Law Web: Whether judgment can be read as statute divorced from facts of case?

It is well settled that a judgment cannot be read like a Statute.
Construction of a judgment should be made in the light of the factual
matrix involved therein. What is more important is to see the issues
involved in a given case, and the context wherein the observations were
made by the Court while deciding the case. Observation made in a
judgment, it is trite, should not be read in isolation and out of context.
[See: Goan Real Estate and Construction Ltd. v. Union of India,
(2010) 5 SCC 388]: (2010 AIR SCW 2671)]. It is the ratio of the
judgment, and not every observation made in the context of the facts of
a particular case under consideration of the court, which constitutes a
binding precedent. The Supreme Court in P.S. Sathappan v. Andhra
Bank Ltd., AIR 2004 SC 5152 has held as follows:
"138. While analyzing different decisions rendered by this Court, an
attempt has been made to read the judgments as should be read under the
rule of precedents. A decision, it is trite, should not be read as a statute.
139. A decision is an authority for the questions of law determined by it.
While applying the ratio, the court may not pick out a word or a sentence

context in which they were used."

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
CRIMINAL MISC.APPLICATION (FOR QUASHING & SET ASIDE FIR/ORDER)
NO. 968 of 2014

NIKHIL P GANDHI.
V
STATE OF GUJARAT & 2.
CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA
Date : 15/06/2016

Citation: 2016 CRLJ4338 Guj

1 Since the issues raised, in all the captioned applications, are more
or less the same, and the relief prayed for is also to quash the selfsame
criminal case, those were heard analogously are being disposed of by
this common judgment and order.
2 The facts of this case may be summarized as under:
2.1 The complainant M/s. Sharda Steel Corporation is a partnership
firm registered under the Partnership Act. The complainant firm is
engaged in the business of supply of Steel, Cement, etc. Shri Bharat B.
Shah is one of the partners of the firm. One Shri Chimanlal B. Shah is an
authorized person so far as the business of the partnership firm is
concerned. Both Shri Bharat B. Shah and Shri Chimanlal B. Shah are
brothers.
2.2 The Gujarat Pipavav Port Limited (original accused No.1) is a
company incorporated under the Companies Act. The accused Nos.2 to
19 shown in the complaint are the Directors and other Office Bearers of
the company.
2.3 Sometime in the decade of early 90’s, the company started
constructing a Jetty at the Pipavav Port. An agreement was entered into

between the complainant firm and the accused company for supply of
Steel, Cement, etc for the purpose of the construction of the Port.
2.4 At the relevant point of time i.e. the applicant of the Criminal
Miscellaneous Application No.968 of 2014, in his capacity, as the
Managing Director and Vice President of the company issued a blank
signed cheque in favour of the complainant firm as a security.
2.5 In the course of the business transactions, a dispute arose between
the accused company and the complainant firm. The complainant firm
preferred three Special Civil Suits Nos.35 of 2000, 36 of 2000 and 37 of
2000 in the Court of the Civil Judge, Senior Division, Amreli, for
recovery of a certain amount raised through bills. The Civil Suits are still
pending as on date. In the year 2008 with the consent of the parties, the
learned Civil Judge passed an order in the Special Civil Suit No.36 of
2000 appointing M/s. Chhajed & Doshi Company, Chartered
Accountants, having its Head Office at Mumbai, as a mediator for the
purpose of settling the accounts.
2.6 M/s. Chhajed & Doshi Company submitted its report dated 28th
April 2009, according to which, the accused company owes a sum of
Rs.15,82,23,865/ (Rupees Fifteen Crore Eighty Two Lac Twenty Three
Thousand Eight Hundred Fifty Five only) to the complainant firm.
2.7 The complainant firm, thereafter, started demanding the amount
from the accused company. There was lot of correspondence between
the complainant and the accused company between 2010 and 2013 in
that regard. Ultimately, the complainant thought fit to fill up the blank
signed cheque, which was drawn by the then Managing Director on
behalf of the company as a security. The cheque was filled up on 28th

March 2013 for the amount of Rs.15,82,23,858/ drawn in favour of the
Sharda Steel Corporation. The complainant negotiated the cheque in
question through its banker Dena Bank which was dishonoured with an
endorsement of “account closed”.
2.8 The complainant, thereafter, issued a statutory notice dated 23rd
April 2013, and called upon the company to make good the amount
mentioned in the cheque. The drawer of the cheque, namely, Mr. Nikhil
P. Gandhi (original accused No.2) gave a reply dated 6th May 2013
denying his liability. The complainant, thereafter, proceeded to file a
complaint in the Court of the learned Chief Judicial Magistrate at
Mahuva. The complaint came to be registered as the Criminal Inquiry
Case No.20 of 2013. After recording of the verification of the
complainant, the Court thought fit to order a Magisterial inquiry under
Section 202 of the Code of Criminal, 1973. On completion of the
Magisterial inquiry, the Chief Judicial Magistrate, Mahuva thought fit to
issue process against the company and the Directors named in the
complaint for the offence under Section 138 of the Negotiable
Instruments Act. On process being issued, the case came to be ultimately
registered as the Criminal Case No.1710 of 2013.
2.9 Hence, these applications by the company and the Directors for
quashing of the criminal proceedings initiated for the offence punishable
under Section 138 of the Negotiable Instruments Act.
3 At the outset, I may state that the learned counsel appearing for
the complainant very fairly made a statement that the criminal
proceedings may be quashed so far as the following applicants of the
Criminal Miscellaneous Application No.1067 of 2014 and Criminal
Miscellaneous Application No.1756 of 2014 are concerned. A pursis in

writing duly signed by the advocates on record was tendered before this
Court. The details are as under:
“Criminal Miscellaneous Application No.1067 of 2014
1. Christian Moller Laursen (petitioner No.1 and original accused No.5)
2. Luis Miranda (petitioner No.3 and original accused No.8)”
“Criminal Miscellaneous Application No.1756 of 2014
1. Mr. Sunil Chawla (petitioner No.1 and original accused No.11)
2. Mr. Anup Sheth (petitioner No.2 and original accused No.10)
3. Dinesh Kumar Lal (petitioner No.3 and original accused No.7).”
4 The aforesaid concession at the end of the complainant was given
on the ground that at the time when the offence is alleged to have been
committed, they were no way concerned with the daytoday affairs and
management of the company.
5 However, so far as the company and the other accused are
concerned, it was argued that the proceedings may not be quashed.
6 I heard Mr. Nephde, the learned senior advocate, Mr. Mahendra
R. Anand, the learned senior advocate, and Mr. Mihir Thakore, the
learned senior advocate and Mr. S.I. Nanavati, the learned senior
advocate appearing for the company and the Directors. I also heard Mr.
Abad Ponda, the learned senior advocate who appeared on behalf of the
complainant.
7 It is not in dispute that a signed blank cheque leaf was given to
the complainant sometime in the year 199495. Except the signature of
the then Managing Director Shri Gandhi, the other parts of the body
were blank.

8 Let me take note of some of the admissions in the complaint itself.
“4) For and on behalf of accused No.1 Company, the accused No.2 had
given cheque as security. In the year 2000 some cheques had arisen
between the complainant firm and the accused No.2 and the accused No.1
Company did not pay legitimate amount of the complainant firm,
therefore, the complainant has filed SPL. Civil Suit No.35 of 2000,
36/2000 and 37/2000 in the Civil Court at Amreli for recovery of dues,
wherein the Court granted exparte interim injunction below Ex. 5 in SPL.
Civil Suit No.36 of 2000.”
“9) The accused were not releasing payment of legitimate dues of
complainant and were passing time. It is respectfully submitted that the
cheque No.839170 of Dena Bank, Industrial Finance Branch, Mumbai was
given by accused as security to the complainant. The partner of
complainant firm wrote a detailed letter dated 922013 to the accused
and requested the accused to make payment of legitimate dues else the
complainant intend to present aforesaid cheque to the banker of accused
for its clearing for Rs.15,82,23,858/ in favor of the complainant. Still,
however, the accused did not make payment of dues to complainant,
hence, the complainant filled up necessary details in the said cheque and
deposited aforesaid cheque in the bank on 2832013 for realization of its
proceeds.”
9 Let me also take note of the averments made in the statutory
notice issued by the complainant under Section 138 of the Act:
“3. That in consideration and on account of the just and legally
enforceable debt i.e. towards the price for the sale, supply and delivery of
cement and iron and other materials to you No.1 by our clients, You No.1
through You No.2 have issued to our clients cheques signed in blank
including cheque No.839170 drawn on Dena Bank, Industrial Finance
Branch, Bombay400 005. The said cheques were given by way of security
towards payment of the price of the said goods sold and delivered by our
clients to You No.1 from the office of our clients from Mahuva. Thye said
cheques were signed by You No.2 as Director and on behalf of You No.1.”
10 In the reply to the statutory notice issued by the complainant, the
following was informed by the drawer of the cheque, namely, Shri

Gandhi.
“2.1 That the Management of Gujarat Pipavav Port Limited (hereinafter
referred to as “GPPL Company”, for short) has been changed with effect
from 30.5.2005 and the said GPPL Company was taken over by A.P.
Moller Group upon purchase of shares and execution of Transfer
Agreement and since then, GPPL Company is run and managed by said
A.P. Moller Group and our clients i.e. Mr. Nikhil P. Gandhi and Mr. Sunil
Tandon have ceased to be the Director and the Managing Director
respectively of the said GPPL Company. Please note that Mr. Sunilt
Tandon has already resigned as Managing Director of GPPL Company as
back as in October, 2001 and Mr. Nikhil P. Gandhi has already resigned
as Director of GPPL Company with effect from 13.4.2005 and their
resignations were duly accepted and acted upon by GPPL Company.
2.2 You may also be pleased to note that a similar notice (as aforesaid)
was issued by your client on 5.1.2010 to GPPL Company and GPPL
Company has elaborately replied on 8.4.2010 negating all the allegations
including the allegations of issuance of blank cheque in favour of your
client. Therefore, your aforesaid notice dated 23.4.2013 is nothing but
malicious abuse of process of law actuated with the motive of threatening
our clients for the payment of illegal claim of your client for which Civil
Suits have been already filed by your client in the year 2000, which are
presently pending for adjudication before Civil Court at Amreli. In the said
Civil Suits (especially Special Civil Suit No.36 of 2000 pending in the Civil
Court at Amreli), the erstwhile Management of the GPPL Company has
already filed its Written Statement wherein the company has specifically
negated all the claims of your client. On the contrary, the company has
filed a Courter Claim against your client. Moreover, there is serious
dispute raised by the GPPL Company for the “accommodation bills” issued
by your client upon GPPL Company. The said “accommodation bills” are to
the extent of Rs.4.36 crores (approximately) for which your client has not
made any actual supply of material to GPPL Company and the dispute is
pending for adjudication in the Civil Court at Amreli..
2.3 Our clients have further instructed us to state that Mr. Sunil
Tandon has ceased to be the Managing Director of GPPL Company with
effect from October 2001 and Mr. Nikhil P. Gandhi has ceased to be the
Director of GPPL Company with effect from 13.4.2005. It is pertinent to
note here that the date mentioned in the cheque No.839170 (which is
dishonoured) is 25.3.2013. Under Section 118 of the Negotiable
Instruments Act, 1881, there is a lawful presumption under Clause (b) of
Section 118 that “Every Negotiable Instrument bearing a date was
made or drawn on such date.” Undisputedly, on 25.3.2013, Mr. Nikhil
P. Gandhi was not the Director of GPPL Company and he cannot sign the
negotiable instrument (cheque) as the Director of GPPL Company for the

simple reason that he has already resigned as Director of GPPL Company
and h is resignation was duly accepted and acted upon with effect from
13.4.2005 by GPPL Company. It is under these circumstances, either the
signature of Mr. Nikhil Gandhi is forged by your client or the negotiable
instrument (cheque) is not negotiable under the provisions of the
Negotiable Instruments Act, 1881 being time barred, has been misused by
your client by writing the date on which the instrument. Our clients have
further instructed us to state that even the Account from which the said
cheque was alleged to have been issued was also closed long back by the
new Management of GPPL Company. Therefore, your client ought not to
have utilized the said cheque for the simple reason that the dispute
between the parties is still pending before the Civil Court, claims and
counter claims are yet to be adjudicated, liabilities of any of the parties
have still to be determined by the Civil Court and, therefore, there is not
question of issuance of a cheque dated 25.3.2013 of the alleged amount by
our client in favour of your client. Your client, with mala fide intention
and ulterior motive to abuse the process of law, has filled up the cheque in
question and deposited the said cheque in his bank account knowing fully
well that the signatory to such cheque has no authority under the law to
sign and/or issue such cheque in favour of your client. It is under these
circumstances that the action of your client is nothing but malicious, abuse
of process of law actuated with the motive of threatening the present and
past Directors and other officers of GPPL Company for unlawful claim of
your client in the pending Civil Suits.”
11 Thus, the picture that emerges from the materials on record and
certain admissions on the part of the complainant is as under:
(a) For the purpose of construction of a Port by the accused company,
materials like Steel, Cement, etc, were purchased from the complainant.
(b) The agreement in this regard was entered into sometime in 90’s
i.e. 199495. It is evident from the cheque in question that the same is of
a chequebook issued in the decade of 1990’s.
(c) Indisputably, the cheque in question was a blank signed cheque.
(d) The cheque came to be deposited after filling up other details by
the complainant on 25th March 2013 i.e. almost after a period of

seventeen years from the date of handing over of the blank cheque. The
Special Civil Suits are still pending for the adjudication. The amount
which was filled up in the cheque was on the basis of the report of the
M/s.Chhajed & Doshi, Chartered Accountants, having its Head Office at
Mumbai. Many objections have been raised by the accused company as
regards the report of M/s.Chhajed & Doshi, Chartered Accountants.
(e) The entire management of the accused company got changed with
effect from 30th May 2005 and was taken over by the A.P. Moller Group
upon purchase of the shares and execution of the Transfer Agreement.
This fact has been admitted in para – 2 of the complaint itself.
(f) No sooner the management of the entire company was taken over
by the A.P. Moller Group, the bank account on which the cheque was
drawn was closed and a new account was opened by the new
management.
(g) The drawer of the cheque, namely, Mr. Nikhil P. Gandhi, ceased to
be the Managing Director of the company with effect from 13th April
2005. The other details are as under:
“(i) Blank Cheque given by Nikhil Gandhi : Prior to 2000
(ii) Date of Retirement of Nikhil Gandhi: 1342005
(iii) Closure of Bank A/c: 1772008
(iv) Date of Cheque drawn by Nikhil Gandhi : 2532013
CRIMINAL MISCELLANEOUS APPLICATION NO.1754 OF 2014
Petitioner No.: Gujarat Pipavav Port Ltd
Petitioner No.2: Prakash Tulsiani (Managing Director)
Date of Appointment : 2812009

CRIMINAL MISCELLANEOUS APPLICATION NO.1755 OF 2014
Petitioner No.1 – Mr. Pravain K Laheri (NonExecutive Director)
Date of Appointment : 2982008 – till date.
Petitioner No.2 – Pradeep Srikrishna Mallick (NonExecutive Director)
Date of appointment : 492012.
Petitioner No.3 – Rabinda Gaitonde (Chief Operating Officer)
Date of appointment : 1122008 – till date.
Petitioner No.4 – Hariharan Iyer (Chief Financial Officer)
Date of appointment : 152009 – till date.
Petitioner No.5 – C.S. Venkiterswaran (Financial Controller)
Date of appointment : 26112001 to 632009
CRIMINAL MISCELLANEOUS APPLICATION NO.1756 of 2014
Petitioner No.1 – Mr. Sunil Chawla (Nominee Director)
Date of Appointment : 2292006
Date of Retirement : 15122009.
Petitioner No.2 – Anoop Kishore Sheth (NoneExecutive Director)
Date of Appointment : 1732008
Date of Retirement : 17122009
Petitioner No.3 : Dinesh Lal (Additional Director)
Date of Appointment : 162004 was Director on date of complaint –
now retired.
CRIMINAL MISCELLANEOUS APPLICATION NO.1067 of 2014
Petitioner No.1 – Christian Moller Laursen (Nominee Director)
Date of appointment : 1352005
Date of retirement : 492012
Petitioner No.2 – Per Jorgensen (NonExecutive Director)
Date of Appointment : 2982008
Date of Retirement: 162013.”
● SUBMISSIONS ON BEHALF OF THE APPLICANTS:

12 Mr. S.I. Nanavati, the learned senior advocate appearing for the
drawer of the cheque vehemently submitted that the learned Magistrate
committed a serious error in taking cognizance upon the complaint and
ought not to have issued process for the offence punishable under
Section 138 of the Negotiable Instruments Act.
13 Mr. Nanavati laid much stress on the fact that that what was
handed over to the complainant was a signed blank cheque leaf by way
of security. According to him, the complainant could not have filled up
the cheque on its own after a period of almost seventeen years according
to his whims and fancies. Mr. Nanavati submitted that the signed blank
cheque could be termed as an incomplete document or inchoate
instrument. He submitted that the complainant had no implied authority
to fill up a signed blank cheque by way of security and present it for
encashment.
14 Mr. Nanavati submitted that Section 20 of the Negotiable
Instruments Act would not apply to a cheque, and therefore, the holder
of the cheque had no authority to make or complete a negotiable
instrument.
15 Mr. Nanavati submitted that the complainant was fully aware of
the fact that way back in the year 2005, the drawer of the cheque had
ceased to be the Managing Director of the company with the change of
the management. He further submitted that the complainant was also
aware of the fact that the account on which the signed blank cheque was
drawn got closed on 17th July 2008 upon the instructions to the bank by
the new management.
16 Mr. Nanavati submitted that since the cheque was issued by way
of security, it could not be said that there was any existing debt or

liability.
17 Mr. Nanavati placed reliance on Section 118(b) of the N.I. Act
which provides that until the contrary is proved, it shall be presumed
that every negotiable instruments bearing a date was made or drawn on
such date.
18 Mr. Nanavati submitted that the presumption which is available in
the law, by virtue of Section 139 of the N.I. Act, that the holder of the
cheque received the cheque of the nature referred to in Section 138 for
the discharge, in whole or in part, or any debt or other liability, could be
said to have stood rebutted on the face of the admission made by the
complainant in the complaint itself that the instrument was handed over
by way of security.
19 Mr. Nanavati submitted that filling up of a signed blank, after a
period of almost seventeen years, without the consent of the company or
the the drawer of the cheque and without any implied authority, would
amount to material alteration, as explained in Section 87 of the N.I. Act.
20 Mr. Nanavati, in support his submissions, placed reliance on two
decisions of the Supreme Court (1) D.C.M. Financial Services Limited v.
J.N. Sareen and another [2008 (8) SCC 1] and (2) Indus Airways Pvt
Ltd v. Magnum Aviation Private Limited [2014 (2) 12 SCC 539].
21 Mr. Nephde, the learned senior advocate appearing for some of
the accused vehemently submitted that Section 20 of the Negotiable
Instruments Act would not save the situation and in the year 2013, the
complainant had no implied authority to fill up a blank signed cheque on
its own according his whims and fancies.

22 Mr. Nephde submitted that none of the Directors or other Office
Bearers are liable to be prosecuted by virtue of Section 141 of the N.I.
Act as there is nothing on record to indicate that on the date of
commission of the alleged offence, they were in any manner connected
with the daytoday affairs and management of the company.
23 Mr. Nephde placed strong reliance on the following decisions:
(1) M.S. Narayan Menon @ Mani v. State of Karnataka and
another [2006(6) SCC 39]
(2) Sudhir Kumar Bhalla v. Jagdish Chand and others [2008(7)
SCC 137]
(3) Urban Cooperative Credit Society v. State of Gujarat
through its Manager Jayrajbhai [2003 (2) GLH 629]
(4) B. Suresh Yadav v. Sharifa Bee and another [2007(13) SCC
107]
(5) N.K. Wahi v. Shekhar Singh and others [2007(9) SCC 481]
(6) Amita Malhotra v. Apparel Export Promotion Council and
another [2012(1) SCC 520]
24 Mr. Mihir Thakore, the learned senior advocate for some of the
accused also vehemently submitted that his clients are not liable to be
prosecuted for the offence punishable under Section 138 of the N.I. Act
by virtue of the vicarious liability created under Section 141 of the N.I.
Act. Mr. Thakore placed reliance on the following two decisions of the
Supreme Court:

(1) K.K. Ahuja v. V.K. Vora [2009(10) SCC 48]
(2) National Small Industries Corporation Limited v. Harmeet
Singh Paintal and another [2010 (3) SCC 330]
25 Mr. Mahendra Anand, the learned senior advocate appearing for
some of the accused also submitted that his clients are not liable to be
prosecuted for the offence punishable under the N.I. Act by virtue of
Section 141 of the N.I. Act.
26 In such circumstances referred to above, all the learned senior
advocates appearing for the applicants submitted that the prosecution
should fail and the complaint deserves to be quashed.
27 On the other hand, all the applications are vehemently opposed by
Mr. Abad Ponda, the learned senior advocate appearing for the
complainant.
28 Mr. Ponda submitted that by virtue of Section 20 of the Act,
although what was handed over to his client was a signed blank cheque,
yet his client had the implied authority to fill up the signed blank cheque
and present it for the purpose of encashment. He vehemently submitted
that a signed blank cheque would remain a bill of exchange till the date
is filled up in the said instrument.
29 Mr. Ponda submitted that the drawer of the cheque cannot
absolve himself from the liability only on the ground that he ceased to be
the Managing Director of the company in the year 2005. According to
Mr. Ponda, although he ceased to be the Managing Director much before
the cheque was filled up and presented, yet being the drawer, his

liability would continue.
30 Mr. Ponda submitted that except the few Directors for whom he
gave concession to quash the complaint, all other accused could be said
to be liable for the dishonour of the cheque by virtue of Section 141 of
the N.I. Act.
31 Mr. Ponda submitted that there are highly disputed questions of
fact which will have to be considered by the trial Court on the basis of
the evidence that would be led oral as well as documentary. He
submitted that having regard to the limited scope of interference in
exercise of the inherent powers under Section 482 of the Cr.P.C., this
Court may not quash the proceedings at this stage.
32 Mr. Ponda vehemently submitted that even if the cheque is issued
by way of security, it would still attract the provisions of Section 138 of
the N.I. Act. He submitted that neither the Section 138 nor explanation
to it suggests that the debt or other liability should be in existence on the
date of issuance of the cheque, i.e. on the date of its delivery to the
drawee.
33 Mr. Ponda laid much emphasis on the fact that the instrument in
question assumed the character of a cheque for the first time on 25th
March 2013, as till that date, the instrument remained a bill of
exchange. He submitted that when the instrument was handed over in
the form of a signed blank cheque, it was just a bill of exchange and
assuming for the moment that at the time of handing over of such signed
blank cheque, there was no existing debt or liability, still when the
cheque was filled up, the liability had been crystallized, and therefore,
the argument that the cheque was issued only for the purpose of security
should fail.

34 Mr. Ponda, in support of his submissions, placed reliance on the
following judgments:
(1) Hiten P. Dalal v. Bratindranath Banerjee [2001 (6) SCC 16]
(2) I.C.D.S. Ltd v. Beena Shabeer and another [AIR 2002 SC
3014]
(3) K. Bhaskaran v. Sankaran Vaidhyan Balan and company
[1999 (7) SCC 510]
(4) Rangappa v. Sri Mohan [2010 (11) SCC 441]
(5) S.M.S. Pharmaceuticals Limited v. Neeta Bhatt and another
[2005 (8) SCC 89]
(6) Subhashbhai v. State of Maharastra and another [2010 (1)
Venkatesh Journal 181]
(7) Hitenbhai Parekh Proprietor – Parekh Enterprises v. State of
Gujarat [2009(3) GLH 742]
(8) H. Maregowda and etc. v. Thippamma and others [AIR
2000 Karnataka 169]
(9) Gunmala Sales Private Limited v. Anu Mehta and others
[2015 Cr.L.J. 285]
(10) Amit Kapoor v. Ramesh Chander and another [2012 (9)
SCC 460]

(11) Sonu Gupta v. Deepak Gupta and others [2015 (3) SCC
424]
35 Having heard the learned counsel appearing for the parties and
having considered the materials on record, the following questions fall
for my consideration:
(i) Whether Section 20 of the Negotiable Instruments Act
applies to a cheque as well?
(ii) Whether filling up of a signed blank cheque leaf would
amount to a material alteration within the meaning of Section 87
of the N.I. Act?
(iii) Is there an implied authority to a person who receives a
signed blank cheque leaf to fill up the same showing any amount
as he likes?
(iv) Whether the presumption under Section 139 of the Act
could be said to have stood rebutted by the admission in the
complaint itself that the blank signed cheque was issued by way of
security?
(v) A person who had resigned as the Managing Director with
the knowledge of the complainant in 2005 could be said to be a
person incharge of the company in 2013 when the cheque was
dishonoured? Whether it could be said that the drawer of the
cheque, who ceased to be the Director eight years before the
dishonour, had no say in the matter of seeing that the cheque is
honoured? Whether he could have asked the company to pay the

amount?
(vi) Whether mere reproduction of the wordings of the Section
141(1) of the N.I. Act in the complaint is sufficient to make a
person liable to face prosecution for the dishonour of the cheque?
● DISCUSSION:
➢ THE ISSUE AS REGARDS SECTIONS 20 AND 87 OF THE
NEGOTIABLE INSTRUMENTS ACT:
36 Section 20 of the N.I. Act reads as under:
“20. Inchoate stamped instruments
Where one person signs and delivers to another a paper stamped in
accordance with the law relating to negotiable instruments then in force in
a [India], and either wholly blank or having written thereon an
incomplete negotiable instrument, he thereby gives prima facie authority
to the holder thereof to make or complete, as the case may be, upon it a
negotiable instrument, for any amount specified therein and not exceeding
the amount covered by the stamp. The person so signing shall be liable
upon such instrument, in the capacity in which he signed the same, to any
holder in sue course for such amount : provided that no person other than
a holder in due course shall recover from the person delivering the
instrument anything in excess of the amount intended by him to be paid
thereunder.”
37 Section 20 deals with the inchoate stamped instruments, and the
scheme of that section is that when a person signs and delivers to
another person an inchoate document which is properly stamped in
accordance with the law relating to negotiable instruments, then by
doing so he gives a prima facie authority to the holder to complete the
document, the authority being restricted to filling the amount not
exceeding that which would be covered by the stamp upon the
document. When the document is completed and becomes a negotiable

instrument, then the maker of the document is liable to any holder in
due course for the amount which has been filled in the document. The
proviso to Section 20 lays down that no person other than a holder in
due course shall recover from the person delivering the instrument
anything in excess of the amount intended by him to be paid thereunder.
It will be noticed that the right given to complete the document is given
to the holder and the holder contemplated in this section is not the
holder as defined in the Act itself because it is clear that that definition
cannot apply to this expression in Section 20, but "holder" is used in this
section in the literal sense of that word, viz., the person who actually
holds the document.
The section further contemplates that if the holder having
completed the document negotiates it then the person who by reason of
such negotiation becomes a holder in due course has a right to proceed
against the maker and recover the amount mentioned in the document.
Therefore, the section provides for two rights in respect of two different
persons. One is the right given to the holder of the document, the person
who is in possession of the document, the document being an inchoate
document, and that right is the right to complete it. The other right
conferred is upon the holder in due course, and that right is that even
though the holder in due course might come in possession of a
negotiable instrument which was not wholly completed by the maker, he
has the same right against the maker as if he had himself written out the
whole of the document, if the document has been completed by a person
who has come into possession of it as contemplated by Section 20.
Therefore, a person who permits an incomplete document to go out into
the world by giving and delivering it to any person, takes the risk of
having to discharge the liability, which may be provided under the
document by the amount being filled in, to the person who bona fide
and for consideration comes into possession of that document. That

seems to be the scheme of Section 20.
[See: Tarachand Kevalram v. Sikri Brothers, AIR 1953 Bom 290]
38 Thus, to constitute an inchoate stamped instrument within the
purview of Section 20 Negotiable Instruments Act it shall have the
following ingredients.
(1) The instrument shall be stamped.
(2) It should be stamped in accordance with law relating to the
negotiable instruments then in force in India.
(3) The instrument should either be wholly blank or contains an
incomplete instrument and
(4) The instrument is signed and delivered to another making
him holder of such instrument.
Before an instrument acquires the status of a fullfledged
negotiable instrument, the two under mentioned conditions should be
satisfied.
(i) only the holder of the such instrument thereof in the physical sense
can make or complete the same.
(ii) provided however that the amount to be specified therein does not
exceed the amount which could be covered by the stamp.
Therefore:
(i) a person who makes himself the payee of an inchoate
document by writing up or completing the negotiable in a blank
paper cannot be regarded as a holder in due course of that
document. It follows therefore, that he cannot render liable the
maker or the person who signed that blank document as a person

who is liable under the Negotiable Instruments Act within the
meaning of the second part of Section 20.
(ii) Until the drawee’s name is inserted before filing of the suit,
the instrument is not a promissory note in the eye of law; the
holder cannot recover the amount on the instrument; even the
permission granted by the court to fill the name would not cure
the defect in the instrument.
(iii) A printed promissory with the space for rate of interest being
blank is not an incomplete instrument, if enables the promisee to
fill up the same so as to complete the instrument within the
meaning of Section 20.
(iv) The instrument may be wholly blank or incomplete in any
particular in either case, the holder has the authority to make or
complete the instrument as a negotiable one. The authority
implied by a signature to a blank instrument, is so wide that the
party so signing is bound to be a holder in due course even though
the holder was authorized to fill for a certain amount, and be in
fact inserts a greater amount, but it is necessary that sum ought
not to exceed the amount covered by the stamp.
39 Section 6 of the N.I. Act defines a “cheque” as under:
“A "cheque" is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand and it includes the
electronic image of a truncated cheque and a cheque in the electronic form.
Explanation I.For the purposes of this section, the expressions
(a) "a cheque in the electronic form" means a cheque which contains the
exact mirror image of a paper cheque, and is generated, written and
signed in a secure system ensuring the minimum safety standards with the

use of digital signature (with or without biometrics signature) and
asymmetric crypto system;
(b) "a truncated cheque" means a cheque which is truncated during the
course of a clearing cycle, either by the clearing house or by the bank
whether paying or receiving payment, immediately on generation of an
electronic image for transmission, substituting the further physical
movement of the cheque in writing.
Explanation II.For the purposes of this section, the expression "clearing
house" means the clearing house managed by the Reserve Bank of India or
a clearing house recognised as such by the Reserve Bank of India.]”
40 Section 5 of the N.I. Act defines a “bill of exchange” as under:
“A "bill of exchange" is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to
pay a certain sum of money only to, or to the order of, a certain person or
to the bearer of the instrument.”
Therefore, a combined reading of Sections 5 and 6 would make it
clear that an instrument would be a cheque if only it contains the
particulars as mentioned in the two sections referred to above. If the
drawee’s name is not written in the instrument, that instrument cannot
even be termed to be a bill of exchange. Therefore, if it is only a signed
blank cheque leaf, it cannot be said to be a cheque within the meaning
of Section 6 of the Act.
41 Section 13 of the N.I. Act defines a negotiable instrument as
under:
“A "negotiable instrument" means a promissory note, bill of exchange or
cheque payable either to order or to bearer.”
Explanation to Section 13 also would make it clear that it must be
an instrument containing all the particulars referred to earlier.
42 If only it is a negotiable instrument within the meaning of Section

13 of N.I. Act, Section 87 would have any application. If it was only a
signed blank cheque leaf, it cannot be termed as a ‘negotiable
instrument’, and if so the question of effecting material alteration of that
paper (signed cheque leaf) does not arise.
43 If it is only a signed blank cheque leaf that was handed over it
cannot be said to be a paper stamped in accordance with law relating to
the negotiable instruments. As such the contention that, whether it is
wholly blank or filled up partly making it an incomplete document and
that handing over of the same would give authority to the holder thereof
to make or complete the instrument as the case may be for any amount
specified therein and not exceeding the amount covered by the stamp,
cannot be sustained. So far as a cheque is concerned, if it is a signed
blank cheque leaf it may be filled up showing any amount without any
restriction what so ever and if that be so, how Section 20 of the N.I. Act
can be applied to a case of cheque. But if it is a paper stamped, it can be
filled up showing the amount not exceeding the amount covered by the
stamp. That is the rationale behind why Section 20 is specifically made
applicable to the stamped documents/instruments.
44 It has been held by a Division Bench of the Kerala High Court in
C.T. Joseph v. I.V. Philip [AIR 2001 Kerala 300] that Section 20 of the
N.I. Act would not apply to a cheque. I may quote the observations in
paras 14 and 15 as under:
“14. Learned counsel for the plaintiff then argued that even the case of the
fourth defendant is that he had entrusted cheque duly signed by the fourth
(defendant) and the fourth defendant was authorised to issue the cheque
on behalf of the Firm. He relied on Section 20 of the Negotiable
Instruments Act and contended that on the basis of that the defendants are
estopped from denying their liability under the cheque. So far as Section
20 of the Negotiable Instruments Act is concerned, according to us, it does
not apply because Section 20 applies only with regard to inchoate

negotiable instruments. So far as the cheques are concerned, they don't
require any stamp under the Stamp Act in force.
15. The Lahore High Court in Dower v. Sohan Lal, AIR 1937 Lahore 816
have held that insofar as the cheque do not require to be stamped, Section
20 of the Negotiable Instruments Act is not applicable. Learned counsel for
the plaintiff then submitted that even if the principles under Section 20 of
the Negotiable Instruments Act do not apply, the general principles of law
of estoppel will apply. Learned counsel also cited some decisions to show
that the general principles of law of estoppel will apply. But according to
us, for the application of such principles, it is highly necessary that the
cheque was issued and filled up as authorised..”
45 It can be argued that when a person takes a bill in an incomplete
form, he cannot be a bonafide holder for value since it can only be said
that he has taken a piece of blank paper and not a bill and that he can
take it as a bill only under the authority given to his transferor. Section
20 of the Act would make it clear that there can be no material
alteration of a cheque leaf only for the reasons that it was subsequently
filled up. But at the same time it cannot be said that when ever a signed
blank cheque leaf is given, it gives authority to the holder to fill up the
same according to his whims and fancies. Filling up of a signed blank
cheque leaf may not attract section 87 of the N.I. Act, for, there was no
insertion, interlineation, erasure, alteration etc, because there was no
completed negotiable instrument within the meaning of sections 5, 6
and 13 of the N.I. Act. Therefore, neither section 20 nor section 87
applies to a blank signed cheque leaf. If so, the question must turn round
to the actual execution of the instrument.
46 With regard to the instruments other than a cheque, an implied
authority is given to the holder at the time of entrusting it to fill up the
same. There may be instances where an implied authority is given to the
person, at the time of entrusting a signed blank cheque containing the
signature of the drawer of the cheque, to fill the columns therein.

47 If a principal or employer deputes his agent or employee to
purchase an article and if the dealer fills up that signed blank cheque
leaf showing the exact amount covered by the bill showing the price of
the article sold then it cannot be said that what was handed over by the
drawer of the cheque is only a signed blank cheque leaf. In such cases an
implied authority to the trader/seller of the article to fill up the cheque
leaf can certainly be inferred. Similarly, there may also be cases where at
the time of settlement of the accounts, a particular amount was found
payable by the drawer of the cheque to the other party and if a signed
blank cheque entrusted to be filled up later is filled up in tune with the
accounts, showing the actual amount payable by the drawer of the
cheque to the other party, then also it can be said that there was the
implied authority to fill up the signed blank cheque leaf. There may be
such instances where the sum is ascertainable and the signed blank
cheque leaf is given to fill up the same after ascertaining the same. In
such cases there would be no difficulty to infer an implied authority
given by the drawer. Simply because the cheque is seen filled up or
written in the hand writing of another person it cannot lead to a
conclusion that only a signed blank cheque leaf was given. The person
signing the cheque may have difficulty due to many reasons to write the
cheque and it might have been filled up by the payee or by another. In
such cases it cannot be said that what was handed over was only a
signed blank cheque leaf. In all such cases the ultimate conclusion may
depend upon the proof of the transaction and execution of the
instrument. It must also be held that when it is a case that only a signed
blank leaf was handed over by the accused, then he must offer
satisfactory explanation as to the circumstances under which the signed
blank cheque happened to be handed over. Considering the totality of

the evidence and circumstances, it is for the court to draw the inference
as to whether it was given with an implied authority to fill up the same
showing the amount ascertained or ascertainable to discharge the debt
or liability. Therefore, there may be such cases where implied authority
can be inferred. But the contention that when a signed blank cheque leaf
is handed over, it can never be filled up and that if it is filled up it would
amount to a material alteration within the meaning of using Section 87
of the N.I. Act, does not stand to rhyme or reason. Similarly, the
contention that Section 20 of the N.I. Act is applicable to an unfilled or
blank cheque leaf also cannot be accepted. It would depend upon the
facts of each case. Therefore, it is neither a case which attracts Section
87 of the N.I. Act nor is it a case where the complainant can rely upon
Section 20 of the N.I. Act and contend that as a signed blank cheque leaf
is given it gives an authority to fill up the same according to the whim
and fancy of the payee. [See : P. Purushothaman Nair v. K. Sreekantan
Nair, 2013 (4) ILR (Ker) 115]
48 In S. Gopal v. D. Balachandran [2008 (1) CTC 491], the Madras
High Court observed that a bare reading of Section 20 of the Negotiable
Instruments Act would go to show that it would apply only to a stamped
instrument viz., pronote and bill of exchange and not to the cheques.
Therefore, Section 20 will have no application to the cheques issued
after signing by the drawer. It has been further observed therein as
follows:
" .... there is no law which prescribes that a cheque shall be filled up by the
drawer himself. If such proposition is accepted, no unlettered person, who
knows only to sign his name, can ever be a drawer of a cheque. Further, a
person who is physically incapacitated to fill up the cheque cannot also
draw a cheque and negotiate it. Of course, as far as the other negotiable
instruments viz., pronotes and bills of exchange, there is a clear mandate
under Section 20 of the Negotiable Instruments Act to the effect that such
an instrument can be negotiated by the maker thereof by simply signing

and delivering the same to the holder in due course giving thereby ample
authority to the latter to fill up the content of the instrument as intended
by the maker thereof.
10. Even in case of a cheque, as there is no clear provision in the
Negotiable Instruments Act, in the light of the above discussion, the court
finds that if a drawer of a cheque gives authority to the payee or holder in
due course or a stranger for that matter to fill up the cheque signed by
him, such an instrument also is valid in the eye of law. There is no bar for
the drawer of a cheque to give authority to a third person to fill up the
cheque signed by him for the purpose of negotiating the same."
49 A learned Single Judge of this Court in the case of Hitenbhai
Parekh Proprietor – Parekh Enterprises v. State of Gujarat [2009(3)
GLH 742] has elaborately explained Section 20 of the N.I. Act.
“9.1 Any material alteration of a negotiable instrument, however, renders
it void as against any one who is a party thereto at the time of making
such alteration and does not consent thereto, unless the alteration was
made in order to carry out the common intention of the original parties.
The provision to that effect contained in section 87 has to be read in
harmony with section 20 which permits and authorizes the holder of a
negotiable instrument to complete the instrument for any amount and
renders the drawer liable to the holder in due course to the extent of the
amount intended by the drawer to be paid under such instrument. It is
clear from plain reading of provisions of section 20 and 87 that the
injunction, under the pain of invalidating a negotiable instrument, against
alteration operates only after an inchoate instrument is completed or a
complete instrument falls within the definition of negotiable instrument.
Therefore, the legally permissible completion of an inchoate instrument
cannot be construed as material alteration of a negotiable instrument.
10. The above analysis of the statutory provisions leads to the conclusion
that, when a cheque bearing only signature of the drawer is delivered and
received by a payee for the discharge, in whole or in part, of any debt or
liability, there is an implied authority for the person receiving such cheque
to complete it by filling the blanks and the amount having been filled up
under such implied authority would be the amount intended by him to be
paid thereunder. The focus in such cases would shift to the aspect of such
amount being for the discharge, in whole or in part, of any legally
enforceable debt or other liability. Therefore, even with the props of legal
presumptions, the onus of proving legally enforceable debt or other
liability for the discharge of which a cheque must have been drawn has to
be discharged by the prosecution for bringing home the charge of

dishonour of cheque. It may, however, be facetious to hold that a blank
cheque, drawn by a person on an account maintained by him with a
banker, for payment of any amount of money to another person, by
merely putting his signature on it, would not be a cheque in the first place,
because of not being a bill of exchange as it did not contain direction to a
certain person to pay a certain sum of money to or to the order of a
certain person or to the bearer of the instrument. When the Negotiable
Instruments Act expressly permits and authorizes by a substantive
provision the completion of an inchoate instrument by section 20 with the
safeguard provided in section 87, provisions of sections 5 and 6 defining
bill of exchange and cheque have to be harmoniously read to mean that an
instrument which was initially not a cheque falling within the definition of
section 6 would become a cheque when it was completed by filling the
blanks and its dishonour shall have all the legal consequences of dishonour
of a cheque proper.”
50 In view of the aforesaid discussion, I am of the view that Section
20 of the N.I. Act would not save the situation as such for the accused
applicants. The collective reading of the various provisions of the N.I. Act
shows that even under the scheme of the N.I. Act, it is possible for the
drawer of a cheque to give a blank cheque signed by him to the payee
and consent either impliedly or expressly to the said cheque being filled
up at a subsequent point in time and present the same for payment by
the drawee.
51 The first three questions are answered accordingly.
● EXISTING DEBT OR ANY OTHER LEGAL LIABILITY:
52 Let me now proceed further to consider whether there was any
existing debt or any other legal liability at the time when the blank
signed cheque was handed over to the complainant. I take notice of the
fact that the cheque in question was not even a postdated cheque. If it
would have been a postdated cheque, it would have remained as a “bill
of exchange” till the date shown on the cheque, and thereafter, it would

have assumed the character of a cheque, but in the instant case, except
the signature, the other columns in the cheque were blank. Therefore, it
cannot be said that it was a “bill of exchange” prior to 25th March 2013.
53 The key differences between a cheque and a bill of exchange are
as under:
(1) An instrument used to make payments, that can be simply
transferred by hand delivery is known as cheque. An
acknowledgment prepared by the creditor to show the
indebtedness of the debtor who accepts it for payment is known as
a bill of exchange.
(2) A Cheque is defined in section 6 while Bill of Exchange is
defined in section 5 of the Negotiable Instrument Act, 1881
(3) The drawer and payee are always different in case of cheque.
In general, drawer and payee are the same persons in case of bill
of exchange.
(4) The stamp is not required in cheque. Conversely, a bill of
exchange must be stamped.
(5) A cheque is payable to the bearer on demand. As opposed to
bill of exchange, it cannot be made payable to the bearer on
demand.
(6) Cheque can be crossed but a Bill of Exchange cannot be
crossed.
(7) There is no days of grace allowed in cheque, as the amount is
paid at the time of presentment of cheque. 3 days of grace are
allowed in bill of Exchange.
(8) A cheque does not need acceptance whereas a bill requires to
be accepted by the drawee.

54 There are clearcut admissions on the part of the complainant in
the complaint itself, as well as the statutory notice issued under Section
138 of the Act by which the presumption that the cheque was for a
consideration has itself been rebutted by the complainant by making a
truthful disclosure in the complaint, but unfortunately, for the
complainant, this statement of truthfulness would be akin to a self goal.
I repeat. The averments in paras – 4 and 9 of the complaint evidenced
that the cheque was not for a valuable consideration when it was drawn.
It was towards security and would have acquired consideration only on
account of future contingencies.
55 The events narrated above occurred sometime in the mid 90’s.
Sometime in the year 2000, disputes cropped up, and the complainant
had to file three civil suits in that regard. If the liability had already been
determined within the meaning of Section 138 of the Act, then there was
no reason for the complainant as such to wait for seventeen odd years. I
am of the view that only with a view to shortcut the suit proceedings in
which the Civil Court is yet to fix the liability, the complainant, on the
strength of the report of the Chartered Accountants, misused the blank
signed cheque. The account, on which the cheque was drawn, already
stood closed on 17th July 2008 after the new management took over the
company. By the time the new management took over, the drawer of the
cheque had ceased himself to be the Director in the year 2005. The
account on which the cheque was drawn was not closed upon the
instructions issued by the drawer, but the same was upon the
instructions of the new management.
56 In such circumstances referred to above, I find it extremely
difficult to fasten any liability under Section 138 of the N.I. Act.

57 Mr. Ponda vehemently submitted that even if a cheque is issued by
way of security, and if such a cheque is dishonoured, the Section 138
would be attracted. This submission is sought to be fortified by the
decision of the Supreme Court in the case of I.C.D.S. Limited (supra). In
that case, the husband of the accused/respondent No. 1 had obtained a
car under a hire purchase agreement from the complainant. The accused
was a guarantor for payment of the amount by her husband and towards
the part payment of the said transaction, she had issued a cheque in
favour of the complainant. The cheque was dishonoured and the
payment was not made in spite of the notice. The High Court quashed
the complaint on the ground that the cheque from the guarantor could
not be said to have been issued for the purpose of discharge of any debt
or liability. However, the Supreme Court set aside the order of the High
Court. The Supreme Court observed thus in paragraphs 10 and 11.
"10. The language, however, has been rather specific as regards the intent
of the legislature. The commencement of the section stands with the words
"Where any cheque". The above noted three words are of extreme
significance, in particular, by reason of the user of the word "any" the first
three words suggest that in fact for whatever reason if a cheque is drawn
on an account maintained by him with a banker in favour of another
person for the discharge of any debt or other liability, the highlighted
words if read with the first three words at the commencement of Section
138, leave no manner of doubt that for whatever reason it may be, the
liability under this provision cannot be avoided in the event the same
stands returned by the banker unpaid. The legislature has been careful
enough to record not only discharge in whole or in part of any debt but
the same includes other liability as well. This aspect of the matter has not
been appreciated by the High Court, neither been dealt with or even
referred to in the impugned judgment.
11. The issue as regards the coextensive liability of the guarantor and the
principal debtor, in our view, is totally out of the purview of Section 138
of the Act, neither the same calls for any discussion therein. The language
of the statute depicts the intent of the lawmakers to the effect that
wherever there is a default on the part of one in favour of another and in
the event a cheque is issued in discharge of any debt or other liability there
cannot be any restriction or embargo in the matter of application of the

provisions of Section 138 of the Act. "Any cheque" and "other liability" are
the two key expressions which stand as clarifying the legislative intent so
as to bring the factual context within the ambit of the provisions of the
statute. Any contrainterpretation would defeat the intent of the
legislature. The High Court, it seems, got carried away by the issue of
guarantee and guarantor's liability and thus has overlooked the true
intent and purport of Section 138 of the Act. The judgments recorded in
the order of the High Court do not have any relevance in the contextual
facts and the same thus do not lend any assistance to the contentions
raised by the respondents."
58 The Supreme Court in I.C.D.S. Limited (supra) considered the
provisions of the law and held that when the cheque is issued by the
guarantor in discharge of such other liability, the provisions of section
138 are applicable. In fact, Section 138 itself specifically provides that
the cheque should have been issued by a person for the discharge of any
debt or other liability. The guarantor may not be himself a debtor but he
guarantees the repayment of the loan taken by the principal debtor. By
giving such a guarantee, the guarantor incurs a liability towards the
creditor and for the discharge of that liability, if he issues a cheque, he
will be covered by the provisions of Section 138. As the cheque was
issued for the discharge of "other liability" case would be covered by
Section 138.
59 In Indus Airways Private Limited (supra), the Supreme Court
explained in details the expression “for discharge of any debt or other
liability” occurring in Section 138 of the N.I. Act:
“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
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 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
exiting 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.
10. In Swastik Coaters[2] , the single Judge of the Andhra Pradesh High
Court while considering the explanation to Section 138 held:
“……..Explanation to Section 138 of the Negotiable Instruments Act
clearly makes it clear that the cheque shall be relateable to an
enforceable liability or debt and as on the date of the issuing of the
cheque there was no existing liability in the sense that the title in the
property had not passed on to the accused since the goods were not
delivered. ……..”
11. The Gujarat High Court in Shanku Concretes[3] dealing with Section
138 of the N.I. Act held that to attract Section 138 of the N.I. Act, there
must be subsisting liability or debt on the date when the cheque was
delivered. The very fact that the payment was agreed to some future date
and there was no debt or liability on the date of delivery of the cheques
would take the case out of the purview of Section 138 of the N.I. Act.
While holding so, Gujarat High Court followed a decision of the Madras
High Court in Balaji Seafoods[4].
12. In Balaji Seafoods Exports (India) Ltd v. Mac Industries Ltd [1999 (1)
CTC 6 (Mad)], the Madras High Court held:
“Section 138 of the Negotiable Instruments Act makes it clear that
where the 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 under Section 138 of the Act. The explanation
reads that for the purposes of this section, ‘debt or other liability’
means a legally enforceable debt or liability.”
13. The Kerala High Court in Ullas Supply House v. Ullas [2006 CriLJ
4330(Ker)] had an occasion to consider Section 138 of the N.I. Act. In

that case, the postdated cheque was issued by the accused along with the
order for supply of goods. The supply of goods was not made by the
complainant. The accused first instructed the bank to stop payment
against the cheque and then requested the complainant not to present the
cheque as he had not supplied the goods. The cheque was dishonoured. The
single Judge of the Kerala High Court held,
“………Ext.P1 cheque cannot be stated to be one issued in
discharge of the liability to the tune of the amount covered by it,
which was really issued, as is revealed by Ext. D1, as the price
amount for 28 numbers of mixies, which the complainant had not
supplied. …..”
14. The reasoning of the Delhi High Court in the impugned order is as
follows:
“8. 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.”
15. The above reasoning of the Delhi High Court is clearly flawed
inasmuch as it failed to keep in mind the fine distinction between civil
liability and criminal liability under Section 138 of the N.I. Act. 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. We are unable to accept the
view of the Delhi High Court that the 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. The Delhi High Court has traveled
beyond the scope of Section 138 of the N.I. Act by holding that the purpose
of enacting Section 138 of the N.I. Act would stand defeated if after
placing orders and giving advance payments, the instructions for stop
payments are issued and orders are cancelled. In what we have discussed
above, 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,
in our considered view, the cheque cannot be said to have been drawn for
an existing debt or liability.
16. In our opinion, the view taken by Andhra Pradesh High Court in
Swastik Coaters (P) Ltd v. Deepak Bros [1997 CriLJ 1942(AP), Madras
High Court in Balaji Seafoods Exports (India) Ltd v. Mac Industries Ltd
[(1999) 1 CTC 6 (Mad)], Gujarat High Court in Shanku Concretes (P)
Ltd v. State of Gujarat [2000 Cr LJ 1988 (Guj)] and Kerala High Court in
Ullas Supply House v. Ullas {2006 Cri LJ 4330(Ker)] is the correct view
and accords with the scheme of Section 138 of the N.I. Act.”
60 Thus, a cheque may be issued under two circumstances. First, it
may be issued for a debt in presenti, but payable in future. Secondly, it

may be issued for a debt which may become payable in future upon the
occurrence of a contingent event. The difference in the two kinds of
cheques would be that the cheque issued under the first circumstance
would be for a debt due, only payment being postponed. The latter
cheque would be by way of a security.
61 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.
62 A learned Single Judge of the Karnataka High Court in the case of
M/s. Shreyas Agro Services Pvt Ltd v. Chandrakumar [2006 Criminal
Law Journal 3140] considered almost an identical issue which I am
called upon to decide. A learned Single Judge of the High Court even
considered the Supreme Court decision in I.C.D.S. Limited (supra).
Considering the same, the learned Single Judge held in paras 3, 4 and 5
as under:
“3. The very scheme of procedure adopted shows that the cheques are not
issued in respect of any current existing ascertained liability. The words
"for discharge of any debt or other liability" in Sec. 138 of N.I. Act should
be interpreted to mean current existing or past ascertained liabilities. The
cheque issued in respect of future liabilities not in existence as on the date
of cheque would not attract prosecution u/S. 138 of N. I. Act.
4. The decision of the Supreme Court in I.C.D.S. Ltd. v. Beena Shabeer, ILR
2003 Kar 4373 : (AIR 2002 SC 3014) has no application to the facts of
the present case. In the said case the cheque was issued by a guarantor.
The Supreme Court while interpreting the words "discharge of any debt or
liability" held that the liability of the guarantor would also come within
the ambit of words "the other liability". In the instant case the issue is
altogether different. The accused had issued a blank cheque not in respect
of any current or ascertained liability but it was issued in respect of
uncertain future liability. In such situation the provisions of Section 138 of
the Act would not attract and if a cheque so issued is dishonoured, no

offence u/S. 138 of the Negotiable Instruments Act can be inferred.
5. The appellant has also produced the letter written by the accused
marked at Ex P. 40 to contend that the accused had admitted the liability.
The contents of the letter discloses that the accused admits the principal
amount but however disputes the interest claimed and states that the
amount reflected in the cheques is not the correct legal liability. Section 20
of N.I. Act declares that inchoate instruments are also valid and legally
enforceable. In the case of a signed blank cheque, the drawer gives
authority to the drawee to fill up the agreed liability. If the drawee were to
dishonestly fill up any excess liability and the extent of liability if it
becomes bona fide matter of civil dispute in such case, the drawer has no
obligation to facilitate the encashment of cheque. In the instant case the
reply Ex. P. 40 discloses that long before presentation of cheque, the extent
of liability was disputed but ignoring the objection, the company filled up
the cheque for an amount not admitted by the drawer. If the accused were
to prove that there is a bona fide dispute with regard to extent of liability,
the dishonour of cheque under such circumstance does not attract
prosecution u/S. 138 of N. I. Act. The dismissal of complaint is sound and
proper. The appeal is dismissed.”
63 I am not impressed by the submission of Mr. Ponda canvassed on
behalf of the complainant that in the year 199495 when the blank
signed cheque was handed over to his client as a security, there may not
be any existing debt or liability, but in the year 2013 when the cheque
was filled up, the liability had got determined, and therefore, on the date
when the cheque was filled up and presented, there was a existing debt.
In fact, as observed earlier, it could be said that the signed blank cheque
as such was misused by the complainant after almost a period of
seventeen years. Such misuse can be inferred from the indirect threats
given in the statutory notice itself that if the amount is not paid, then the
complainant would fill up the signed blank cheque and present the same
for its encashment. In the year 2013, neither the accused i.e. the drawer
of the cheque was the Managing Director of the company or in any way
concerned with the company nor the account on which the blank signed
cheque was drawn in existence. In such peculiar circumstances, it is
difficult to fix the strict liability under Section 138 of the N.I. Act on the

drawer of the cheque.
64 As on date, there may be a report of the Chartered Accountants
fixing some liability on the accused company to be discharged towards
the complainant, but the report of the Chartered Accountants cannot be
termed as final. The civil suits are still pending, and are yet to be
adjudicated.
65 I also take notice of the two decisions of the Supreme Court,
which are helpful to the drawer of the cheque.
66 In D.C.M. Financial Services (supra), the cheque in question was
a postdated one. It was drawn in 1995 and was presented in 1998. The
drawer of the cheque, in the meantime, had resigned from the
directorship of the company. The Supreme Court, while explaining the
principle of constructive liability, held as under:
“21. The cheque in question was admittedly a post dated one. It was
signed on 3rd April, 1995. It was presented only sometimes in June, 1998.
In the meantime he had resigned from the directorship of the Company.
The complaint petition was filed on or about 20th August, 1998.
Intimation about his resignation was given to the complainant in writing
by the 1st respondent on several occasions. Appellant was, therefore,
aware thereof. Despite having the knowledge, the 1st respondent was
impleaded one of the accused in the complaint as a Director Incharge of
the affairs of the Company on the date of commission of the offence, which
he was not. If he was proceeded against as a signatory to the cheques, it
should have been disclosed before the learned Judge as also the High Court
so as to enable him to apply his mind in that behalf. It was not done.
Although, therefore, it may be that as an authorized signatory he will be
deemed to be person incharge, in the facts and circumstances of the case,
we are of the opinion that the said contention should not be permitted to
be raised for the first time before us. A person who had resigned with the
knowledge of the complainant in 1996 could not be a person incharge of
the Company in 1998 when the cheque was dishonoured. He had no say in
the matter of seeing that the cheque is honoured. He could not ask the
Company to pay the amount. He as a Director or otherwise could not have

been made responsible for payment of the cheque on behalf of the
Company or otherwise. (See also Shiv Kumar Poddar v. State (NCT of
Delhi) : (2007) 3 SCC 693 : Everest Advertising Pvt. Ltd. v. State (NCT of
Delhi) : (2007) 5 SCC 54 and Raghu Lakshminarayanan v. Fine Tubes :
(2007) 5 SCC 103.
22. Mr. Patwalia, however, submitted that a situation may arise where
change in the management is effected only to avoid such constructive
liability. Firstly we are not concerned with such a hypothetical case.
Secondly, as noticed by this Court in Rangachari's case (supra) that a
person normally having business or commercial dealings with a company,
would satisfy himself about its creditworthiness and reliability by looking
at its promoters and Board of Directors and the nature and extent of its
business and its memorandum or articles of association.
23. When post dated cheques are issued and the same are accepted,
although it may be presumed that the money will be made available in the
bank when the same is presented for encashment, but for that purpose, the
harsh provision of constructive liability may not be available except when
an appropriate case in that behalf is made out.
24. Section 140 of the Act cannot be said to have any application
whatsoever. Reason to believe on the part of a drawer that the cheque
would not be dishonoured cannot be a defence. But, then one must issue
the cheque with full knowledge as to when the same would be presented. It
appears to be a case where the appellant has taken undue advantage of
the post dated cheques given on behalf of the company. The statute does
not envisage misuse of a privilege conferred upon a party to the contract.
Submission of Mr. Patwalia made in view of the decision of this Court in
Adalat Prasad v. Rooplal Jindal and Others [(2004) 7 SCC 338] is
misplaced. Had such a contention been raised even in terms of Adalat
Prasad (supra), the respondents could have filed an application for
quashing in terms of Section 482 of the Code of Criminal Procedure at
that stage. Again such a contention had not been raised before the High
Court. No such ground appears to have been taken even in the Special
Leave Petition.”
67 I can appreciate a situation that a Director of a company who
drew the cheque on behalf of that company thinks it fit to tender
resignation after having received the notice of dishonour and demand
for payment of the cheque drawn by him. In such circumstances, he
cannot avoid the criminal liability under Section 138 of the N.I. Act as it
may result in incongruous situations. He could not escape from his

liability under Section 138 of the N.I. Act. The Director appointed in his
place subsequently can plead that he was not incharge of the affairs of
that company when the cheque was drawn and so he cannot be made
liable. In the circumstances like this, though the offence under Section
138 of the Act becomes complete only if the payment is not made within
fifteen days of the receipt of the statutory notice, yet since the Director
who tendered the resignation could pay the amount covered by the
dishonoured cheque and then resigned.
68 The situation in the case on hand is altogether different. Much
before the statutory notice was issued i.e. almost eight years before the
issue of statutory notice, the drawer of the cheque had ceased himself to
be the Managing Director of the company. There could be many
circumstances under which a Director of a company, who drew the
cheque, may have to quit the office. Sometimes the company itself would
relieve the Director. Like the case in hand, the entire management would
change and a new management may take over the affairs of the
company. After 2005, the accused, who had drawn cheque, had
absolutely no say in the matter of saying that the cheque is honoured.
He could not have asked the new management to pay the amount.
69 In taking the aforesaid view of the matter, I am supported by a
decision of this Court rendered by a learned Single Judge in the case of
Alka N. Shah v. State of Gujarat and another [2001 (2) GLR 1023. The
short facts of the said case are that the complainant had placed fixed
deposit with the company by the name of M/s. Piramal Finance Services
Limited, wherein the accused was the Managing Director. The company
had issued four cheques by way of repayment of the fixed deposit. Those
four cheques were issued in the name of the complainant and were
drawn on the account of the company under the signature of the

accused. The accused had not drawn such cheques in her personal
capacity, but in her capacity as the Managing Director of the said
company. The cheques were postdated whereby the due date was 13th
July 1999. The accused resigned from the company, both as Director as
well as Managing Director. In such circumstances, this Court held in
paras – 9 and 10 as under after considering the decision of the Supreme
Court:
“9. The short contention raised on behalf of the present applicant
[accused No.1] is that even according to the complainant, the offence
is committed by the company and the accused No.1 is only liable on
account of her position as Managing Director of the company. On a
plain reading of section 141 of the Negotiable Instruments Act, it
becomes obvious that every person "at the time the offence was committed,
was in charge of and was responsible to the company" shall be deemed
to be guilty of the offence....... On the facts of the case, it is an admitted
position that the offence was committed [u/s 138] when the cheques
were dishonoured, and when a notice of dishonour was issued u/s 138.
This occurred in November and December of 1999, whereas the applicant
had resigned both as Director and Managing Director of the company as
early as on 27th January 1999. It could not therefore possibly be urged
that the applicant was in any manner in charge of or responsible to the
company, at the time the offence was committed.

10. Another aspect of the matter is as to precisely when the offence
came to be committed. It is obvious that the offence could only be
committed on the presentation of the cheques on due dates, on the
dishonour of the cheques, and the consequential notice being issued u/s
138 of the said Act. It is not possible to contend that the offence could be
said to have been committed on the dates when the cheques were
issued irrespective of the due dates mentioned on the cheques. In this
context, it would be relevant to refer to the observations made by the
Supreme Court in the case of Sil Imports, USA v/s Exim Aides Silk
Exporters, Bangalore, reported in 1999[4] SCC 567. The Supreme
Court in this decision has mainly dealt with the period of limitation for
filing a complaint u/s 142[A], in the context of the facts where notice u/s
138 proviso [b] was given more than once. In this context, the Supreme
Court held that the limitation period started running from the date of
receipt of the first notice by the drawer, by discussing and deciding that
the cause of action arose for the purpose of filing a complaint u/s
138, when the first notice is issued to the drawer and not complied with
by the latter. The necessary implication which flows from this decision is,
that it is the dishonour of the cheque, the issuance of the notice u/s 138,

and the noncompliance thereof which furnishes the complainant with
the cause of action. The same principle would apply in respect of the
accrual of the cause of action against a company, which would be
applicable to a company and its officers by virtue of section 141 of the said
Act.”

70 In the case in hand also, the accused had not drawn the cheque in
question in his personal capacity, but in his capacity as a Managing
Director of the company. It is not possible to contend that any cause of
action had accrued against the applicant accused i.e. the drawer of the
cheque, since the applicant held no position whatsoever of the company
when the cause of action in fact accrued against the company.
71 The decision of the Supreme Court in D.C.M. Financial Services
Limited (supra) has been considered by a Division Bench of the Bombay
High Court in the case of Suhas Bhand v. State of Maharastra reported
in 2010 (1) BankCas 207. The Division Bench, while answering the
reference made by a learned Single Judge, observed in para – 32 as
under:
“In the case of DCM Financial Service Ltd. vs. J.N. Sareen & anr., 2008
ALL MR (Cri) 2272, the Supreme Court has considered the effect of
resignation of a Director in proceedings under Section 138 of the Act. In
that case, the Director had already resigned prior to the complaint being
filed and the complainant was kept informed of his resignation. The
complainant had not even raised the plea that that Director was incharge
and management of the Company at the relevant time in the complaint.
That was also a case of PDCs. The resignation of the Director was accepted
by the Company. The agreement of purchase/lease was entered into
between the Company and the complainant in April 1995. The PDCs were
issued in April 1995 itself. The Director resigned in May 1996. The
complainant was informed of his resignation. One of the cheques was postdated
to January 1998 which came to be presented in June 1998 and was
dishonoured. The resignation of the Director was not challenged as not
genuine. Hence, there was no rebuttal of the presumption of the certified
copy of Form No.32. It was observed that the Directors of the Company
would retire by rotation and may or may not be reappointed to the Board

(which is under the provisions of Section 255 to 258 of the Companies
Act). The Directors may also resign from the Company. There would be a
change in the management of the Company. That change is not a private
affair of the Company. Hence the Directors, who have resigned years
before the cheque came to be dishonoured, could not be prosecuted. Such a
Director cannot be taken to be incharge of and responsible to the
Company for the conduct of the business of the Company merely because
at one point of time he played the role of a Director. It was further
observed that person who had resigned to the knowledge of the
complainant could not be taken to be a person incharge of the Company
when the cheque was dishonoured. It may be mentioned that that was also
a case where there was no dispute as to the factum of resignation of that
Director.”
72 In taking the aforesaid view, I am also supported by a decision of
the Delhi High Court in the case of Kamal Goyal v. United Phosphorus
Ltd reported in 2013(7) RCR(Cri) 3224. The Delhi High Court also
considered D.C.M. Financial Services Limited (supra) and observed in
paras 11, 12 and 13 as under:
“11. In DCM Financial Services Limited Vs. J.N.Sareen & Another, 2008
(3) RCR (Crl.) 152, postdated cheques were issued by the Company
known as M/s. International Agro Allied Products Limited. The first
respondent before the Hon'ble Supreme Court resigned from the
Directorship of the Company on 25th of May, 1996. One of the postdated
cheques, which was issued in April, 1995, i.e., before he resigned from the
Directorship of the Company, was dated 28.1.1998. The cheque when
presented in the Bank for encashment was dishonoured. The payment to
the complainant was not made despite issue of Notice of Demand by it.
The complaint against the first respondent before the Hon'ble Supreme
Court was based on the allegation that he was the person in charge and
responsible to the Company at the time when the offence was committed.
It was also alleged that the offence had been committed by the Company
with the consent and connivance of accused Nos.2 to 10, which included
respondent No.1 before the Hon'ble Supreme Court. He filed an application
seeking discharge, relying upon Form No.32 issued by Registrar of
Companies in support of his contention that he had resigned as a Director
of the Company much prior to dishonour of the cheque in question. The
learned Additional Sessions Judge took note of Form No.32 and also noted
that the complainant had not filed any affidavit to the effect that it had
verified from the Registrar of Companies and Form No.32 filed by the
accused was not genuine. A Criminal Revision Petition filed against the

order of the learned Additional Sessions Judge was dismissed by the High
Court. Relying upon its earlier decisions in the case of " K.Srikanth Singh
Vs. M/s.North East Securities Limited & Another", 2007(3) RCR
(Criminal) 934 : 207 (4) RAJ 226 : JT 2007 (9) SC 449, the Hon'ble
Supreme Court observed as under:
"Section 141 of the Act provides for a constructive liability. A legal
fiction has been created thereby. The statute being a penal one,
should receive strict construction. It requires strict compliance of
the provision. Specific averments in the complaint petition so as to
satisfy the requirements of Section 141 of the Act are imperative.
Mere fact that at one point of time some role has been played by
the accused may not by itself be sufficient to attract the
constructive liability under Section 141 of the Act."
12. In the case before the Hon'ble Supreme Court, the respondent No.1 had
resigned from the Directorship of the Company under intimation to the
complainant and, in these circumstances, the Hon'ble Supreme Court was
of the view that a person who had resigned with the knowledge of the
complainant in the year 1996, could not be a person in charge of the
Company in the year 1999 when the cheque was dishonoured as he had
no say in the matter that the cheque is honoured and he could not have
asked the Company to pay the amount. In my view even if resignation was
not given by the petitioner under intimation to the complainant, that
would not make any difference, once the Court relying upon certified copy
of Form 32 accepts his plea that he was not a director of the Company, on
the date the offence under Section 138 of Negotiable Instruments Act was
committed. He having resigned from the directorship much prior to even
presentation of the cheque for encashment, he cannot be vicariously liable
for the offence committed by the Company, unless it is alleged and shown
that even after resigning from directorship, he continued to control the
affairs of the company and therefore continued to be person in charge of
and responsible to the company for the conduct of its business.
13. It was also contended by the learned counsel for the
complainant/respondent that the petitioner being the signatory of cheque
in question, he was its drawer within the meaning of Section 138 of
Negotiable Instruments Act. In my view, the contention is totally
misconceived. The cheque was issued by the Company and not by the
petitioner. He only signed the cheque on behalf of the Company. He does
not become a drawer of the cheque merely by signing it on behalf of the
company when the cheque is issued by the company in discharge of its debt
or liability and is not signed by him in his personal capacity. If the
contention of the learned counsel for the complainant/respondent is
accepted, even an employee of the Company, who on account of his being
an authorized signatory signs a cheque issued by the Company towards

discharge of the debt or other liability of the Company, would be liable to
prosecution and conviction under Section 138 of Negotiable Instruments
Act even after he resigns from the company and is no more in its
employment. This certainly could not have been the intention of the
legislature. Even the vicarious liability created under Section 138 of
Negotiable Instruments Act would not be attracted in respect of a Director
or an employee of the Company who resigns and severs his connections
with the company, unless the complainant is able to bring his case within
the purview of subSection 2 of Section 141 of Negotiable Instruments Act,
by proving that the offence had been committed with his consent or
connivance or was otherwise attributable to any neglect on his part.”
73 Mr. Ponda placed strong reliance on the decision of the Supreme
Court in the case of Laxmi Dyechem v. State of Gujarat and others
[2012 (13) SCC 375] to meet with the contention as regards the drawer
of the cheque ceasing to be the Managing Director much before the
blank signed cheque was filled up and presented in the bank. In Laxmi
Dyechem (supra), the case of the appellant was that a running account
was opened in the books of accounts of the appellant in the name of the
respondent – company in which the value of the goods supplied was
debited from time to time according to the standard accounting practice.
A sum of Rs.4,91,91,035/ (Rupees Four Crore Ninety One Lac Ninety
One Thousand Thirty Five only) was according to the appellant
outstanding against the respondent – company in the former’s books of
accounts towards the supply made to the latter. The appellant’s further
case was that the respondent – company had issued under the signatures
of its authorized signatories, several postdated cheques towards the
payment of the amount aforementioned. Several of those cheques
(1017) when presented were dishonoured by the bank on which the
same were drawn, on the ground that the drawer’s signatures were
incomplete or that no image was found or that the signatures did not
match. The appellant informed the respondents about the dishonour in
terms of the statutory notice sent under Section 138 and called upon

them to pay the amount covered by the cheques.
Manifold contentions were raised before the Supreme Court and
one of those was on behalf of the signatories that the dishonour had
taken place after they had resigned from their positions and that the
failure of the company to honour the commitment implicit in the
cheques could not be construed as an act of dishonesty on the part of the
signatories of the cheques. In the peculiar facts of the case, the Supreme
Court, while negativing the contention, held as under:
“18...Just because the authorised signatories of the cheques have taken a
different line of defence than the one taken by the company does not in our
view justify quashing of the proceedings against them. The decisions of this
Court in National Small Industries Corporation Limited v. Harmeet Singh
Paintal and Anr., (2010) 3 SCC 330 : (AIR 2010 SC (Supp) 569 : 2010
AIR SCW 1508) and S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and
Anr., (2005) 8 SCC 89 : (AIR 2005 SC 3512 : 2005 AIR SCW 4740)
render the authorised signatory liable to be prosecuted along with the
company. In the National Small Industries Corporation Limited's case
(supra) this Court observed:
"19. xxxx
(c) The answer to Question (c) has to be in the affirmative. The
question notes that the Managing Director or Joint Managing
Director would be admittedly incharge of the company and
responsible to the company for the conduct of its business. When
that is so, holders of such positions in a company become liable
under Section 141 of the Act. By virtue of the office they hold as
Managing Director or Joint Managing Director, these persons are
incharge of and responsible for the conduct of business of the
company. Therefore, they get covered under Section 141. So far as
the signatory of a cheque which is dishonoured is concerned, he is
clearly responsible for the incriminating act and will be covered
under subsection (2) of Section 141."”
74 It is well settled that an authorized signatory is very much liable to
be prosecuted along with the company for the offence under Section 138
of the N.I. Act. However, it would all depend on the facts of each case.

As discussed by me, the facts of the case in hand are all together
different. I find it difficult to accept the argument of Mr. Ponda outright
relying upon the decision of the Supreme Court in the case of Laxmi
Dyechem (supra). So far as this issue is concerned, I have placed
reliance on the decision of the Supreme Court in the case of D.C.M.
Financial Services Limited (supra) and the Division Bench decisions of
the Bombay High Court as well as the Delhi High Court. It appears that
in Laxmi Dyechem (supra), there is no reference of the decision of
D.C.M. Financial Services Limited (supra).
75 The observations of the Supreme Court in Laxmi Dyechem have
to be read in the context in which they were made.
76 It is well settled that a judgment cannot be read like a Statute.
Construction of a judgment should be made in the light of the factual
matrix involved therein. What is more important is to see the issues
involved in a given case, and the context wherein the observations were
made by the Court while deciding the case. Observation made in a
judgment, it is trite, should not be read in isolation and out of context.
[See: Goan Real Estate and Construction Ltd. v. Union of India,
(2010) 5 SCC 388]: (2010 AIR SCW 2671)]. It is the ratio of the
judgment, and not every observation made in the context of the facts of
a particular case under consideration of the court, which constitutes a
binding precedent. The Supreme Court in P.S. Sathappan v. Andhra
Bank Ltd., AIR 2004 SC 5152 has held as follows:
"138. While analyzing different decisions rendered by this Court, an
attempt has been made to read the judgments as should be read under the
rule of precedents. A decision, it is trite, should not be read as a statute.
139. A decision is an authority for the questions of law determined by it.
While applying the ratio, the court may not pick out a word or a sentence

from the judgment divorced from the context in which the said question
arose for consideration. A judgment as is wellknown, must be read in its
entirety and the observations made therein should receive consideration in
the light of the questions raised before it. (See Haryana Financial
Corporation and Anr. v. Jagdamba Oil Mills and Anr., [2002] 1 SCR
621 : (AIR 2002 SC 834). Union of India and Ors. v. Dhanwanti Devi and
Ors. , (1996) 6 SCC 44 : (1996 AIR SCW 4020) Dr. Nalini Mahajan v.
Director of Incometax (Investigation) and Ors., [2002] 257 ITR 123
(Delhi) (2003 Tax LR 18 (Del) State of U.P. and Anr. v. Synthetics and
Chemicals Ltd. and Anr. , 1991 (4) SCC 139 , AOne Granites v. State of
U.P. and Ors., 2001 AIR SCW 848 and Bhavnagar University v. Palitana
Sugar Mill (P) Ltd. and Ors., (2003) 2 SCC 111 : (AIR 2003 SC 511)
140. Although, decisions are galore on this point, we may refer to a recent
one in State of Gujarat and Ors. v. Akhil Gujarat Pravasi V.S.
Mahamandal and Ors., AIR 2004 SC 3894 wherein this Court held:
"... It is trite that any observation made during the course of
reasoning in a judgment should not be read divorced from the
context in which they were used."
77 The above now takes me to consider the case of other Office
Bearers of the company who have been arrayed as accused by virtue of
section 141 of the N.I. Act. As such it is not necessary for me to go into
this issue in view of the discussion on other points, but there are few
NonExecutive Directors and Office Bearers, like Chief Operating Officer,
Chief Financial Officer, Financial Controller, nominated Directors who
have been arrayed as accused since they all came into picture after the
new management took over the company. Whether they could be held
liable under Section 141 of the N.I. Act is the question?
● SCOPE OF SECTION 141 OF THE NEGOTIABLE INSTRUMENTS
ACT:
78 Before I proceed to consider the case of the other applicants, who
have been arrayed as accused, by virtue of their vicarious liability, I
propose to take note of the relevant portion of the complaint, which

reads thus:
“4) For and on behalf of accused No.1 Company, the accused No.2 had
given cheque as security. In the year 2000 some cheques had arisen
between the complainant firm and the accused No.2 and the accused No.1
Company did not pay legitimate amount of the complainant firm,
therefore, the complainant has filed SPL. Civil Suit No.35 of 2000,
36/2000 and 37/2000 in the Civil Court at Amreli for recovery of dues,
wherein the Court granted exparte interim injunction below Ex. 5 in SPL.
Civil Suit No.36 of 2000...”
xxx xxx xxx
“17) ...The accused No.3 to 13 and 17 and 17 to 19 are the directors of
accused No.1 company, and they are in charge of daytoday management
of affairs of accused No.1 company hence, they are also responsible persons
for the management of accused No.1 company...”
“...Moreover, the accused No.3 to 13 and 17 to 19 did not take proper care
and caution to prevent occurrence of offence of dishonour of cheque nor
did they make arrangement of money. The aforesaid cheque issued by
accused No.1 company has returned/dishonoured, hence, the accused No.3
to 13 and 17 to 19 in their capacity as directors of accused No.1 have
abated the commission of offence. The accused No.3 to 13 and 17 to 19
are in charge of daytoday management of affairs of accused No.1
company. These accused persons had also attended various meetings on
behalf of accused No.1 company. If the minutes of meeting Board of
Directors dated 1812010 are considered, then it is clear that there is
mention therein about the dues of complainant and the cheque given for
payment thereof. Therefore, it is clear that the accused No.3 to 13 and 17
to 19 were aware about the issuance of cheque by accused No.1.”
79 Two classes of persons are liable to be prosecuted under Section
138. First, those persons who are in charge of and responsible to the
company for the conduct of its business. They are per se responsible. In
the second category comes those persons with whose consent or
connivance the offence can be attributed.
When the offence under Section 138 of the Negotiable
Instruments Act has been committed by a company “every person who,

at the time the offence was committed, was incharge 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. “ (vide Section 141 of the Negotiable Instruments Act).
In Anil Hada v. Indian Acrylic Ltd [2000 Cri. LJ 373 (SC) :
(2001) 1 SCC 1, it has been pointed out that three categories of persons
can be discerned as brought within the purview of the penal liability,
through the legal fiction envisaged in Section 141 of the Negotiable
Instruments Act. They are: (1) The company which committed the
offence. (2) Every person who was incharge of and responsible to the
company for the conduct of the business of the company. (3) Any other
person who is a director or a manager or a secretary or any officer of the
company with whose connivance or with whose neglect the company has
committed the offence. [Followed in M/s. B.S.I. Ltd v. Gift Holdings Pvt
Ltd, 2000 Cr. LJ 1424 : AIR 2000 SC 926]
The Apex Court in the said case of Anil Hada further explaining
the law as to the liability of the company and its directors, for
committing offence of dishonour of cheque, has held that normally an
offence can be committed by human beings who are natural persons.
Such offence can be tried according to the procedure established by law.
But there are offences which could be attributed to the juristic persons
also. If the drawer of a cheque happens to be a juristic person like a body
corporate it can be prosecuted for the offence under Section 138 of the
Act. Now there is no scope for doubt regarding that aspect in view of the
clear language employed in Section 141 of the Act. In the expanded
ambit of the word “company” even firms or any other associations of
persons are included and as a necessary adjunct thereof a partner of the

firm is treated as a director of that company.
Thus when the drawer of the cheque who falls within the ambit of
Section 138 of the Act is a human being or a body corporate or even a
firm, prosecution proceedings can be initiated against such drawer. In
this context the phrase “as well as” used in subsection (1) of Section
141 of the Act has some importance. The said phrase would embroil the
persons mentioned in the first category within the tentacles of the
offence on a par with the offending company. Similarly the words “shall
also” in subsection (2) are capable of bringing the third category
persons additionally within the dragnet of the offence on an equal par.
The effect of reading Section 141 is that when the company is the
drawer of the cheque such company is the principal offender under
Section 138 of the Act and the remaining persons are made offenders by
virtue of the legal fiction created by the Legislature as per the section.
Hence the actual offence should have been committed by the company,
and then alone the other two categories of persons would become liable
for the offence.
Section 141 (1) of the Negotiable Instruments Act would provide
that 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. Section 141(2) provides, where any offence 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. So, the joint reading of the

subsections (i)a(2) of Section 141 would make it clear that both the
company as well as other persons who are connected and responsible for
the conduct of the business of the company are liable to be proceeded.
Where offence under Section 138 of Negotiable Instruments Act is
committed by a company, the complaint must prima facie disclose the act
committed by the Directors from which a reasonable inference of their
vicarious liability cane be drawn. [Ashok Muthanna v. Exports Finance
Ltd (2001) 2 Crimes 602 (Mad)]
‘Vicarious liability’ in legal parlance means the liability of the
master for the acts of the servant or agent done in the course of
employment. Section 141 makes a natural person vicariously liable for
the contravention committed by a company provided such person has
some nexus with the crime either because of his connivance with it or
due to by criminal negligence which had resulted in its commission. No
doubt the law makes the principal liable for the acts of his agent, but
unless there is some absolute duty cast upon the principal, he cannot be
held responsible for the acts of his agent. [State of Shewprasad, AIR
1956 All. 610 : 1956 Cr.L.J. 1156]
80 In K.K. Ahuja (supra), the Supreme Court while explaining the
vicarious liability of persons of the company observed as under:
“16. Having regard to section 141, when a cheque issued by a company
(incorporated under the Companies Act, 1956) is dishonoured, in addition
to the company, the following persons are deemed to be guilty of the
offence and shall be liable to be proceeded against and punished :
(i) 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;
(ii) any Director, Manager, Secretary or other officer of the company with

whose consent and connivance, the offence under Section 138 has been
committed; and
(iii) any Director, Manager, Secretary or other officer of the company
whose negligence resulted in the offence under Section 138 of the Act,
being committed by the company.
While liability of persons in the first category arises under subsection (1)
of Section 141, the liability of persons mentioned in categories (ii) and
(iii) arises under subsection (2). The scheme of the Act, therefore is, that
a person who is responsible to the company for the conduct of the business
of the company and who is in charge of business of the company is
vicariously liable by reason only of his fulfilling the requirements of subsection
(1). But if the person responsible to the company for the conduct of
business of the company, was not in charge of the conduct of the business
of 11 the company, then he can be made liable only if the offence was
committed with his consent or connivance or as a result of his negligence.
17. The criminal liability for the offence by a company under Section 138,
is fastened vicariously on the persons referred to in subsection (1) of
Section 141 by virtue of a legal fiction. Penal statutes are to be construed
strictly. Penal statutes providing constructive vicarious liability should be
construed much more strictly. When conditions are prescribed for
extending such constructive criminal liability to others, courts will insist
upon strict literal compliance. There is no question of inferential or
implied compliance. Therefore, a specific averment complying with the
requirements of Section 141 is imperative. As pointed out in K. Srikanth
Singh vs. North East Securities Ltd 2007 (12) SCC 788, the mere fact
that at some point of time, an officer of a company had played some role
in the financial affairs of the company, will not be sufficient to attract the
constructive liability under Section 141 of the Act.
18 Subsection (2) of section 141 provides that a Director, Manager,
Secretary or other officer, though not in charge of the conduct of the
business of the company will be liable if the offence had been committed
with his consent or connivance or if the offence was a result of any 12
negligence on his part. The liability of persons mentioned in subsection
(2) is not on account of any legal fiction but on account of the specific part
played consent and connivance or negligence. If a person is to be made
liable under subsection (2) of section 141, then it is necessary to aver
consent and connivance, or negligence on his part.
19 This takes us to the next question under subsection (1) of section
141, as to (i) who are the persons who are responsible to the company for
the conduct of the business of the company, and (ii) who could be said to
be in charge and was responsible to the company for the conduct of the

business of the company. The words "every person who, at the time of the
offence was committed, was in charge of, and was responsible for the
conduct of the business of the company" occurs not only in section 141(1)
of the Act but in several enactments dealing with offences by companies, to
mention a few – section 278 B of the Income Tax Act, 1961, Section 22C
of Minimum Wages Act, 1948, Section 86A of the Employees State
Insurance Act, 1948, Section 14A of Employees Provident Fund and
Miscellaneous Provisions Act, 1952, Section 29 of Payment of Bonus Act,
1965, Section 40 of The Air 13 (Prevention and Control of Pollution) Act,
1981 and Section 47 of Water (Prevention and Control of Pollution) Act,
1974. But neither section 141(1) of the Act, nor the pari materia
provisions in other enactments give any indication as to who are the
persons responsible to the company, for the conduct of the business of the
company. Therefore, we will have to fall back upon the provisions of
Companies Act, 1956 which is the law relating to and regulating
companies.
20 Section 291 of the said Act provides that subject to the provisions of
that Act, the Board of Directors of a company shall be entitled to exercise
all such powers, and to do all such acts and things, as the company is
authorised to exercise and do. A company though a legal entity can act
only through its Board of Directors. The settled position is that a
Managing Director is prima facie in charge of and responsible for the
company's business and affairs and can be prosecuted for offences by the
company. But insofar as other directors are concerned, they can be
prosecuted only if they were in charge of and responsible for the conduct of
the company's business.
21 A combined reading of Section 5 and 291 of Companies Act, 1956
with the definitions in clauses (24), (26), (30), (31), (45) of section 2 of
that Act would show that the following persons are considered to be the
persons who are responsible to the company for the conduct of the business
of the company :
(a) the managing director(s);
(b) the wholetime director(s);
(c) the manager;
(d) the secretary;
(e) any person in accordance with whose directions or instructions the
Board of directors of the company is accustomed to act;
(f) any person charged by the Board with the responsibility of complying
with that provision (and who has given his consent in that behalf to the
Board); and
(g) where any company does not have any of the officers specified in

clauses
(a) to (c), any director or directors who may be specified by the Board in
this behalf or where no director is so specified, all the directors.
It follows that other employees of the company, cannot be said to
be persons who are responsible to the company, for the conduct of the
business of the company.
22 Section 141 uses the words "was in charge of, and was responsible
to the company for the conduct of the business of the company". It is
evident that a person who can be made vicariously liable under subsection
(1) of Section 141 is a person who is responsible to the company for the
conduct of the business of the company and in addition is also in charge of
the business of the company. There may be many directors and secretaries
who are not in charge of the business of the company at all. The meaning
of the words "person in charge of the business of the company" was
considered by this Court in Girdhari Lal Gupta v. D.N. Mehta [1971 (3)
SCC 189] followed in State of Karnataka v. Pratap Chand [1981 (2) SCC
335] and Katta Sujatha vs. Fertiliser & Chemicals Travancore Ltd. [2002
(7) SCC 655]. This Court held that the words refer to a person who is in
overall control of the day to day business of the company. This Court
pointed out that a person may be a director and thus belongs to the group
of persons making the policy followed by the company, but yet may not be
in charge of the business of the company; that a person may be a Manager
who is in charge of the business but may not be in overall charge of the
business; and that a person may be an officer who may be in charge of
only some part of the business.
23 Therefore, if a person does not meet the first requirement, that is
being a person who is responsible to the company for the conduct of the
business of the company, neither the question of his meeting the second
requirement (being a person in charge of the business of the company),
nor the question of such person being liable under subsection (1) of
section 141 does not arise. To put it differently, to be vicariously liable
under sub section (1) of Section 141, a person should fulfill the 'legal
requirement' of being a person in law (under the statute governing
companies) responsible to the company for the conduct of the business of
the company and also fulfill the 'factual requirement' of being a person in
charge of the business of the company.
24 Therefore, the averment in a complaint that an accused is a
director and that he is in charge of and is responsible to the company for
the conduct of the business of the company, duly affirmed in the sworn
statement, may be sufficient for the purpose of issuing summons to him.
But if the accused is not one of the persons who falls under the category of
'persons who are responsible to the company for the conduct of the

business of the company' (listed in para 14 above), then merely by stating
that 'he was in charge of the business of the company' or by stating that
'he was in charge of the day to day management of the company' or by
stating that he was in charge of, and was responsible to the company for
the conduct of the business of the company', he cannot be made vicariously
liable under section 141(1) of the Act.
25 It should, however, be kept in view that even an officer who was
not in charge of and was responsible to the company for the conduct of the
business of the company can be made liable under subsection (2) of
Section 141. For making a person liable under Section 141(2), the
mechanical repetition of the requirements under Section 141(1) will be of
no assistance, but there should be necessary averments in the complaint as
to how and in what manner the accused was guilty of consent and
connivance or negligence and therefore, responsible under subsection (2)
of Section 141 of the Act.
26 Another aspect that requires to be noticed is that only a Director,
Manager, Secretary or other officer can be made liable under subsection
(2) of section 141. But under subsection (1) of section 141, it is
theoretically possible to make even a person who is not a director or
officer, liable, as for example, a person falling under category (e) and (f)
of section 5 of Companies Act, 1956. When in SMS Pharma (I), this Court
observed that 'conversely, a person not holding any office or designation in
a company may be liable if he satisfies the requirement of being in charge
of and responsible for conduct of the business of the company', this Court
obviously had in mind, persons described in clauses (e) and (f) of section 5
of Companies Act. Be that as it may.
27 The position under section 141 of the Act can be summarized thus :
(i) If the accused is the Managing Director or a Joint Managing Director,
it is not necessary to make an averment in the complaint that he is in
charge of, and is responsible to the company, for the conduct of the
business of the company. It is sufficient if an averment is made that the
accused was the Managing Director or Joint Managing Director at the
relevant time. This is because the prefix `Managing' to the word `Director'
makes it clear that they were in charge of and are responsible to the
company, for the conduct of the business of the company.
(ii) In the case of a director or an officer of the company who signed
the cheque on behalf of the company, there is no need to make a specific
averment that he was in charge of and was responsible to the company,

for the conduct of the business of the company or make any specific
allegation about consent, connivance or negligence. The very fact that the
dishonoured cheque was signed by him on behalf of the company, would
give rise to responsibility under subsection (2) of section 141.
(iii) In the case of a Director, Secretary or Manager (as defined in Sec.
2(24) of the Companies Act) or a person referred to in clauses (e) and (f)
of section 5 of Companies Act, an averment in the complaint that he was
in charge of, and was responsible to the company, for the conduct of the
business of the company is necessary to bring the case under section
141(1). No further averment would be necessary in the complaint, though
some particulars will be desirable. They can also be made liable under
section 141(2) by making necessary averments relating to consent and
connivance or negligence, in the complaint, to bring the matter under that
subsection.
(iv)Other Officers of a company can not be made liable under subsection
(1) of section 141. Other officers of a company can be made liable only
under subsection (2) of Section 141, be averring in the complaint their
position and duties in the company and their role in regard to the issue
and dishonour of the cheque, disclosing consent, connivance or negligence.
28 If a mere reproduction of the wording of section 141(1) in the
complaint is sufficient to make a person liable to face prosecution,
virtually every officer/employee of a company without exception could be
impleaded as accused by merely making an averment that at the time
when the offence was committed they were in charge of and were
responsible to the company for the conduct and business of the company.
This would mean that if a company had 100 branches and the cheque
issued from one branch was dishonoured, the officers of all the 100
branches could be made accused by simply making an allegation that they
were in charge of and were responsible to the company for the conduct of
the business of the company. That would be absurd and not intended
under the Act.
29 As the trauma, harassment and hardship of a criminal proceedings
in such cases, may be more serious than the ultimate punishment, it is not
proper to subject all and sundry to be impleaded as accused in a complaint
against a company, even when the requirements of section 138 read and
section 141 of the Act are not fulfilled.”
81 In view of the aforesaid dictum of law explained by the Supreme

Court, the other accused who have been arrayed as accused by virtue of
Section 141 of the N.I. Act could not be held liable. I take notice of the
fact that some of the accused are Office Bearers, like the Chief Operating
Officer, Chief Financial Officer, Financial Controller. Some of the
Directors are nominated Directors and also NonExecutive.
82 I am also not impressed by the argument of Mr. Ponda that as the
inherent powers of this Court under Section 482 of the Cr.P.C. are
circumscribed, and should be exercised only in cases where the Court
finds an abuse of the process of law, all the applications deserve to be
outright rejected, leaving all the legal contentions open to be canvassed
before the trial Court.
83 In Harshendra Kumar D. v. Rebatilata Koley etc [2011 Criminal
Law Journal 1626], the Supreme Court held as under:
“21 In our judgment, the above observations cannot be read to mean
that in a criminal case where trial is yet to take place and the matter is at
the stage of issuance of summons or taking cognizance, materials relied
upon by the accused which are in the nature of public documents or the
materials which are beyond suspicion or doubt, in no circumstance, can be
looked into by the High Court in exercise of its jurisdiction under Section
482 or for that matter in exercise of revisional jurisdiction under Section
397 of the Code. It is fairly settled now that while exercising inherent
jurisdiction under Section 482 or revisional jurisdiction under Section 397
of the Code in a case where complaint is sought to be quashed, it is not
proper for the High Court to consider the defence of the accused or embark
upon an enquiry in respect of merits of the accusations. However, in an
appropriate case, if on the face of the documents which are beyond
suspicion or doubt placed by accused, the accusations against him cannot
stand, it would be travesty of justice if accused is relegated to trial and he
is asked to prove his defence before the trial court. In such a matter, for
promotion of justice or to prevent injustice or abuse of process, the High
Court may look into the materials which have significant bearing on the
matter at prima facie stage.
22. Criminal prosecution is a serious matter; it affects the liberty of a
person. No greater damage can be done to the reputation of a person than
dragging him in a criminal case.”

84 I take notice of the fact that in complaints filed for the offence
under Section 138 of the N.I. Act, all the Directors of the company and
even the Office Bearers are routinely being proceeded against by
invoking the provisions under Section 141 of the N.I. Act by glibly
repeating the words in the section that certain Director “was incharge of
and responsible to the company for the conduct of business of the
company”. It is necessary to emphasis that Section 141 of the N.I. Act
where an offence under Section 138 of the N.I. Act has been committed
by a company, the complainant is required to give a serious thought and
make enquiries and ascertain the fact as to whether a particular Director
was incharge of and responsible to the affairs and conduct of the
business of the company. Routinely roping in all the Directors by merely
repeating the words used in Section 141 of the N.I. Act without
ascertaining the facts is a serious matter which has to be deprecated.
85 Some of the applicants before me are indisputably nonexecutive
Directors of the company. A nonexecutive Director is no doubt a
custodian of the governance of the company, but does not involve in the
daytoday affairs of the running of its business and only monitors the
executive activity. [See: Pooja Ravinder Devidasani v. State of
Maharastra, AIR 2015 SC 675]
86 In Pooja Ravinder Devidasani (supra), the Supreme Court made
the following observations in para – 30, which I deem fit to refer and
rely upon :
“30. Putting the criminal law into motion is not a matter of course. To
settle the scores between the parties which are more in the nature of a civil
dispute, the parties cannot be permitted to put the criminal law into

motion and Courts cannot be a mere spectator to it. Before a Magistrate
taking cognizance of an offence under Section 138/141 of the N.I. Act,
making a person vicariously liable has to ensure strict compliance of the
statutory requirements. The Superior Courts should maintain purity in the
administration of justice and should not allow abuse of the process of the
Court. The High Court ought to have quashed the complaint against the
appellant which is nothing but a pure abuse of process of law.
87 A Division Bench of this Court (to which I was a party) in the case
of Ionic Metalliks and others [Special Civil Application No.645 of
2014 decided on 9th September 2014], while examining the challenge
to the legality and validity of a master circular dated 2nd July 2012
issued by the Reserve Bank of India in respect of “willful defaulters” had
an occasion to consider the categories of Directors as classified under the
Companies Act. I may quote the following from the judgment referred to
above:
“The circular speaks about director and independent and nominee
director. The classification of the directors under the Companies Act is as
under :
A. Classification under the Companies Act
Categories of Directors
The Companies Act refers to the following two specific categories of
Directors:
1. Managing Directors; and
2. Wholetime Directors.
A Managing Director is a Director who has substantial powers of
management of the affairs of the company subject to the superintendence,
control and direction of the Board in question. A Wholetime Director
includes a Director who is in the wholetime employment of the company,
devotes his wholetime of working hours to the company in question and
has a significant personal interest in the company as his source of income.
Every public company and private company, which is a subsidiary

of a public company, having a share capital of more than Five Crore
rupees (Rs. 5,00,00,000/) must have a Managing or Wholetime Director
or a Manager.
Further classification of Directors
Based on the circumstances surrounding their appointment, the
Companies Act recognizes the following further types of Directors:
1. First Directors: Subject to any regulations in the Articles of a company,
the subscribers to the Memorandum of Association, or the company's
charter or constitution ("Memorandum"), shall be deemed to be the
Directors of the company, until such time when Directors are duly
appointed in the annual general meeting ("AGM").
2. Casual vacancies: Where a Director appointed at the AGM vacates office
before his or her term of office expires in the normal course, the resulting
vacancy may, subject to the Articles, be filled by the Board. Such person so
appointed shall hold office up to the time which the Director who vacated
office would have held office if he or she had not so vacated such office.
3. Additional Directors: If the Articles specifically so provide or enable, the
Board has the discretion, where it feels it necessary and expedient, to
appoint Additional Directors who will hold office until the next AGM.
However, the number of Directors and Additional Directors together shall
not exceed the maximum strength fixed in the Articles for the Board.
4. Alternate Director: If so authorized by the Articles or by a resolution
passed by the company in general meeting, the Board may appoint an
Alternate Director to act for a Director ("Original Director"), who is absent
for whatever reason for a minimum period of three months from the State
in which the meetings of the Board are ordinarily held. Such Alternate
Director will hold office until such period that the Original Director would
have held his or her office. However, any provision for automatic reappointment
of retiring Directors applies to the Original Director and not
to the Alternate Director.
5. 'Shadow' Director: A person, who is not appointed to the Board, but on
whose directions the Board is accustomed to act, is liable as a Director of
the company, unless he or she is giving advice in his or her professional
capacity. Thus, such a 'shadow' Director may be treated as an 'officer in
default' under the Companies Act.
6. De facto Director: Where a person who is not actually appointed as a

Director, but acts as a Director and is held out by the company as such,
such person is considered as a de facto Director. Unlike a 'shadow'
Director, a de facto Director purports to act, and is seen to the outside
world as acting, as a Director of the company. Such a de facto Director is
liable as a Director under the Companies Act.
7. Rotational Directors: At least twothirds of the Directors of a public
company or of a private company subsidiary of a public company have to
retire by rotation and the term "rotational Director" refers to such
Directors who have to retire (and may, subject to the Articles, be eligible
for reappointment) at the end of his or her tenure.
8. Nominee Directors: They can be appointed by certain shareholders, third
parties through contracts, lending public financial institutions or banks, or
by the Central Government in case of oppression or mismanagement. The
extent of a nominee Director's rights and the scope of supervision by the
shareholders, is contained in the contract that enables such appointments,
or (as appropriate) the relevant statutes applicable to such public financial
institution or bank. However, nominee Directors must be particularly
careful not to act only in the interests of their nominators, but must act in
the best interests of the company and its shareholders as a whole.The
fixing of liabilities on nominee Directors in India does not turn on the
circumstances of their appointment or, indeed, who nominated them as
Directors. Chapter 4 and Chapter 5 that follow set out certain duties and
liabilities that apply to, or can be affixed on, Directors in general. Whether
nominee Directors are required by law to discharge such duties or bear
such liabilities will depend on the application of the legal provisions in
question, the fiduciary duties involved and whether such nominee Director
is to be regarded as being in control or in charge of the company and its
activities. This determination ultimately turns on the specific facts and
circumstances involved in each case.
B. Classification under the Listing Agreement
The Securities Contracts (Regulation) Act, 1956, read with the
rules and regulations made thereunder, requires every company desirous
of listing its shares on a recognized Indian stock exchange, to execute a
listing agreement ("Agreement") with such Indian stock exchange. This
Agreement is in a standard format (prescribed by the Securities Exchange
Board of India ("SEBI")), as amended by SEBI from time to time. The
Agreement provides for the following further categories of Directors:
Categories under Listing Agreement

1. Executive Director;
2. Nonexecutive Director; and
3. Independent Director.
Executive and nonexecutive Directors
An Executive Director can be either a Wholetime Director of the
company (i.e., one who devotes his whole time of working hours to the
company and has a significant personal interest in the company as his
source of income), or a Managing Director (i.e., one who is employed by
the company as such and has substantial powers of management over the
affairs of the company subject to the superintendence, direction and
control of the Board). In contrast, a nonexecutive Director is a Director
who is neither a Wholetime Director nor a Managing Director. Clause 49
of the Agreement prescribes that the Board shall have an optimum
combination of executive and nonexecutive Directors, with not less than
fifty percent (50%) of the Board comprising nonexecutive Directors.
Where the Chairman of the Board is a nonexecutive Director, at least onethird
of the Board should comprise independent Directors and in case he is
an executive Director, at least half of the Board should comprise
independent Directors. Where the nonexecutive Chairman is a promoter
of the company or is related to any promoter or person occupying
management positions at the Board level or at one level below the Board,
at least onehalf of the Board of the company shall consist of independent
Directors.
Independent Directors
The Agreement defines an "Independent Director" as a nonexecutive
Director of the company who:
a. apart from receiving Director's remuneration, does not have material
pecuniary relationships or transactions with the company, its promoters,
its Directors, its senior management, or its holding company, its
subsidiaries, and associates which may affect independence of the Director;
b. is not related to promoters or persons occupying management positions
at the board level or at one level below the board;
c. has not been an executive of the company in the immediately preceding
three (3) financial years;
d. is not a partner or an executive or was not a partner or an executive

during the preceding three (3) years, of any of the following:
i. the statutory audit firm or the internal audit firm that is associated
with the company, and
ii. the legal firms and consulting firms that have a material
association with the company;
e. is not a material supplier, service provider or customer or a lessor or
lessee of the company, which may affect the independence of the Director;
or
f. he is not a substantial shareholder of the company, i.e., owning two
percent (2%) or more of the block of voting shares; and
g. he is not less than twentyone (21) years of age.
Nominee directors appointed by an institution that has invested in, or lent
money to, the company are also treated as independent Directors.”
88 The following observations of the Supreme Court, made in the
case of M/s. Pepsi Foods Ltd v. Special J.M. [1998 Cri. L.J. 1 : AIR
1998 SC 128] should be kept in mind by the Magistrates, when they
decide to summon a director or partner of a company or firm to face trial
under Section 138 of the Negotiable Instruments Act.
“Summoning of an accused in a criminal case is a serious matter. Criminal
law cannot be set into motion as a matter of course. It is not that the
complainant has to bring only two witnesses to support his allegations in
the complaint to have the criminal law set into motion. 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. He has to
examine the nature of allegations made in the complaint and the evidence
both oral and documentary in support thereof and would that be sufficient
for the complainant to succeed in bringing charge home to the accused. It
is not that the Magistrate is a silent spectator at the time of recording of
preliminary evidence before summoning of the accused. Magistrate has to
carefully scrutinise the evidence brought on record and may even himself
put questions to the complainant and his witnesses to elicit answers to find

out the truthfulness of the allegations or otherwise and then examine if
any offence is prima facie committed by all or any of the accused.”
“This has assumed all the more significance in view of the recent
trend found that in respect of offences under Section 138 of the Negotiable
Instruments Act alleged against a company, all the Directors of the
company are being routinely roped in as accused with a statement that
they are incharge of and responsible to the business of the company as
required under Section 141 of the Negotiable Instruments Act. In fact, it
has been seen that some times, even the nominee Directors nominated by
the financial agencies like IDBI have also been arrayed as accused for the
offence committed by the Company on the Board of which they have been
nominated. The need to carefully scrutinize the material and if necessary
to question the complainant as to the basis for implicating an accused as
observed by the Supreme Court in the above cited judgment cannot be
ignored.
Considering this, it appears necessary that at any rate even if on
the basis of formal allegations in the complaint such Directors have been
summoned to face the trial, they must be afforded an opportunity at least
at the earliest stage to show with reference to the material which may be
placed before the Court that they are not incharge of and are not
responsible to the business of the company and on that basis seek their
discharge from the array of the accused. In such cases, I think it will be a
great injustice if they are asked to go through the ordeal of the trial and
plead their defence only during the trial. [Om Prakash Agrawal v. State
of A.P., 2001 Cri. L.J. 253 (para 13) A.P.]”
89 In N.K. Wahi v. Shekhar Singh and others [2007 (9) SCC 481],
the Supreme Court, after considering its earlier judgment on the point in
question, held as under:
“7. This provision clearly shows that so far as the companies are concerned
if any offence is committed by it then every person who is a Director or
employee of the company is not liable. Only such person would be held
liable if at the time when offence is committed he was in charge and was
responsible to the company for the conduct of the business of the company
as well as the company. Merely being a Director of the company in the
absence of above factors will not make him liable.
8. To launch a prosecution, therefore, against the alleged Directors there
must be a specific allegation in the complaint as to the part played by
them in the transaction. There should be clear and unambiguous

allegation as to how the Directors are incharge and responsible for the
conduct of the business of the company. The description should be clear. It
is true that precise words from the provisions of the Act need not be
reproduced and the Court can always come to a conclusion in facts of each
case. But still in the absence of any averment or specific evidence the net
result would be that complaint would not be entertainable.”
90 In Gunmala Sales Private Limited (supra), the Supreme Court,
after an exhaustive review of all its earlier decisions on Section 141 of
the N.I. Act, summarized its conclusion as under:
“a) Once in a complaint filed under Section 138 read with Section 141 of
the NI Act the basic averment is made that the Director was in charge of
and responsible for the conduct of the business of the company at the
relevant time when the offence was committed, the Magistrate can issue
process against such Director;
b) If a petition is filed under Section 482 of the Code for quashing of such
a complaint by the Director, the High Court may, in the facts of a
particular case, on an overall reading of the complaint, refuse to quash the
complaint because the complaint contains the basic averment which is
sufficient to make out a case against the Director;
c) In the facts of a given case, on an overall reading of the complaint, the
High Court may, despite the presence of the basic averment, quash the
complaint because of the absence of more particulars about role of the
Director in the complaint. It may do so having come across some
unimpeachable, uncontrovertible evidence which is beyond suspicion or
doubt or totally acceptable circumstances which may clearly indicate that
the Director could not have been concerned with the issuance of cheques
and asking him to stand the trial would be abuse of the process of the
court. Despite the presence of basic averment, it may come to a conclusion
that no case is made out against the Director. Take for instance a case of a
Director suffering from a terminal illness who was bedridden at the
relevant time or a Director who had resigned long before issuance of
cheques. In such cases, if the High Court is convinced that prosecuting such
a Director is merely an armtwisting tactics, the High Court may quash
the proceedings. It bears repetition to state that to establish such case
unimpeachable, uncontrovertible evidence which is beyond suspicion or
doubt or some totally acceptable circumstances will have to be brought to
the notice of the High Court. Such cases may be few and far between but
the possibility of such a case being there cannot be ruled out. In the
absence of such evidence or circumstances, complaint cannot be quashed;

d) No restriction can be placed on the High Court's powers under Section
482 of the Code. The High Court always uses and must use this power
sparingly and with great circumspection to prevent inter alia the abuse of
the process of the Court. There are no fixed formulae to be followed by the
High Court in this regard and the exercise of this power depends upon the
facts and circumstances of each case. The High Court at that stage does
not conduct a mini trial or roving inquiry, but, nothing prevents it from
taking unimpeachable evidence or totally acceptable circumstances into
account which may lead it to conclude that no trial is necessary qua a
particular Director.”
91 In view of the above, there is no cogent material on record to
fasten any vicarious liability so far as the other accused are concerned
who are NonExecutive Directors including the Office Bearers concerned
with the Accounts Department of the company.
92 The plain reading of Section 138 of the N.I. Act would clearly go
to show that by reason thereof, a legal fiction had been created. A legal
fiction, as is wellknown, although is required to be given full effect, yet
has its own limitations. It cannot be taken recourse to for any purpose
other than the one mentioned in the statute itself. Section 138 of the Act
moreover provides for a penal provision. A penal provision created by
reason of a legal fiction must receive strict construction. Such a penal
provision, enacted in terms of the legal fiction drawn, would be attracted
when a cheque is returned by the bank unpaid. Before a proceeding
thereunder is initiated, all the legal requirements therefor must be
complied with. The Court must be satisfied that all the ingredients of
commission of an offence under the said provision have been complied
with. [See: Raj Kumar Khurana v. State of (NCT of Delhi) and another,
(2009) 6 SCC 72]
93 Before concluding, I may only say that, whenever a blank cheque
or postdated cheque is issued, a trust is reposed that the cheque will be

filled in or used according to the understanding or agreement between
the parties. If there is a prima facie reason to believe that the said trust is
not honoured, then the continuation of prosecution under Section 138 of
the N.I. Act would be the abuse of the process of law. It is in the interest
of justice that the parties in such cases are left to the civil remedy.
94 In my view, having regard to the peculiar facts and circumstances
of the case, as narrated above, all the petitions succeed and are allowed.
The order of the issuance of the process under Section 138 of the N.I.
Act is hereby quashed. Rule is made absolute accordingly.
95 It is clarified that the three civil suits, which are pending as on
date, in the Court of the learned Civil Judge, Senior Division, Amreli,
shall proceed further in accordance with law. The learned Civil Judge is
directed to take up all the three civil suits for hearing and see to it that
they are disposed of with the judgment within a period of one year from
the date of receipt of this order. It is further clarified that the three civil
suits shall be decided strictly on the basis of the evidence that may be
led oral as well as documentary by both the sides, and without being
influenced, in any manner, by any of the observations made in this
judgment and order. This judgment and order is only confined so far as
the liability of the accused applicants under Section 138 of the N.I. Act is
concerned. It has nothing to do so far as the other civil liabilities are
concerned.
(J.B.PARDIWALA, J.)

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Sunday 4 December 2016

Whether judgment can be read as statute divorced from facts of case?

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