Magistrate is only concerned with the allegations made in the complaint or the evidence in support of the averments in the complaint to satisfy himself that there is sufficient ground for proceeding against the accused. Hence, the Court held: 33. The order of the Magistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anuka Ors. v. Najima Mamtaj Ors. 1 , Abhijit Pawar v. Hemant Madhukar Nimbalkar and Anr. and Birla Corporation Limited v. Adventz Investments and Holdings Limited Ors.). There has been a divergence of opinion amongst the High Courts relating to the applicability of Section 202 in respect of complaints filed under Section 138 of the Act. Certain cases under Section 138 have been decided by the High Courts upholding the view that it is mandatory for the Magistrate to conduct an inquiry, as provided in Section 202 of the Code, before issuance of process in complaints filed under Section 138. Contrary views have been expressed in some other cases. It has been held that merely because the accused is residing outside the jurisdiction of the court, it is not necessary for the Magistrate to postpone the issuance of process in each and every case. Further, it has also been held that not conducting inquiry under Section 202 of the Code would not vitiate the issuance of process, if requisite satisfaction can be obtained from materials available on record. 11. The learned Amici Curiae referred to a judgment of this Court in K.S. Joseph v. Philips Carbon Black Ltd Anr. where there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound for conviction. Whether the evidence is adequate for supporting the conviction can only be determined at the trial. [See also in this context the decision in Bhushan Kumar v. State (NCT of Delhi) (2012) 5 SCC 424 ]. 41. The High Court did not quash the complaint against the appellants since it was prima facie established that they were triable for dishonour of cheque. Section 141 of the NI Act provides: 141. Offences by companies.-(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence: [Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect. One such example is Section 141 of the Negotiable Instruments Act, 1881. In Aneeta Hada [Aneeta Hada v. Godfather Travels Tours (P) Ltd., (2012) 5 SCC 661 : (2012) 3 SCC (Civ) 350 : (2012) 3 SCC (Cri) 241] , the Court noted that if a group of persons that guide the business of the company have the criminal intent, that would be imputed to the body corporate and it is in this backdrop, Section 141 of the Negotiable Instruments Act has to be understood. Such a position is, therefore, because of statutory intendment making it a deeming fiction. Here also, the principle of alter ego , was applied only in one direction, namely, where a group of persons that guide the business had criminal intent, that is to be imputed to the body corporate and not the vice versa. Otherwise, there has to be a specific act attributed to the Director or any other person allegedly in control and management of the company, to the effect that such a person was responsible for the acts committed by or on behalf of the company. 43. In SMS Pharmaceutic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ument that in the complaint the appellant has not taken the averment that the accused was the person in charge of and responsible for the affairs of the Company. However, as the respondent was the Managing Director of M/s Salvi Infrastructure (P) Ltd. and sole proprietor of M/s Salvi Builders and Developers, there is no need of specific averment on the point. This Court has held in National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal [(2010) 3 SCC 330 : (2010) 1 SCC (Civ) 677 : (2010) 2 SCC (Cri) 1113] , as follows : (SCC p. 346, para 39) 39. (v) If the accused is a Managing Director or a Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with. 44. The test to determine if the Managing Director or a Director must be charged for the offence committed by the Company is to determine if the conditions in Section 141 of the NI Act have been fulfilled i.e., whether the individual was in-charge of and responsible for the affairs of the company during the commission of the offence. However, the determination of whether the conditions stipulated in Section 141 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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