Can charges under S. 138 of NI Act sustain in case of non-compliance with the clauses of a Non-competing Agreement? Tis Hazari Court elucidates

Tis Hazari Court, Delhi: While deciding the instant complaint filed under S. 138 of Negotiable Instruments Act, 1881, wherein the dispute revolved around the non-compliance of the clauses of Non-Competing Agreement (NCA) executed between the parties to the dispute; the accused company was acquitted from the charges levied under S. 138. Presiding over the matter, Devanshu Sajlan, D.J.S., while making detailed observations concerning S. 138 of NI Act and S. 27 of Contact Act and, held that the accused company has successfully raised a probable defence in its favour and the complainant has failed to prove his case beyond reasonable doubt.

Facts of the Case: The accused company  and complainant  had signed into a Non-Competing Agreement (NCA) stating that a compensation of Rs. 3,80,00,000 was required to be paid in 120 equal installments of Rs. 3, 16, 666 each to the complainant  for agreeing to resign from the accused company under clause 4.1 of the NCA. In partial discharge of the aforesaid liability, the accused company issued the cheque(s) in question thus giving the complainant the right to proceed under section 138 of the NI Act in the event of dishonour of the said cheques.

The parties  also signed a share purchase agreement (SPA) in violation of which both parties invoked arbitral proceedings, which they settled with a consent award which stated the requirement of furnishing fresh bank guarantee which would be considered valid till the payment of the last instalment. As a security for payment of monthly installments, cheques were given.

The case revolved around the non-compliance of the clauses of NCA due to which the accused  is not obligated to make any payment and possess no legal liability towards the complainant. The case also concerns with the arbitral award give liberty to the complainant in order to explore its legal remedies under the NCA. It is filed to pursue the remedies given under NCA.

The complainant further alleged that the present cheque(s) which were given to the complainant towards payment of the installment of the compensation contemplated under NCA, were returned dishonoured with remarks ‘Funds insufficient’. Thereafter, the complainant sent a legal demand notice to the accused persons, but the accused persons allegedly failed to pay the cheque amount and therefore, thus complainant was compelled to file the present complaint.

Issues:

  1. Whether the accused had committed breach of consent award by not paying the cheque amount as agreed upon in the NCA?
  2. Whether the liability has arisen if the requirements under S. 138 of NI Act are not met with?
  3. Whether a post-dated cheque is for “discharge of debt or liability” U/S 138 of NI Act depends on the nature of the transaction?
  4. Whether a mutually settled arbitral award demarcates the liability of payment signed under NCA?

Submissions: The submissions of the accused were centred around the second ingredient of S. 138 of NI Act i.e. “The cheque was drawn by the drawer for discharge of any legally enforceable debt or other liability”.

 

It was submitted that the cheque(s) were given as advance payment towards the monthly instalment amount pertaining to the total compensation under the non-compete agreement. The said cheque(s) were not issued in discharge of any existing/ subsisting debt.

Accused contended that payments were made regularly to the complainant until the breach of terms of contract came to their notice. It was submitted that the accused had no liability to pay non-competing fees to the complainant  as he  failed to  comply with statutory obligations.

It was further argued by the accused that since the complainant is being aptly compensated for not practicing the competing business, hence it cannot be said that NCA is in restraint of trade and is in violation of S.27 of Contract Act, 1872. It was also submitted that cheque(s) were suspended as advance payment constituting to total compensation procured under NCA.

 

Meanwhile, the complainant submitted that there can be no challenge for the validity of the NCA since the arbitral consent award under NCA is legally enforceable.  It was also submitted to the court that since the legal liability of giving payment liquidates due to non-performance of NCA, it does not matter if the issued cheque was dated for advance payment of a liability debt.

Observations – Upon perusal of the contentions, the Court made the following salient observations:

  • The liability had crystallised/ matured when the cheque(s) in question were presented. The monthly liability to pay non-compete fee arose in the present matter upon performing of non-competing service by the complainant for the said month. Thus, the cheque(s) in question cannot be held to be not for a subsisting liability.
  • It was further observed that the NCA clearly stipulated that in case the consent award is breached, the complainant can file a complaint under S. 138 of NI Act. It was noted that there was not even a shred of evidence available on record to support the assertion of the accused no. 2 that complainant breached the terms of the NCA. Therefore, the burden of proof placed upon the accused persons have not been discharged as regards the contention of breach of NCA.
  • The Court also referred to Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd., (2016) 10 SCC 458, which held that the crucial test for applicability of S. 138 of NI Act is that such liability should have arisen on the date mentioned on the post-date cheque or the date when the cheque is handed over in order for it to constitute as an offence under S. 138 of NI Act.
  • The Court made detailed observations regarding the NCA being voidable in light of S. 27 of the Indian Contract Act. It was stated that the NCA in the present case is a simplicitor contract of restraint of trade by which the complainant has been refrained from involving in a trade of similar domain for a period of 10 years after he files his resignation. The Court pointed out that this case does not fall within the ambit of the exception of sale of goodwill of business. The NCA or the connected SPA between the same parties nowhere mentions that the complainant is transferring goodwill of the business of the accused company to the new management. Thus, such non-compete agreements such as the NCA in question, squarely falls within the mischief prohibited under S. 27 of Indian Contract Act, 1872. Thus, the instant NCA is void agreement under S. 27. It was observed that the right against restraint of trade cannot be waived off by the conduct of the parties. The court cannot enforce a void contract based on the waiver of the respective parties, especially in a case when a clause is based on the public policy of India.

 

Decision: It was held that since the NCA is void pursuant to S. 27 of the Indian Contract Act, the cheque(s) in question given to discharge the liability under the NCA cannot be held to be issued in discharge of a legally enforceable liability. In the present case, since the complainant’s promise (to not do competing business) is unlawful, there is no legal reciprocal consideration to make the NCA a valid binding contract. Regarding the validity of NCA vis-a-vis the arbitral consent award, the Court held that while it is correct that the arbitral consent award was passed to settle the disputes under the NCA and SPA, there is no specific undertaking that the cheques in question, which were issued prior to the arbitral award, will be used to secure the consent arbitral award. “It would have been a different case if the cheques in question would have been issued pursuant to the arbitral award since the same would then have been considered to have been issued to enforce the consent award (which is akin to a consent decree), and hence enforceable”. [Anil Thakur v. Blazeflash Courier Ltd., 2022 SCC OnLine Dis Crt (Del) 23, decided on 31-05-2022]

Counsel for Complainant: S.K. Gupta

                                          Vikas Gupta

Counsel for Accused: S N Gupta

                                    Sanjay Goel


*Sucheta Sarkar, Editorial Assistant has reported this brief.

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