Indus Airways Pvt. Ltd. & Ors. Versus Magnum Aviation Pvt. Ltd. & Anr. - Section 138 of NI Act

A cheque with Thomas Jefferson as payee and payor from 1809.

You can read the whole judgment here.

Question of Law Involved

Whether the post-dated cheques issued by the purchasers as an advance payment in respect of purchase orders could be considered in discharge of legally enforceable debt or other liability, and, if so,

Whether the dishonour of such cheques amounts to an offence under Section 138 of the Negotiable Instruments Act, 1881 (for short, ‘the N.I. Act’)?

Facts

1. The purchasers placed two purchase orders for supply of certain aircraft parts with respondent No.1, M/s. Magnum Aviation Pvt. Ltd. (supplier).  In respect of these purchase orders, the purchasers also issued two post-dated cheques dated 15.03.2007 for a sum of Rs.34,57,164/- and 20.03.2007 for a sum of Rs.15,91,820/-. The said cheques were issued by way of advance payment for the purchase orders.  One of the terms and conditions of the contract was that the entire payment would be given to the supplier in advance.  The supplier says that the advance payment was made by the purchasers as it had to procure the parts from abroad.

2. These cheques got dishonoured when they were presented on the ground that the purchasers had stopped payment.

3. The supplier received letter dated 22.03.2007 from the purchasers cancelling the purchase orders and requesting the supplier to return both the cheques.

4. The supplier sent response to the letter dated 22.03.2007 on 23.03.2007 asking the purchasers as to when the supplier could collect the payment.

5. Thereafter, on 12.04.2007, the supplier sent a notice to the purchasers and then filed a complaint against the purchasers under Section 138 of the N.I. Act before the Court of Additional Chief Metropolitan Magistrate, New Delhi.

6. On 22.05.2007, the concerned Additional Chief Metropolitan Magistrate took cognizance of the alleged offence and issued summons to the purchasers.

7. The purchasers challenged the order issuing summons in a revision petition under Section 397 of the Code of Criminal Procedure, 1973 (for short, ‘Code’).  The Additional Sessions Judge, after hearing the parties, allowed the revision petition vide order dated 02.09.2008 and quashed the process issued by the Additional Chief Metropolitan Magistrate.

8. The supplier challenged the order of the Additional Sessions Judge in a petition under Section 482 of the Code before the High Court.  The High Court allowed the petition, set aside the order of the Additional Sessions Judge and restored the order of the Additional Chief Metropolitan Magistrate issuing process to the purchasers.

9. The Delhi High Court following its earlier decision in Mojj Engineering held that the issuance of a cheque at the time of signing such contract has to be considered against a liability, as the amount written in the cheque is payable by the person on the date mentioned in the cheque.

Delhi High Court’s Judgment

“If at the time of entering into a contract it is one of the conditions of the contract that the purchaser has to pay the amount in advance then advance payment is a liability of the purchaser. The seller of the items would not have entered into contract unless the advance payment was made to him. A condition of advance payment is normally put by the seller for the reason that the purchaser may not later on retract and refuse to take the goods either manufactured for him or procured for him. Payment of cost of the goods in advance being one of the conditions of the contract becomes liability of the purchaser. The purchaser who had issued the cheque could have been asked to make payment either by draft or in cash. Since giving cheque is a mode of payment like any other mode of payment, it is normally accepted as a payment. The issuance of a cheque at the time of signing such contract has to be considered against a liability as the amount written in the cheque is payable by the person on the date mentioned in the cheque. Where the seller or manufacturer, on the basis of cheques issued, manufactures the goods or procures the goods from outside, and has acted upon the contract, the liability of the purchaser gets fastened, the moment the seller or manufacturer acts upon the contract and procures the goods. If for any reason, the seller fails to manufacture the goods or procure the goods it is only under those circumstances that no liability is created. However, where the goods or raw material has been procured for the purchaser by seller or goods have been manufactured by the seller, it cannot be said that the cheques were not issued against the liability. I consider that if the liability is not construed in this manner, the sole purpose of making dishonour of the cheque as an offence stands defeated. The purpose of making or enacting Section 138 of the N.I. Act was to enhance the acceptability of cheque in settlement of commercial transactions, to infuse trust into commercial transactions and to make a cheque as a reliable negotiable instrument and to see that the cheques of business transactions are not dishonoured. The purpose of Negotiable Instrument Act is to make an orderly statement of rules of law relating to negotiable instruments and to ensure that mercantile instruments should be equated with goods passing from one hand to other. The sole purpose of the Act would stand defeated if after placing orders and giving advance payments, the stop payments are issued and orders are cancelled on the ground of pricing of the goods as was done in this case.”

Provision of Law Involved

Section 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 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 provisions of this Act, be punished with imprisonment for 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, 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 or other liability" means a legally enforceable debt or other liability.”

Discussion by the Supreme Court

 We see that the interpretation of the expression ‘for discharge of any debt or other liability’ occurring in Section 138 of the N.I. Act is significant and decisive in this matter.

The explanation appended to Section 138 explains the meaning of the term ‘debt or other liability’ as a legally enforceable debt of other liability. Section 138 treats dishonoured cheque as an offence if and only if the cheque has been issued in discharge of any debt or other liability. The court said that “in other words, drawal of the cheque in discharge of existing or past adjudicated liability is sine qua non for bringing an offence under Section 138”.

According to the court, if a cheque has been issued for advance payment for purchase of goods and because of some reason, the purchase order gets cancelled, the cheque cannot be said 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.

The court cited various cases that have held that there must be subsisting liability or debt on the date when the cheque was delivered. The Apex court said that the high court’s reasoning was flawed as it failed to keep in mind the distinction between civil liability and criminal liability under section 138. According to the court, if at the time of entering into a contract, it is one of the conditions of the contract that the purchaser has to pay the amount in advance and there is breach of such condition then purchaser may have to make good the loss that might have occasioned to the seller but that does not create a criminal liability under Section 138. For a criminal liability to be made out under Section 138, there should be legally enforceable debt or other liability subsisting on the date of drawal of the cheque.

The court further said that it is unable to accept the view that issuance of cheque towards advance payment at the time of signing such contract has to be considered as subsisting liability and dishonour of such cheque amounts to an offence under Section 138 of the N.I. Act.

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 by the supplier, the cheque cannot be said to have been drawn for an existing debt or liability.

Hence, the court allowed the appeal and restored the order of the Sessions Judge.

To be Continued Here....