Cheque issued as security when matures into a legally enforceable debt - Legally enforceable debt is a matter of trial.

Delhi High Court Upholds Summoning Order in Negotiable Instruments Act Case. Court Dismisses Petition to Quash Complaint, Enforcing Security Cheque Liability Under Section 138

In a significant ruling, the Delhi High Court has dismissed the petition filed by Mr. Manmohan Gaind, Director of M/s Mahesh Prefab Pvt. Ltd., challenging the summoning order and complaint filed under Section 138 of the Negotiable Instruments Act, 1881. The judgment, delivered by Justice Neena Bansal Krishna, affirms the legal enforceability of security cheques when liabilities arise and mature into debts.

The case revolves around a business agreement between M/s Mahesh Prefab Pvt. Ltd. and Negolice India Pvt. Ltd., where the former was awarded a work order for the supply and installation of GRC grills. Against the mobilization advance of Rs. 6,82,416 provided by Negolice India, Mahesh Prefab issued a security cheque of equivalent value. Disputes arose when Negolice India terminated the contract, leading to conflicting claims regarding the amount of work completed and the corresponding liabilities.

Despite the ongoing disputes and a legal notice from Mahesh Prefab warning against presenting the cheque, Negolice India proceeded to present the cheque, which was dishonored with the remark "account closed." This prompted Negolice India to initiate legal proceedings under Section 138 of the NI Act, resulting in the summoning order that Mahesh Prefab sought to quash.

Justice Krishna's judgment emphasizes that security cheques can be presented for encashment if liabilities arise that mature into legally enforceable debts. The court referenced several Supreme Court rulings, including Indus Airways Private Limited v. Magnum Aviation Private Limited and Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited, to underscore that liability is determined at the time of cheque presentation, not issuance.

The judgment also addressed whether the cheque amount exceeded the legally recoverable debt, noting that such determinations are matters for trial. The court observed that disputes regarding the exact amount due are factual issues that cannot be settled at the summoning stage.

In conclusion, the court found no merit in the petition to quash the complaint, underscoring that the legality of presenting the security cheque is contingent upon the existence of a crystallized liability. The ruling reinforces the applicability of Section 138 in scenarios where security cheques secure potential financial liabilities, thereby dismissing the petition and affirming the summoning order.

Bottom Line:

Security Cheques - Cheque issued as security can be presented if liability arises and matures into a legally enforceable debt - Determination of legally enforceable debt is a matter of trial.

Statutory provision(s): Section 138, Negotiable Instruments Act, 1881

Manmohan Gaind v. Negolice India Pvt. Ltd, (Delhi) : Law Finder Doc Id # 2806697