Cheque given as gift and not for satisfaction of debt, does not attract penal consequences of NI Act in event of it being returned for insufficiency of funds: SC

Read Judgment: Sunil Todi & Others vs. State of Gujarat & Another

Pankaj Bajpai 

New Delhi, December 6, 2021:The Supreme Court has held that a cheque given as a gift and not for the satisfaction of a debt or other liability, would not attract the penal consequences of the provision in the event of its being returned for insufficiency of funds.

A Division Bench of Justice Dr. D.Y Chandrachud and Justice A.S. Bopanna therefore observed that there is no inflexible rule which precludes the drawee of a cheque issued as security from presenting it for payment in terms of the contract, and it all depends on whether a legally enforceable debt or liability has arisen.

The observation came pursuant to appeals filed by Directors and the Managing Director of a company by the name of R.L. Steels & Energy Company challenging the order, whereby the Gujarat High Court dismissed the petitions u/s 482 of CrPC instituted by Sunil Todi & Others (Appellants) to quash the criminal complaint instituted by the second respondent for offences punishable u/s 138 of the Negotiable Instruments Act, 1881 and challenge an order of summons of the JMFC Mundra on the complaint, which arose from the dishonour of a cheque in the amount of Rs.2,67,84,000/-.

It was urged on behalf of the appellants that a complaint u/s 138 of the NI Act would not be maintainable since the cheque of Rs 2.67 crores was issued by way of a security and, is thus not against a legally enforceable debt or liability.

After considering the arguments, the Top Court found that in the present case, the PSA between the parties envisaged that the second respondent would supply power to the company of which the appellants are directors or as the case may be, managing director.

The agreement postulated that payment for the power supplied would be made by means of LCs. Though, the LCs’ were provided, they were allegedly not in a form acceptable to the bankers of the second respondent, added the Court.

Speaking for the Bench, Justice Chandrachud noted that 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.

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, and thus, 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, added Justice Chandrachud.

In the present case, Justice Chandrachud noted that the cheque was issued in close proximity with the commencement of power supply, and thus, 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, and therefore, 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, added the Bench.

Hence, the Top Court opined that merely labelling the cheque as a security would not obviate its character as an instrument designed to meet a legally enforceable debt or liability, once the supply of power had been provided for which there were monies due and payable.

At last, the Top Court concluded that 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 MMDR Act have been fulfilled is a matter of trial, added the Court.