Madras High Court Says No Cheque Bounce Prosecution If Underlying Arbitral Award Was Challenged

The Madras High Court has recently quashed cheque bounce proceedings against a builder after finding that he had challenged the arbitral award cited as the basis of the alleged liability before the cheque was allegedly issued.

Justice G.K. Ilanthiraiyan said, “Even before the date of issuance of the cheque i.e. 15.07.2019, the accused challenged the very arbitration award before this Court as early as on 11.02.2019 in Arb.OP.Nos.381 and 382 of 2019. Therefore, the accused would not have issued the cheque dated 15.07.2019 to discharge his partial liability towards the award passed against him. Subsequently, the very award itself was set aside by this Court by order dated 29.04.2024 in Arb.OP.Nos.381 and 382 of 2019. In overall circumstances, the entire initiation of proceedings under Section 138 of NI Act is nothing but clear abuse of process of law and it cannot be sustained.”

The case arose out of a financial dispute between builder S. Ramamoorthy and partnership firm T. Jayaraman.

According to T. Jayaraman, Ramamoorthy had borrowed ₹5.54 crore by depositing title deeds relating to a third-party property and agreed to pay interest at 18% annually. Arbitration proceedings culminated in an award dated October 22, 2018 directing him to pay ₹9.27 crore.

T. Jayaraman claimed that during execution proceedings, Ramamoorthy agreed on July 16, 2019 to pay ₹1.65 crore for release of the title documents and issued a cheque dated July 15, 2019, which was later dishonoured for insufficiency of funds.

Ramamoorthy moved the High Court seeking the quashing of the criminal proceedings pending before the Metropolitan Magistrate, Fast Track Court-III, Saidapet.

Ramamoorthy told the High Court that he had already moved against the arbitral award before the cheque was allegedly issued, and that the award was later thrown out after the Court found the arbitrator had been appointed unilaterally and the proceedings had gone ahead ex parte.

He also claimed the cheque came from a 2015 cheque book and had been misused. Another plank of his case was that the cheque was issued in T. Jayaraman's individual name, not in the name of the partnership firm that later filed the complaint.

T. Jayaraman countered that the firm remained valid despite the death of one partner, with new partners having since been brought in. It also maintained that the cheque was not tied solely to the arbitral award, but was issued towards part payment of the underlying debt of ₹5.54 crore.

The High Court was not persuaded by the prosecution's version.

It was noted that Ramamoorthy had challenged the arbitral award as early as February 11, 2019, making it improbable that he would subsequently issue the cheque towards partial discharge of that liability.

The Court also noted that the cheque appeared to belong to a February/March 2015 cheque book and observed that it “was issued for some other purpose in the year 2015 and it was misused by the complainant in the year 2019.”

It further held that T. Jayaraman could not maintain the complaint because the cheque had not been issued in its favour, observing that the firm was “neither the payee nor holder in due course.”

The High Court ultimately allowed Ramamoorthy's petition and quashed the proceedings.

For S. Ramamoorthy: Advocate P.P. Palaniyandy.

For T. Jayaraman: Senior Advocate P.L. Narayanan for Advocate E. Hariharan.