Sunil Todi & Ors. Vs State of Gujarat & Anr. (Supreme Court of India)
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 of a commercial transaction must be understood in the context of the business dealings. The issuance of the cheque was followed close on its heels by the supply of power. To hold that the cheque was not issued in the context of a liability which was being assumed by the company to pay for the dues towards power supplied would be to produce an outcome at odds with the business dealings. If the company were to fail to provide a satisfactory LC and yet consume power, the cheques were capable of being presented for the purpose of meeting the outstanding dues.
A cheque may be issued to facilitate a commercial transaction between the parties. Where, acting upon the underlying purpose, a commercial arrangement between the parties has fructified, as in the present case by the supply of electricity under a PSA, the presentation of the cheque upon the failure of the buyer to pay is a consequence which would be within the contemplation of the drawer. The cheque, in other words, would in such an instance mature for presentation and, in substance and in effect, is towards a legally enforceable debt or liability.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. A Single Judge of the High Court of Gujarat dismissed the petitions under Section 482 of the Code of Criminal Procedure, 19731, instituted by the appellants to quash the criminal complaint2 instituted by the second respondent for offences punishable under Section 138 of the Negotiable Instruments Act, 18813, 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 Rs.2,67,84,000/-. In the two appeals which arose from the order of the High Court, the appellants are respectively, four Directors4 and the Managing Director5 of a company by the name of R.L. Steels & Energy Limited6.
2. The background in which the controversy has arisen needs to be noticed. On 19 December 2015, a Letter of Intent was issued by the company to the second respondent for providing uninterrupted power supply at the plant of the company situated at Aurangabad in Maharashtra. Clause (k) of the Letter of Intent envisages that all payments would be made within sixty days through a Letter of Credit7 to be opened by the company. On 29 April 2016, an email was addressed by the company stating that payment security would be by cheque for an amount equivalent to the quantum of energy to be scheduled for forty-five days. Payments for monthly billing were to be made by LC within seven days of the receipt of bills. This was agreed upon in a communication dated 30 April 2016 addressed on behalf of the second respondent. On 30 June 2016, the company addressed a communication to the second respondent that it was issuing two cheques “only for security deposit” and that the cheques were to be deposited “after getting confirmation only”. The details of the cheques were :
Cheque No. Amount
013287 13392000/-
013286 26784000/-
3. A cheque post-dated 28 August 2017 in the amount of Rs.2,67,84,000/-was accordingly issued with the following endorsement on its reverse: “to be deposited after confirmation only for security purpose”. The power supply commenced from 1 July 2016. On 4 July 2016, the company addressed a communication to its banker, Karur Vysya Bank, requesting to stop payment of the above two cheques. On 24 July 2016, a Power Supply Agreement8 was entered into between the second respondent and the company. The agreement envisages that the company would make payment to the second respondent on the tenth day of every calendar month by a LC. Clause 2.5.1 of the agreement stipulated thus:
“2.5.1 The Member Consumer shall on the date of execution of this Agreement or not later than 30 (thirty) days prior to the Date of Commencement of Supply furnish to GENERATOR an BG/postdated cheque of 45 days energy bill, in a form and substance acceptable to 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 behest of the company.
6. According to the complaint, the LCs’ provided by the company were not in the format required by their bankers. The company was stated to have been informed of this position in an exchange of emails in spite of which, it is alleged that it failed to provide LCs in the correct format.
7. On 4 August 2016, the second respondent raised a provisional bill for Rs.1,77,56,157/- for electricity supplied during the period from 1 July 2016 to 31 July 2016. On 27 August 2016, an invoice for Rs.1,66,48,028/- was issued for power supply during the month of July 2016. On 1 September 2016, an invoice was raised in the amount of Rs.2,17,24,875/- for power supplied during August 2016. On 1 October 2016, an invoice was raised in the amount of Rs.2,19,18,186/- for power supplied during September 2016.
8. On 20 October 2016, the company terminated its agreement with the second respondent. The cheque which was issued by the company was deposited on 28 August 2017. On 18 September 2017, a legal notice was issued by the second respondent to the appellants alleging the commission of offences under Section 138 of the NI Act. It was alleged in the notice that according to the ledger maintained by the second respondent in its books of account, a sum of Rs.6,02,91,089/- remained outstanding. The notice alleged that the appellants had issued a cheque dated 28 August 2017 drawn on Karur Vysya Bank, Aurangabad which had been dishonoured for the reason of ‘payment stopped by drawer’. A reply dated 5 October 2017, was addressed in response to the legal notice. It was stated that the cheque that was issued was only for the purpose of Security and not for encashment.
9. On 2 November 2017, a criminal complaint was filed by the second respondent in the court of the Additional Chief Judicial Magistrate, Mundra against the appellants seeking issuance of summons and imposition of fine of Rs. 5,35,68,000. An affidavit was filed on 3 November 2017, in support of the complaint. On 6 November 2017, the Magistrate issued summons to the appellants. The appellants instituted petitions under Section 482 of the CrPC for quashing of the criminal complaint. Simultaneously, the complainant filed a Regular Civil Suit for recovery of dues.
10. By the impugned judgment and order dated 24 June 2019, the High Court has dismissed the petitions for 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. 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. Sidharth Luthra, learned senior counsel has urged three submissions in support of the appeals:
(i) The cheques which were issued to the second respondent were intended at all material times to be a security towards payment. This is evident from the endorsement made on the reverse of the cheque in the amount of Rs.2,67,84,000/- dated 28 August 2017, and is buttressed by the stipulation under PSA that payment was to take place by means of LC. A suit has been instituted by the company against the second respondent in the court of the Civil Judge, Senior Division, RCS 15/2017 in which the defence in the written statement is that:
a. There was a default by the company in the payment of electricity consumption charges from July to September 2016; and
b. Though the company had issued LC to cover the dues of the electricity bills/ invoices, it had intentionally avoided to furnish them in terms of the draft LCs’ furnished by the bankers of the company. In the suit instituted by the second respondent against the company, being CS 236/2019 before the High Court of Judicature at Madras, the pleading in paragraph 8 of the plaint is that the cheques were issued by way of security:
“8. As agreed between the parties, the Defendant thereafter by its issued two cheques bearing Nos.013287 & 013286 of amount of Rs.1,33,92,000/-(One Crore Thirty Three Lakhs and Ninety Two Thousand only) and Rs.2,67,84,000/- (Two Crores and Sixty Seven Lakhs and Eighty Four Thousand Only) respectively as security deposit to the Plaintiff on the condition that the cheques were to be deposited after obtaining permission. The Plaintiff states that the same was accepted, and the condition was further incorporated under Clause 2.5.1 of the PSA. The associated cheques are filed herewith as Plaint Document No.5 (Colly). However, the Defendant subsequently vide letter dated 04.07.2016 ordered their bank to stop payment of their cheques. The communication is filed herewith as Plaint Document No.6.”
Consequently, since the cheques have been issued by way of security and were not intended to be deposited, the institution of a complaint under Section 138 is an abuse of the process. Therefore, the invocation of the jurisdiction under Section 482 CrPC is justified;
(ii) Section 202 CrPC envisages the postponement of the issuance of process where the accused resides beyond the jurisdiction of the territory of the court. 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:
