2021 Supreme Court Digest On Negotiable Instruments Act

1. Moratorium Under Section 14 IBC Covers Section 138 NI Act Proceedings Against Corporate Debtor For Cheque Dishonour

In P Mohanraj and others v M/s Shah Brothers Ispat Ltd, the Supreme Court held that the declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code(IBC) covers criminal proceedings for dishonour of cheque under Section 138 of the Negotiable Instruments Act against the corporate debtor.

The bench of Justices RF Nariman, Navin Sinha and KM Joseph also observed that moratorium was applicable only to the corporate debtor and that the cheque case proceedings can continue against natural persons in-charge of the corporate debtor, such as directors of the company.

"...for the period of moratorium, since no Section 138/141 proceeding can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated or continued against the persons mentioned in Section 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in Section 14 of the IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act," the Top Court observed.

2. Section 138 NI Act A 'Civil Sheep' In A 'Criminal Wolf's Clothing'; Quasi-Criminal In Nature

In P Mohanraj and others v M/s Shah Brothers Ispat Ltd the Supreme Court has observed that criminal proceedings for the dishonour of cheque under Section 138 of the Negotiable Instruments Act, 1881, are "quasi-criminal" in nature.

The bench comprising Justices RF Nariman, Navin Sinha and KM Joseph also made an interesting comment that Section 138 proceedings can be called a "civil sheep" in a "criminal wolf's clothing."

3. Person Who Has Not Drawn The Cheque Cannot Be Prosecuted U/s 138 NI Act Even In Case Of Joint Liability 

In Alka Khandu Avhad vs. Amar Syamprasad Mishra the Supreme Court observed that, even in case of a joint liability, in case of individual persons, a person other than a person who has drawn the cheque on an account maintained by him, cannot be prosecuted for the offence under Section 138 of the Negotiable Instruments Act.

"A person might have been jointly liable to pay the debt, but if such a person who might have been liable to pay the debt jointly, cannot be prosecuted unless the bank account is jointly maintained and that he was a signatory to the cheque," the bench comprising Justices DY Chandrachud and MR Shah observed.

4. Section 313 CrPC Statement By Accused Is Not A Substantive Evidence To Rebut Presumption Under Section 139 NI Act 

In Sumeti Vij Vs. Paramount Tech Fab Industries, the bench of Justices Indu Malhotra and Ajay Rastogi had observed that the statement of the accused recorded u/s313 of the Code of Criminal Procedure was not a substantive evidence of defence to rebut the presumption under Section 139 of the Negotiable Instruments Act that the cheques were issued for consideration.

5. Section 138 NI Act - Magistrates Should Record Reasons Before Converting Summary Trial To Summons Trial

In Re Expeditious Trial Of Cases Under Section 138 of N.I Act, the Supreme Court had directed the Magistrates to record reasons before converting trial of complaints under Section 138 of Negotiable Instruments Act from summary trial to summons trial in exercise of power under the second proviso to Section 143 of the Act.

"The High Courts are requested to issue practice directions to the Magistrates to record reasons before converting trial of complaints under Section 138 of the Act from summary trial to summons trial," a Constitution Bench headed by Chief Justice of India SA Bobde also comprising Justices L Nageswara Rao, BR Gavai, AS Bopanna and S Ravindra Bhat stated.

6. Amend Section 138 NI Act To Allow One Trial For Multiple Cases From Single Transaction: Supreme Court Issues Directions For Expeditious Trial Of Cheque Cases

In Re Expeditious Trial Of Cases Under Section 138 of N.I Act, a Constitution Bench headed by Chief Justice of India SA Bobde also comprising Justices L Nageswara Rao, BR Gavai, AS Bopanna and S Ravindra Bhat had issued a set of directions to expedite the trial of cheque dishonour cases under Section 138 of the Negotiable Instruments Act.

The directions are as follows :

• The High Courts are requested to issue practice directions to the Magistrates to record reasons before converting trial of complaints under Section 138 of the Act from summary trial to summons trial.
• Inquiry shall be conducted on receipt of complaints under Section 138 of the Act to arrive at sufficient grounds to proceed against the accused, when such accused resides beyond the territorial jurisdiction of the court.
• For the conduct of inquiry under Section 202 of the Code,evidence of witnesses on behalf of the complainant shall be permitted to be taken on affidavit. In suitable cases, the Magistrate can restrict the inquiry to examination of documents without insisting for examination of witnesses
• We recommend that suitable amendments be made to the Act for provision of one trial against a person for multiple offences under Section 138 of the Act committed within a period of 12 months, notwithstanding the restriction in Section 219 of the Code.
• The High Courts are requested to issue practice directions to the Trial Courts to treat service of summons in one complaint under Section 138 forming part of a transaction,as deemed service in respect of all the complaints filed before the same court relating to dishonour of cheques issued as part of the said transaction.
• Judgments of the Court in Adalat Prasad v Rooplal Jindal and others (2004) 7 SCC 338 and Subramanium Sethuraman v State of Maharashtra (2004) 13 SCC 324 have interpreted the law correctly and we reiterate that there is no inherent power of Trial Courts to review or recall the issue of summons.This does not affect the power of the Trial Court under Section 322 of the Code to revisit the order of issue of process in case it is brought to the court's notice that it lacks jurisdiction to try the complaint
• Section 258 of the Code is not applicable to complaints under Section 138 of the Act and findings to the contrary in Meters and Instruments Private Ltd and Another v Kanchan Mehta and others (2018) 1 SCC 560 do not lay down correct law. To conclusively deal with this aspect, amendment to the Act empowering the Trial Courts to reconsider/recall summons in respect of complaints under Section 138 shall be considered by the Committee constituted the Court on 10.03.2021

7. Section 258CrPC Not Applicable To 138 Cases- Supreme Court Suggests Amendment To NI Act Empowering Magistrate To Recall Summons

In Re Expeditious Trial Of Cases Under Section 138 of N.I Act, the Supreme Court has recommended an amendment empowering Magistrate to recall summons in respect of complaints under Section 138 Negotiable Instrument Act.

The Constitution Bench headed by CJI SA Bobde also comprising Justices L Nageswara Rao, BR Gavai, AS Bopanna and S Ravindra Bhat observed that Section 258 of the Code of Criminal Procedure is not applicable to complaints under Section 138 of the Negotiable Instruments Act and the Magistrates are not empowered to discharge the accused if the complainant is compensated to the satisfaction of the court.

8. Condition Of Pre-deposit Of Fine Amount Cannot Be Imposed To Hear Revision Petition Filed By Convict

While considering a criminal appeal against the order of dismissal by High Court in which the accused was convicted under Section 138 of the Negotiable Instruments Act and was sentenced to fine in the sum of Rs.6,00,000/-, the Supreme Court in R. Kalai Selvi vs. Bheemappa observed that deposit of fine amount cannot be made a condition precedent for hearing revision petition under Section 397 of the Criminal Procedure Code.

While setting aside the order, the bench of Justices Vineet Saran and Dinesh Maheshwari observed, "We are clearly of the view that the High Court could not have made the deposit of fine amount a condition precedent for the purpose of hearing the revision petition. As to what order is to be passed ultimately in the revision petition is a matter entirely different and that would depend on the examination of the matter in terms of the requirements of revisional jurisdiction but, in any case, depositing of fine amount could not have been made a condition precedent for the purpose of even hearing of the revision petition so filed by the appellant."

9. Section 138 NI Act - If Signature On Cheque Is Admitted, Presumption Under Section 139 Will Be Raised

The Supreme Court in Triyambak S. Hegde vs. Sripad has observed that if the signature on the cheque is admitted, then presumption under Section 139 of the Negotiable Instruments Act that the cheque was issued in discharge of a legally enforceable debt will be raised. Upon such presumption being raised, it is incumbent upon the accused to rebut the same.

"..it is clear that signature on the cheque having been admitted, a presumption shall be raised under Section 139 that the cheque was issued in discharge of debt or liability," a bench comprising Chief Justice of India NV Ramana, Justices Surya Kant and AS Bopanna observed.

10. Section 138 NI Act: Complaint Cannot Be Proceeded With Once The Accused And Complainant Enter Into A Settlement Agreement

In ​​Gimpex Private Limited vs Manoj Goel, the Supreme Court has observed that a complaint under Section 138 of Negotiable Instruments Act cannot be proceeded with once the accused and the complainant enter into a settlement agreement.

The bench headed by Justice DY Chandrachud observed that non-compliance of the terms of the settlement agreement or dishonour of cheques issued subsequent to it, would then give rise to a fresh cause of action attracting liability under Section 138 of the NI Act and other remedies under civil law and criminal law.

A fresh cause of action accrues to the complainant under the terms of the settlement deed, the bench also comprising Justices Vikram Nath and BV Nagarathna observed.

11. Section 138 NI Act - Summons To Directors Justified If Complaint Avers That They Were In Charge & Responsible For Conduct Of Business Of Company

In Ashutosh Ashok Parasrampuriya and another versus M/s Gharrkul Industries Pvt Ltd, the Supreme Court bench of Justices Ajay Rastogi and Abhay S Oka has reiterated that the summons issued by a Magistrate on a complaint under Section 138 of the Negotiable Instruments Act to the Directors of a Company is justified if the complaint contains the basic averment that they were in charge and responsible for the conduct of the business of the company.

12. Dishonour Of Cheque Issued As A Security Can Also Attract Offences U/Sec 138 NI Act

The Supreme Court in Sripati Singh (D) vs. State of Jharkhand observed that the dishonour of cheque issued as a security can also attract offence under Section 138 of the Negotiable Instruments Act.

There cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque, the bench of Justices MR Shah and AS Bopanna observed.

The court added that such contention would arise only in a circumstance where the debt has not become recoverable and the cheque issued as security has not matured to be presented for recovery of the amount, if the due date agreed for payment of debt has not arrived.

13. Sec 138 NI Act - Merely Because Complaint Mentions Managing Director's Name First, It Can't Be Held That Complaint Is Not On Behalf Of Company

In Bhupesh Rathod versus Dayashankar Prasad Chaurasia and another, the Supreme Court has held that a complaint filed on behalf of a company under Section 138 of the Negotiable Instruments Act is not liable to be dismissed for the sole reason that it stated the name of the Managing Director first followed by the company's name.

A bench comprising Justices Sanjay Kishan Kaul and MM Sundresh held that though this format may not be perfect it cannot be termed defective.

"There could be a format where the Company's name is described first, suing through the Managing Director but there cannot be a fundamental defect merely because the name of the Managing Director is stated first followed by the post held in the Company," the bench observed in the order.

14. Section 138 NI Act Attracted Even In Cases Where Debt Is Incurred After Cheque Is Drawn But Before Presentation

In Sunil Todi vs State of Gujarat, the Supreme Court has observed that Section 138 of Negotiable Instruments Act is attracted in cases where debt is incurred after the drawing of the cheque but before its encashment.

One of the issues considered in this appeal was whether the dishonor of a cheque furnished as a 'security' is covered under the provisions of Section 138 of the NI Act? "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," the bench comprising Justices DY Chandrachud and AS Bopanna observed.

The court added 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.

15. Section 202(2) CrPC Inapplicable To Complaints Under Section 138 NI Act In Respect Of The Examination Of Witnesses On Oath

The Supreme Court in Sunil Todi vs State of Gujarat reiterated that the Section 202(2) CrPC is inapplicable to complaints under Section 138 in respect of the examination of witnesses on oath.

The Court observed that the evidence of witnesses on behalf of the complainant shall be permitted on affidavit.

"If the Magistrate holds an inquiry himself, it is not compulsory that he should examine witnesses and in suitable cases the Magistrate can examine documents to be satisfied that there are sufficient grounds for proceeding under Section 202," the bench comprising Justices DY Chandrachud and AS Bopanna observed while dismissing an appeal filed against a Gujarat High Court judgment refusing to quash a complaint under Section 138 of Negotiable Instruments Act.