The true purpose of section 138 of the Negotiable Instruments Act 1881 would not be achieved if the term “debt or other liability” were interpreted to include only a debt which exists on the date the check is drawn – Business/Commercial Law

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INTRODUCTION:

The Apex Court, in its recent decision in
Sunil Todi and Ors. v State of Gujarat and Anr.1 concluded that simply labeling a check as a security would not eliminate its character as an instrument to honor a legally enforceable debt or commitment.

FACTS:

The appellants are four directors and the managing director of the company, RL Steels and Energy Limited (“Company”).

On December 19, 2015, a Letter of Intent was issued by the company in favor of Respondent No. 2 to provide uninterrupted power supply to the company’s factory located in Aurangabad, Maharashtra.

The Company issued a post-dated check dated August 28, 2017, in the amount of Rs. 2,67,84,000/- with an endorsement “to be deposited after confirmation only for security purposes” (“says Check”).

On July 24, 2016, the Company and Defendant 2 signed a power supply contract (“the said agreement”). The said agreement provided that the company would make payments to Respondent No. 2 on the tenth day of each calendar month by means of a letter of credit (“LC”).

On August 10, 2016, September 12, 2016 and September 27, 2016 respectively, a total of three Letters of Credit in favor of Respondent No. 2 were issued by Punjab National Bank at the request of the Company.

The LCs provided by the Company were not in the format required by Respondent #2’s bankers. The Company was made aware of this position in an email exchange in which Respondent #2 alleged that the Company failed to provide LCs in the required format. However, despite the correspondence exchanged, it was alleged by Respondent #2 that the company did not provide the LCs in the correct format.

On October 20, 2016, the Company terminated said Agreement. Subsequently, Respondent No. 2 deposited said check on August 28, 2017. This was dishonoured.

On September 18, 2017, Respondent No. 2 gave legal notice to the appellants, alleging that they had committed offenses under section 138 of the Negotiable Instruments Act 1881 (“says act”). The notice stated that the callers issued the said check drawn on Karur Vysya Bank, Aurangabad which was dishonored on the grounds of ‘payment stopped by drawer‘.

Subsequently, the Appellants sent a reply dated October 5, 2017, in response to the legal notice, indicating among othersthat said check issued was for security purposes only and not cashing and therefore could not have been deposited in the first place.

On November 2, 2017, a criminal complaint was filed by Respondent No. 2 before the Additional Chief Judicial Magistrate, Mundra, against the Appellants seeking the issuance of a summons and the imposition of a fine of Rs 5,35,68,000/-.

The appellants approached the High Court by filing petitions under Section 482 of the Code of Criminal Procedure 1973 (“the CPRC”), in cassation of the criminal complaint.

The Intermediate Court, by its order dated June 24, 2019, rejected the aforementioned requests. This order was challenged in the Supreme Court.

ISSUES TO CONSIDER:

The main question to be considered before the Supreme Court among others has been:

Was the refusal to honor a check provided as a “guarantee” covered by the provisions of article 138 of the said law?

ARGUMENTS ON BEHALF OF THE APPELLANTS:

The Appellant maintained that the said Check issued in favor of Respondent No. 2 was intended to be a guarantee of payment, at all relevant times. This was evident from the endorsement affixed to the reverse of said cheque, and was further supported by the provisions of said agreement that payment was to be made by letter of credit.

It was argued that since said check was issued as security, it was never intended that said check be deposited.

The Appellants further argued that recourse to filing a complaint under Article 138 of the said law constituted an abuse of the judicial process and that a clear case of invoking jurisdiction under Article 482 of the CrPC was justified.

SUBMISSIONS ON BEHALF OF RESPONDENTS:

Respondent No. 2 among others argued that the High Court, in its contested order dated June 24, 2019, held that there was no dispute as to the liability of the Company, for electricity supplied under said agreement during the August, September and October 2016.

It was argued that the law did not prohibit the invocation of section 138 of said law in a situation where checks were issued as security.

There was therefore no reason to interfere with the contested order of the High Court.

JUDGEMENT:

The Apex Court observed that the said agreement between the parties provided that Respondent No. 2 would supply electricity to the company. The Appellants do not dispute that the electricity was supplied for a period of three months to the Company. Accordingly, the said agreement was executed and the electricity was supplied by Respondent 2 and consumed by the company.

The Apex Court observed that the explanation of Section 138 of the Act provided that ‘debt or other liabilitywould mean an enforceable debt or other liability.

Relying on a full court judgment of the Calcutta High Court in
Banchharam Majumdar vs Adyanath Bhattacharjee2, the Apex Court noted that the term debt included a sum of money promised to be paid at a future date by reason of a present obligation. A post-dated check issued after the debt was incurred would fall within the definition of “debt”. However, if the sum to be paid depended on a contingent event, then it would take on the color of a debt only after the contingency had occurred. In this case, a debt was incurred after Respondent 2 commenced the supply of electricity for which payments were not made due to non-acceptance of letters of credit.

The Apex Court further observed that the object of the law was to improve the acceptability of checks and to instill faith in the effectiveness of negotiable instruments for commercial transactions. The object of the provision of the said law would become vain if the provision of the said law were interpreted so as to exclude the cases where the debt was incurred after the check was drawn but before it was cashed.

The Apex Court observed that said check was issued in close proximity to the start of the power supply. To consider that the said Check was not issued within the framework of an obligation, as assumed by the Company, to pay the fee for the electricity supplied would amount to producing a result contrary to business relations. If the Company fails to provide a satisfactory LC and yet consumes electricity, such check may be presented for the purpose of settling outstanding dues.

The Apex Court held that once payments for the electricity supply had become due under the said agreement and the company had failed to pay its rights, Respondent No. 2 was entitled to present said check for payment. The Apex Court further held that the mere fact of labeling said check as a guarantee would not eliminate its character as an instrument to honor a legally enforceable debt or commitment, that is, once the electricity supply had been supplied for which there were sums due and payable.

The Apex Court dismissed the appeals, finding them unfounded.

Footnotes

1. Criminal Appeal No. 1446 of 2021 and Criminal Appeal No. 1447 of 2021

2. (1909) ILR 36 Cal 936

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