Filling up of a blank cheque need not be material alteration

Reference

Order by the High Court of Gujrat in the case of Nikhil P. Gandhi vs. State of Gujarat – CDJ 2016 GHC 071

Back Ground:

The applicant was an ex- Managing Director of a company. The Criminal Miscellaneous Application was filed by him challenging Section 138 proceedings initiated against him in respect of a signed blank cheque drawn by him when he was the Managing Director of the company. Only signature was affixed and other parts of the cheque were blank.  The cheque was issued for discharging the liability of the company towards a firm.  The cheque was issued in the year 1994-1995 and the applicant ceased to be the Director of the company from the year 2005. The dishonoured cheque carried the date 25.03.2013.

Major contentions of the applicant

(i)    Section 20 of the Negotiable Instruments Act (NI Act) which deals with inchoate (incomplete) instruments would not apply to a cheque, and therefore, the holder has no authority to make it a complete negotiable instrument.
(ii)    Filling up of a blank cheque after a period of 17 years, without the consent of the company or the drawer of the cheque would amount to material alteration u/s S 87 of NI Act.
(iii)    On the date of commission of the alleged offence u/s 138, the applicant was not in the affairs of the company.

Decision of the Court:

With regard to the 1st and 2nd contentions raised by the Applicant, the Court held that various provisions of the N.I. Act together make it possible for the drawer of a cheque to give a duly signed blank cheque to the payee with an expressed or implied consent to fill up the cheque later on and present for payment. S. 87 of the NI Act does not support the  contention that when a signed blank cheque leaf is handed over, it can never be filled up and that if it is filled up it would amount to a material alteration.  The analysis of the statutory provisions gives the impression that when a signed blank cheque is delivered by drawer and received by a payee for discharge, there is an implied authority for the payee to fill up the cheque and the amount filled up by the payee would be the amount intended to be paid by the drawee.

The Hon’ble High Court was of the view that in such cases point of contention shold be whether the cheque was tendered for the discharge of any legally enforceable debt or other liability. To take benefit of the provisions under S 20 of N I Act, the applicant should prove said aspect. The court  clarified that a blank cheque, drawn by a person by simply putting his signature on it, for payment of any amount of money to another person, would not be a cheque in the first place, because of not being a bill of exchange, since it would not contain direction to a certain person to pay a certain sum of money to or to the order of a certain person or to the bearer of the instrument. By practice,  Section 20 of NI Act  expressly permits and authorizes the completion of an inchoate instrument with the safe-guard provided in section 87.  When the  provisions of sections 5 and 6 defining bill of exchange and cheque are read together, it means that an instrument which was initially not a cheque falling within the definition of section 6 would become a cheque when it was completed by filling the blanks. Hence its dishonour shall have all the legal consequences of dishonour of a cheque.

With regard to the 2nd issue, the court was guided by the decision  of  Supreme Court in DCM Financial Services Limited  vs. J.N. Sareen & anr., 2008 ALL MR (Cri) 2272, holding that the retired Director cannot be held vicariously liable for the acts of the company unless it is proved that even after resigning from directorship, he continued to control the affairs of the company and therefore continued to be person in charge of and responsible to the company for the conduct of its business.  In the instant case, since the had resigned from the directorship of the company much earlier to presentation of the cheque for encashment, he cannot be vicariously liable for the offence committed by the Company. Hence, the Hon’ble Court quashed the S. 138 proceedings initiated against the Applicant.

What is the implication of the order?

If the cheque fulfills all the criteria provided in S.20 of NI Act, completion of the cheque by the payee on a later date, would not amount to material alteration. S.20 of NI Act authorizes completion of inchoate negotiable instruments.