New Delhi: The Supreme Court on Friday ruled that a person cannot be prosecuted under Article 138 of the Constitution if he repays a personal loan through a check signed by him as a director of a company.
A man took out a personal loan of Rs 7 lakh and returned the amount through a check drawn on the account of Shilabati Hospital in Kolkata, where he was a director. The check bounced and the creditor commenced proceedings under section 138 of the NI Act. The Supreme Court quashed the proceedings. The creditors appealed to the Supreme Court.
A bench of Justices JB Pardiwala and R Mahadevan said Section 138 is a criminal provision and must be strictly construed and a person can face prosecution only when a check issued from an account held by himself is encashed.
It was alleged that since the check was drawn from the hospital account, the director could not be prosecuted under the National Intelligence Act. As of 2023, there are as many as 3.6 million bad check cases pending in various courts.
In a detailed judgment analyzing the provision, Justice Padivala said, “Section 138 of the NI Act clearly provides that a check returned for insufficient funds shall be withdrawn by a person from an account maintained by him.”
“If Section 138 of the Act is interpreted to mean that even if a person draws a check on an account which is not held by himself, he shall be liable if the check is returned for insufficient funds.” This interpretation would lead to absurd and completely unexpected results,” he said.
Referring to the dishonor of a check signed by the debtor as a director of Shilabati Hospital, the judge said: “A check signed by the defendant in his capacity as a ‘director’ of the company would under normal circumstances be deemed dishonored. The honor conferred by the Bank did not meet the statutory requirements of Section 138 of the Act.
However, the judge said that while the debtor could not be prosecuted under Section 138, he would be liable for fraud because it was proven beyond dispute that he provided checks to repay the loan amount.
“In this case, although it is impossible to hold the defendant guilty of violating Section 138 of the National Intelligence Act, the possibility that he is guilty of cheating cannot be ruled out.” On the surface, the defendant’s criminal intent is self-evident Yes,” the judge said.
