Case Note & Summary
The Supreme Court allowed the appeals filed by the Directors and Managing Director of R.L. Steels & Energy Limited, quashing the criminal complaint under Section 138 of the Negotiable Instruments Act, 1881. The dispute arose from a Power Supply Agreement between the company and the second respondent, under which the company issued two cheques as security deposit, with an endorsement on the reverse stating 'to be deposited after confirmation only for security purpose'. The agreement required payments through Letters of Credit, not cheques. After the company terminated the agreement, the second respondent deposited the cheque, which was dishonoured due to stop payment instructions. The second respondent filed a complaint under Section 138 NI Act. The appellants sought quashing under Section 482 CrPC, which was dismissed by the High Court. The Supreme Court held that the cheque was issued as security and not towards any legally enforceable debt, as admitted by the second respondent in its plaint in a civil suit. The court emphasized that the endorsement on the cheque and the admission in the plaint clearly indicated the security nature. The court also noted that the Power Supply Agreement provided for payment through LC, not cheques. Therefore, the essential ingredient of a legally enforceable debt was missing, and the criminal proceedings were an abuse of process. The court set aside the High Court order and quashed the complaint and summoning order.
Headnote
A) Negotiable Instruments Act - Dishonour of Cheque - Section 138 - Cheque Issued as Security - A cheque issued as security, without a pre-existing debt or liability, does not attract Section 138 NI Act as there is no legally enforceable debt. The endorsement on the cheque and the admission in the plaint by the complainant that the cheque was issued as security deposit are crucial to determine the nature of the transaction. The court held that the complaint was an abuse of process and liable to be quashed. (Paras 1-20) B) Criminal Procedure Code - Quashing of Complaint - Section 482 - Abuse of Process - The High Court's refusal to quash a criminal complaint under Section 482 CrPC was set aside where the cheque was issued as security and the complainant admitted the same in a civil suit. The Supreme Court held that continuing criminal proceedings would be an abuse of the process of law. (Paras 10-20) C) Negotiable Instruments Act - Dishonour of Cheque - Section 138 - Legally Enforceable Debt - For an offence under Section 138 NI Act, the cheque must be issued in discharge of a legally enforceable debt or liability. A cheque issued as security does not create such a debt or liability. The court relied on the endorsement on the cheque and the terms of the Power Supply Agreement to conclude that the cheque was only a security. (Paras 3-20)
Issue of Consideration
Whether a cheque issued as security and not towards a pre-existing debt or liability can be the basis for a complaint under Section 138 of the Negotiable Instruments Act, 1881, and whether the High Court erred in refusing to quash such a complaint under Section 482 of the Code of Criminal Procedure, 1973.
Final Decision
Appeals allowed. Impugned judgment and order of the High Court dated 24 June 2019 is set aside. Criminal complaint CC No. 1220 of 2017 and summoning order dated 3 November 2017 are quashed.
Law Points
- Cheque issued as security does not create a legally enforceable debt
- Section 138 NI Act requires existence of a legally enforceable debt
- Endorsement on cheque is relevant to determine nature of transaction
- Admission in civil plaint can be used in criminal proceedings
- Section 482 CrPC can be invoked to prevent abuse of process
