Security Cheques

IN THE HIGH COURT OF DELHI AT NEW DELHI
SUBJECT : Negotiable Instruments Act
Crl.M.C. No.3011/2004
DATE OF DECISION: 11.10.2007

M/s.Collage Culture & Ors. … Petitioners
through: Mr.Atul Jain, Adv.

VERSUS

Apparel Export Promotion Council & Anr. … Respondent
through : Mr.Kuljeet Rawal, Adv.

: PRADEEP NANDRAJOG, J.
1. Petitioners pray that the order dated 21.1.2004 summoning the
petitioners to face trial for the alleged offence under Section 138 of the Negotiable
Instruments Act 1881 be quashed.

2. It is urged that no actionable cause exists in favour of the complainant to
make out the offence under Section 138 of the Negotiable Instruments Act 1881. It
is urged that the sine qua non for the applicability of Section 138 of the
Negotiable Instruments Act 1881 is the issuance of cheque for a debt which is due
towards discharge of a liability. It is urged that a cheque given as a collateral
security or as a security for payment of an amount which may become payable at a
future date upon the happening or the non-happening of an event i.e. towards a
contingency cannot be the foundation of an action under Section 138 of the
Negotiable Instruments Act 1881.

3. Admittedly, the complaint which was filed under Section 138 of the
Negotiable Instruments Act 1881 pertained to cheques issued by the petitioners on
1.6.2003. 4. The cheques in question were in replacement of earlier cheques issued
on 1.6.2002 and had to be replaced on account of the fact that the 6 months’ validity
period of the cheques had expired.

5. A little elaboration is required as to under what circumstances the
cheques were issued.

6. First petitioner is in the business of export of garments. The export of
garments was regulated by Apparel Export Promotion Council. It used to allot
quotas to intending exporters for exporting garments. The quota was valid for an
year.

7. As per the policy, if a firm could not exhaust the quota within the
stipulated time, a penalty used to be imposed.

8. For the year 2003-04, the policy stipulated that the earnest money would
have to be deposited in the form of an security when quota was allotted. The security
was liable to be forfeited if goods were not exported. In case of partial export,
proportionate penalty was levied with reference to the unexhausted quota.

9. Clause 8 of the policy stipulated as under:-
“8. EARNEST MONEY DEPOSITS (EMD)
Amount of Earnest Money Deposits, can be given in the form of Bank Guarantee,
FDR (unilaterally encashable by AEPC), or Demand Draft. Legal Undertaking
(LUT) subject to the provision of para “E” below and Post Dated Cheques (PDC)
subject to the provisions of para “F” below would also be accepted for extension of
entitlements in systems other than FCFS. The release/forfeiture of EMD based on
performance will be as per the following procedures in different systems of
allotment.”

10. As per the policy, it was permissible to seek revalidation of the
unutilized quota for the ensuing year and for which, pertaining to the unutilized
quota, the earnest money deposit had to be revalidated.

11. Realizing that first petitioner would not be in a position to utilize its
quota for the year 2001, on 15.10.2001 it sought extension of time to utilize the quota
for the year 2001 i.e. sought extension of time to comply with the policy. Along
therewith post dated cheques dated 1.6.2002 were issued in favour of the
complainant as earnest money deposits. 12. It may be noted that as per the clause 8 of the policy, earnest money
could be deposited by post dated cheques.

13. First petitioner could not fulfill its obligations to utilize the unexpired
quota by the extended period and on 23.4.2002 the complainant issued a show-cause
notice as to why the earnest money be not forfeited and cheques encashed. Letter
dated 23.4.2002 reads as under:-
“TO
COLLAGE CULTURE
56-58 COMMUNITY CENTRE,
EAST OF KAILASH,
NEW DELHI-110 065.

SUB : SHOW CAUSE NOTICE

DEAR SIRS,

AS PER YOUR REQUEST, AEPC HAS GRANTED REVALIDATION OF
VARIOUS ENTITLEMENT CERTIFICATES DURING THE YEAR 2001. THE
DETAILS OF EMD PROVIDED HEREWITH

S.NO. CHEQUE NO. DATE PDC AMOUNT
1. 210469 01-JUNE-2002 29200.00
2. 210472 01-JUNE-2002 277980.00
3. 210473 01-JUNE-2002 540000.00
4. 210474 01-JUNE-2002 417980.00
5. 210475 01-JUNE-2002 400000.00
6. 210476 01-JUNE-2002 517980.00
7. 210477 01-JUNE-2002 186060.00

page 4 of 10
IT IS OBSERVED THAT YOU HAVE NOT COMPLIED WITH THE TERMS
AND CONDITIONS OF THE ALLOTMENT AS PER THE ALLOTMENT
POLICY, IN RESPECT OF THE ENTITLEMENT CERTIFICATES AS PER
DETAILS GIVEN IN THE ENCLOSED SHEET.

AS PER CONDITIONS OF REVALIDATION, YOUR EMD IS LIABLE TO BE
FORFEITED FOR AN AMOUNT OF RS.2369200.00 (RUPEES TWENTY THREE
LAC SIXTY NINE THOUSAND TWO HUNDRED ONLY).
YOU ARE HEREBY CALLED UPON TO SHOW CAUSE AS TO WHY YOUR
EMD SHOULD NOT BE FORFEITED FOR THE AMOUNT AS INDICATED
ABOVE FOR THE REASONS MENTIONED IN THE ENCLOSED SHEET.
YOUR REPLY SHOULD REACH THE UNDER SIGNED WITHIN A PERIOD OF
15 DAYS FROM THE DATE OF THIS SHOW CAUSE NOTICE, FAILING
WHICH IT WILL BE PRESUMED THAT YOU HAVE NOTHING TO
REPRESENT AGAINT THE DECISION INDICATED ABOVE IN CASE OF
YOUR WISH TO AVAIL THE BENEFIT ON OVERALL PERFORMANCE
BASIS. PLEASE ENSURE THAT YOUR REPLY TO THIS NOTICE IS
SUPPORTED BY A DETAILED STATEMENT AS PER ANNEXURE-XIII OF
POLICY BOOKLET. AN OPPORTUNITY FOR PERSONAL HEARING IS ALSO
GIVEN TO YOU AT 4.00 PM ON 9.5.2002 WITH SHRI J.K.ARORA, ADDL.
DIRECTOR, AEPC, NEHRU PLACE. YOU ARE REQUESTED TO ATTEND
THE PERSONAL HEARING WITH ALL DOCUMENTARY EVIDENCES
SUPPORTING YOUR CONTENTION. KINDLY NOTE THAT IF YOU FAIL TO
ATTEND THE PERSONAL HEARING OR REPLY TO THIS NOTICE, A FINAL
DECISION ON THIS MATTER WILL BE TAKEN WITHOUT FURTHER
REFERENCE TO YOU.

THANKING YOU

YOURS FAITHFULLY
MAHESH JHA
JOINT DIRECTOR”
page 5 of 10

14. First petitioner filed a reply. Finding the reply unsatisfactory, on
3.7.2002, the complainant, Apparel Export Promotion Council forfeited the earnest
money deposit i.e. the amounts covered by the cheques.

15. First petitioner filed an appeal before the Textile Commissioner
challenging the order dated 3.7.2002. On 29.8.2002 the Textile Commissioner
stayed the operation of the order dated 3.7.2002.

16. During the pendency of the appeal, the post dated cheques issued by the
first petitioner on 1.6.2002 expired. On 30.11.2002, under directions of the
Appellate Authority, first petitioner replaced the cheques towards earnest money
deposit by issuing post dated cheques dated 1.6.2003. The appeal was pending when
the complainant presented the cheques for encashment. The cheques were dishonoured somewhere in the 3rd week of November 2003 resulting in the
complaint being filed.

17. On 21.1.2004, learned Metropolitan Magistrate, taking cognizance of
the complaint summoned the petitioners to face trial.

18. It may be noted that in the meanwhile appeal filed by the petitioner
before the Textile Commissioner against the order
dated 3.7.2002 was dismissed.

19. It is not in dispute that the cheques which have formed the subject
matter of the complaint were post dated cheques. It is also not in dispute that the
cheques were towards replacement of the cheques issued on 1.6.2002 which cheques
were also post dated cheques. It is also not in dispute that the cheques were issued as
earnest money deposit. It is also not in dispute that the earnest money was liable to
be forfeited only if the first petitioner failed to exhaust the quota issued by the
complainant for export of garments.

20. A post dated cheque may be issued under 2 circumstances. Under
circumstance one, it may be issued for a debt in presenti but payable in future. Under
second circumstance it may be issued for a debt which may become payable in future
upon the occurrence of a contingent event.

21. The difference in the two kinds of post-dated cheques would be that the
cheque issued under first circumstance would be for a debt due, only payment being
postponed. The latter cheque would be by way of a security.

22. The word ‘due’ means ‘outstanding at the relevant date’. The debt has to
be in existence as a crystallized demand akin to a liquidated damages and not a
demand which may or may not come into existence; coming into existence being
contingent upon the happening of an event.

23. Section 138 of the Negotiable Instruments Act 1881 reads as under:-
“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 returned by the bank unpaid,
either because of the amount of money standing returned by the bank unpaid, either
because of the amount of money standing 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 provision 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.”

24. It would be relevant to note that the statute does not refer to the debt
being payable, meaning thereby, a post dated cheque for a debt due but payment
postponed at a future date would attract Section 138 of the Negotiable Instruments
Act 1881. But the cheque issued not for an existing due, but issued by way of a
security, would not attract Section 138 of the Negotiable Instruments Act 1881, for it
has not been issued for a debt which has come into in existence.

25. Looking to the precedent, I find that in the decision reported as 2006 (6)
SCC 39 M.S.Narayana Menon @Mani vs. State of Kerala & Anr., it was observed as
under:-
“52. ……………………… If the defence is acceptable as probable the cheque
therefor cannot be held to have been issued in discharge of the debt as, for example,
if a cheque is issued for security or for any other purpose the same would not come
within the purview of Section 138 of the Act.

26. Under the circumstances, the petition must succeed. 27. The summoning order dated 21.1.2004 is quashed.

Sd/-
(PRADEEP NANDRAJOG)
JUDGE

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