File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Security Cheque Review of SC Rulings

Prosecution and Persecution:

In a cheque dishonor case, while an accused is prosecuted, the complainant gets persecuted. Many a time, in the hope of recovery by prosecution, the complainant looses civil remedy by bar of limitation to file suit for recovery. End result would be a sense of frustration to the one who received the cheque, which, as regards the complainant, lost all its credibility as a negotiable instrument. The complaint loses its efficacy as regards the dishonoured payee.

Defense of security cheque:

This prelude is written to introduce the reader to the problem of what is conveniently referred as security cheque, a stock defense, in the prosecution for dishonor of cheque.

Is this defense tenable?

Is such a defense available at all is what is proposed to be examined in this article. Case laws are plenty. However it is felt that a fresh look needs to be taken, because, unlike common law country, we have statute law and as such we need not be bugged with case laws.

Two latest rulings of Supreme Court on the point:

Both are cases for quashing prosecution, by invoking sec.482 of Cr P C. In one it succeeds and in the other it fails at the apex court.

Case of security cheque being not enforceable:

In the case of Indus Airways P Ltd v. Magnum Aviation P Ltd, (2014) 12 SCC 539 it is held at para 9 that the cheque has to be drawn in ‘discharge of existing or past adjudicated liability' in order to attract the offence under sec.138 of N I Act.

Facts of Airways case:

The facts of this case as narrated in the reported ruling show that:- Indus Airways was purchaser. Magnum Aviation was supplier. The cheques were issued as advance for the purchase order for supply of certain parts of aircraft. According to Supplier it had to procure the parts from abroad and hence advance was required. Cheques were post dtd.15-03-07 and 20-03-07 for purchase-orders dtd.19-02-07 and 26-02-07. By letter dtd.22/3/07 Indus Airways cancelled purchase orders and requested for return of the cheques.

That is to say after due dates of the cheques the purchase order was cancelled. Though exact date of stop payment instruction is not found from the facts narrated in the ruling, it records the fact that the cheques were dishonoured by Indus Airways stopping its payment. There is nothing to show that the bank account of Indus Airways did not have sufficient funds to honour the cheques. On the said facts, the quashing of criminal prosecution at the threshold was being agitated before the Supreme Court.

Question for decision:
The question for decision of S C was: whether the post-dated cheques issued by the appellant-purchaser as an advance payment for the purchase orders could be considered as cheque issued in discharge of legally enforceable debt or other liability, and, if so, whether the dishonour of such cheques amounts to an offence under Section 138 of the the N.I. Act.

Assume that prosecution for stop payment was tenable:
How far a prosecution can be started if the cheque was ordered to be stopped from payment and whether without prima facie proof of want of funds in the Bank account a complaint relating to dishonour of cheque by stop payment can be taken cognizance under sec.138 is itself another contentious issue with which I shall not dilate on this occasion. Indus Airways Ruling did not deal with such issue. I assume that the complaint was otherwise cognizable.

Reasoning of the Court:
The ruling indicates at Para 8 that the Court found that the interpretation of the expression ‘for discharge of any debt or other liability' occurring in Section 138 of the N.I. Act is significant and decisive of the matter. The Court then concludes that when cheque is issued as advance payment for supply of goods there would be no existing liability.

The decision of Delhi High Court was under challenge before the Supreme Court. The reasoning of Delhi High Court to the effect that delivery of cheque as a condition of contract to purchase goods is valid liability to issue cheque is, according to the Supreme Court, a clearly flawed reasoning. This is because, according to Supreme Court, there is ‘fine distinction between civil and criminal liability under sec.138 of N I Act.

According to Supreme Court, for breach of contract committed by buyer the seller has a claim for damages against buyer. But it would not create criminal liability under sec.138 of N I Act. The reasoning of Delhi High Court was found to be far beyond the scope of section 138 of N I Act.

Distinction not available submitted:
It is respectfully submitted that the fine distinction between civil and criminal liability as mentioned in the ruling of the Supreme Court does not exist because sec.138 and other sections of the Chapter XVII added to N I Act in 1988 does not deal with civil liability for issue of cheque at all.

It was added as a chapter dealing with penalty for dishonour of cheques for certain reasons.

The objects and reasons of amending and inserting the said chapter mentions thus:
This clause [Clause (4) of the Bill] inserts a new Chapter XVII in the Negotiable Instruments Act, 1881. The provisions contained in the new Chapter provide that where any cheque drawn by a person for the discharge of any liability is returned by the bank unpaid for the reason of the insufficiency of the amount of money standing to the credit of the account on which the cheque was drawn or for the reason that it exceeds the arrangements made by the drawer of the cheque with the bankers for that account, the drawer of such cheque shall be deemed to have committed an offence. In that case, the drawer, without prejudice to the other provisions of the said Act, shall be punishable with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both.

While further amending the said chapter again in 2002 in the objects and reasons it is clearly mentioned thus, thereby further confirming that the distinction which the Supreme Court found to exist is not correct:

The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument. [italics for emphasis].

Why reasoning requires reconsideration stated:
Section 138 speaks of debt or liability. Further the concept of debt or other liability should be ‘legally enforceable'. That is all. If cheque is issued for advance payment for supply of goods it is definitely a legally enforceable liability.

One should not confuse the issue of consideration for a negotiable instrument and concept of legally enforceable liability.

Section 43 of N I Act existed from the beginning of the enactment, dealing with negotiable instruments made without consideration. Relevant portion of it reads thus:
43. Negotiable instrument made, etc., without consideration.-A negotiable instrument made, drawn, accepted, indorsed, or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction.---.

If legislature intended only to bring in concept of consideration to cheques covered under sec.138, the separate definition of debt or other liability was not required to be given in that section. As the object of enactment indicates, to encourage cashless transactions the penal provision is made, thereby expanding its scope to cheques issued to cover debts and ‘other liabilities', which naturally would be wider than debts. While sec.43 applies to all negotiable instruments, sec.138 is confined to cheques only. Therefore the concept of consideration as mentioned in sec.43 would not be relevant for the purpose of sec.138 of the Act.

It is humbly submitted that cheques issued by way of advance payment for supply of goods would be covered by the concept of ‘other liability' found in the said section. Therefore quashing the complaint at threshold was not permissible. The accused could prove justification for stop payment of the cheque and become successful in getting the complaint dismissed on trial. As observed in MMTC case, [(2002) 1 SCC 234] the accused can discharge the presumption by establishing the facts showing how the cheque is not issued for an existing liability.

The said ruling shows that even when the cheque is dishonoured by reason of stop payment instructions, by virtue of Section 139 the Court has to presume that the cheque was received by the holder for the discharge, in whole or in part, of any debt or liability. Of course this is a rebuttable presumption.

The accused can thus show that the stop payment instructions were not issued because of insufficiency or paucity of funds. If the accused shows that in his account there was sufficient funds to clear the amount of the cheque at the time of presentation of the cheque for encashment at the drawer bank and that the stop payment notice had been issued because of other valid causes including that there was no existing debt or liability at the time of presentation of cheque for encashment, then an offence under Section 138 would not be made out. [Italics for emphasis].

Next Ruling of security cheque found enforceable:

In the case of Sampelly Satyanarayana Rao Vs. Indian Renewable Energy Development Agency Ltd, 2016 (4) K L T 24[SC] = [2016] 10 SCC 458 post dated cheques were issued to meet obligation to pay future instalments of amounts repayable as per certain agreement between the parties.

In the context of dishonour of such cheques, it has been held thus:

We are of the view that the question whether a post-dated cheque is for discharge of debt or liability depends on the nature of the transaction. If on the date of the cheque liability or debt exists or the amount has become legally recoverable, the Section is attracted and not otherwise.

Indus Airways case distinguished:

With reference to Indus Airways case this is what is observed in Sampelly case:
Judgment in Indus Airways (supra) is clearly distinguishable. As already noted, it was held therein that liability arising out of claim for breach of contract under Section 138, which arises on account of dishonour of cheque issued was not by itself at par with criminal liability towards discharge of acknowledged and admitted debt under a loan transaction.

Dishonour of cheque issued for discharge of later liability is clearly covered by the statute in question. Admittedly, on the date of the cheque there was a debt/liability in presenti in terms of the loan agreement, as against the case of Indus Airways (supra) where the purchase order had been cancelled and cheque issued towards advance payment for the purchase order was dishonoured. In that case, it was found that the cheque had not been issued for discharge of liability but as advance for the purchase order which was cancelled.

Keeping in mind this fine but real distinction, the said judgment cannot be applied to a case of present nature where the cheque was for repayment of loan installment which had fallen due though such deposit of cheques towards repayment of installments was also described as security in the loan agreement. In applying the judgment in Indus Airways (supra), one cannot lose sight of the difference between a transaction of purchase order which is cancelled and that of a loan transaction where loan has actually been advanced and its repayment is due on the date of the cheque.

Security cheque concept kept floating:

Thus one can infer that the concept of security cheque has not stuck its last note with Airways case. It will keep lingering in view of Sampelly case. So long as the accused keep hoping to get complaints quashed, the journey of sec.482- petitions will continue in the light of these rulings.

Irrelevance of concept of security stated:
In the case of Klen & Marshalls vs. Ishar Alloy Steels Ltd, Crl A 1610/01 dtd.26-07-2006 which decision given by Karnataka High Court was confirmed in Supreme Court, it was held that: cheque issued either for discharge of a debt or as security makes little distinction in law.

Dishonor in both situations attracts valid prosecution under sec.138 of N I Act. Citing this unreported ruling it was held in a later reported ruling by the same High Court thus:
This legal position would especially be so if the cheque offered as security has subsequently become enforceable on account of default or failure of performance of the contract in respect of which such security is furnished. M/S.Shree Ganesh Steel Rolling Mills vs. M/S. STCL Ltd, 2013(4) AKR 70, at page 79.

Provision examined:
Sec 138 uses the phrase ‘debt or other liability'. The disjunctive ‘or' is used, designedly to distinguish the word debt and cover something more than a debt, within the provision of law.
The word ‘liability' has wider connotation. In the case of First National Bank Ltd vs. Seth Sant Lal, AIR 1959 P H 328, in the context of shareholders liability to pay the calls on shares the concept was examined and stated thus:
14. According to Bouvier's Law Dictionary, Liability is the state of being bound or obliged in law or justice. According to Anderson's Law Dictionary, liability means the state of being bound or obliged in law or justice to do, pay or make good something; legal responsibility.

According to Oxford English Dictionary, liability means the condition of being liable or answerable by law or equity. Liability as defined in Black's Law Dictionary means, the state of being bound or obliged in law or justice to do, pay or make good something; legal responsibility,. Webster defines liability to be the state of being bound or obliged in law or justice; responsibility.

15. The term liability is of large and comprehensive significance, and when construed in its usual and ordinary sense, in which it is commonly employed, it expresses the state of being under obligation in law or in justice: see also Feil v. Coeur D'alene, 43 Lawyers Reports Annotated (N. S.) 1095 (1103): Benge's Adm'r v. Bowling, 51 South Western Reporter 151. [italics for emphasis].

In Mohd Yagule vs. Union of India & ors, AIR 1971 Delhi 45 at page 48[FB] it is laid down that liability is a broad term of large and comprehensive significance and means a legal responsibility or obligation to do a thing. More or less to the same effect are the observations of Bombay High Court in the case of W W Joshi vs. State of Bombay, AIR 1959 Bom 363 at 365.

Thus, the concept of liability is wider than the concept of debt. It is also different from the concept of consideration.

Security cheque is as much cheque for liability:

Bereft of case law, if one examines the provision of law, keeping in mind the objects and reasons of the enactment as mentioned above, it would be clear that the intention of legislature is to enable complaint to be filed if there is dishonour of cheque within the parameters laid down by sec.138 of the Act so long as there was a debt or a legal obligation to pay the amount covered by the cheque. In the light of this view, ‘security cheque', as popularly called, would be cheque for the discharge of a liability. Such liability may be present or contingent on the date of delivery of the cheque to the payee.

Conditional delivery of cheque is recognised by sec.46 of N I Act. As observed in the decision of Karnataka High Court, quoted above, so long as there is a liability, dishonour of cheque is enforceable by complaint under sec.138 of N I Act. The distinction of civil and criminal liability cannot be imported because sec.138 is meant to bring about culpability only. It is one thing to say that complaint cannot be quashed at the threshold by restricting the concept of liability as equal to that of consideration and it is totally different thing to say that the complainant has not made out culpability after examination of the merits of the concept of liability for which cheque would have been issued.

Conclusion: need to have fresh look:
In the interest of encouraging cashless transactions, a fresh look is required regarding the tenability of threshold bar for prosecution by using the concept of security cheque, which is not permissible by the wordings of the provision of law.

Written By: M V Shanker Bhat, B.A.B.L., Advocate, Mangaluru

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly