Dishonour of a 'security' cheque under Section 138 of the Negotiable Instruments Act, 1881.

The Supreme Court of India recently reiterated that the dishonour of a cheque issued as security can also attract an offence punishable under Section 138 of the Negotiable Instruments Act, 1881 and further observed that a cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance.

The Division Bench in Sripati Singh Versus The State of Jharkhand & Anr.1 was dealing with a case wherein the Respondent No. 2 on learning that the Appellant was involved in business, had approached him and sought financial assistance to the tune of Rs.1 Crore. Since the Respondent No.2 had assured that the same would be returned, the Appellant claimed to have advanced a total sum of Rs.2 Crores during the periods between January, 2014 to July, 2014 from the account of Appellant’s daughter and also from the account of the Appellant. Towards the said transaction, four agreements are stated to have been entered into acknowledging the receipt of the loan. The said agreements were reduced into writing on non-judicial stamp papers.

The Respondent No.2 assured that the amount would be returned during June/July, 2015. Towards the same, three cheques amounting to Rs.1 Crore was handed over to the Appellant. Thereafter, three more cheques for Rs.1 Crore were also given. The Appellant is stated to have met Respondent No.2 during July, 2015 when the Respondent No.2 assured that the amount will be repaid by October, 2015. Based on such assurance, the Appellant presented the cheques for realisation on 20.10.2015. On presentation, the said cheques were returned due to ‘Insufficient Funds’ in the bank account of Respondent No.2.

The Respondent No.2 contended that the Learned Judicial Magistrate without application of mind to the facts had taken cognizance and issued summons however, the Hon’ble High Court had taken note of the entire gamut of the case and arrived at the conclusion that the offence alleged both under Section 420 of the Indian Penal Code, 1860 and Section 138 of the Negotiable Instruments Act, 1881 has not been made out. The Hon’ble High Court had further observed that a cheque issued towards security cannot attract an offence under Section 138 of the Negotiable Instruments Act, 1881.

Point of contention
Thus the Hon’ble Supreme Court had to consider whether the Appellant has prima facie established a transaction under which there is a legally recoverable debt payable to the Appellant by the Respondent No.2, whether the cheques in question are still to be considered only as ‘security’ for the said amount and whether it was not liable to be presented for recovery of the legally recoverable debt. The question which also arose for consideration is as to whether the complaint filed by the Appellant should be limited to a proceeding under Section 138 of the Negotiable Instruments Act, 1881 or based on the facts, whether invoking of Section 420 of the Indian Penal Code, 1860 and was also justified.

Cheating with cheque bouncing?
The Division Bench held that under the loan agreement, the period for repayment was agreed and the cheque had been issued to ensure repayment. The fact is that the cheques when presented for realisation were dishonoured; but the mere dishonourment of the cheque cannot be construed as a deliberate and intentional act on the part of the Respondent No.2 to cheat the Appellant and the mens rea in that regard cannot be gathered and therefore no sufficient evidence remains for an offence under Section 420 of the Indian Penal Code, 1860 to be made out.

However, with respect to the cheque being given as ‘security’, it was held that when a cheque is issued and is treated as ‘security’ towards repayment of an amount with a time period being stipulated for repayment, all it ensures is that such cheque which is issued as ‘security’ cannot be presented prior to the loan or the instalment maturing for repayment towards which such cheque is issued as security. But there cannot be a hard and fast rule that a cheque which is issued as ‘security’ can never be presented by the drawee of the cheque. The Court held that if such is the understanding a cheque would also be reduced to an ‘on demand promissory note’ and in all circumstances, it would only be a civil litigation to recover the amount, which is not the intention of the statute.

Thus, merely due to the fact that the cheques presented and dishonoured are shown to have been issued as ‘security’ as indicated in the loan agreement cannot be a defence that the Respondent No. 2 can use. Such contention would arise only in a circumstance where (1) the debt has not become recoverable, the cheque issued as security has not matured to be presented for recovery of the amount or if the due date agreed for payment of debt has not arrived and (2) there was an altered situation due to which there was an understanding between the parties is a sine qua non, to not present the cheque which was issued as security.

  1. Criminal Appeal Nos. 1269-1270 of 2021

By - Lakshmi Raman