The main legal point established is that the nature of the cheques, whether towards liability or security, determines the petitioner's criminal liability under Section 138 of the Negotiable Instruments Act 1881.

G. P. Mittal, J.:—

1. These two Petitions raise a very interesting question for consideration, viz. whether a cheque issued by the Client (the borrower) in a Factoring Agreement is towards liability or security.

2. The facts of the case are not very much in dispute. The Petitioner Company (M/s. Krish International Pvt. Ltd.) approached Respondent No.2 IFCI Factors Limited to grant it domestic factoring facilities.

Respondent No.2 by an Agreement dated 18.02.2010 allowed the factoring facility to the maximum pre-payment amount of Rs.5 crores. M/s. Koutons Retails India Limited (Koutons) was approved as debtor in terms of Clause 4 (i) of the Agreement. The approved terms of trade was 90 days or less from invoice date as was to be approved by Respondent No.2 (the factor). A copy of the Factoring Agreement dated 18.02.2010 has been placed on the paper book by the Petitioners as well as by Respondent No.2.

3. The Petitioner was granted pre-payment (after deducting the commission) to the extent of Rs. 3 crores. The cheques for this sum of Rs. 3 crores issued by the debtors (Koutons) were dishonoured. The Respondent No.2 presented the cheques bearing Nos.541554, 541555, 541556, 541557, 541558 and 541559, dated 15.12.2010, all drawn on Punjab National Bank, New Rajendra Nagar, New Delhi of amount Rs.50 lacs each, which got dishonoured on presentation. A legal notice under Section 138 of the Negotiable Instruments Act, 1881 (the Act) dated 17.01.2011 was served upon the Petitioners calling upon them to make the payment of the cheque amounts along with interest failing which a complaint under the Act was to be filed against the Petitioners.

4. On failure to pay the amount, Respondent No.2 filed two separate Complaints under Section 138 of the Act (in respect of three cheques each).

5. By order dated 09.03.2011, the learned Metropolitan Magistrate (‘MM’) took cognizance and ordered issuance of the summons against the Petitioners.

6. The following contentions are raised on behalf of the Petitioners:-

(i) Admittedly, the cheques issued by Koutons were dishonoured. Notice under Section 138 of the Act was issued to Koutons and on failure to pay the amount, complaints under Section 138 of the Act was instituted against M/s. Krish International Pvt. Ltd. and the officers responsible for the conduct of its business. These facts were not disclosed by Respondent No.2 in the criminal complaint filed against the Petitioners and thus, the Court of learned ‘MM’ was mislead in issuance of summons.

(ii) The Petitioners were wrongly described as borrowers in the Complaint when in fact they were not the borrowers.

(iii) The cheques given by the Petitioners were by way of security and thus in case of dishonour of cheque, the Petitioners were not criminally liable under Section 138 of the Act. The learned counsel for the Petitioners places reliance on M/s. Collage Culture & Ors. v. Apparel Export Promotion Council & Anr. 2007 (4) JCC (NI) 388; Exports India & Anr. v. State & Anr. 2007 (3) JCC (NI) 252; and MCD v. State of Delhi & Anr. 2005SCC (Cri.) 1322.

7. On the other hand, learned counsel for the Respondent contends that there was no misrepresentation by Respondent No.2. The Petitioners were rightly described as borrowers as the amount was paid by Respondent No.2 to Petitioner No.1.

8. As per the terms of the Agreement dated 18.02.2010 entered into between the parties, the Petitioners were liable to make the payment in case of non performance of the obligation by Koutons. A personal undertaking dated 18.02.2010 was also given by Alok Aggarwal (Petitioner No.2) whereby he undertook to make the payment for ourstanding prepayments or values of reassigned. Petitioner No.2 also undertook to keep sufficient balance in the account and to honour the cheques when presented. It is urged that the Petitioners’ liability was co-extensive with the debtor M/s. Koutons Retails India Limited. Learned counsel for Respondent No.2 places reliance on a judgment of this Court