The Conundrum Regarding Security Cheques: Culpability And Consequences As Per Ni Act
Introduction
A division bench of the Apex court in a recent case observed that, “Cheque issued as security for financial deal cannot be considered as worthless piece of paper”. The statement was made in pursuance of establishing the legal obligation of a dishonored cheque which had the character of a security cheque. The Apex Court through its decisions in recent years has made its position amply clear regarding cheques which qualify as security and the same is being discussed hereunder.
The Root Of The Problem: Security Cheques
A Security Cheque can be defined as a cheque issued to a payee as security or surety for availing the option of drawing the same in an instance where the drawer fails to fulfill the future obligations arising from a business deal or any other such transactions. Security cheques are thus issued in furtherance of a financial obligation and acts as a surety for the person accepting such cheque.
A Post-Dated Cheque[i] is a form of a crossed or account payee bearer cheque but post-dated to meet the said financial obligation at a future date. Post-dated cheque is furnished by the drawer for a future date, the purpose of furnishing such a cheque is to ensure that the person encashing the cheque does so after the date mentioned on the cheque and not on the date the cheque was made. Ever so often, post-dated cheques are used as securities in various business transactions and other such obligations. Post-dated cheques can be issued for any purpose i.e. to secure a loan, to serve as an advance or security or for discharge of a legally enforceable debt.
[Image Sources : Shutterstock]
The primary objective behind the enactment of the Negotiable Instruments Act, 1881 (“NI Act”) was to engender binding and authoritative rules of law relating to negotiable instruments so that the claims upon mercantile instruments could be equated with ordinary goods, passing from hand to hand.[ii] The Apex Court while laying emphasis on the commercial nature of the Act observed that the provisions under the Negotiable Instruments Act are aimed to, “facilitate the activities in trade and commerce, making provision of giving sanctity to the instruments of credit which could be deemed to be convertible into money and easily passable from one person to another. In the absence of such instruments, the trade and commerce activities were likely to be adversely affected as it was not practicable for the trading community to carry on with it the bulk of the currency in force.”[iii]
Dishonouring a post-dated cheque attracts culpability under Section 138[iv] of the Negotiable Instruments Act (NIA), 1881. It is pertinent to note that post-dated cheques having a definite amount specified on them are within the ambit of Section 138, and even a blank post-dated cheque may qualify as dishonouring a cheque due to insufficiency of funds, it is immaterial that the cheque may have been filled in by any person other than the drawer.[v] The court in the case of Bir Singh v. Ramesh Kumar[vi] remarked that “a person who signs a cheque and makes it over to the payee remains liable unless he adduces evidence to rebut the presumption that the cheque had been issued for payment of a debt or in discharge of a liability. It is immaterial that the cheque may have been filled in by any person other than the drawer, if the cheque is duly signed by the drawer. If the cheque is otherwise valid, the penal provisions of Section 138 would be attracted.”
Furthermore, Section 138 of the act is governed by the presumption provided under the subsequent section i.e,, 139 that the court presumes that the holder of a cheque received the cheque of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability. The term debt included a sum of money promised to be paid at a future date by reason of a present obligation.[vii]
Tracing The Judicial Precedent
Erstwhile, the Madras High Court[viii] adjudicated upon a case regarding the furnishing of a security cheque and the liability that it entailed on the accused as per Section 138 of the NIA. The Court held that when the parties to the suit entered into a contract with a clause regarding the security cheque, there was no subsisting liability or debt which is why the contract itself makes it clear that the cheque had to be handed over as a security. The Court further explained that when the cheque was handed over, there was no legally enforceable debt or other liability. Thus, the Court was of the view that as an undated cheque having been given only as security, the provision of Section 138 of the NIA would not be attracted.
The case of Somnath vs. Mukesh Kumar[ix], held that the accused would not be held liable under section 138 of the aforementioned act wherein the cheque in question had been issued qua a time barred debt. Moreover, in the case of Indus Airways Private Limited v Magnum Aviation Private Limited[x] (Indus Airways Case), the Apex Court clarified its position wherein a security cheque was issued in the form of advance payment of a purchase order, however, on the subsequent cancellation of the purchase order, the security cheque was dishonoured. By way of the aforementioned judgment, the term legally enforced debt or other liability was emphasised upon, also particularly the fact that there should be a legally enforceable debt or other liability subsisting on the date of drawal of the cheque. Thus, in the Indus Airways case, it was held that a Post-dated cheque issued in order to make an advance payment could not qualify as cheque for discharge of debt however there may be liability subsisting under the Contract act but a case of dishonouring of cheque as per Section 138 cannot be made out.
Recent Trend
The Supreme Court in the past five years has adjudicated upon cases of security cheques and post-dated cheques (having the character of security cheques) and has taken a different approach towards the culpability under Section 138. The Apex Court in the case of Sampelly Satyanarayana Rao v Indian Renewable Energy Development Agency Limited[xi] (Sampelly case) held that wherein a post-dated cheque described as ‘security’ in the loan agreement is dishonoured, the same would be punishable under Section 138 of NIA. The Supreme Court drew a distinction between the current case and the Indus Airways case stating that the true test was whether the cheque was in discharge of an existing enforceable debt or liability or whether it was towards an advance payment without there being a subsisting debt or liability. It was held that the repayment of the loan amount fell due under the agreement the moment that the loan was advanced and the instalments fell due; thus, the dishonoured cheques fell within the scope of Section 138 of the act. As such, the dishonoured cheques represented outstanding liability.
This view of the Apex Court was also reiterated in its judgment in the cases of Sripati Singh v. State of Jharkhand[xii] (Sripati Singh case) and Sunil Todi v. State of Gujarat[xiii] (Sunil Todi case). In the case of Sripati Singh, the division bench opined that where a cheque is issued as security for a time specific loan, then on default of repayment of loan the security cheque issued would mature, if then the security cheque is dishonored, “the consequences contemplated under Section 138 and other provisions of N.I. Act would flow.” On a similar tangent, in the case of Sunil Todi, Justice D.Y. Chandrachud observed that a security cheque issued for advancement of a loan would be mature for presentation upon the default of repayment of loan. Upon dishonour of such a security cheque, the same would lie under the ambit of Section 138.
Critical Analysis & Conclusion
In a market where borrowers often resort to issuing security cheques and post-dated cheques (in the form of security), lenders often found themselves at the short end. The Courts seemed to make progress with regard to the rights of lenders by recognising the culpability under Section 138 that arises with the issuing of security cheques.
The distinction drawn by the Apex Court in the discharge of an existing enforceable debt or liability pertaining to an advance payment and discharge of a subsisting debt or liability under section 138 was a turning point. The Court, in clear terms, stated that a subsisting debt or liability in the form of Security Cheque would bring the dishonour of such a cheque within the ambit of Section 138. The liability need not arise at the time the cheque was issued, but in the case where the cheque matured leading to subsisting liability of the drawer.
The recent judgements in the matter have further shed light upon the parliamentary intent behind the expression ‘debt or other liability’ as stated under section 138 wherein the expression ‘or other liability’ has been accorded a broader meaning than debt and cannot be equated with the same. The Supreme Court has thus widened the interpretation and eventually the scope of meaning of ‘debt and other liability’ as under the section. The object of the Negotiable Instrument Act was to equate the use of certain negotiable instruments with those of ordinary mercantile instruments and facilitate their settlement in business transactions and likewise operations. Through its precedent the Indian Judiciary has fulfilled this object by preventing a negotiable instrument from being equated to a mere piece of paper and preventing the drawer to have impunity in such cases.
Author: Reet Kaur Virk, A Student of Rajiv Gandhi National University of law, Patiala , in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing.
References
[i] Section 138 Negotiable Instruments Act, https://districts.ecourts.gov.in/sites/default/files/study%20circles.pdf last accessed on 21st October, 2022
[ii] Varun Sharma and Abhishek Goyal, Cheque Dishonour Cases And Security Deposit Enigma: Explicating The Incertitude By Dictates, 20 December 2021, https://www.mondaq.com/india/financial-services/1142572/cheque-dishonour-cases-and-security-deposit-enigma-explicating-the-incertitude-by-dictates last accessed on 21st October 2022
[iii] Shri Ishar Alloy Steels Ltd. v. Jayaswals Neco Ltd, Appeal (crl.) 219 of 2001
[iv] Negotiable Instruments Act, 1881, Section 138, https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_33_00042_00042_1523271998701§ionId=45718§ionno=138&orderno=143
[v] CRIMINAL APPEAL NOS.230-231 OF 2019
[vi] Ibid
[vii] (1909) ILR 36 Cal 936
[viii] M/S. Balaji Seafoods Exports vs Mac Industries Ltd, S. Pichalah 1999 (1) CTC 6
[ix] Supra note 1
[x] Criminal Appeal No. 830 of 2014
[xi] Criminal Appeal No. 867 of 2016
[xii] Criminal Appeal Nos. 1269,1270 of 2021
[xiii] Criminal Appeal No.1446 of 2021
