Legal Expertise You Can Rely On

Supreme Court’s Landmark Verdict: Directors Not Liable Under Section 138 NI Act After Resignation

Introduction

The Supreme Court of India recently delivered a landmark judgment clarifying the liability of directors in cheque bounce cases under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). The Court categorically ruled that a director cannot be held liable for a cheque bounce offence under Section 138 NI Act if they had resigned from the company prior to the issuance of the cheque in question. This pivotal decision provides much-needed clarity on the legal responsibilities of directors, managing directors, CEOs, CFOs, and other corporate officers in cheque bounce matters. It also underscores the importance of establishing the timeline of resignation and cheque issuance in defending against allegations of cheque dishonour.

Ingredients of an Offence Under Section 138 NI Act

To appreciate the reasoning behind the Court’s decision, it is essential to understand the specific ingredients that constitute an offence under Section 138 of the NI Act. For the offence of cheque dishonour to be complete, the following conditions must be met:

1. Existence of a Legally Enforceable Debt or Liability: Their must be a legally enforceable debt/liability existing on the drawer towards the drawee.

2. Issuance of the Cheque: The cheque must be issued towards the payment of the said debt or liability.

3. Dishonour of the Cheque: The cheque must be dishonoured by the bank for insufficiency of funds or other reasons.

4. Statutory Notice: A notice must be sent to the drawer of the cheque, demanding payment within the stipulated time frame.

5. Failure to Pay: The drawer must fail to make the payment within the stipulated period after receiving the notice.

These ingredients must collectively exist for an offence under Section 138 NI Act to be established. Any missing link renders the offence incomplete.

The Case Before the Supreme Court

In the matter before the Supreme Court of India, the complainant alleged that a director of the company was liable under Section 138 NI Act, even though the director is not the drawer of the cheque and had already resigned before the company issued the cheque in question. The complainant argued that since the debt or liability existed during the tenure of the director, their role and responsibility should be examined during the trial, and thus, the complaint against them should not be quashed.

​

Supreme Court’s Decision

The Supreme Court rejected this argument and held that a director cannot be held liable under Section 138 NI Act if they had resigned before the issuance of the cheque. The Court emphasized the following:

1. Issuance of the Cheque is a Key Event: The offence under Section 138 NI Act revolves around the act of issuing a cheque. A director, managing director, or CFO who has resigned before the cheque is issued cannot be considered a "drawer" of the cheque.

2. Existence of Debt is Not Sufficient: The mere existence of a legally enforceable debt or liability during the director’s tenure is not sufficient to establish their liability under Section 138. The act of issuing the cheque is crucial.

3. Fairness and Accountability: Holding a person liable for an act they did not participate in would be against the principles of fairness and justice.

Significance of the Verdict

This decision reinforces the principle that liability under Section 138 NI Act is not automatic and requires strict compliance with the statutory ingredients. It also provides relief to directors, CEOs, CFOs, and other corporate officers who have resigned from a company, ensuring they are not unnecessarily dragged into litigation for actions taken after their departure.

Practical Implications

1. Clarity for Directors and Corporate Officers: The judgment provides clarity and protection to directors, managing directors, and other corporate officers who have resigned, ensuring they are not held liable for the company’s subsequent actions.

2. Compliance and Due Diligence: Directors and officers must ensure their resignation is properly documented and communicated to avoid any ambiguity.

3. Focus on Accountability: The judgment underscores the importance of focusing on the actual drawer of the cheque rather than implicating individuals based on past associations.

Conclusion

The Supreme Court’s verdict is a welcome development, upholding the rule of law and the principles of natural justice. By delineating the scope of liability under Section 138 NI Act, the Court has ensured that individuals, including directors, managing directors, CEOs, and CFOs, are held accountable only for their direct actions and not for circumstances beyond their control. This decision will serve as a guiding precedent in similar cases, promoting fairness and precision in the application of the law.

​

The Hidden Dangers of Property Dealing: Protecting Your Investments

Introduction

Real estate is one of the most significant investments in a person’s life. However, despite its importance, many buyers fall victim to fraudulent practices due to a lack of awareness about legal procedures for property dealing. Common pitfalls include purchasing properties based on non-transferable documents like General Power of Attorney (GPA), Agreements to Sell, or other ancillary paperwork.

​

Such transactions may appear convenient or cost-effective but are fraught with risks. These documents are not recognized as valid means of property transfer. The Supreme Court's judgment in Suraj Lamps v. State of Haryana [(2011) 11 SCR 848] clarified that ownership cannot be transferred via these methods. Unfortunately, fraudulent sellers and brokers exploit these loopholes, often selling the same property to multiple buyers. This leads to significant financial loss, emotional distress, and long legal battles.

For buyers in Delhi, understanding legal requirements such as property registration in Delhi, stamp duty in Delhi, and compliance with property laws is critical. If you're exploring property registration in Delhi or seeking reliable property dealers in Delhi, working with experts who understand these complexities is essential.

​

This article unpacks the hidden dangers of property disputes stemming from invalid documents and provides actionable solutions to ensure your property dealing is secure, legally compliant, and hassle-free. Safeguard your investment with the right knowledge and legal support.

​​

Understanding the Legal Context

The Supreme Court’s ruling in "Suraj Lamps v. State of Haryana" aimed to curb the misuse of non-transferable documents in property transactions. The judgment unequivocally stated that property ownership cannot be legally transferred through instruments like GPA, Agreements to Sell, or notarized affidavits. Instead, only registered sale deeds or conveyance deeds are considered valid for transferring ownership.

A detailed summary of the judgment highlights the following key points:

1. SA/GPA/WILL transactions are not recognized as valid transfers of property ownership. They are often used to avoid legal and financial obligations such as stamp duty, registration charges, and capital gains taxes.

2. The judgment references various legal provisions, including the Transfer of Property Act, Indian Stamp Act, and Registration Act, to emphasize that a valid transfer of immovable property requires a registered deed of conveyance.

3. These transactions contribute to black money circulation, real estate mafia activities, and legal disputes. They also complicate title verification and certification.

4. The court reiterates that immovable property can only be legally transferred through a registered deed. SA/GPA/WILL transactions do not convey title and should not be treated as valid transfers.
    

Issues Faced by Buyers in Invalid Transactions

1. Lack of Legal Ownership: Since these transactions do not involve a registered deed of conveyance, buyers do not obtain legal ownership of the property. This means they cannot claim full legal rights over the property.

2. Title Uncertainty: Without a registered title, buyers face uncertainty regarding the property's ownership. This can lead to disputes and challenges from other parties claiming rights to the property.

3. Vulnerability to Fraud: The absence of a registered deed makes it easier for sellers to resell the property to another party, potentially leading to fraud and loss of the buyer's investment.

4. Limited Legal Protection: Buyers have limited legal recourse if disputes arise, as these transactions do not provide the same level of protection as registered sales. They may only defend possession under certain conditions, such as Section 53A of the Transfer of Property Act.

5. Financial Risks: Buyers may still be liable for taxes and fees that were avoided through the transaction, leading to unexpected financial burdens.

6. Difficulty in Obtaining Financing: Financial institutions may be reluctant to provide loans or mortgages for properties acquired through SA/GPA/WILL transactions due to the lack of clear legal title.

7. Challenges in Future Sales: Selling the property in the future can be difficult without a registered title, as potential buyers may be wary of the legal risks involved.

How Fraudulent Practices Exploit Buyers

Despite clear legal guidelines, fraudulent sellers and brokers continue to exploit loopholes, preying on buyers who may not be well-versed in property laws. Here’s how they operate:

1. Selling Properties Multiple Times: By using non-transferable documents, sellers can create multiple agreements for the same property, duping multiple buyers.

2. Avoiding Registration Costs: To lure buyers, these fraudsters often highlight the cost-saving aspect of avoiding registration and stamp duty fees.

3. Creating Legal Ambiguities: Once the fraud is discovered, buyers face legal hurdles proving ownership, as non-transferable documents hold little to no legal weight in court.

Solutions: Safeguarding Your Property Investments

To avoid falling victim to such scams, buyers must take proactive steps to ensure their transactions are secure and legally sound. 

Here’s how:

1. Demand a Registered Sale Deed: Always insist on a registered sale deed when purchasing property. This is the only legally recognized document for ownership transfer.

2. Verify the Title: Conduct a thorough title search to confirm that the seller has clear and undisputed ownership of the property.

3. Engage Legal Experts: Hire a qualified lawyer to review all documents and ensure compliance with property laws.

4. Avoid Cash Transactions: Conduct all financial transactions through banks to create a transparent and verifiable record.

5. Check Encumbrance Certificates: Ensure that the property is free from any legal disputes or unpaid dues by obtaining an encumbrance certificate from the sub-registrar’s office.

6. Regularization: Buyers can seek to regularize the transaction by obtaining a registered deed of conveyance. This involves formalizing the sale through proper legal channels to secure legal ownership. Buyers may file a suit for specific performance, compelling the seller to execute a registered sale deed as initially agreed upon in the transaction.

7. Legal Action for Fraud: If fraud is involved, buyers can pursue legal action against the seller for fraudulent misrepresentation or breach of contract.

8. Possession Defense: Under Section 53A of the Transfer of Property Act, buyers can defend their possession of the property against the seller, provided they have fulfilled their part of the agreement.

9. Consultation with Legal Experts: Engaging a legal expert or attorney can help buyers understand their rights and explore legal options based on the specifics of their case.

​

Conclusion

Buying property is a significant milestone, but it’s crucial to approach it with caution and awareness. Non-transferable documents like GPA and Agreements to Sell might seem convenient, but they pose severe legal and financial risks. By staying informed about the legal requirements for property transfers and taking necessary precautions, you can protect your investments and avoid falling victim to fraudulent schemes.

Remember, the cost of ignorance is far greater than the effort required to ensure legal compliance. When in doubt, always consult legal experts to guide you through the process and safeguard your dream investment.

​

**The author, Tarun Gaur, is a practising Advocate and is also All India Rank 1 holder of AILET, LLM, NLU Delhi.**

​

Supreme Court on Arbitration: Recent Judgment Expands Scope for Non-Signatory Parties

In a landmark decision, the Supreme Court of India has clarified that an arbitration agreement is not inherently non-binding on non-signatory parties. The Court emphasized that non-signatories may still be bound by the agreement based on their actions or their relationship with the signatory parties. This significant judgment underscores the evolving approach to arbitration in India and its broader applicability.

​

The Court highlighted the role of referral courts in assessing the binding nature of such agreements from a prima facie perspective. However, the final determination rests with the arbitral tribunal, which will evaluate the matter based on factual evidence. This recent judgment of the Supreme Court on arbitration reaffirms the flexibility and inclusivity of arbitration as a dispute resolution mechanism in India, ensuring fairness and accountability for all involved parties.

​

Key Ruling Highlights

The Supreme Court's decision is grounded in its previous judgment in "Cox and Kings Ltd. v. SAP India Pvt. Ltd.", where it reiterated that a referral court must initially assess whether an arbitration agreement exists. The Court pointed out that the definition of "parties" under the Arbitration and Conciliation Act, 1996 encompasses both signatories and non-signatories. Therefore, entities that have not formally signed the contract containing the arbitration agreement may still intend to be bound by it.

​

The Court further elaborated that a non-signatory's intention to be bound can be inferred from their involvement in negotiations, performance, and termination of the underlying contract. However, this involvement must be **positive, direct, and substantial**, rather than merely incidental.

Factual Background

This case arose from a Family Arrangement Agreement (FAA) involving three groups: AMP Group, JRS Group, and SRG Group. Representatives from these groups were part of the same family and engaged in various business ventures together. Disputes emerged between these groups from 2013 to 2019, leading to multiple legal proceedings.

After unsuccessful mediation efforts and failure to appoint a Sole Arbitrator within 30 days, the AMP Group filed a petition seeking arbitration. They argued that although SRG Group was not a signatory to the FAA, it was effectively a party to the arbitration agreement due to its active participation in negotiations and ongoing discussions related to the FAA's implementation.

Arguments Presented

**Petitioner (AMP Group)**: 
- Asserted that SRG Group's involvement in negotiations made it a de facto party to the arbitration agreement.
- Claimed that executing the FAA required SRG Group's participation and that all parties recognized its role in fulfilling the FAA's terms.
- Argued that referral courts should defer jurisdictional questions regarding non-signatories to arbitral tribunals based on factual evidence.

**Respondents (JRS and SRG Groups)**:
- JRS Group did not object to appointing a Sole Arbitrator but contended that SRG Group could not be bound by the FAA as it was not a signatory.
- SRG Group maintained that it was intended solely for AMP and JRS Groups, emphasizing that there was no defined legal relationship with AMP Group.

Court Observations

The Supreme Court reviewed multiple precedents concerning Section 11 of the Arbitration Act. It noted that while prima facie evidence of an arbitration agreement existed, determining whether SRG Group could be included in arbitration proceedings required careful consideration of its conduct and relationship with other parties.

The Court concluded that non-signatories could indeed be considered parties to an arbitration agreement based on their involvement in contract performance. It stated that if a non-signatory actively participates in contractual obligations linked to the dispute at hand, it may create an appearance of being a "veritable party" to the arbitration agreement.

Conclusion

Ultimately, the Supreme Court ruled that it would be appropriate for the arbitral tribunal to decide whether SRG Group is indeed bound by the arbitration agreement after considering all relevant evidence. The petition was granted, leading to former Chief Justice of Rajasthan High Court Akil Kureshi being appointed as Sole Arbitrator.

This ruling underscores a pivotal shift in Indian arbitration law towards recognizing non-signatories' potential obligations under arbitration agreements based on their actions and relationships within contractual frameworks.

​

Acquittal Granted Due to Procedural Lapses and Evidentiary Doubts in NDPS Case.

In Mangilal v. State of Madhya Pradesh, Crl. Appeal no. 1651/2023, the appellant underwent a legal proceeding where they were accused and subsequently found guilty under Section 8(b) in conjunction with Section 15(c) of the Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act). However, during the trial, numerous pivotal witnesses, both from the general public and official panch witnesses, renounced their previous stances, providing testimonies that were both unreliable and uncooperative. These testimonies failed to corroborate the prosecution's argument.

The defense posited that the prosecution had not adhered to the stipulations outlined in Section 52A of the NDPS Act, which pertains to the proper disposal and destruction of seized materials. The defense's contention rested on the assertion that the prescribed procedure for disposing of the confiscated narcotic substances had not been followed, and the prosecution had not supplied adequate evidence to substantiate the lawful seizure and recovery of these substances.

​

Furthermore, it came to light that the trial Judge had issued an order permitting the prosecution to retain the seized materials within the confines of the police station. This was indicative of a lack of conformity with Section 52A. Testimonies from witnesses, including an Executive Magistrate and the individual in charge of the storage facility (Malkhana), confirmed the absence of any directive for the disposal of the confiscated narcotics.

Adding to the complexity, the testimony of a police officer (P.W.5) dismantled the foundation of the prosecution's argument. This officer asserted that the seized materials were in existence prior to the purported incident. Strikingly, the prosecution did not contest this crucial testimony, further eroding their case.

The courts placed substantial reliance on the Forensic Science Laboratory (FSL) Report and the statement of another witness (P.W.11), while neglecting to consider the significant irregularities and uncertainties that had arisen during the course of the trial.

​

Following a comprehensive examination of the evidence presented and the discrepancies that emerged, the higher court nullified the initial conviction and sentence pronounced by the trial court. This culminated in the appellant's exoneration from all charges and an order for their immediate release.

In summation, owing to the non-adherence to Section 52A and the substantial doubts cast on the seizure and recovery process, the appellant was absolved of guilt. The decision was underpinned by the principle of benefiting the accused in cases of uncertainty.

Legal Precedent and Procedural Integrity: Appellant's Acquittal in NDPS Act Case

​

In a recent case titled Simarnjit Singh v. State of Punjab, Crl. Appeal no. 1443/2023, the appellant was found guilty under Section 15 of the Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) for possessing poppy husk. According to the prosecution's account, police officers, including SI Hardeep Singh, were on patrol in the vicinity of Balak Khurd village. During this patrol, they motioned for a tempo traveling from Matran village to stop. The driver and two other passengers in the tempo were apprehended. A search was conducted in the presence of the District Superintendent of Police, resulting in the uncovering of eight bags of poppy husk that were concealed under a tarpaulin. Within each bag, two 250-gram samples were extracted, and the remaining poppy husk in each bag was determined to weigh 29.5 kilograms.

​

The respondent State supported the appeal, and the Court examined the testimony presented by PW-7 Hardeep Singh, who had taken samples from the eight bags of poppy husk immediately after the seizure. Nevertheless, the Court referenced the precedent set in the case of Union of India v. Mohanlal & Anr. In this prior case, it was established that the procedure for obtaining samples should involve a Magistrate's presence and supervision, with certification from the Magistrate to validate the correctness of the entire process.

​

The Court determined that the actions of PW-7, who collected samples from all the bags during the seizure without involving a Magistrate, did not align with the standards established in Mohanlal's case. As a consequence, this cast significant doubt on the validity of the prosecution's argument since the samples were not collected following the proper procedure mandated by the NDPS Act.

​

Due to these uncertainties and the inability to conclusively prove the case beyond reasonable doubt, the Court invalidated the previous judgments as they pertained to the present appellant. Consequently, the appellant's conviction and sentencing under Section 15 of the NDPS Act were annulled. The appeal was ruled in favor of the appellant. In practical terms, this signifies that the appellant's conviction was reversed, leading to their acquittal regarding the charges under the NDPS Act.

​

No need to hear person summoned under Section 319 CrPC before arraying him as an accused in an on going trial, Says Supreme Court​

In the recent case of Yashodhan Singh & Ors. v. State of UP, Crl. Appeal 2186/2023, the Supreme Court made a significant ruling stating that there is no requirement for a court to hear a person/accused summoned under section 319 CrPC (Code of Criminal Procedure) before including them as an accused in an ongoing trial. The Court reasoned that the considerations to be kept in mind while exercising jurisdicition under section 319 CrPC is much greater than those applicable during the stage of framing of charge hence there is no power with the Trial Court to entertain any application seeking discharge on behlaf of the person summoned under section 319 CrPC.

​

The court also referred to two earlier decisions by coordinate benches, namely Jogendra Yadav and Ors. vs. State of Bihar and Anr., reported in (2015) 9 SCC 244, and Ram Janam Yadav & Ors. v/s. State of U.P. & Anr. in SLP (Crl.) No.3199/2021, and overruled them as they were not in line with the constitutional bench judgments of the Supreme Court, specifically Hardeep Singh; Sukhpal Singh Khair vs. State of Punjab, (2023) 1 SCC 289, and Brijendra Singh & Ors. v/s. State of Rajasthan (2017) 7 SCC 706.

​

In my view, the court's decision is correct since the CrPC itself does not mandate or provide discretion to the trial court to hear the accused before adding them under section 319.

​

However, it is essential to note that once someone is added as an accused person in an ongoing trial under section 319 CrPC, it does not necessarily mean that they have to go through the entire trial without any recourse. There are remedies available against the court's order of adding someone as an accused under section 319, and these remedies can be used to challenge the order if any irregularities or errors occurred while passing it under section 319 CrPC.

​​

Arbitration agreement is a separate agreement even if entire agreement is a nullity, Delhi High Court

Metcon India Reality and Infrastructure Pvt. Ltd. v. Delhi Metro Rail Corporation [Arb. Pet. 1140/2022]

Delhi High Court reiterated the rule of Kompetenz – Kompetenz in a petition seeking referring of dispute to arbitration and appointment of arbitrator.
 

Dispute between the parties was regarding payment of work done by petitioner over and above the tender given by the respondent, on the assurance of respondent that the extra work done will be completely compensated.

Petitioner, after completing the work, raised bills but the respondent refused to make the payment and the Petitioner reached High Court seeking appointment of arbitrator to adjudicate the dispute occurred between them.
 

Respondent tried to persuade the Court by citing various provisions of the agreement to conclude that the petition seeking referral of dispute is not maintainable as no arbitration agreement exist since the petitioner has already given respondent the no claim certificate and also the claim is time barred.
 

The Court, while applying the principle of Kompetenz – Kompetenz, held that the dispute be referred to arbitration as the arbitration agreement in a contract is a distinct and separate agreement in itself and hence it’s the tribunal only which has all the power to rule on the issue of claim being time barred and interpretation of agreement in order to see whether the agreement is a nullity or not.