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Reportable

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

Criminal Appeal No.1446 of 2021

Sunil Todi & Ors. … Appellants

Versus

State of Gujarat & Anr. … Respondents

And With

Criminal Appeal No.1447 of 2021

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J U D G M E N T

Dr Dhananjaya Y Chandrachud, J

1. A Single Judge of the High Court of Gujarat dismissed the petitions under

Section 482 of the Code of Criminal Procedure, 1973

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, instituted by the

appellants to quash the criminal complaint

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instituted by the second respondent

for offences punishable under Section 138 of the Negotiable Instruments Act,

1881

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, 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 Directors

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and the Managing

Director

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of a company by the name of R.L. Steels & Energy Limited

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.

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 Credit

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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

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“CrPC”

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CC No. 1220 of 2017

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“NI Act”

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SLP (Crl) 6590/ 2019

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SLP (Crl) 6995/2019

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“Company”

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“LC”

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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”. T he 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 Agreement

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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

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“PSA”

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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 .

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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

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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 n ominee director who was not in- charge of the

day-to-day management of the com pany 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

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facts, as in this case.

11. Mr. 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. Mr. 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,

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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.

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In this backdrop, the following sequence of events was emphasized in the course

of the submissions:

• 10 August 2016 : issuance of LC ;

• 30 September 2016: complainant stopped the supply of power;

• 20 October 2016: termination of the PSA by the company ;

• 30 June 2017: instructions issued to the b ankers to stop payment;

• 31 August 2017: presentation of the cheques;

• 2 November 2017: complaint under Section 138 filed;

• 3 November 2017: affidavit filed in support of the complaint; and

• 6 November 2017: summoning order issued.

13. On the basis of the above sequence of events, it has been submitted that

recourse to the filing of a complaint under Section 138 of NI Act is an abuse of

the process. In the course of evaluating the submissions, the line of precedent to

which a reference has been made would be considered.

14. Ms. Meenakshi Arora, learned senior counsel submitted that a clear case

for the invocation of the jurisdiction under Section 482 CrPC was established for

the following reasons:

(i) Though the contract was terminated on 20 October 2016 by the company ,

the cheques were presented to the bank only on 31 August 2017;

(ii) The fact that the cheques were issued towards security for payment is

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evident from the endorsement on the reverse of the cheques and from the

admission in paragraph 8 of the plaint instituted by the second respondent

in the High Court of Madras;

(iii) Under the terms of the PSA , payment was envisaged to be made through

LC and not by cheque;

(iv) A civil suit has been instituted by the second respondent for the recovery

of its dues;

(v) MSEDCL has raised an additional charge which has been occasioned by

the default of the second respondent; and

(vi) Apart from the bald statement that the Directors are in-charge of and

responsible for the management of the company, no specific role has been

ascribed to them in the plaint so as to invoke the doctrine of vicarious

liability.

15. On the other hand, Mr. Mohit Mathur and Ms. Rebecca John, learned

senior counsel appearing on behalf of the second respondent have submitted

that:

(i) The High Court has noted in the impugned judgment that there is no

dispute in regard to the liability of the company for electricity supplied

during the months of August, September and October 2016;

(ii) Though the PSA envisaged that payment would be made through LC , they

could not be honoured because the LC were not in a format acceptable to

the Bankers of the second respondent;

(iii) The Law does not prohibit the invocation of Section 138 of the NI Act even

in a situation where the cheques have been issued initially as a security;

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(iv) The summoning order of the Magistrate conforms to law. The complaint

was instituted on 2 November 2017 and was duly supported by an affidavit

dated 3 November 2017. A summoning order is not required to furnish

detailed reasons particularly in a case under Section 138 of the NI Act,

having due regard to the summary nature of the proceedings; and

(v) The complaint spells out the role attributed to the Directors and prima facie

at this stage, the test of vicarious liability is duly met.

On the above premises, it has been submitted that there is no reason for this

Court, to interfere with the judgment of the High Court since detailed reasons

have been furnished by the High Cour t for rejecting the petitions under Section

482 of the CrPC.

16. Ms. Aastha Mehta, learned counsel for the State of Gujarat has submitted

that the trial has not proceeded since 2017 due to the pendency of the

proceedings before the High Court and this Court. Learned counsel urged that

there is no ground to interfere with the order of the High Court.

17. The issues which arise for our consideration are as follows:

(i) Whether the dishonor of a cheque furnished as a ‘security’ is covered

under the provisions of Section 138 of the NI Act;

(ii) Whether the Magistrate, in view of Section 202 CrPC, ought to have

postponed the issuance of process; and

(iii) Whether a prima facie case of vicarious liability is made out against the

appellants.

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18. The first submission which has been urged on behalf of the appellants is

that a complaint under Section 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. The appellant has placed reliance

on the judgment of a two judge Bench of this Court in Indus Airways Private

Limited v. Magnum Aviation Private Limited

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. The issue in that case was

whether the post-dated cheques which were issued by the appellants who were

purchasers, as an advance payment in respect of purchase orders, could be

considered to be in discharge of a legally enforceable debt or other liability and

whether the dishonor of the cheques amounted to an offence under Section 138.

The appellants had placed two purchase orders for the supply of air craft parts

with the first respondent and had issued two post-dated cheques as advance

payment. The supplier received a letter from the purchasers cancelling the

purchase and requesting the return of both the cheques. Following a notice by

the suppliers, a complaint was instituted under Section 138 upon which

cognizance was taken by the Magistrate and summons were issued. The High

Court allowed a petition under Section 482 CrPC and set aside the order issuing

process by construing the expression “discharge of any debt or other liability” in

Section 138 holding that there must be a liability at the time of issuing the

cheque

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. In appeal, Justice R M Lodha writing for a two- Judge Bench allowed

the appeal

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observing:

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(2014) 12 SCC 539

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“138. Dishonour of cheque for insufficiency, etc., of funds in the account.—Where any cheque drawn by a

person on an account maintained by him with a banker for payment of any amount of money to another person

from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank

unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the

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“9. The Explanation appended to Section 138 explains the

meaning of the expression “debt or other liability” for the

purpose of Section 138. This expression means a legally

enforceable debt or other liability. Section 138 treats

dishonoured cheque as an offence, if the cheque has been

issued in discharge of any debt or other liability. The

Explanation leaves no manner of doubt that to attract an

offence under Section 138, there should be a legally

enforceable debt or other liability subsisting on the date of

drawal of the cheque. In other words, drawal of the cheque in

discharge of an existing or past adjudicated liability is sine

qua non for bringing an offence under Section 138. If a

cheque is issued as an advance payment for purchase of the

goods and for any reason purchase order is not carried to its

logical conclusion either because of its cancellation or

otherwise, and material or goods for which purchase order

was placed is not supplied, in our considered view, the

cheque cannot be held to have been drawn for an existing

debt or liability. The payment by cheque in the nature of

advance payment indicates that at the time of drawal of

cheque, there was no existing liability.”

19. Drawing the distinction between civil and criminal liability, it was observed

that if there is a breach in the condition of advance payment, it would not incur

criminal liability under Section 138 of the NI Act since there is no legally

enforceable debt or liability at the time when the cheque was drawn. The Court

held that if at the time when a contract is entered into, the purchaser has to pay

cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that

bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other

provision of this Act, be punished with imprisonment for 8 [a term which may be extended to two years’], or with

fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless—

(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or

within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of

the said amount of money by giving a notice; in writing, to the drawer of the cheque, 9 [within thirty days] of the

receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case

may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation.—For the purposes of this section, “debt of other liability” means a legally enforceable debt or other

liability.”

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It was held that the view taken by the Andhra Pradesh High Court in Swastik Coaters v. Deepak Bros, 1997

Cri LJ 1942 (AP), the Gujarat High Court in Shanku Concreates v. State of Gujarat, 2000 Cro LJ 1988 (Guj),

the Madras High Court in Balaji Seafoods Exports v. Mac Industries, (1999) 1 CTC 6 (Mad).

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an advance and there was a breach of that condition, the purchaser may have to

make good the loss to the seller, but this would not occasion a criminal liability

under Section 138. The issuance of a cheque towards advance payment at the

time of the execution of the contract would not - in the view which has adopted in

Indus Airways - be considered as a subsisting liability so as to attract an offence

under Section 138 upon the dishonor of the cheque.

20. A later judgment of a two judge Bench in Sampelly Satyanarayana Rao v.

Indian Renewable Energy Development Agency Limited

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considered the

decision in Indus Airways. In Sampelly, the appellant was the Director of a

company which was engaged in power generation, while the respondent was a

government enterprise engaged in renewable energy. The respondent agreed to

advance a loan for setting up a power project and the agreement envisaged that

post-dated cheques towards payment of installments of the loans would be given

by way of security. The cheques having been dishonored, complaints were

instituted under Section 138 which led to quashing petitions filed before the High

Court. The submission which was urged before this Court was that dishonor of

the post-dated cheques given by way of security did not amount to a legally

enforceable debt or liability under Section 138 in presentia. This Court held, after

adverting to the decision in Indus Airways that if on the date of the cheque, a

liability or debt exists or the amount has become enforceable, Section 138 would

stand attracted and not otherwise. The decision in Indus Airways was

distinguished in Sampelly (supra) on the ground that in that case , the chequ e

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(2016) 10 SCC 458

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had not been issued for discharge of a liability but as advance for a purchase

order which was cancelled. On the other hand, in Sampelly, the cheque was for

the repayment of a loan installment which had fallen due. The Court noted that

though the deposit of cheques towards the repayment of installments was

described as a security in the loan agreement, the true test was whether the

cheque was in discharge of an existing enforceable debt or liability or whether it

was towards an advance payment without there being a subsisting debt or

liability.

21. Besides the distinguishing features which were noticed in Sampelly, there

was another ground which weighed in the judgment of this Court. The Court

adverted to the decision in HMT Watches v. MA Habida

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to hold that whether

the cheques were given as security constitutes the defense of the accused and is

a matter of trial. The extract from the decision in HMT Watches which is cited in

the decision in Indus Airways is thus:

“10. 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. In our opinion, the

High Court should not have expressed its view on the

disputed questions of fact in a petition under Section 482 of

the Code of Criminal Procedure, to come to a conclusion that

the offence is not made out. The High Court has erred in law

in going into the factual aspects of the matter which were not

admitted between the parties.

22. In a more recent judgment of a two judge Bench in Sripati Singh v. State

of Jharkhand

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, an order of the Magistrate taking cognizance and issuing

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(2015) 11 SCC 776

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2021 SCC OnLine SC 1002

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summons on a complaint under Section 420 IPC and Section 138 of the NI Act

was challenged before the High Court. There was a transaction between the

second respondent and the complainant pursuant to which the appellant had

advanced sums of money. Several cheques were handed over but they were

dishonored on presentation. The High Court allowed the petitions. A n appeal was

filed before this Court. Before this Court, the appellant urged that a cheque

issued towards discharge of the loan and presented for recovery could not be

construed as a security for the transaction. In appeal, this Court noted that there

were four loan agreements under which the second respondent agreed to pay a

total sum of Rs 2 crores and six cheques were issued as security. The High Court

had held that since under the loan agreement the cheques were given by way of

security, the complaint could not be maintained. Justice AS Bopanna, speaking

for the two judge bench, adverted to the earlier decision in Indus Airways and

the distinguishing features which were noticed in the decision in Sampelly. The

Court held that where in the case of a loan transaction, the borrower agrees to

repay the amount in a specified time frame and issues a cheque as a security to

secure the repayment and the loan is not repaid, the cheque which is issued as

security would mature for presen tation. The Court observed:

“17. A cheque issued as security pursuant to a financial

transaction cannot be considered as a worthless piece of

paper under every circumstance. ‘Security’ in its true sense is

the state of being safe and the security given for a loan is

something given as a pledge of payment. It is given, deposited

or pledged to make certain the fulfilment of an obligation to

which the parties to the transaction are bound. If in a

transaction, a loan is advanced and the borrower agrees to

repay the amount in a specified timeframe and issues a

cheque as security to secure such repayment; if the loan

amount is not repaid in any other form before the due date or if

there is no other understanding or agreement between the

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parties to defer the payment of amount, the cheque which is

issued as security would mature for presentation and the

drawee of the cheque would be entitled to present the same.

On such presentation, if the same is dishonoured, the

consequences contemplated under Section 138 and the other

provisions of N.I. Act would flow.”

Moreover, as the Court explained:

“18. When a cheque is issued and is treated as ‘security’

towards repayment of an amount with a time period being

stipulated for repayment, all that it ensures is that such cheque

which is issued as ‘security’ cannot be presented prior to the

loan or the instalment maturing for repayment towards which

such cheque is issued as security. Further, the borrower would

have the option of repaying the loan amount or such financial

liability in any other form and in that manner if the amount of

loan due and payable has been discharged within the agreed

period, the cheque issued as security cannot thereafter be

presented. Therefore, the prior discharge of the loan or there

being an altered situation due to which there would be

understanding between the parties is a sine qua non to not

present the cheque which was issued as security. These are

only the defences that would be available to the drawer of the

cheque in a proceedings initiated under Section 138 of the N.I.

Act. Therefore, 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. If such is the understanding a

cheque would also be reduced to an ‘on demand promissory

note’ and in all circumstances, it would only be a civil litigation

to recover the amount, which is not the intention of the statute.

When a cheque is issued even though as ‘security’ the

consequence flowing therefrom is also known to the drawer of

the cheque and in the circumstance stated above if the cheque

is presented and dishonoured, the holder of the

cheque/drawee would have the option of initiating the civil

proceedings for recovery or the criminal proceedings for

punishment in the fact situation, but in any event, it is not for

the drawer of the cheque to dictate terms with regard to the

nature of litigation.”

The complaint, insofar as it invoked the provisions of Section 138 of the NI Act,

was accordingly restored to the Judicial Magistrate to proceed in accordance with

law.

23. 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

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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. 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. In other words, the agreement for the supply of power

was acted upon and power was supplied to by the second respondent and

consumed by the company .

24. In Sampelly and Sripati Singh, post-dated cheques were issued as a

security for loan installments that were due. On the dates on which the cheques

were drawn, there was an outstanding debt. In the present case, the cheques

were issued on 30 June 2016. The second respondent commenced the supply of

electricity immediately from the next day that is from 1 July 2016. The facts of

this case are in contrast with the facts in Indus Airways . In Indus Airways,

since the purchase agreement was cancelled, there was no outstanding liability

incurred before the encashment of the cheque. The transaction between the

parties did not go through as a result of the cancellation of the purchase orders.

25. The explanation to Section 138 of the NI Act provides that ‘debt or any

other liability’ means a legally enforceable debt or other liability. The proviso to

Section 138 stipulates that the cheque must be presented to the bank within a

period of six months from the date on which it is drawn or within its period of

validity. Therefore, 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 . Aiyar’s Judicial Dictionary

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defines debt as follows: “Debt is a pecuniary liability. A sum payable or

recoverable by action in respect of money demand.” Lindey L.J in Webb v.

Strention

15

defined debt as “ … a sum of money which is now payable or will

become payable in the future by reason of a present obligation, debitum in

praesenti, solvendum in futuro.” The definition was adopted by this Court in

Keshoram Industries v. CWT

16

. Justice Mookerjee writing for a F ull Bench of

the Calcutta High Court in Banchharam Majumdar v. Adyanath

Bhattacharjee

17

adopted the definition provided by the Supreme Court of

California in People v. Arguello

18

:

“Standing alone, the word ‘debt’ is as applicable to a sum of

money which has been promised at a future day as to a sum

now due and payable. If we wish to distinguish between the

two, we say of the former that it is a debt owing, and of the

latter that it is a debt due. In other words, debts are of two

kinds: solvendum in praesenti and solvendum in future … A

sum of money which is certainly and in all events payable is

a debt, without regard to the fact whether it be payable now

or at a future time. A sum payable upon a contingency,

however, is not a debt or does not become a debt until the

contingency has happened.”

Thus, the term debt also includes a sum of money promised to be paid on a

future day by reason of a present obligation. A post-dated cheque issued after

the debt has been incurred would be covered by the definition of ‘debt’. However,

if the sum payable depends on a contingent event, then it takes the color of a

debt only after the contingency has occurred. Therefore, in the present case, a

debt was incurred after the second respondent began supply of power for which

payment was not made because of the non- acceptance of the LCs’. The issue to

be determined is whether Section 138 only covers a situation where there is an

15

1888 QBD 518

16

AIR 1966 SC 1370

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(1909) ILR 36 Cal 936

18

1869 37 Calif 524

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outstanding debt at the time of the drawing of the cheque or includes drawing of

a cheque for a debt that is incurred before the cheque is encashed.

26. 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 draw ing 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.

21

27. According to the complainant, the LCs’ were not in a format agreed to by

their bankers. The cheques which were initially towards security could not have

been presented before the payments under the PSA fell due. Moreover, if the

company were to discharge its liability to pay the outstanding dues under the

power supply agreement through the agreed modality of an LC to the satisfaction

of the second respondent’s bankers, there would be no occasion to present the

chequ e thereafter. In other words, once payments for electricity supply became

due in terms of the PSA , and the company failed to discharge its dues, the

second respondent was entitled in law to present the cheque for payment. 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. 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. . It all

depends on whether a legally enforceable debt or liability has arisen.

28. At this stage, it would be instructive to note the order of a two judge Bench

of this Court in M/s Womb Laboratories Pvt Ltd v. Vijay Ahuja

19

. In that case,

the High Court had quashed proceedings initiated against the first respondent for

offences punishabl e under Section 138 of the NI Act merely on the basis of the

assertion in the complaint that “security cheques were demanded” in response to

which the accused had issued three signed blank cheques with the assurance

that if the amount was not returned, the cheques could be encashed. The High

19

Criminal Appeal Nos 1382-1383 of 2019, decided on 11 September 2019

22

Court held that the cheques were given only by way of security and therefore not

towards the discharge of a debt or liability on the basis of which the complaint

was quashed. Allowing the appeal by the drawee, this Court observed:

“5. In our opinion, the High Court has muddled the entire

issue. The averment in the complaint does indicate that the

signed cheques were handed over by the accused to the

complainant. The cheques were given by way of security, is a

matter of defence. Further, it was not for the discharge of any

debt or any liability is also a matter of defence. The relevant

facts to countenance the defence will have to be proved - that

such security could not be treated as debt or other liability of

the accused. That would be a triable issue. We say so

because, handing over of the cheques by way of security per

se would not extricate the accused from the discharge of

liability arising from such cheques.”

29. The order of this Court in Womb Laboratories holds that the issue as to

whether the cheques were given by way of security is a matter of defence. This

line of reasoning in Womb Laboratories is on the same plane as the

observations in HMT Watch es, where it was held that whether a set of cheques

has been given towards security or otherwise or whether there was an

outstanding liability is a question of fact which has to be determined at the trial on

the basis of evidence. The rationale for this is that a disputed question of this

nature cannot be resolved in proceedings under Section 482 CrPC, absent

evidence to be recorded at the trial.

30. The submission which has been urged on behalf of the appellants,

however, is that the fact that the cheques in the present case have been issued

as a security is not in dispute since it stands admitted from the pleading of the

second respondent in the suit instituted before the High Court of Madras. The

legal requirement which Section 138 embodies is that a cheque must be drawn

23

by a person for the payment of money to another “for the discharge, in whole or

in part, of any debt or other liability’. 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. This precisely is the situation in the

present case which would negate the submissions of the appellants.

31. The second submission which has been urged on behalf of the appellants

turns upon Section 202 CrPC, which is extracted:

“202. Postponement of issue of process.—(1) Any Magistrate,

on receipt of a complaint of an offence of which he is

authorised to take cognizance or which has been made over

to him under section 192, may, if he thinks fit, 1 [and shall, in

a case where the accused is residing at a place beyond the

area in which he exercises his jurisdiction,] postpone the

issue of process against the accused, and either inquire into

the case himself or direct an investigation to be made by a

police officer or by such other person as he thinks fit, for the

purpose of deciding whether or not there is sufficient ground

for proceeding:

Provided that no such direction for investigation shall be

made,— (a) where it appears to the Magistrate that the

offence complained of is triable exclusively by the Court of

Session; or (b) where the complaint has not been made by a

Court, unless the complainant and the witnesses present (if

any) have been examined on oath under section 200.

(2) In an inquiry under sub- section (1), the Magistrate may, if

he thinks fit, take evidence of witnesses on oath: Provided

that if it appears to the Magistrate that the offence complained

of is triable exclusively by the Court of Session, he shall call

24

upon the complainant to produce all his witnesses and

examine them on oath.

(3) If an investigation under sub- section (1) is made by a

person not being a police officer, he shall have for that

investigation all the powers conferred by this Code on an

officer in charge of a police station except the power to arrest

without warrant.”

32. Under Sub- Section (1) of Section 202, a Magistrate upon the receipt of a

complaint of an offence of which he/she is authorized to take cognizance is

empowered to postpone the issuance of process against the accused and either

(i) enquire into the case; or (ii) direct an investigation to be made by a police

officer or by such other person as he thinks fit. The purpose of postponing the

issuance of process for the purposes of an enquiry or an investigation is to

determine whether or not there is sufficient ground for proceeding. However, it is

mandatory for the Magistrate to do so in a case where the accused is residing at

a place beyond the area in which t he Magistrate exercises jurisdiction. The

accused persons in the present case reside at Aurangabad while the complaint

under Section 138 was filed before the Magistrate in Mundra. The argument of

the appellants is that in these circumstances, the Magistrate was duty bound to

postpone the issuance of process and to either enquire into the case himself or to

direct an investigation either by a police officer or by some other person. Section

203 stipulates that if the Magistrate is of the opinion on considering the statement

on oath, if any, of the complainant and of the witnesses, and the result of the

enquiry or investigation if any under Section 202 that there is no sufficient ground

for proceeding, he shall dismiss the complaint recording briefly his reasons for

doing so. The requirement of recording reasons which is specifically incorporated

in Section 203 does not find place in Section 202. Section 204 which deals with

25

the issuance of process stipulat es that if in the opinion of the Magistrate taking

cognizance of an offence, there is sufficient ground for proceeding, he may issue

(a) in a summons case, a summons for attendance of the accused; (b) in a

warrant case, a warrant or if he thinks fit a summons for the appearance of the

accused. These proceedings have been interpreted in several judgments of this

Court. For the purpose of the present case, some of them form the subject matter

of the submissions by the appellants and the second respondent.

33. The provisions of Section 202 which mandate the Magistrate, in a case

where the accused is residing at a place beyond the area of its jurisdiction, to

postpone the issuance of process so as to enquire into the case himself or direct

an investigation by police officer or by another person were introduced by Act 25

of 2005 with effect from 23 June 2006. The rationale for the amendment is based

on the recognition by Parliament that false complaints are filed against persons

residing at far off places as an instrument of harassment. In Vijay Dhan uka v.

Najima Mamtaj

20

, this Court dwelt on the purpose of the amendment to Section

202, observing:

“11. Section 202 of the Code, inter alia, contemplates

postponement of the issue of the process ‘in a case where

the accused is residing at a place beyond the area in which

he exercises his jurisdiction’ and thereafter to either inquire

into the case by himself or direct an investigation to be made

by a police officer or by such other person as he thinks fit. In

the face of it, what needs our determination is as to whether

in a case where the accused is residing at a place beyond the

area in which the Magistrate exercises his jurisdiction, inquiry

is mandatory or not.

12. The words ‘and shall, in a case where the accused is

residing at a place beyond the area in which he exercises his

20

(2014) 14 SCC 638

26

jurisdiction’ were inserted by Section 19 of the Code of

Criminal Procedure (Amendment) Act (Central Act 25 of

2005) w.e.f. 23- 6-2006. The aforesaid amendment, in the

opinion of the legislature, was essential as false complaints

are filed against persons residing at far-off places in order to

harass them. The note for the amendment reads as follows:

‘False complaints are filed against persons residing at far-off

places simply to harass them. In order to see that innocent

persons are not harassed by unscrupulous persons, this

clause seeks to amend sub- section (1) of Section 202 to

make it obligatory upon the Magistrate that before

summoning the accused residing beyond his jurisdiction he

shall enquire into the case himself or direct investigation to be

made by a police officer or by such other person as he thinks

fit, for finding out whether or not there was sufficient ground

for proceeding against the accused.’

The use of the expression “shall” prima facie makes the

inquiry or the investigation, as the case may be, by the

Magistrate mandatory. The word “shall” is ordinarily

mandatory but sometimes, taking into account the context or

the intention, it can be held to be directory. The use of the

word “shall” in all circumstances is not decisive. Bearing in

mind the aforesaid principle, when we look to the intention of

the legislature, we find that it is aimed to prevent innocent

persons from harassment by unscrupulous persons from false

complaints. Hence, in our opinion, the use of the expression

“shall” and the background and the purpose for which the

amendment has been brought, we have no doubt in our mind

that inquiry or the investigation, as the case may be, is

mandatory before summons are issued against the accused

living beyond the territorial jurisdiction of the Magistrate.”

34. This Court has held that the Magistrate is duty bound to apply his mind to

the allegations in the complaint together with the statements which are recorded

in the enquiry while determining whether there is a prima facie sufficient ground

for proceeding. In Mehmood UI Rehman v. Khazir Mohammad Tunda

21

, this

Court followed the dictum in Pepsi Foods Ltd. v. Special Judicial Magistrate

22

,

21

(2015) 12 SCC 420

22

(1998) 5 SCC 749

27

and observed that setting the criminal law in motion against a person is a serious

matter. Hence, there must be an application of mind by the Magistrate to whether

the allegations in the complaint together with the statements recorded or the

enquiry conducted constitute a violation of law. The Court observed:

“20. The extensive reference to the case law would clearly

show that cognizance of an offence on complaint is taken for

the purpose of issuing process to the accused. Since it is a

process of taking judicial notice of certain facts which

constitute an offence, there has to be application of mind as

to whether the allegations in the complaint, when considered

along with the statements recorded or the inquiry conducted

thereon, would constitute violation of law so as to call a

person to appear before the criminal court. It is not a

mechanical process or matter of course. As held by this Court

in Pepsi Foods Ltd. v. Judicial Magistrate [Pepsi Foods

Ltd. v. Judicial Magistrate, (1998) 5 SCC 749 : 1998 SCC

(Cri) 1400] to set in motion the process of criminal law against

a person is a serious matter.”

***

“22. The steps taken by the Magistrate under Section

190(1)(a) CrPC followed by Section 204 CrPC should reflect

that the Magistrate has applied his mind to the facts and the

statements and he is satisfied that there is ground for

proceeding further in the matter by asking the person against

whom the violation of law is alleged, to appear before the

court. The satisfaction on the ground for proceeding would

mean that the facts alleged in the complaint would constitute

an offence, and when considered along with the statements

recorded, would, prima facie, make the accused answerable

before the court. No doubt, no formal order or a speaking

order is required to be passed at that stage. The Code of

Criminal Procedure requires speaking order to be passed

under Section 203 CrPC when the complaint is dismissed and

that too the reasons need to be stated only briefly. In other

words, the Magistrate is not to act as a post office in taking

cognizance of each and every complaint filed before him and

issue process as a matter of course. There must be sufficient

indication in the order passed by the Magistrate that he is

satisfied that the allegations in the complaint constitute an

offence and when considered along with the statements

recorded and the result of inquiry or report of investigation

under Section 202 CrPC, if any, the accused is answerable

before the criminal court, there is ground for proceeding

against the accused under Section 204 CrPC, by issuing

process for appearance. The application of mind is best

28

demonstrated by disclosure of mind on the satisfaction. If

there is no such indication in a case where the Magistrate

proceeds under Sections 190/204 CrPC, the High Court

under Section 482 CrPC is bound to invoke its inherent power

in order to prevent abuse of the power of the criminal court.

To be called to appear before the criminal court as an

accused is serious matter affecting one's dignity, self-respect

and image in society. Hence, the process of criminal court

shall not be made a weapon of harassment.”

These decisions were cited with approval in Abhijit Pawar v. Hemant Madhukar

Nimbalkar

23

. After referring to the purpose underlying the amendment of Section

202, the Court observed:

“25. … the amended provision casts an obligation on the

Magistrate to apply his mind carefully and satisfy himself that the

allegations in the complaint, when considered along with the

statements recorded or the enquiry conducted thereon, would

prima facie constitute the offence for which the complaint is filed.

This requirement is emphasised by this Court in a recent

judgment Mehmood Ul Rehman v. Khazir Mohammad

Tunda [Mehmood Ul Rehman v. Khazir Mohammad Tunda,

(2015) 12 SCC 420 : (2016) 1 SCC (Cri) 124]…”

35. While noting that the requirement of conducting an enquiry or directing an

investigation before issuing process is not an empty formality, the Court relied on

the decision in Vijay Dhanuka which had held that the exercise by the Magistrate

for the purpose of deciding whether or not there is sufficient ground for

proceeding against the accused is nothing but an enquiry envisaged under

Section 202 of the Code.

23

(2017) 3 SCC 528

29

36. In Birla Corporation Ltd. v. Adventz Investments and Holdings

24

, the

earlier decisions which have been referred to above were cited in the course of

the judgment. The Court noted:

“26. The scope of enquiry under this section is extremely

restricted only to finding out the truth or otherwise of the

allegations made in the complaint in order to determine

whether process should be issued or not under Section 204

CrPC or whether the complaint should be dismissed by

resorting to Section 203 CrPC on the footing that there is no

sufficient ground for proceeding on the basis of the

statements of the complainant and of his witnesses, if any. At

the stage of enquiry under Section 202 CrPC, the Magistrate

is only concerned with the allegations made in the complaint

or the evidence in support of the averments in the complaint

to satisfy himself that there is sufficient ground for proceeding

against the accused.”

Hence, the Court held:

“33. The order of the Magistrate summoning the accused

must reflect that he has applied his mind to the facts of the

case and the law applicable thereto. The application of mind

has to be indicated by disclosure of mind on the satisfaction.

Considering the duties on the part of the Magistrate for

issuance of summons to the accused in a complaint case and

that there must be sufficient indication as to the application of

mind and observing that the Magistrate is not to act as a post

office in taking cognizance of the complaint, in Mehmood Ul

Rehman [Mehmood Ul Rehman v. Khazir Mohammad Tunda,

(2015) 12 SCC 420 : (2016) 1 SCC (Cri) 124]…”

The above principles have been reiterated in the judgment in Krishna Lal

Chawla v. State of U.P

25

.

24

(2019) 16 SCC 610

25

(2021) 5 SCC 435.

30

37. In this backdrop, it becomes necessary now to advert to an order dated 16

April 2021 of a Constitution Bench in Re: Expeditious Trial of Cases under

Section 138 of N.I. Act 1881

26

. The Constitution Bench notes “the gargantuan

pendency of complaints filed under Section 138” and the fact that the “situation

has not improved as courts continue to struggle with the humongous pendency”.

The court noted that there were seven major issues which arose from the

responses filed by the State Governments and the Union Territories including in

relation to the applicability of Section 202 of the CrPC. Section 143 of the NI Act

provides that Sections 262 to 265 of the CrPC (forming a part of Chapter XXI

dealing with summary trials) shall apply to all trials for offences punishable under

Section 138 of the NI Act. On the scope of the inquiry under Section 202 CrPC in

cases under Section 138 of the NI Act, there was a divergence of view between

the High Courts. Some High Courts had held that it was mandatory for the

Magistrate to conduct an inquiry under Section 202 CrPC before issuing process

in complaints filed under Section 138, while there were contrary views in the

other High Courts. In that context, the Court observed:

“10. Section 202 of the Code confers jurisdiction on the

Magistrate to conduct an inquiry for the purpose of deciding

whether sufficient grounds justifying the issue of process are

made out. The amendment to Section 202 of the Code with

effect from 23.06.2006, vide Act 25 of 2005, made it

mandatory for the Magistrate to conduct an inquiry before

issue of process, in a case where the accused resides

beyond the area of jurisdiction of the court. (See: Vijay

Dhanuka & Ors. v. Najima Mamtaj & Ors. 1 , Abhijit Pawar v.

Hemant Madhukar Nimbalkar and Anr. and Birla Corporation

Limited v. Adventz Investments and Holdings Limited & Ors.).

There has been a divergence of opinion amongst the High

Courts relating to the applicability of Section 202 in respect of

complaints filed under Section 138 of the Act. Certain cases

26

Suo Motu Writ Petition (Crl) No. 2 of 2020, decided on 16 April 2021

31

under Section 138 have been decided by the High Courts

upholding the view that it is mandatory for the Magistrate to

conduct an inquiry, as provided in Section 202 of the Code,

before issuance of process in complaints filed under Section

138. Contrary views have been expressed in some other

cases. It has been held that merely because the accused is

residing outside the jurisdiction of the court, it is not

necessary for the Magistrate to postpone the issuance of

process in each and every case. Further, it has also been

held that not conducting inquiry under Section 202 of the

Code would not vitiate the issuance of process, if requisite

satisfaction can be obtained from materials available on

record.

11. The learned Amici Curiae referred to a judgment of this

Court in K.S. Joseph v. Philips Carbon Black Ltd & Anr.

where there was a discussion about the requirement of

inquiry under Section 202 of the Code in relation to

complaints filed under Section 138 but the question of law

was left open. In view of the judgments of this Court in Vijay

Dhanuka (supra), Abhijit Pawar (supra) and Birla Corporation

(supra), the inquiry to be held by the Magistrate before

issuance of summons to the accused residing outside the

jurisdiction of the court cannot be dispensed with. The

learned Amici Curiae recommended that the Magistrate

should come to a conclusion after holding an inquiry that

there are sufficient grounds to proceed against the accused.

We are in agreement with the learned Amici.”

38. Section 145 of the NI Act provides that evidence of the complainant may

be given by him on affidavit, which shall be read in evidence in an inquiry, trial or

other proceeding notwithstanding anything contained in the CrPC. The

Constitution Bench held that Section 145 has been inserted in the Act, with effect

from 2003 with the laudable object of speeding up trials in complaints filed under

Section 138. Hence, the Court noted that if the evidence of the complainant may

be given by him on affidavit, there is no reason for insisting on the evidence of

the witnesses to be taken on oath. Consequently, it was held that Section 202(2)

CrPC is inapplicable to complaints under Section 138 in respect of the

examination of witnesses on oath. The Court held that the evidence of witnesses

32

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.

39. In the present case, the Magistrate has adverted to:

(i) The complaint;

(ii) The affidavit filed by the complainant;

(iii) The evidence as per evidence list and; and

(iv) The submissions of the complainant.

40. The order passed by the Magistrate cannot be held to be invalid as

betraying a non- application of mind. In Dy. Chief Controller of Imports &

Exports v. Roshanlal Agarwal

27

, this Court has held that in determining the

question as to whether process is to be issued, the Magistrate has to be satisfied

whether there is sufficient ground for proceeding and not whether there is

sufficient ground for conviction. Whether the evidence is adequate for supporting

the conviction can only be determined at the trial.

[See also in this context the decision in Bhushan Kumar v. State (NCT of

Delhi)

28

].

41. The High Court did not quash the complaint against the appellants since it

was prima facie established that they were triable for dishonour of cheque.

Section 141 of the NI Act provides:

27

(2003) 4 SCC 139

28

(2012) 5 SCC 424

33

141. Offences by companies.—(1) If the person

committing an offence under section 138 is a company,

every person who, at the time the offence was

committed, was in charge of, and was responsible to, the

company for the conduct of the business of the company,

as well as the company, shall be deemed to be guilty of

the offence and shall be liable to be proceeded against

and punished accordingly:

Provided that nothing contained in this sub- section shall

render any person liable to punishment if he proves that

the offence was committed without his knowledge, or that

he had exercised all due diligence to prevent the

commission of such offence:

[Provided further that where a person is nominated as a

Director of a company by virtue of his holding any office

or employment in the Central Government or State

Government or a financial corporation owned or

controlled by the Central Government or the State

Government, as the case may be, he shall not be liable

for prosecution under this Chapter.]

(2) Notwithstanding anything contained in sub- section (1),

where any offence under this Act has been committed by

a company and it is proved that the offence has been

committed with the consent or connivance of, or is

attributable to, any neglect on the part of, any director,

manager, secretary or other officer of the company, such

director, manager, secretary or other officer shall also be

deemed to be guilty of that offence and shall be liable to

be proceeded against and punished accordingly.

Explanation.—For the purposes of this section, — (a)

“company” means anybody corporate and includes a firm

or other association of individuals; and (b) “director”, in

relation to a firm, means a partner in the firm.”

42. Section 141 of the NI Act stipulates that if a company is alleged to have

committed an offence under Section 138, then every person who ‘was in charge

of, and responsible to, the company for the conduct of the business of the

company’ shall also be deemed guilty of the offence. The proviso provides an

exception if she proves that the offence was committed without her knowledge or

that she had exercised due diligence. In Sunil Bharati Mittal v. CBI

29

, a three

29

(2015) 4 SCC 609

34

judge Bench of this Court observed that the general rule is that criminal intent of

a group of people who undertake business can be imputed to the Company but

not the other way around. Only two exceptions were provided to this general rule:

(i) when the individual has perpetuated the commission of offence and there is

sufficient evidence on the active role of the individual; and (ii) the statute

expressly incorporates the principle of vicarious liability. Justice Sikri writing for a

three- judge Bench observed:

“43. Thus, an individual who has perpetrated the

commission of an offence on behalf of a company can be

made an accused, along with the company, if there is

sufficient evidence of his active role coupled with criminal

intent. Second situation in which he can be implicated is in

those cases where the statutory regime itself attracts the

doctrine of vicarious liability, by specifically incorporating

such a provision.

44. When the company is the offender, vicarious liability of

the Directors cannot be imputed automatically, in the

absence of any statutory provision to this effect. One such

example is Section 141 of the Negotiable Instruments Act,

1881. In Aneeta Hada [Aneeta Hada v. Godfather Travels

& Tours (P) Ltd., (2012) 5 SCC 661 : (2012) 3 SCC (Civ)

350 : (2012) 3 SCC (Cri) 241] , the Court noted that if a

group of persons that guide the business of the company

have the criminal intent, that would be imputed to the

body corporate and it is in this backdrop, Section 141 of

the Negotiable Instruments Act has to be understood.

Such a position is, therefore, because of statutory

intendment making it a deeming fiction. Here also, the

principle of “alter ego”, was applied only in one direction,

namely, where a group of persons that guide the business

had criminal intent, that is to be imputed to the body

corporate and not the vice versa. Otherwise, there has to

be a specific act attributed to the Director or any other

person allegedly in control and management of the

company, to the effect that such a person was responsible

for the acts committed by or on behalf of the company.”

35

43. In SMS Pharmaceuticals v. Neeta Bhalla

30

, a three judge Bench while

construing the provisions of Section 141 of the Negotiable Instruments Act 1881,

has noted that the position of a Managing Director or a Joint Managing Director of

a company is distinct since persons occupying that position are in charge of and

responsible for the conduct of the business. It was observed that though there is

a general presumption that the Managing Director and Joint Managing Director

are responsible for the criminal act of the company, the director will not be held

liable if he was not responsible for the conduct of the company at the time of the

commission of the offence. The Court observed:

“9. The position of a managing director or a joint

managing director in a company may be different. These

persons, as the designation of their office suggests, are in

charge of a company and are responsible for the conduct

of the business of the company. In order to escape liability

such persons may have to bring their case within the

proviso to Section 141(1), that is, they will have to prove

that when the offence was committed they had no

knowledge of the offence or that they exercised all due

diligence to prevent the commission of the offence.

[…]

Every person connected with the company shall not fall

within the ambit of the provision. It is only those persons

who were in charge of and responsible for the conduct of

business of the company at the time of commission of an

offence, who will be liable for criminal action. It follows

from this that if a director of a company who was not in

charge of and was not responsible for the conduct of the

business of the company at the relevant time, will not be

liable under the provision. The liability arises from being

in charge of and responsible for the conduct of

business of the company at the relevant time when

the offence was committed and not on the basis of

merely holding a designation or office in a company.

Conversely, a person not holding any office or designation

in a company may be liable if he satisfies the main

30

(2005) 8 SCC 89

36

requirement of being in charge of and responsible for the

conduct of business of a company at the relevant time.”

(emphasis supplied)

The same principle has been followed by a Bench of two judges in Mainuddin

Abdul Sattar Shaikh v. Vijay D Salvi

31

:

“12. The respondent has adduced the argument that in

the complaint the appellant has not taken the averment

that the accused was the person in charge of and

responsible for the affairs of the Company. However, as

the respondent was the Managing Director of M/s Salvi

Infrastructure (P) Ltd. and sole proprietor of M/s Salvi

Builders and Developers, there is no need of specific

averment on the point. This Court has held in National

Small Industries Corpn. Ltd. v. Harmeet Singh

Paintal [(2010) 3 SCC 330 : (2010) 1 SCC (Civ) 677 :

(2010) 2 SCC (Cri) 1113] , as follows : (SCC p. 346, para

39)

“39. (v) If the accused is a Managing Director or a

Joint Managing Director then it is not necessary to make

specific averment in the complaint and by virtue of their

position they are liable to be proceeded with.”

44. The 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. There are sufficient averments in the complaint to raise a prima

facie case against them. It is only at the trial that they could take recourse to the

proviso to Section 141 and not at the stage of issuance of process.

31

(2015) 9 SCC 622

37

45. In the present case, it is evident that the principal grounds of challenge

which have been set up on behalf of the appellants are all matters of defence at

the trial. The Magistrate having exercised his discretion, it was not open to the

High Court to substitute its discretion. The High Court has in a carefully

considered judgment, analysed the submissions of the appellants and for

justifiable reasons has come to the conclusion that they are lacking in substance.

46. For the above reasons, we have come to the conclusion that there is no

merit in the appeals. The appeals shall stand dismissed.

47. Pending applications, if any, are disposed of.

…..….…………………………...............................J.

[Dr Dhananjaya Y Chandrachud]

…...….…………………………...............................J.

[A S Bopanna]

New Delhi;

December 03, 2021.