The Allahabad High Court, in a significant ruling, has held that when a Memorandum of Understanding (MOU) specifies that a payment is to be made “before” a certain date, a legally enforceable debt exists prior to that date. The court dismissed petitions seeking to quash proceedings under Section 138 of the Negotiable Instruments Act, 1881, clarifying that cheques presented for payment before the final date stipulated in the agreement are valid if the debt is established.
The judgment was delivered by Justice Sanjay Kumar Pachori while adjudicating on two applications filed by Gaurav Sharma seeking to quash complaint cases initiated against him for dishonoured cheques.
The court heard arguments from Senior Advocate Sri Manish Tiwary, assisted by Ms. Shriyanshi Upadhyay (holding brief of Sri Aushim Luthra) for the applicant, Gaurav Sharma. Senior Advocate Sri V.P. Srivastava, assisted by Sri Indra Deo Mishra and Ms. Anju Agarwal, appeared for the opposite party. Sri Karunakar Singh, learned A.G.A., represented the State of U.P.
Background of the Case
The dispute arose from the dissolution of a partnership firm named “Bankey Bihari Vidhya Mandir.” The applicant, Gaurav Sharma, and the opposite parties, Ankit Agarwal and Ashish Agarwal, were partners. Upon deciding to end the partnership, a Memorandum of Understanding (MOU) was executed on January 4, 2020.
As per the MOU, Mr. Sharma was liable to pay a total of Rs. 58,00,000 and Rs. 38,95,193 to the retiring partners. In pursuance of this, Mr. Sharma issued two cheques: one for Rs. 58,00,000 dated September 25, 2020, and another for Rs. 38,95,193, also dated September 25, 2020.
The cheque for Rs. 58,00,000 was presented to the bank on September 30, 2020, and the other cheque was presented on October 5, 2020. Both were dishonoured due to “insufficient funds” and “stop payment” instructions by the applicant. Consequently, after a legal notice dated October 14, 2020, went unheeded, two separate complaints under Section 138 of the N.I. Act were filed against Mr. Sharma, leading to a summoning order by the Additional Chief Judicial Magistrate, Agra, on February 22, 2021.
Arguments of the Parties
The primary contention on behalf of the applicant, Gaurav Sharma, was that no legally enforceable debt or liability existed on the date the cheques were drawn. His counsel argued that the cheques were delivered as “security cheques” as per the MOU, and the liability to pay was set to mature on or before December 31, 2021. Therefore, presenting the cheques in September and October 2020 was premature. It was also submitted that even if another clause mentioned a due date of December 31, 2020, the presentation was still premature. A further ground was raised that the complaint was filed through a power of attorney holder who had no knowledge of the transaction, which was argued to be a “grave defect” in the case.
Conversely, counsel for the opposite party contended that the Magistrate had correctly taken cognizance of the offence. It was argued that since the cheques were issued and the signatures on them were admitted, “the presumption of a legally enforceable debt would arise in favour of the holder of the cheques.” The proceedings under the N.I. Act were initiated only after the applicant failed to pay the amount within the stipulated time after the dishonour.
Court’s Analysis and Interpretation of the MOU
The High Court centered its analysis on the interpretation of the MOU to answer the core question: “Whether there existed a legally enforceable debt or liability against the applicant on 5.10.2020 and 30.9.2020?”
The court meticulously examined the clauses of the MOU. It noted that Clauses 1 and 2 explicitly stated that the applicant “shall be liable to pay the total partners’ capital contribution… before 31.12.2020.” The court found this language to be a “clear and specific agreement between the parties with regard to liability of the applicant.”
The court rejected the applicant’s reliance on another clause that mentioned the date “31.12.2021.” Justice Pachori clarified that this date was related to the imposition of interest, stating, “The word ‘on or before 31.12.2021’ as mentioned in clause no. 3 having no interpretation that the due amount is payable on or before 31.12.2021. The aforesaid date is fixing liability only for 12% p.a. interest upon the due amount.” The judgment emphasized that the interest clause did not override the primary payment obligation clauses.
The court also considered precedents, including the Supreme Court’s decision in Dashrathbhai Trikambhai Patel v. Hitesh Mahendrabhai Patel & Anr., which held that “for the commission of any offence under Section 138 of N.I. Act, the cheque that is dishonoured must represent a legally enforceable debt on the date of maturity or presentation.” Applying this test, the court found that the debt was indeed legally enforceable when the cheques were presented.
Final Decision
Concluding its analysis, the court found the applicant’s arguments to be “misconceived and not sustainable.”
Justice Pachori held: “After having consideration of the facts, circumstances of the case and keeping in mind the position of law, I am of the considered view that as per terms of clause 1 and 2 of the MOU, the applicant agreed to pay the amount as mentioned Rs 58,00,000/- and Rs. 38,95,193/- to the private opposite party no. 2 ‘before 31.12.2020’… There was a legally enforceable debt against the applicant on 5.10.2020 and 30.9.2020 respectively.”
Finding no merit in the applications, the High Court dismissed both petitions and vacated any interim orders, allowing the proceedings before the trial court in Agra to continue.
