Offense Under Section 138 Of NI Act Maintaianable Only For Cheques Issued For 'Enforceable Debt' And Not 'Security': Gujarat High Court

"It is a settled proposition of law that proceedings under Section 138 of the NI Act would lie only in respect of any 'enforceable debt'", the Gujarat High Court has observed today. The Bench comprising Justice Gita Gopi made this observation in connection with an application filed under Section 482 of CrPC, seeking the quashment of the order passed by the CJM Rajkot for offence under Section 138 of the Negotiable Instruments Act. Background The Applicant-Company, an organisation engaged in manufacturing cast iron, had business relations with Respondent No. 2, a partnership firm. However, due to certain defects in the products supplied by Respondent No.2 to the Applicant-Company, the Company had to encounter returns from other industries and thereby suffered losses. Respondent No. 2 filed a summary suit against the Company for the recovery of INR 1,12,26,500 for the goods delivered per the Applicant-Company's order. The Civil Judge passed a decree in favour of the Respondent and directed the payment of the sum along with interest. Subsequently, the Applicant-Company filed the First Appeal, wherein the Division Bench of the Gujarat High Court granted interim relief but directed a deposit of INR 43,40,061 as security. The Company failed to make this deposit and consequently, Respondent No. 3 moved a Special Execution Petition at the civil court, as well. The Civil Judge issued a Warrant of Attachment against the Applicant-Company. The Applicant contended that Respondent No. 3, armed with the Warrant Attachment, threatened to remove machineries, and disrupt the production process of the Applicant-Company. The Company, subsequently, granted 11 cheques to the Respondent, one of which was to be kept as security. However, on presenting this cheque worth INR 69,62,879 to the bank, it got returned and in response, the Respondent issued notice to the Applicant-Company under Section 138 of theNI Act. The Civil Judge passed an order directing issuance of process under Section 204 of CrPC. Being aggrieved of the same, the Applicant preferred the instant application. Key Contentions The Applicant-Company primarily contended that the process issued by the lower Court was contrary to the settled principles of law related to negotiable instruments since under Section 138, the disputed cheque should be 'enforceable debt'. However, the instant cheque was given as 'security', as evident from the Deed of Undertaking between the parties. Further averring that the Warrant of Attachment was void ab initio, the Applicant pointed out that the Warrant pertaining to those properties which were not within the jurisdiction of the Court. Per contra, Respondent No. 2 argued that the cheque was issued in pursuance of the settlement agreement between the parties. Additionally, the execution proceedings and the proceedings under the NI Act were independent of each other. Hence, even if the Warrant issued in the execution proceedings was illegal, the proceedings under NI Act were sustainable in law. Significantly, the Company had committed default in payment which were not delivered by the Respondent-Complainant. The Respondent relied on Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited, (2016) 10 SCC 458 where it was held: "Whether the cheques were given as security or not, or whether there was outstanding liability or not is a question of fact which could have been determined only by the trial court after recording evidence of the parties."of the parties.Whether the cheques were given as security or not, or whether there was outstanding liability or not is a question of fact which could have been determined only by the trial court after recording evidence Judgement The Bench while noting the facts and orders of the lower Courts, averred that that the Civil Court, Rajkot was not legally authorised to issue the Warrant, since the movable/immovable properties of the Company were not situated within its jurisdiction. This was in consonance with Section 39(4) of the CPC. Further, the orders passed by the Civil Court, Rajkot were quashed and set aside by the High Court which rendered the initiation of all proceedings, including the Warrant of Attachment and the execution of the Deed of Undertaking as baseless. Regarding the NI Act, the Bench opined that the cheque was given as 'security'. Whereas Section 138 of the NI Act lies only in respect of 'enforceable debt' which was a settled proposition of law. To bolster this view, the Bench relied on Lalit Kumar Sharma v. State of Uttar Pradesh, 2008 (5) SCC 638, where the Apex Court had held that the cheque was issued in terms of compromise, and it did not create any new liability. Consequently, it could not have been issued towards payment of debt, even if the compromise had not fructified. Justice Gopi opined that Respondent No. 3 ought to have returned the cheque to the...

Offense Under Section 138 Of NI Act Maintaianable Only For Cheques Issued For 'Enforceable Debt' And Not 'Security': Gujarat High Court

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Offense Under Section 138 Of NI Act Maintaianable Only For Cheques Issued For 'Enforceable Debt' And Not 'Security': Gujarat High Court

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