Criminal Application No.4568 of 2009,Criminal Application No.4569 of 2009

21st November, 2009

Petitioner Counsel: Mr. SUDHIR S. VODITE,Mr. G. D. UTANGALE ,Mr. AKSHAY JADHAV,M. K. Utangale& Co.
Respondent Counsel: Ms. PRAVINA J. KANANI,Mr. Y. S. SHINDE

Cases Cited:
M. S. Narayana Menon Vs. State of Kerala, 2006(5) ALL MR 33=AIR 2006 SC 3366 [Para 5,7,9]
ICDS Ltd. Vs. Beena Shabeer, (2002)6 SCC 426 [Para 6,8,9]
Sreenivasan Vs. State of Kerala, 1999(3) KLT 849 [Para 8]
Industrial Investment Bank of India Ltd. Vs. Biswanath Jhunjhunwala, 2009(6) ALL MR 511 (S.C.)=2009(3) Bankers' Journal 1 [Para 13,15]
State Bank of India Vs. Indexport Registered, AIR 1992 SC 1740 [Para 13]

JUDGMENT

JUDGMENT :- Rule. By consent, Rule is made returnable forthwith.

2. Heard counsel for the parties.

3. An order dated 19th October, 2006 passed by the 30th Metropolitan Magistrate Court issuing process in Criminal Case No.1694/SS/2007 is challenged by the applicants, who are co-accused, by these two applications. Hence, both the applications are disposed of by this common order.

4. There is no dispute between the parties regarding the basic facts which are as follows. The H.D.F.C. Bank Ltd. (hereinafter referred to as "the complainant") filed a complaint, bearing Criminal Case No.1650/2006 (renumbered as Criminal Case No.1694/SS/2007), against Rajesh Sharma (hereinafter referred to as "Rajesh"), his son Kartik Sharma (hereinafter referred to as "Kartik") and wife Neelam Sharma (hereinafter referred to as "Neelam") for an offence punishable under section 138 of the Negotiable Instruments Act. The complaint states that under a loan agreement dated 22nd November, 2005, the complainant granted a loan of Rs.1,50,00,000/- to M/s. Silverline Motors Pvt. Ltd. (for short "the Company") on the terms and conditions recorded in the agreement. Under the loan agreement, the Company had agreed to provide personal guarantee of Rajesh or a corporate guarantee of M/s. Neelam India Pvt. Ltd. for repayment of the loan. Accordingly, M/s. Neelam India Pvt. Ltd. issued a corporate guarantee on 30th November, 2005. Rajesh, his son Kartik and wife Neelam also executed three separate deeds of guarantee on 22nd and 30th November, 2005 guaranteeing the repayment of the loan with interest. The Company was unable to repay the loan as per the terms and conditions of the loan agreement. Hence, as a comfort to the complainant, Rajesh sent to the complainant a cheque bearing no.631151 dated 10th May, 2006 for Rs.1,40,00,000/- from a joint account of the applicants maintained with ICICI Bank, New Delhi Branch. The said cheque was to be held as a security and/or additional comfort as is clear from the letter dated 31st May, 2006 sent by Rajesh. The letter states :

"Further for the sheer purpose of providing an Additional Level of Comfort, as also strongly suggested by your goodselves, we are also enclosing a cheque drawn from the personal account of Mr. Rajesh Sharma, maintained with ICICI Bank, Saket, New Delhi, bearing cheque No.631151, for the same amount in lieu of the above."

On 10th July, 2006, the complainant without notice to Rajesh, Kartik or Neelam sought to encash the cheque. On 17th July, 2006, the cheque was dishonoured on its presentation and was returned to the complainant by ICICI Bank on 25th July, 2006. Demand notice dated 2nd August, 2006 issued by the complainant to Rajesh, Kartik and Neelam yielded no response. The complainant, therefore, filed the complaint with the learned Magistrate who issued the process. That order is impugned by these applications.

5. Relying upon a judgment of the Supreme Court rendered in M. S. Narayana Menon Vs. State of Kerala, AIR 2006 SC 3366 : [2006(5) ALL MR (S.C.) 33], learned counsel for the applicants submitted that as the cheque was issued only by way of a security for repayment of the loan by the Company, they were not liable under section 138 of the Negotiable Instruments Act (for short "the Act"). he applicants were not indebted to the complainant. The cheque was not issued towards the discharge of any debt or liability and therefore the case would not fall within the purview of section 138 of the Act.

6. Per contra, referring to a decision of the Supreme Court in ICDS Ltd. Vs. Beena Shabeer, (2002)6 SCC 426, learned counsel for the complainant bank submitted that a complaint under section 138 of the Negotiable Instruments Act was maintainable against a guarantor. Since the applicants were guarantors to the loan borrowed by the Company, the complaint under section 138 of the Negotiable Instruments Act was maintainable.

7. In M. S. Narayana Vs. State of Kerala [2006(5) ALL MR (S.C.) 33] (supra) relied upon by the applicants, the Supreme Court has observed :-

"57. We in the facts and circumstances of this case need not go into the question as to whether even if the prosecution fails to prove that a large portion of the amount claimed to be a part of debt was not owing and due to the complainant by the accused and only because he has issued a cheque for a higher amount, he would be convicted if it is held that existence of debt in respect of large part of the said amount has not been proved. The Appellant clearly said that nothing is due and the cheque was issued by way of security. The said defence has been accepted as probable. If the defence is acceptable as probable the cheque therefor cannot be held to have been issued in discharge of the debt as, for example, if a cheque is issued for security or for any other purpose the same would not come within the purview of Section 138 of the Act." (underlining supplied)

8. In ICDS Ltd. Vs. Beena Shabeer (supra), the facts were that the appellant therein had advanced some money to the respondents and had obtained a promissory note. It was stipulated that the respondents should pay interest every month. At the same time, the appellant creditor took a blank signed cheque from the respondents with an understanding that the complainant could fill the other columns in the cheque and present it if the respondents committed default in payment of interest. On dishonour of the cheque, a complaint was filed. The accused moved the High Court for quashing. The High Court relying upon its earlier decision in the case of Sreenivasan Vs. State of Kerala, 1999(3) KLT 849 wherein it was held that when a cheque was issued as a security, no complaint will lie under section 138 of the Act, quashed the proceedings before the Magistrate. Allowing the appeal, the Supreme Court held that the relevant words in section 138 of the Negotiable Instruments Act, namely "any cheque" and "other liability" make it absolutely clear that a cheque may be issued on account of any liability and, therefore, even if the liability was as a guarantor, nonetheless a prosecution under section 138 of the Negotiable Instruments Act would be maintainable.

9. The decision in the case of ICDS Ltd. (supra) was rendered by two Judges Bench of the Supreme Court on 12th August 2002. The decision in the case of M.S. Narayana Menon [2006(5) ALL MR (S.C.) 33] (supra) was also by two Judges Bench of he Supreme Court on 4th July 2006. The decision in ICDS Ltd. (supra) was not brought to the notice of the Supreme Court while it was deciding the case of M.S. Narayana Menon. In ICDS Ltd., the Supreme Court held that a prosecution under section 138 of the Act is maintainable even in respect of a cheque which is issued as a security while in M.S. Narayana Menon, the Supreme Court held that if a cheque is issued as security or for any other purpose, the same would not come within the purview of section 138 of the Act. It is not necessary to reconcile apparently varied observation in the aforementioned decisions in the facts and circumstances of the present case for the reasons indicated below.

10. The loan agreement dated 22nd November 2005 between the complainant and the Company shows that the Company had undertaken to provide personal guarantee of Rajesh or a corporate guarantee of M/s. Neelam India Pvt. Ltd. by way of additional security. Accordingly, Rajesh had issued a personal guarantee on 22nd November, 2005. Though not contemplated by the loan agreement, similar personal guarantees were also issued by Kartik and Neelam. The guarantees issued by the applicants are identically worded. Para 1 of the operative part of the deeds of guarantee is material and is quoted herein below :

"In consideration of the Bank having agreed to grant the said facility the Guarantor hereby irrevocably and unconditionally guarantee that the Borrower shall from time to time repay/liquidate the facility to the Bank, together with interests and all other monies payable in respect thereof under the said Loan Agreement and shall perform and observe all terms and conditions of the said Loan Agreement and that in the event of he Borrower failing to pay or discharging his liability to the Bank the facility of Rs.150 lacs or any part thereof together with interest and other monies in terms of the said Loan Agreement or committing or happening of any event of default as defined in the said Loan Agreement, the Guarantor shall on written demand by the Bank pay to the Bank without any demur and/or contestation and notwithstanding any dispute between the Bank and the Borrower and without going into regularity or veracity of such demands and notwithstanding any objection on the part of the Borrower the sum outstanding with interest and all other monies payable in respect thereof under the said Loan Agreement." (underlining supplied)

Under the deed of guarantee the liability of Rajesh, Kartik and Neelam as guarantors was to arise on a written demand made by the complainant bank. The cheque in question was issued in pursuance of this deed of guarantee dated 22nd November, 2005. The liability, for which the cheque is claimed to have been issued was to crystalise only on a demand made by the complainant on them. Before the presentation of the cheque, no demand was made by the complainant on the guarantors, namely Rajesh, Kartik or Neelam. Therefore, on the day when the cheque was presented by the complainant to the ICICI Bank in July, 2006, the guarantors were not liable under the deed of guarantee as their liability had not arisen in the absence of any prior demand. Consequently, it must be held that the cheque was not issued in respect of any present liability. The liability was contingent upon the principal debtor not paying and the complainant making a demand on the guarantors.

11. At this stage, while the judgment is being dictated in open court, learned counsel for the respondent no.1 prays that she may be permitted to argue further as she wants to rely upon a recent decision of the Supreme Court, copy of which is not with her at the moment. The request is granted and the matter is adjourned for further hearing and continuation of the judgment.

21ST NOVEMBER, 2009

12. Heard the learned counsel for the parties further.

13. Learned counsel for the respondent no.1 invited my attention to a decision of the Supreme Court in Industrial Investment Bank of India Ltd. Vs. Biswanath Jhunjhunwala, 2009(3) Bankers' Journal 1 : [2009(6) ALL MR 511 (S.C.)]. In that case, the facts were that the appellant - Industrial Investment Bank of India Ltd. (for short "the IIBI") had sanctioned a working capital loan of Rs.3 crores to Modern Malleables Limited (for short "the company"). A loan agreement was executed between the IIBI and the company on 3rd October, 1994. In addition thereto, Mr. Jhunjhunwala (the respondent before the Supreme Court) executed a personal deed of guarantee on the very day in respect of the loan granted to the company. Clause 11 of the personal guarantee provided that to give effect to the guarantee, the IRBI may act as though the guarantors were the principal debtor. In view of a default committed by the company, IIBI issued a notice of demand to the company on 18th January, 1987 recalling the loan and also made an application in the High Court of Calcutta for attachment and sale of the assets of the company. Mr. Jhunjhunwala was not made a party to the application. A separate notice of demand was issued to Mr. Jhunjhunwala on 20th March, 1987 invoking the personal guarantee and calling upon him to pay the amount of loan together with further interest and liquidated damages. On 17th July, 1997, IIBI filed an application against Mr. Jhunjhunwala under section 19 of the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 (for short "Debt Recovery Act") in the Debt Recovery Tribunal (for short "the Tribunal") praying for a certificate against Mr. Jhunjhunwala. On 20th March, 1998, Mr. Jhunjhunwala applied to the Tribunal for stay of proceedings, inter alia, on the ground that the rights of IIBI against Mr. Jhunjhunwala as guarantor did not crystalise till the rights of IIBI against the borrower company were established. Relying upon a decision of the Supreme Court in State Bank of India Vs. Indexport Registered & others, AIR 1992 SC 1740, the Tribunal dismissed the application holding that the liability of Mr. Jhunjhunwala (the guarantor) was co-extensive with that of the principal debtor. The order was challenged by Mr. Jhunjhunwala before the Calcutta High Court by filing a writ petition under Article 227 of the Constitution. The High Court allowed the petition and stayed further proceedings before the Tribunal. That order was impugned before the Supreme Court. After considering several decisions of the Courts as well as commentaries by Pollock & Mulla on the Indian Contract, Chitty on Contracts and the Halsbury's Law of England, the Supreme Court held that the liability of the guarantor and principal debtor are co-extensive and not alternative. Consequently, the Supreme Court set aside the order of the High Court staying the proceedings before the Tribunal. In my view, the decision is of no assistance to the complainant for the reasons indicated below.

14. In that case, the Supreme Court has quoted the following passage appearing at page 728 of the celebrated book of Pollock & Mulla on Indian Contract and Specific Relief Act, 10th Edition.

"Co-extensive.- Surety's liability is co-extensive with that of the principal debtor.

A surety's liability to pay the debt is not removed by reason of the creditor's omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued."

This portion is written by the learned authors in their commentaries on section 128 of the Indian Contract Act, which reads thus :

"128. The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract."

Section 128 itself provides that liability of the surety would be co-extensive with that of the principal debtor unless it is otherwise provided by the contract. It is permissible for the parties to agree that the liability of a surety shall be different than that of a principal debtor or that it would be conditional upon the principal debtor not paying the amount due or contingent upon something like the creditor issuing a notice of demand to the guarantor. In the present case, the contract between the complainant (creditor) and the applicants (sureties) specifically provides that the liability of the sureties would arise only after demand was made on them.

15. In the case of Industrial Investment Bank of India [2009(6) ALL MR 511 (S.C.)] (supra), the Supreme Court has referred to a passage appearing at 1031 of Chitty on Contracts, 24th Edition, Volume 2. The passage reads thus :

"Conditions precedent to liability of surety.- Prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor."(underlining supplied)

The observation of Chitty that surety can be proceeded without demand against him is general in nature and only prima facie. In the light of section 128 of the Indian Contract Act. which specifically provides that the liability of a surety would be co-extensive with the principal debtor unless the contract provides otherwise. Under the Indian Contract Act, it is permissible for the parties to agree that the liability of a surety would be different and may not be the same as that of the principal debtor. It is also possible for the parties to agree that the liability of the surety would be contingent upon the principal debtor not paying the amount or would arise on demand being made on the surety. In the present case, the contract of guarantee clearly provides that the liability of Rajesh, Kartik and Neelam as sureties was to arise in the event of the borrower failing to pay or discharge his liability and on a written demand made by the complainant-bank on the guarantors. As already held, prior to the date of presentation of the cheque, no demand was made by the complainant on Rajesh, Kartik and Neelam and, therefore, on the date of presentation of the cheque there was no existing liability against them.

16. Offence under section 138 of the Act is committed only if the cheque which is dishonoured, is issued for discharge, in the whole or in part, of any debt or liability. As the cheque was not issued towards discharge of any liability and in fact there was none on the date of issuance and presentation of the cheque, the applicants were not liable to be prosecuted. Consequently, no offence under section 138 of the Negotiable Instruments Act was committed by them.

17. Learned counsel for the complainant submitted that this court, in exercise of its extra-ordinary jurisdiction under Article 227 of the Constitution, may not interfere at this stage. She submitted that on recording of the evidence, and after the trial, it is for the Magistrate to consider whether an offence under section 138 of the Negotiable Instruments Act has been made out, and at this stage the proceedings should not be quashed. It is true that normally this Court would be slow to interfere to quash a criminal trial before trial. However, in the present case, the facts are all undisputed. The date of the guarantee, the terms and conditions contained in the deed of guarantee, the date of presentation of the cheque, date of first demand made on Rajesh, Kartik and Neelam as guarantors are undisputed. A copy of the deed of guarantee has been produced before me by the complainant-bank itself. Thus, on the undisputed facts, it is clear that the liability of Rajesh, Kartik and Neelam as guarantors was not crystalised on any of the material dates. There was no legally enforceable debt or liability on the date of presentation and dishonour of the cheque. Therefore, no useful purpose would be served by continuation of the trial which would be mere waste of judicial time. In the circumstances, the objection of the learned counsel for the complainant is over-ruled.

18. For these reasons, the applications are allowed and the proceedings before the learned Magistrate being Criminal Case No.1694/SS/2007 are hereby quashed. Rule is made absolute in terms of prayer clause (a) in both the applications.

Applications allowed.