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P.J Agro Tech Limited And Others v. Water Base Limited .
Factual and Procedural Background
Appellant 1 is an agro-based company headquartered in Hyderabad, Andhra Pradesh; Appellants 2 and 3 are its Managing Director and Chairperson. Respondent 1, a prawn-feed manufacturer, entered into a distribution arrangement with the appellants to utilise their dealer network. When the venture proved commercially unsuccessful, the appellants settled all outstanding accounts with Respondent 1 and authorised the latter to recover any remaining dues directly from the customers. Customers were duly notified, and Respondent 1 was asked to coordinate with the appellants’ General Manager in Nellore, K. Balashankar Reddy.
Respondent 1 accepted the arrangement but later discovered that some of its employees, in conspiracy with Balashankar Reddy, had misappropriated funds. On 13-12-2002 Respondent 1 issued a statutory notice under Section 138 of the Negotiable Instruments Act, 1881 (“the 1881 Act”), alleging dishonour of a cheque dated 25-11-2002 drawn by Balashankar Reddy on State Bank of Hyderabad, Nellore Branch, and demanded payment from the appellants.
The appellants replied on 26-12-2002 that they maintained no account with that bank and had not issued the cheque. Nevertheless, summons were issued by the XVIII Metropolitan Magistrate, Saidapet, Chennai, in Complaint Case No. 1142 of 2003, wherein Appellant 1, its Directors, and other pro forma respondents were arrayed as accused along with Balashankar Reddy (Accused 11). A petition to quash the summons was dismissed by the High Court on 14-9-2006, prompting the present appeal before the Supreme Court.
Legal Issues Presented
- Whether a complaint under Section 138 of the Negotiable Instruments Act, 1881 is maintainable against persons who are not the drawers of the dishonoured cheque and who do not maintain the bank account on which it was drawn.
Arguments of the Parties
Appellants' Arguments
- Section 138 requires that the dishonoured cheque be drawn by the accused on an account maintained by the accused; this element is absent because the cheque was issued from Balashankar Reddy’s personal savings account.
- No director of Appellant 1 signed the cheque; therefore, criminal liability cannot be fastened on the company or its Directors.
- The complaint constitutes an abuse of process aimed at extracting money rather than addressing a statutory offence.
Respondent 1's Arguments
- The cheque was issued to liquidate the dues of Appellant 1 and its Directors; hence they are liable for dishonour under Section 138.
- The High Court correctly refused to quash the complaint since the liability sought to be discharged was that of the appellants.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Supreme Court extracted and analysed the text of Section 138 of the 1881 Act, emphasising that:
- The statutory offence is attracted only when a cheque is drawn by “a person on an account maintained by him” and is dishonoured.
- Criminal or quasi-criminal provisions must be strictly construed; liability cannot be extended to parties who are not statutorily covered.
- Even if the cheque was intended to discharge the appellants’ debt, that circumstance does not override the statutory requirement that the accused must be the drawer of the cheque.
- Respondent 1 may have civil remedies against the appellants for recovery of dues, but Section 138 cannot be invoked against them for a cheque drawn by another person.
Holding and Implications
Holding: The appeal is allowed; the High Court’s order is set aside and the criminal complaint is quashed insofar as it relates to Appellant 1, its Directors, and other pro forma respondents. Any bail bonds executed by these parties stand discharged.
Implications: The decision confines criminal liability under Section 138 strictly to the drawer of the dishonoured cheque and underscores that corporate officers and companies cannot be prosecuted merely because the cheque was issued to discharge their liabilities if they did not draw it. The ruling resolves the dispute between the parties but does not create a new legal precedent beyond reaffirming a strict interpretation of the statutory text.
Altamas Kabir, J.— Leave granted. Appellant 1 herein is an agro-based company having varied interests in providing feed supplements, vaccines, etc. Appellants 2 and 3 are the Managing Director and Chairperson of Appellant 1 Company, which is based in Hyderabad in the State of Andhra Pradesh. In order to utilise the dealer network of Appellant 1 Company, Respondent 1 Company approached the appellants for distribution of prawn feed manufactured by it. Inasmuch as the said venture did not turn out to be very successful, Appellant 1 Company took a decision to discontinue its dealings with Respondent 1 Company.
2. In furtherance of the above, the appellant Company settled all its outstandings with Respondent 1 Company and also gave an authorisation letter to Respondent 1 Company to collect all other dues directly from the customers of Appellant 1 Company, who had bought the feed but were yet to pay the price therefor. The customers concerned were also informed about the aforesaid decision. Thereafter, on 4-10-2001, the appellant Company requested Respondent 1 Company to coordinate with one K. Balashankar Reddy, the then General Manager at Nellore, for collecting the dues which were still outstanding.
3. From the contents of the said letter it appears that the respondent Company had accepted the said offer. However, in the course of making collections from the customers directly, it was found that some of its employees had conspired with the said K. Balashankar Reddy and had misappropriated some amounts of money and the same was intimated by Respondent 1 Company to the appellant Company which asked the former to take action against the said Balashankar Reddy and its employees concerned.
4. Subsequently, however, the appellant and the pro forma respondents received a notice dated 13-12-2002, from Respondent 1 Company purporting to be a notice under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as “the 1881 Act”) wherein it was stated that a cheque issued by K. Balashankar Reddy on 25-11-2002, drawn on State Bank of Hyderabad, Nellore Branch, had been returned dishonoured with the endorsement “account closed”. The notice also demanded repayment of the cheque amount from the appellants.
5. On receiving the said notice, the appellants replied to the same on 26-12-2002, stating that they never had any account with State Bank of Hyderabad and the cheque in question had not been issued by Appellant 1 Company. Apparently, there was no response to the reply sent on behalf of the appellants and instead the appellants were served with summons from the Court of XVIIIth Metropolitan Magistrate, Saidapet, Chennai, in Complaint Case No. 1142 of 2003 based on the complaint which had been filed by Respondent 1 on 23-1-2003.
6. The appellants entered appearance in the aforesaid complaint case and upon obtaining copies of the complaint, they were surprised to learn that the same had been filed against the appellants on the basis of a personal cheque issued by Accused 11, K. Balashankar Reddy, from out of his personal savings bank account. The said summons was challenged by the appellants and the pro forma respondents before the High Court on the ground that the Company did not have any account with State Bank of Hyderabad and that the cheque had been issued by K. Balashankar Reddy (Accused 11) from out of his personal savings bank account and that none of the Directors had signed the said cheque.
7. It was contended that the complaint was an abuse of the process of court and had been filed with the sole motive of extracting money from the appellants. On 14-9-2006, the High Court dismissed the said petition holding that the cheque which had been issued by K. Balashankar Reddy was to meet the liability of Appellant 1 Company and its Directors on their request and that as a result they had rightly been prosecuted under Section 138 of the 1881 Act. The said order of the High Court dismissing the appellants' petition has been challenged in the instant appeal essentially on the ground that the High Court had erred in allowing the complaint proceedings to continue although the same were not maintainable against the appellants and the pro forma respondents who were not the drawers of the cheque, nor was the cheque issued from any of their banks.
8. Appearing for the appellants, Mr Siddhartha Dave, learned advocate, submitted that both the learned Magistrate as well as the High Court had failed to consider in their proper perspective the provisions of Section 138 of the Negotiable Instruments Act, 1881. It was pointed out by Mr Dave that in order to attract the provisions of Section 138 of the 1881 Act, it was necessary that a cheque would have to be drawn by a person on an account maintained by him with his banker and if the said cheque was dishonoured, it would be deemed that such person had committed an offence and would, without prejudice to any other provision of the 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.
9. Mr Dave urged that in order to maintain an action against a person under Section 138 of the 1881 Act, it would be necessary to show that the cheque had been issued by such person on an account maintained by him, which fact was absent in the instant case as far as the appellants are concerned. It was reiterated that the cheque in question had been drawn by Respondent 11 in his personal capacity on his bank and upon dishonour thereof, only he could be prosecuted under Section 138 of the 1881 Act. It was further submitted that the proceedings against the Company and its Directors were not maintainable and the High Court had erred in law in not quashing the same.
10. The stand taken on behalf of the appellants was vehemently opposed on behalf of Respondent 1 Company and a spirited attempt was made to involve Appellant 1 Company and its Directors for dishonour of the cheque which had been issued by Respondent 11 from his own bank, which did not attract the provisions of Section 138 of the 1881 Act against Appellant 1 Company and its Directors. It was urged that since the cheque had been issued by Respondent 11 to liquidate the dues of the appellant Company and its Directors, the High Court had quite justifiably refused to quash the complaint filed by Respondent 1 Company.
11. From the submissions made on behalf of the respective parties, it is quite apparent that the short point for decision in this appeal is whether a complaint under Section 138 of the 1881 Act would be maintainable against a person who was not the drawer of the cheque from an account maintained by him, which ultimately came to be dishonoured on presentation.
12. Since the provisions of Section 138 of the 1881 Act have fallen for consideration in this appeal, the same are extracted hereinbelow:
“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 provision of this Act, be punished with imprisonment for a term which may extend 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.”
13. From a reading of the said section, it is very clear that in order to attract the provisions thereof a cheque which is dishonoured will have to be drawn by a person on an account maintained by him with the 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. It is only such a cheque which is dishonoured which would attract the provisions of Section 138 of the above Act against the drawer of the cheque.
14. In the instant case, the cheque which had been dishonoured may have been issued by Respondent 11 for discharging the dues of Appellant 1 Company and its Directors to Respondent 1 Company and the respondent Company may have a good case against Appellant 1 Company for recovery of its dues before other fora, but it would not be sufficient to attract the provisions of Section 138 of the 1881 Act. The appellant Company and its Directors cannot be made liable under Section 138 of the 1881 Act for a default committed by Respondent 11. An action in respect of a criminal or a quasi-criminal provision has to be strictly construed in keeping with the provisions alleged to have been violated. The proceedings in such matters are in personam and cannot be used to foist an offence on some other person, who under the statute was not liable for the commission of such offence.
15. Having regard to the above, we allow the appeal and set aside the order passed by the High Court and quash the complaint filed by Respondent 1 Company as far as the appellants and other pro forma respondents are concerned. In the event, any of the appellants and/or pro forma respondents have been released on bail, they shall stand discharged from their bail bonds forthwith.
16. The appeal is allowed to the aforesaid extent.
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