M/s. Shree Ganesh Steel Rolling Mills Limited And Ors vs M/S Stcl Limited ( A Government Of India

(By Shri. G.L. Rawal, Senior Advocate for Shri. K. Sachindra Karanth, Advocate)

AND:

M/s. STCL Limited (A Government of India undertaking) Having their office at No.166/2, 13th Main Road, Vasanthanagar, Bangalore - 560 052, Represented by its Managing Director, through its Authorised Officer, Mr. Jagadeesh Kumar, Manager - Marketing (in-charge). ...RESPONDENT COMMON

(By Shri. Chandrashekara .K, Advocate for Shri. Kiran S Javali, Advocate) ***** IN CRL.P.No.4104 of 2009

This Criminal Petition is filed under Section 482 code of Criminal Procedure, 1973, praying to set aside the order dated 20.07.2009 passed by the XV Additional Chief Metropolitan Magistrate, Bangalore, in P.C.R.No.11982 of 2009 now numbered as C.C.No.16289 of 2009 issuing summons to the 3

petitioners and allow this petition by quashing the entire proceedings in P.C.R.No.11982/2009 now numbered as C.C.No. 16289 of 2009 on the file of XV Additional Chief Metropolitan Magistrate, Bangalore.

IN CRL.P.No.4369 of 2009

This Criminal Petition is filed under Section 482 code of Criminal Procedure, 1973, praying to set aside the order dated 17.06.2009 passed by the XV Additional Chief Metropolitan Magistrate, Bangalore, in C.C.No.13784 of 2009 originally numbered as P.C.R.No.7831/2009 and issuing summons to the petitioners

These petitions having been heard and reserved on 19.04.2013 and coming on for pronouncement of orders this day, the Court delivered the following:-

ORDER

These petitions are heard and disposed of together as

identical facts and circumstances are involved and are in

relation to transactions between the same parties.

2. Heard the learned Senior Advocate Shri G.L.Rawal

appearing for the counsel for the petitioners and the learned

counsel appearing for the respondent.

4

3. In Criminal Petition no.4104 of 2009, the petitioners 1

to 3 are a company and its directors, respectively, arraigned as

accused in a criminal case filed by the respondent, M/s STCL

Limited, a Government of India undertaking, before the Court

of XV Additional Chief Metropolitan Magistrate , Bangalore, in

case no. C.C.16289 of 2009, alleging an offence punishable

under Section 138 of the Negotiable Instruments Act, 1880.

Petitioner no.1 had entered into a contract dated 9.7.2008

with the respondent for import purchase of 750 MT of MS

Turnings and Borings for a value of Rs. 1,61,26000. In terms

of the contract the petitioner was to furnish a "PDC" (sic) or a

post dated cheque equivalent to 100% of the contract value as

security for due payment and that the same would be returned

on satisfactory performance of the contract. It was also

required of Petitioner no.2 as a Director of Petitioner no.1 to

execute a personal guarantee on 9.7.2008, for the contract

value. Incidentally, an undated cheque bearing no.917881 for

the afore said amount, referred to in the personal guarantee, was 5

furnished. Of the contracted quantity of 750 MT, it transpires

that the actual quantity delivered, in four shipments, was 681

MT. The petitioner company has taken delivery of a quantity

of 106 MT and made a total payment of Rs.22.94 lakh towards

the same, the balance quantity was said to be with the

respondent. It is the case of the petitioners that when matters

stood thus, the respondent had chosen to present the undated

cheque, furnished by the petitioners as security for the total

contract price of Rs.1,61,26000, for encashment - while

supplying the date on the cheque as "11.3.2009", as if the

cheque had been issued in discharge of a debt or other legal

liability. It transpires that the banker of the petitioners had

dishonoured the cheque as there were insufficient funds in the

account of the petitioners. It is in this background that the

criminal proceedings had been initiated after exchange of legal

notices.

4. In Criminal Petition No. 4369 of 2009 arising out of

case no. C.C.13784 of 2009, before the Court of the XV 6

Additional Chief Metropolitan Magistrate, Bangalore, the facts

are almost identical. The first petitioner had entered into 3

contracts with the respondent - one for import purchase of 1000

MT of M.S Turnings and Borings for a value of Rs.2,15,25,000,

dated 11.5.2008. Another for import purchase of 217 MT of

waste and scrap of Iron and steel, also dated 11.5.2008 . And

yet another for the purchase of 735.640 MT of shredded steel

scrap, dated 14.6.2008. In terms of the respective contracts,

personal guarantees were obtained from petitioner no.2 , as a

Director of the petitioner no.1 company, two of them dated

20.5.2008 in respect of the aforesaid contracts dated 11.5.2008,

respectively, and one dated 14.6.2008 in respect of the contract

of the same date. These guarantees along with undated

cheques, as security for due payment of the entire value of the

aforesaid three contracts were furnished to the respondent.

In respect of the first contract mentioned above, where

the contract was for purchase of 1000 MT, valued at Rs. 2.15

crore, the quantity delivered in six shipments was about 861 7

MT. The petitioners had lifted about 261 MT against payment

of a total amount of Rs.68.54 lakh . The balance quantity of the

material was said to be in the custody of the respondent. The

amount payable in respect of the same was about Rs.1.17 crore.

However, the respondent is said to have inexplicably supplied a

date as, "5.3.2009" to the undated cheque bearing no.894163,

issued for a value of Rs.1,85,42000 , furnished as security for

the due payment of the contract value, and had presented the

same for encashment, when there was no due outstanding or

other liability. The same having been dishonoured, the

petitioners are sought to be proceeded against as aforesaid.

In so far as the second contract was concerned, in an

identical manner, the undated cheque furnished along with the

personal guarantee of petitioner no.2, bearing no. 894164, for a

value of Rs.57,60,000 , furnished as security was similarly

sought to be utilized.

In respect of the third contract, the undated cheque

bearing no.917858 was for the total contract value of 8

Rs.1,59,75000. The respondent had sought to draw the entire

amount,while indicating the date of the cheque as 26.2.2009,

when there was no such amount due to be paid to the

respondent by the petitioners. The cheque furnished as

security was thus sought to be misused. The same having been

dishonoured, the aforesaid proceedings have been initiated on

the basis of the same.

It is in the above background that the present petitions

are filed.

5. The learned Senior Advocate, Shri Rawal contends -

that it is demonstrable on the face of it, and the respondent

cannot also dispute the fact, that the cheques in question , which

are the subject matter of the complaints, were furnished as

security for the performance of the respective contracts and

were not issued in discharge of any debt or other legal liability.

Hence, in the light of the decision of the apex court in the case

of Narayana Menon vs. State of Kerala(2006) 6 SCC 39, the 9

complaint was not maintainable and ought to have been

dismissed as not maintainable.

The cheques in question had been handed over along

with personal guarantees of the second petitioner, wherein the

respective undated cheques find mention, on which relevant

date there was no outstanding debt or other legal liability-

which the petitioners were required to meet. This circumstance

is also consistent with the corresponding contract which

envisaged the provision of such security. Therefore, the

respondent having unauthorisedly supplied a date to the

respective cheques and having sought to encash the same ,

could not be brought within the purview of Section 138 of the

NI Act.

It is contended that the magistrate in taking cognizance of

the complaint ought to have noticed that, from the very

documents filed along with the complaint, it was a glaring

circumstance that the cheques in question were obviously

furnished as security and therefore there is a cardinal error 10

committed by the court in having failed in its duty to have

scrutinized the case with the necessary attention and application

of mind. It is hence contended that the proceedings before the

court below are liable to be quashed as the complaints cannot

be sustained in the light of the above circumstances.

The learned Senior Advocate places reliance on the

following authorities in support of the petitions.

1. Judgment dated 19.2.2009 in Crl. M.C.No.2/2008

2. Judgment dated 11.10.2007 in Crl. M.C.No.3011/2007

3. Laxminivas Aggarwal Vs. Andhra Semi, 2006, Crl.

L.J.2643,

4. New Tech Pesticides Ltd. Vs. Pavan Commercial

Corporation and another, 2006 (IV) BC 80,

5. Taher N Khambati Vs. M/s.Vinayak Enterprises

Secunderabad and others, 1995 (1) BC 473,

6. M/s.Balaji Sea Foods Exports (India) Limited and

another Vs. Mac Industries Limited, 1999 (1) BC 298, 11

7. M/s. Pepsi Food Limited and another Vs. Special

Judicial Magistrate and others, 1998 SC 128,

8. V.Y. Jose and another Vs. State of Gujarat and

another, 2009(1) AD(SC) 500,

9. National Small Industries Corporation Limited Vs.

Harmeet Singh Paintal and another, (2010) 3 SCC 330,

10. K.K.Ahuja Vs. V.K.Vora and another, (2009) 10 SCC

48,

11. M.S. Narayana Menon @ Mani Vs. State of Kerala

and another , (2006) 6 SCC 39.

6. Per contra, the learned counsel for the respondent

contends that the petitioners have not disputed the issuance of

the cheques or the fact that the same have been issued in the

course of a contractual relationship. The same having been

presented for encashment had been returned with the banker's

endorsement that the funds were insufficient . Therefore, the

respondent having made a demand for payment in terms of the 12 NI Act , has initiated action which is in accordance with the

law. The purported defence on the part of the petitioners that

the cheques in question were furnished as security and not in

discharge of any debt or other liability, would necessarily

require the petitioners to establish the same at the trial. The

presumption on the other hand, in terms of Section 139 of the

NI Act , is in favour of the holder of a cheque, that the same has

been issued in discharge of legal liability.

Further, the several authorities relied upon by the

petitioners are decisions rendered in proceedings that had been

concluded and in which findings had been recorded by the

competent court as to the rival contentions - whereas in the

present case on hand , as there is a dispute on the question

whether the cheques in question, even if issued as security for

due performance of the contract, were indeed presented after

the liability had arisen, it would be premature to arrive at any

conclusion on that aspect in the present proceedings and hence 13

seeks dismissal of the petitions. Reliance is placed on the

following authorities:

a) Sri Krishna Agencies vs. State of Andhra Pradesh and

another, (2009)1 SCC (Cri) 241,

b) Trisuns Chemical Industry vs. Rajesh Agarwal and others,

2000 SCC (Cri)47,

c) M/s MMTC Limited and another vs. M/s Medchl Chemicals

and Pharma Private Limited and another, AIR 2002 SC 182.

d) M/s Klen & Marshalls vs. Shri Ishar Alloy Steels Limited,

Crl.A.1610/2001 dated 26.7.2006

7. The case law relied upon by the parties is briefly

reviewed hereunder :

a) Strong reliance is placed by the petitioners on the

decision in the case of Narayana Menon, supra, it is hence

necessary to note the facts of that case. The appellant was the

accused in a complaint brought by the second respondent for an

offence punishable under Section 138 of the NI Act. The 14

appellant was said to be carrying on transactions in shares. The

second respondent was a share broker. The appellant had

transactions with the second respondent. The account however,

was closed. The appellant had issued a cheque, dated

31.7.1992, in favour of the second respondent after the account

was closed. It had been returned when presented for

encashment, with the remark - "account closed".

It was alleged that a sum of Rs.3 lakh was due to the

complainant from the appellant. The appellant is said to have

paid Rs.5000 in cash and issued another cheque dated

17.8.1992, for a sum of Rs.2.95 lakh. The said cheque was

dishonoured for want of sufficient funds. A notice of demand

having been issued, pursuant to the dishonour of the cheque. It

was the defence of the appellant that the first cheque was a

blank cheque issued by way of security . The second cheque

was not issued in discharge of a debt or liability but was given

for discounting.

15

The appellant stood trial on the complaint in the above

background. The trial court held that the accused had failed to

discharge the onus placed on him in terms of Section 139 of the

NI Act. He was sentenced to undergo rigorous imprisonment

for one year. That judgment was set aside in appeal . The

complainant had then approached the High Court which in turn

allowed the criminal appeal. The accused was before the apex

court.

The apex court had examined the findings of fact in some

detail and found that the High Court had committed an error in

overlooking the fact that the complainant had not been able to

explain discrepancies found in his books of account. And

further, that he had not brought on record any material to

establish that the parties had any transactions other than the

transactions held before the account between them was closed.

The apex court then addressed the questions of law with regard

to the scope and effect of Sections 118 (a) and 139 of the NI

Act. The court then concluded thus :

16

"52. We, in the facts and circumstances of this case, need not go into the question as to whether even if the prosecution fails to prove that a large portion of the amount claimed to be a part of the debt was not owing and due to the complainant by the accused and only because he has issued a cheque for a higher amount, he would be convicted if it is held that existence of debt in respect of large part of the said amount has not been proved. The appellant clearly said that nothing is due and the cheque was issued by way of security. The said offence has been accepted as probable. If the defence is acceptable as probable the cheque therefor cannot be held to have been issued in discharge of the debt, as for example, if a cheque is issued for security or for any to her purpose the same would not come within the purview of Section 138 of the Act."

It was also found that the High Court entertained an

appeal treating it to be an appeal against acquittal , when in fact

it was exercising revisional jurisdiction. It was observed that

even while exercising an appellate power against a judgment of

acquittal, the High Court should have borne in mind the well

settled principles of law that where two views are possible the 17

appellate court should not interfere with a finding of acquittal

recorded by the court below.

Consequently the judgment of the High Court was

reversed.

b) In the decision of the High Court of Delhi in

Bishanswarup Ram Krishan v. STC of India Ltd. ( CRL M.C.

3940/2007 dated 19-2-2009 ) and a connected case - the facts

were as follows :

The petitions were filed under Section 482 of the Code of

Criminal Procedure, 1973 seeking the quashing of proceedings

initiated under Section 138 of the NI Act.

An E-auction was floated by M/s MSTC Ltd. Bangalore,

offering the sale of a Fertilizer plant and machinery of M/s

Neyveli Lignite corporation Ltd.. At the auction, one M/s

MMT Machinery Traders was the highest bidder. In order to

dispose of the entire ferrous and non-ferrous scrap of the above

referred plant and machinery, MMT proposed to enter into a 18

contract with M/s State Trading Corporation of India Ltd.

Accordingly a MOU was signed, dated 28-4-2005. In terms of

the same, MMT was to provide two corporate guarantees for

the due refund of Rs 150 crore claimed by STC. In this regard

M/s Bishan Swarup Ram Kishan Agro Pvt. Ltd., through its

Managing Director and Director executed a guarantee in favour

of the respondent undertaking to reimburse STC in the event of

a failure on the part of MMT to meet its commitment. The said

guarantees were secured by two post dated cheques, for Rs.75

crore, each.

The proceedings initiated under Section 138 of the NI

Act, on dishonour of such cheques was in challenge primarily

on the ground , that as referred to in the Deed of Guarantee

itself, the cheques were issued in lieu of a liability which may

or may not arise in future and in order to indemnify STC

against possible losses on account of any default by MMT and

therefore the complaint filed was not maintainable as the

cheques were issued only as a security and not for any debt due.

19 The Court has, while relying on Narayan Menon's case

supra and noticing the fact that there was a dispute between the

parties pending in arbitration as to the propriety of the cheques

having been sought to be encashed and the veracity of

documents relating to the contract, took note of the observation

of the apex court in the case of State of Bihar v. P.P. Sharma ,

AIR 1991 SC 1260, to the following effect:

"The annexure to the writ petition challenging criminal proceedings against accused were neither part of the police-reports nor were relied upon by the investigating officer. These documents were produced by the accused before the High Court along with the writ petitioners. By treating the annexure and affidavits as evidence and by converting itself into a trial Court the High Court cannot declare the accused to be innocent and quashed the proceedings. The appreciation of evidence is the functions of the criminal Courts. The High Court, under the circumstances, could not have assumed jurisdiction and put an end to the process of investigation and trial provided under the law."

20 However, the court has proceeded to examine the

documents pertaining to the case at length and has concluded

thus :

"24. A bare reading of the documents relied upon and relevant portion of which has been reproduced above (statutory notice issued by the respondent to the petitioners, the complaint and the affidavit by way of evidence. Deed of Corporate Guarantee and the Memorandum of Understanding of Understanding dated 28th April, 2005), leave no scope for any doubt that the cheques in question were not issued against a debt which was in existence at the time of issuance of cheque. The cheques were issued not for an existing debt due, but issued by way of security.

25. For the reasons afore stated, the trial judge patently failed to read the complaint and the documents annexed along with it, carefully and further failed to see the error apparent on the fact of it, and issued summons without proper application of mind; In my considered opinion, in view of the principles affirmed in the case of V.Y. Jose (supra), the present petitions must succeed. Accordingly, Criminal Complaint Nos. 837/06 and 838/06 under section 138 read with section 141 of the Negotiable Instruments Act, 1881, pending before the learned Metropolitan magistrate, are quashed and the summoning 21

order dated 9.06.2006 in CC No.837/06 and order dated 9.06.2006 in CC No.838/06, are set aside."

c) In the case of Collage culture and others, supra, the

issuance of process in proceedings under Section 138 of the NI

Act was under challenge. The primary contention was that the

cheque given as collateral security or as security for payment of

an amount which may become payable at a future date upon the

happening or the non-happening of an event , could not be the

foundation of an action under Section 138 of the NI Act.

On examining the material documents pertaining to the

case the High Court has arrived at a finding thus :

"19. It is not in dispute that the cheques which have formed the subject matter of the complaint were post dated cheques. It is also not in dispute that the cheques were towards replacement of the cheques issued on 1.6.2002 which cheques were also post dated cheques. It is also not in dispute that the cheques were issued as earnest money deposit. It is also not in dispute that the earnest money was liable to be forfeited only if the first petitioner failed to exhaust the quota issued by the complainant for export of garments.

22 20. A post dated cheque may be issued under 2 circumstances. Under circumstance one, it may be issued for a debt in presenti but payable in future. Under second circumstance it may be issued for a debt which may become payable in future upon the occurrence of a contingent event.

21. The difference in the two kinds of post-dated cheques would be that the cheque issued under first circumstance would be for a debt due, only payment being postponed. The latter cheuqe would be by way of a security.

Xxx

24. It would be relevant to note that the statute does not refer to the debt being payable, meaning thereby, a post dated cheque for a debt due but payment postponed at a future date would attract Section 138 of the Negotiable Instruments Act 1881. But the cheque issued not for an existing due, but issued by way of a security, would not attract Section 138 of the Negotiable Instruments Act 1881, for it has not been issued for a debt which has come into in existence."

The High Court has allowed the petition placing reliance

on the observations in Narayana Menon's case. 23

d) In Laxminivas Agarwal's case the High Court of

Andhra Pradesh was dealing with an appeal filed against

acquittal of the accused in a case for an offence punishable

under Section 138 of the NI Act.

The points that the court framed for its consideration

were as under:

"(1) Whether Exs: P-1 and P-2 cheques were taken from the accused on 17.9.1998 without putting the date as security for the amount of Rs.3,00,000/- lent on that date and not on the dates 9.6.2000 and 10.6.2000 as contended by the accused?

(2) Whether the cheque Ex: P-3 for Rs.1,30,000/-

was taken on 15.4.1999 from the accused as security for the amount lent by the complainant to the accused on that day and it was not issued on the date 9.6.2000 contained therein, as contended by the accused?

(3) If so, whether the drawer cannot be prosecuted for the offence punishable under Section 138 of the Negotiable Instruments Act, in case of dishonour of such cheques?

(4) Whether A-3 and A-4 who are not signatories to the cheques issued are not liable to be prosecuted for the offences punishable under Section 138 of the Act? 24

(5) Whether the order of acquittal passed by the trial Court is not sustainable in law?

(6) To what relief? "

The High Court has dismissed the appeal after an

elaborate consideration of the material on record and the case

law especially with reference to an earlier decision of the very

High Court in Taher N. Khambati v. Vinayak Enterprises , 1995

Crl.LJ 560 - to the following effect :

"xxx xxx xxx in the event of creditor advancing certain sum to debtor and obtaining a signed blank cheque with a view to make use of it, for realization of amount, such cheque cannot be said to have been issued voluntarily for discharge of any debt and therefore, the provisions of Section 138 of the Negotiable Instruments Act does not attract for such cheques obtained by the creditor from the debtor without putting the date for the same amount. On the said finding the learned magistrate found all the accused not guilty of the offence punishable under Section 138 of the Negotiable Instruments Act and acquitted all of them."

e) In New Tech Pesticides Ltd., the question for

consideration by the High Court, was whether the magistrate in 25

addressing the circumstance whether the accused had

discharged the burden of establishing that a cheque in question

was not issued in the discharge of a debt or legal liability, found

from the evidence on record that there were clear admissions by

the complainant that at the time that the cheque in question was

issued there was no such liability.

f) In Balaji Sea foods Exports ( India ) Ltd. - it was

found that on the date when the cheque in question was handed

over, there was no legally enforceable debt or other liability.

An undated cheque for Rs.35 lakh was handed over as security

for the purpose of the contract it was not handed over with the

intention of making it as an instrument of immediate

negotiation to discharge a subsisting liability or debt. Thus it

was a case where one of the parties to the contract had obtained

a signed post dated cheque as security for the due performance

of the contract. As a dispute had arisen between them the 26

cheque was sought to be utilized by resort to section 138 of the

Act. The court held that the complaint could not be maintained.

g) Reliance is placed on the decisions in the case

KK Ahuja, supra and National small Industries Corporation

Limited, supra, to support the contention that in so far as the

third petitioner is concerned no liability could be fastened on

her on the basis of the complaint as the apex court has held that

Section 141 of the NI Act would require that the person who is

sought to be made vicariously liable for a criminal offence

under the said provision should be, at the time the offence is

committed, in charge of, and responsible to the company for the

conduct of the business of the company. Every person

connected with the company shall not fall within the ambit of

the provision. If a Director of a company who was not in

charge of and was not responsible for the conduct of the

business at the relevant point of time, will not be liable for a

criminal offence under the provisions. The liability could not 27

be found on the basis of a person merely holding a designation

or office in a company.

8. On the other hand, the authorities relied upon by the

learned counsel for the respondent are to the following effect :

a) In the case of M.M.T.C., supra, the apex court while

addressing the question whether the High Court, before which

the accused had sought to quash the proceedings in which

process had been issued on a complaint for an offence under

Section 138 of the NI Act , could have arrived at a conclusion

that certain cheques in question were issued as security and not

for any debt or liability, held thus :

"13. The learned Judge has next gone into facts and arrived at a conclusion that the cheques were issued as security and not for any debt or liability existing on the date they were issued. In so doing the learned Judge has ignored well settled law that the power of quashing criminal proceedings should be exercised very stringently and with circumspection. It is settled law that at this stage the Court is not justified in embarking upon an enquiry as to the reliability or genuineness or otherwise of the allegations made in the complaint. The inherent powers do 28

not confer an arbitrary jurisdiction on the Court to act according to it s whim or caprice. At this stage the Court could not have gone into merits and / or come to a conclusion that there was no existing debt or liability.

It is next held as follows:-

"This is a special provision incorporated in the Negotiable Instruments Act. It is Necessary to allege specifically in the complaint that there was a subsisting liability and an enforceable debt and to discharge the same, the cheques were issued. But we do not find any such allegation at all. The absence of such vital allegation, considerably impairs the maintainability."

xxx

16. There is therefore no requirement that the Complainant must specifically allege in the complaint that there was a subsisting liability. The burden of proving that there was no existing debt or liability was on the respondents. This they have to discharge in the trial. At this stage, merely on basis of averments in the Petitions filed by them the High Court could not have concluded that there was no existing debt or liability."

b) In M/s Klen & Marshalls, supra, this court was dealing

with an appeal against acquittal of the accused for an offence

punishable under Section 138 of the NI Act. It was a case where

Accused no.6 had issued a hundi in favour of Accused no. 1 29

towards supply of goods. The contract for supply was between

Accused no.1 and the complainant. The complainant

discounted the hundi and paid Rs.50lakh to Accused no.1 in

terms of the contract. Accused no.1 had, in addition to the

hundi, issued a cheque as security to bind himself, if Accused

no.6 should default in payment of the hundi amount. There was

indeed a default. The cheque in question was presented for

encashment. As it was dishonoured, a complaint was filed after

issuance of a notice under Section 138 of the NI Act.

The trial court had acquitted the accused on the ground

that the basic document, the hundi, was not stamped. That the

complainant had not produced the necessary evidence to prove

the payment of money to Accused no.1 ,by discounting the

hundi and held that the complainant had failed to prove the

existence of the debt or legal liability.

It was held, (while disagreeing with the view taken in

Sreenivasan v. State of Kerala, 1 (2000) BC 323 , Lalan Prasad

v. State of Jharkand , 2005(1) DCR 79 and while distinguishing 30 Nagisetty Nagaiah v. State of A.P., 2004 Crl.LJ 4107 and

Antony v. KG Raghavan Nair, AIR 2003 SC 182 -) that a

cheque issued either for discharge of a debt or as a security

makes little distinction in law. Dishonour of a cheque in both

the situations attracts valid prosecution under Section 138 of the

NI Act.

The above decision which was challenged in appeal

before the apex court in Criminal Appeal No.1842 of 2008, was

dismissed by an order dated 17.8.2010, affirming the view of

this court.

c) In the case of Future Metals Pvt. Ltd . and connected

cases, supra, the petitioners had sought quashing of proceedings

initiated under Section 138 of the NI Act - It was urged that the

transactions referred to in the complaint would indicate that

there had been violation of the Foreign Exchange Management

Act. As the financial transactions were contrary to the

provisions of FEMA , the cheques upon which the complaint 31

was initiated could not be considered as having been issued in

discharge of a legally enforceable debt or liability.

It was contended on behalf of the petitioners as follows :

"The averments of complaints and contents of documents annexed to complaints at their face value would establish that cheque were not issued for discharging the existing debt or liability. Therefore, Section 138 of the Negotiable Instruments Act is not attracted.

As per averments of complaints, Letters of credit were opened by respondent and cheques were issued by petitioners in relation to financial transactions. The averments of complaint would indicate that there has been contravention of provisions of FEMA. Therefore, cheques were not issued for discharge of legally recoverable debt or liability.

The averments of complaints accepted at their face value would indicate that the contract entered into between the parties is void-ab-initio and cannot be enforced under Section 23 of the Indian Contract Act."

The respondent had contended thus :

"These petitions are filed against order of issuance of process for an offence punishable under 32 Section 138 of the Negotiable Instruments Act. The petitioners at this stage cannot dispute that the cheques were drawn by the petitioners. Therefore, presumptions under Section 118 (a) and 139 of the Negotiable Instruments Act are available to respondent.

This court in exercise of power under Section 482 Cr.P.C., cannot interfere with the order of trial court unless the averments of complaints accepted on their face value do not constitute an offence punishable under Section 138 of the negotiable Instruments Act."

This court after discussing the legal position in extenso

has held that the presumption available in favour of the

complainant under Section 118(a) and 139 of the NI Act would

have to be rebutted by the petitioners as provided under Section

4 of the Evidence Act. The petitioners seeking to rely upon

certain documents could not contend that they have rebutted the

presumptions available in favour of the respondent. It was held

that the said presumptions in favour of the complainant could

not be rebutted by the petitioners without going to trial. It was

also held that in petitions filed under Section 482 CrPC, this 33

court could not record a finding of fact when the trial was yet to

take place before the court below. And accordingly dismissed

the petitions.

9. In the light of the above, the points for consideration

by this court are :

a) Whether the cheques in question were issued in

discharge of any debt or other liability or whether the same

were issued as collateral security for a debt or liability which

was to accrue on a future date?

b) Whether the proceedings could have been initiated

against the third petitioner, merely in the circumstance that she

was designated as a director of the petitioner company, when

she was otherwise not answerable for the transaction?

Keeping in view the settled legal position that the trial

court while passing an order under Section 204 CrPC need not

pass a detailed order, but nevertheless the order should indicate

that the court has satisfied itself, prima-facie, that the

allegations in the complaint would constitute an offence alleged 34

in the complaint. And when such an order is challenged before

this court, invoking Section 482 Cr.P.C., this court would

examine the order of the trial court and the contentions raised

by the parties in the light of settled principles of law regarding

exercise of power and the scope of examination under Section

482 Cr.P.C. In this regard the guidelines, spelt out in State of

Haryana v. Bhajan lal AIR 1992 SC 604, which was followed

and reiterated in Union of India v. Ramesh Gandhi (2012)1

SCC 476, have remained consistent.

In the instant case on hand, the contractual relationship

between the parties is not denied. It is also not in dispute that

the cheques in question had been issued in the course of the

transactions. It would also appear from the allegations and

counter allegations that the contracts in question are not

completed contracts and have not been performed to the letter.

In that , the petitioners allege that the contracted quantity of the

goods , in each given contract, was not actually shipped by the

foreign seller to the respondent. And it is admitted that the 35

petitioners had paid for and taken delivery of part only of the

goods so available.

The complaint itself does not indicate that the cheques in

question were issued as security for due performance of the

contract. The tenor of the complaint is limited to claiming that

there was a dishonour of the cheques issued by the petitioners

in the course of business and that the respondent has complied

with the pre-requisite procedure of making a demand for

payment before presenting the complaint.

It may be that the very documents accompanying the

complaint if perused closely would enable the discovery of the

circumstance that the cheques in question were handed over as

security for due performance of the contract. And that the same

were however, undated. Assuming that the undated cheques

had been issued only as security and not in discharge of a debt

or legal liability - the question whether such a liability had

accrued by virtue of a failure on the part of the petitioners to

perform the contract and whether the respondent was in law 36

entitled to supply the date on the instrument in seeking to

encash the same, would yet remain circumstances to be

examined at the trial.

It is to be noticed that the observation made by the apex

court in Narayana Menon's case that " ................if a cheque

is issued for security or for any other purpose the same would

not come within the purview of Section 138 of the Act...."

This was a passing observation in that case with reference to the

facts found therein. It cannot be construed as an axiomatic

statement of law to be mechanically applied, in all

circumstances. It is also to be noticed that in Naryana Menon's

case, the accused had stood trial and was found guilty and was

convicted by the trial court. On an appeal preferred the

judgment of conviction was set aside. The same was

challenged further before the High court which allowed the

appeal. The apex court was thus the fourth court in the

hierarchy, that was examining the record with reference to

findings of fact. It was on finding that there were admissions as 37

to the cheque in question was at best issued as security , which

could not be encashed, as there was no liability that was present

when it had been issued nor had any liability accrued thereafter.

It is in that light that the apex court has made the said

observation.

No doubt, apart from Narayan Memon's case, reliance

has been placed on some decisions referred to hereinabove of

the High Court of Delhi and the High Court of Madras, where

the challenge to proceedings under Section 138 of the NI Act,

even at the stage of issuance of process, have been upheld and

the courts have even arrived at findings of fact - on

examination of the material made available, without the parties

having gone to trial.

That there is a civil dispute between the parties in the

case on hand and that arbitration proceedings are afoot in

respect of the same is also a material circumstance in

considering this petition. In that, the breach or otherwise of the 38

contractual obligations and the fastening of liability if any, are

details that cannot be addressed in these proceedings at all.

The view taken by this court in Klen & Marshalls to the

effect that a cheque issued either for discharge of a debt or as

security makes little distinction in law. And that dishonour in

both situations attracts valid prosecution under Section 138 of

the NI Act, has been affirmed by the apex court in an appeal

against the said judgment, as stated hereinabove. This legal

position would especially be so if the cheque offered as security

has subsequently become enforceable on account of default or

failure of performance of the contract , in respect of which such

security is furnished.

10. In the light of the above opinion of this court the first

question framed for consideration cannot be answered with any

degree of finality. In that, even if it is possible to prima facie

find that the cheques have indeed been issued at a time when

there was no debt or legal liability outstanding, the intention of 39

the parties being that the cheques could be utilized if a liability

did accrue on account of failure of the contract is a question that

is not capable of being answered be a mere perusal of the

material made available and such an exercise is not

contemplated in proceedings under Section 482 Cr.P.C.

The law mandates that presumptions available in favour

of the complainant under Section 118(a) and 139 of the NI Act

shall be drawn. The accused may rebut such presumption by

raising their probable defence or even relying on the evidence

adduced by the complainant itself.

In so far as the second question for consideration is

concerned. From a close examination of the record - it is

evident that the third petitioner apart from being a designated

Director of the company , is not shown to have been involved in

the affairs of the company and more particularly in the course

of the transactions that are the subject matter of the complaints. 40

In that light of the matter, the petitions are partly

allowed. The proceedings as brought against the third petitioner

in case in CC 16289/2009 and in case in CC No.13784/2009,

before the XV Additional Chief Metropolitan Magistrate Court,

Bangalore, respectively stand quashed. There is however, no

warrant for interference in so far as the proceedings brought

against petitioner no.1 and 2 in these respective petitions. The

petitions are hereby dismissed in so far as those petitioners are

concerned. The order of stay granted earlier stands vacated.

Sd/-

JUDGE

nv*