Court’s Decision
The Delhi High Court dismissed a petition seeking quashing of a complaint under Section 138 of the Negotiable Instruments Act, 1881. The petitioner had issued two post-dated cheques totalling ₹1.9 crore under a Memorandum of Understanding (MoU) for the purchase of equity shares from the respondent. The Court held that the MoU was a binding agreement, and the petitioner could not evade liability by unilaterally terminating it. Emphasizing that the presumption under Section 139 of the NI Act applies once issuance and signature on the cheque are admitted, the Court ruled that disputed questions of fact—such as whether the cheques were issued in discharge of a legally enforceable liability—could not be adjudicated at the pre-trial stage and must be determined at trial.
Facts
The petitioner and the respondent were co-directors in a company engaged in the textiles and used garments business. The respondent held 45% equity, which he agreed to sell to the petitioner for ₹1.9 crore. A Memorandum of Understanding dated 14 February 2020 formalised this arrangement, and the petitioner issued two post-dated cheques—₹1.13 crore and ₹76.5 lakh respectively—as consideration for the share purchase.
However, before executing the Share Purchase Agreement, the petitioner sent an email on 18 March 2020 terminating the MoU citing financial hardship. The respondent objected to this unilateral termination, stating that the MoU did not permit such termination. Despite being warned, the respondent deposited the cheques which were dishonoured due to “Payment Stopped by Drawer.” A legal notice was served, but no payment ensued. The respondent then filed a complaint under Section 138 of the NI Act. The petitioner sought quashing of the complaint on grounds that no enforceable liability existed.
Issues
- Whether the post-dated cheques issued by the petitioner were in discharge of a legally enforceable debt or liability?
- Whether unilateral termination of the MoU absolved the petitioner of liability?
- Whether the complaint under Section 138 NI Act could be quashed at the pre-trial stage?
Petitioner’s Arguments
The petitioner contended that the cheques were not issued against an existing liability but were conditional upon the execution of a Share Purchase Agreement which never took place. It was argued that the MoU itself was terminated on 18 March 2020 before the cheques were presented, thereby nullifying any obligation. He maintained that the cheques were given only as a future commitment and did not represent a legally enforceable debt at the time of presentation.
The petitioner also argued that the complaint lacked the essential ingredients under Section 138 NI Act, particularly the requirement of a subsisting debt. He relied on specific clauses of the MoU that indicated the payment and share transfer were interdependent and conditional on future events. He submitted that a mere MoU without execution of a formal agreement could not give rise to liability under the NI Act.
Respondent’s Arguments
The respondent argued that the MoU constituted a binding and complete contract, and that the petitioner had agreed to buy his shares for ₹1.9 crore. The cheques issued were part of a concluded agreement and not contingent upon the execution of another document. The respondent emphasized that the MoU had no termination clause and the petitioner’s email did not amount to valid cancellation.
He further stated that the petitioner’s obligations under the MoU remained alive when the cheques were presented. The trial court had already taken cognizance, issued summons, and framed notice under Section 251 CrPC. Moreover, in a parallel civil suit for specific performance of the MoU, the Delhi High Court had already upheld the MoU’s enforceability and directed the petitioner to pay ₹1.9 crore.
Reliance was placed on various Supreme Court judgments to argue that presumptions under Section 139 of the NI Act could only be rebutted during trial and not at the stage of quashing. The respondent urged that the petitioner was trying to evade trial on untenable grounds.
Analysis of the Law
Section 138 of the NI Act criminalizes dishonour of cheques issued in discharge of a legally enforceable debt or liability. As per the Supreme Court in Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel, for an offence to be made out under Section 138, there must be:
- Issuance of cheque;
- Towards a legally enforceable debt;
- Dishonour due to insufficiency of funds or payment stopped.
The petitioner admitted issuance and signing of the cheques, which activated the presumption under Section 139 that the cheques were issued in discharge of a liability. To rebut this, the petitioner had to show absence of debt—a defence which is factual and must be adjudicated at trial.
Precedent Analysis
The Court relied on the following key decisions:
- Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel (2023): Clarified essential ingredients of Section 138.
- Oriental Bank of Commerce v. Prabodh Kumar Tewari (2022): Held that once the cheque is signed and handed over, liability is presumed unless rebutted during trial.
- Rathish Babu Unnikrishnan v. State (2022): Observed that courts should be cautious in quashing Section 138 complaints at pre-trial stage.
- M.M.T.C. Ltd. v. Medchl Chemicals (2002): Held that presumption under Section 139 can be rebutted only by leading evidence.
- Akbar Ali v. State (2023): Delhi High Court reiterated that enforceability of debt is a matter for trial.
The Court also took note of the coordinate bench judgment in the civil suit for specific performance where the MoU was held to be binding and enforceable, with directions to pay ₹1.9 crore.
Court’s Reasoning
The Court held that prima facie the ingredients of Section 138 were fulfilled. The petitioner’s admission of cheque issuance, receipt of notice, and absence of reply satisfied procedural requirements. The civil court’s finding that the MoU was binding further reinforced the existence of a legal liability.
The Court emphasized that the presumption under Section 139 stands unless rebutted with evidence at trial. Since the petitioner’s defences involved disputed facts—such as whether the MoU was contingent or the cheques were security—such matters could not be determined at the stage of quashing.
Further, the unilateral attempt to terminate a binding agreement was held invalid by the coordinate bench. Therefore, the MoU and corresponding liability subsisted when the cheques were dishonoured.
Conclusion
The Delhi High Court dismissed the petition to quash the complaint under Section 138 of the NI Act. The Court reaffirmed that the defence of absence of legal liability must be examined at trial and cannot form the basis for quashing. It clarified that the judgment was limited to the petition and would not affect the trial’s merits.
Implications
This ruling strengthens the enforceability of contractual cheques under Section 138 even when issued under MoUs, particularly where post-dated cheques are given pursuant to concluded agreements. It underscores the judicial restraint in quashing criminal complaints under Section 138 and reaffirms the statutory presumption of liability under Section 139.
Cases Referred and Their Relevance
- Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel (2023) – Laid down the ingredients of Section 138 offences.
- Oriental Bank of Commerce v. Prabodh Kumar Tewari (2022) – Affirmed presumption under Section 139.
- Rathish Babu Unnikrishnan v. State (2022) – Held pre-trial quashing improper when presumption applies.
- M.M.T.C. Ltd. v. Medchl Chemicals (2002) – Held burden is on drawer to prove absence of liability at trial.
- Akbar Ali v. State (2023) – Reiterated that defences regarding enforceability must go to trial.
FAQs
Q1. Can a cheque issued under an MoU be enforceable under the Negotiable Instruments Act?
Yes. If the MoU is binding and the cheque is issued pursuant to such an agreement, it is enforceable under Section 138, especially when not conditional or meant as mere security.
Q2. Can a complaint under Section 138 be quashed if the drawer alleges absence of legal liability?
No. Such a defence involves factual disputes and must be adjudicated at trial. Courts generally do not entertain such claims at the quashing stage.
Q3. What happens if a drawer unilaterally terminates a contract after issuing a cheque?
Unilateral termination of a concluded agreement, particularly when not permitted by the contract, does not absolve the drawer of liability under Section 138.
