Section 138 of NI Act| No hard and fast rule that a cheque issued as security can never be presented by drawee: Supreme Court 

Supreme Court: In a case where it was argued before the Court that an offence under Section 138 of the Negotiable Instruments Act was not made out as the dishonourment alleged is of the cheques which were issued by way of ‘security’ and not towards discharge of any debt, the bench of MR Shah and AS Bopanna*, JJ has held that a cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance and that 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 explained that ‘security’ in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfilment of an obligation to which the parties to the transaction are bound.

“If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as security to secure such repayment; if the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque which   is   issued   as   security   would   mature   for presentation and the drawee of the cheque would be entitled to present the same. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of N.I. Act would flow.”

When a cheque is issued and is treated as ‘security’ towards repayment of an amount with a time period being stipulated for repayment, all that 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.

Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. Therefore, the prior discharge of the loan or there being an altered situation due to which there would be understanding between the parties is a sine qua non to not present the cheque which was issued as security. These are only the defences that would be available to the drawer of the cheque in a proceedings initiated under Section 138 of the N.I. Act. Therefore, 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. 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.

“When a cheque is issued even though as ‘security’ the consequence flowing therefrom is also known to the drawer of the cheque and in the circumstance stated above if the cheque is presented and dishonoured, the holder of the cheque/drawee would have the option of initiating the civil proceedings for recovery or the criminal proceedings for punishment in the fact situation, but in any event, it is not for the drawer of the cheque to dictate terms with regard to the nature of litigation.”

[Sripati Singh v. State of Jharkhand, 2021 SCC OnLine SC 1002, decided on 28.10.2021]


Counsels

For appellant: Advocate M.C. Dhingra

For respondents: Advocate Raj Kishor Choudhary and Keshav Murthy


*Judgment by: Justice AS Bopanna

Know Thy Judge | Justice A. S. Bopanna

One comment

  • The term ‘Security” has meaning only when there is ” Value” and a Cheque is supposed to be issued by the drawer only when there is adequate funds in the account. A holder or holder in due course has every right to encash according to the apparent tenor of the instrument. A Security is always liable to be exercised in case of default.

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