Cheque Dishonor under Section 138 NI Act: SC set aside conviction based on the civil court’s declaration that the cheque was only for ‘security’

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While hearing the Prem Raj vs. Poonamma Menon & Anr. case on April 02, 2024, the Supreme Court of India set aside a conviction in a criminal case for cheque dishonor under Section 138 of the Negotiable Instruments Act (NI Act) based on the civil court’s declaration that the cheque was only for security. While delivering the decision, the SC considered various existing similar matters. It observed that “The position as per K.G. Premshanker vs. Inspector of Police & Anr. is that sentence and damages would be excluded from the conflict of decisions in civil and criminal jurisdictions of the Courts. Therefore, in the present case, considering that the Court in criminal jurisdiction has imposed both sentence and damages, the ratio of the above-referred decision dictates that the Court in criminal jurisdiction would be bound by the civil Court having declared the cheque, the subject matter of dispute, to be only for the purposes of security.” The bench comprising Justice Sanjay Karol and Justice Aravind Kumar held that “the criminal proceedings resulting from the cheque being returned unrealized due to the closure of the account would be unsustainable in law and, therefore, are to be quashed and set aside. Resultantly, the damages as imposed by the Courts must be returned to the appellant…” 

In this case, the appellant (Prem Raj) borrowed Rs.2,00,000/- from the Complainant (K.P.B. Menon) with the promise that he would repay it on demand. On receipt of such demand, he issued a cheque for the said amount from the South Indian Bank, encashment thereof was to be through Canara Bank,  to which the cheque was sent through the post with a covering letter. The cheque was dishonored due to insufficient funds and ‘payments stopped by drawer’. The Complainant came to know of such dishonor and issued a notice of demand. Accounting for no action on the part of the appellant, the complaint came to be filed. Equally, though, the accused had filed an Original Suit and five parties were impleaded as defendants: K.P. Bhaskara Menon, K.P. Vipinendra Kumar, Praveen Menon, The Manager South Indian Bank Limited Kathikudam, Via Koratty, Trichur, and N.T. Raghunandanan. The prayers made were “to declare cheque…of the South Indian Bank Limited, Kathikudam, as a security cheque, issue mandatory injunction directing the 1st defendant to return the said cheque and issue a permanent prohibitory injunction restraining defendants 1 to 4 named hereinabove from taking any steps to encash the said cheque.” 

The Additional District Munsif, Irinjalakuda, decreed the Suit in favor of the accused. The Suit in respect of the Manager, South Indian Bank, was dismissed and the Suit was wholly decreed against the remaining defendants. K.P. Bhaskara Menon filed an appeal before the Additional Subordinate Judge which was dismissed. Moreover, it has been observed that “the very same cheque was in issue before the Civil Court and also the Court seized of the Section 138 N.I. Act complaint.” The Trial Court convicted the appellant to undergo simple imprisonment for 1 year as well as pay compensation of Rs. 2,00,000 in default and he was to undergo further simple imprisonment for six months. The First Appellate Court confirmed the conviction handed down by the trial Court. The Kerala High Court, in revision, observed that no perversity could be indicated in the concurrent findings of the Trial Court and First Appellate Court, and the same was dismissed. The matter was therefore mentioned before the SC. 

During the proceedings, the main question addressed by the bench was “Whether, a criminal proceeding can be initiated and the accused therein held guilty with natural consequences thereof to follow, in connection with a transaction, in respect of which a decree by a competent Court of civil jurisdiction, already stands passed?” The SC observed, “...Civil cases are decided on the basis of preponderance of evidence, while in a criminal case, the entire burden lies on the prosecution, and proof beyond reasonable doubt has to be given. There is neither any statutory provision nor any legal principle that the findings recorded in one proceeding may be treated as final or binding in the other, as both the cases have to be decided on the basis of the evidence adduced therein…” The bench further pointed out,  “No hard-and-fast rule can be laid down but we do not consider that the possibility of conflicting decisions in the civil and criminal courts is a relevant consideration. The law envisages such an eventuality when it expressly refrains from making the decision of one court binding on the other, or even relevant, except for certain limited purposes, such as sentence or damages.” After hearing the matter, the SC bench set aside and quashed the conviction upheld by the High Court.