Security Cheques and NI138

Security cheques are the cheques only like any other cheques and they create  same liability to discharge as if they are the ordinary cheques and attract the provisions of NI 138 when they are dishonored. What is important is to show under which circumstances the cheque was issued, and in order an offence under section 138 of NI act is to be proved the said cheque must be issued in discharge of legally enforceable debt, merely calling a cheque a security cheque will not help the accused. He has to show the probable circumstances, such that the cheque was not issued in discharge of a legally enforceable debt or other liability.

When the said cheque is bounced it raises a rebuttable presumption as envisaged in section 139  of NI 138 act, legally enforceable debt and accused person has to rebut this presumption in order to secure acquittal.

M.S. Narayana Menon Alias Mani V. State of Kerala and Anr. [(2006) 6 SCC 39] wherein it was held :

“30. Applying the said definitions of “proved” or “disproved” to the principle behind Section 118(a) of the Act, the court shall presume a negotiable instrument to be for consideration unless and until after considering the matter before it, it either believes that the consideration does not exist or considers the non-existence of the consideration so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that the consideration dos not exist. For rebutting such presumption, what is needed is to raise a probable defence. Even for the said purpose, the evidence adduced on behalf of the complainant could be relied upon.”

There is no magic in the word “security cheque”, such that, the moment the accused claims that the dishonoured cheque (in respect whereof a complaint under Section 138 of the Act is preferred) was given as a “security cheque”, the Magistrate would acquit the accused. The expression “security cheque” is not a statutorily defined expression in the NI Act. The NI Act does not per se carve out an exception in respect of a ‘security cheque’ to say that a complaint in respect of such a cheque would not be maintainable. There can be mirage situations in which the cheque issued by the accused may be called as security cheque, or may have been issued by way of a security, i.e. to provide an assurance or comfort to the drawee, that in case of failure of the primary consideration on the due date, or on the happening (or not happening) of a contingency, the security may be enforced. While in some situations, the dishonor of such a cheque may attract the penal provisions contained in Section 138 of the Act, in others it may not.

Even if blank cheque has been given towards liability or even as security, when the liability is assessed and quantified, if the cheque is filled up and presented to the bank, the person who had drawn the cheque cannot avoid the criminal liability arising out of Section 138 of the Negotiable Instruments Act

In Collage Culture and Ors. vs. Apparel Export Promotion Council: 2007 (99) DRJ 251, a distinction has been drawn between two kinds of cheques namely one issued in discharge in presenti but payable in future and the other issued in respect of a debt which comes into existence on the occurrence of a contingent event, and is not in existence on the date of issue of a cheque. The latter cheque, being by way of security cheque, will not be covered under Section 138 of NI Act. In the aforesaid decision, definition of the word ‘due’ has been given as ‘outstanding on the relevant date’. The Court, therefore, held that the debt has to be in existence as a crystallized demand akin to liquidated damages and not a demand which may or may not come into existence.

Section 138 of NI Act does not distinguish between a cheque issued by the debtor in discharge of an existing debt or other liability, or a cheque issued as a security cheque on the premise that on the due future date the debt which shall have crystallized by then, shall be paid. So long as there is a debt existing, in respect whereof the cheque in question is issued, the same would attract Section 138 of NI Act in case of its dishonour.

In Credential Leasing & Credits Ltd. vs. Shruti Investments and Anrs.: 2015 (151) DRJ 147 held as under:

“30. Thus, I am of the considered view that there is no merit in the legal submission of the respondent accused that only on account of the fact that the cheque in question was issued as security in respect of a contingent liability, the complaint under Section 138 of the NI Act would not be maintainable. At the same time, I may add that it would need examination on a case to case basis as to whether, on the date of presentation of the dishonoured cheque the ascertained and crystallized debt or other liability did not exist. The onus to raise a probable defence would lie on the accused, as the law raises a presumption in favour of the holder of the cheque that the dishonoured cheque was issued in respect of a debt or other liability.”

It is not the question of whether cheque is a security cheque or not even a security cheque can be treated as normal cheque if there is legally enforceable debt on the date of its presentation.

Security cheque for repayment of loan

K.P. Rathikumar vs N.K. Santhamma on 26 September, 2006

When repayment is assured by issue of a cheque, in common parlance the laity may refer to such handing over of the cheque for discharge of the liability as a conduct to assure and secure payment and discharge of the liability. It would be impermissible from that expression used, which, according to me, only conveys that the lending/borrowal was on the strength of the cheque issued for the discharge of the liability, to conclude that the cheque was not issued for the discharge of any liability. The inexact expression used in the notice of demand even assuming that it does not mean “on the strength of” and means “on the security of” cannot in any way deliver any advantage to the petitioner. The cheque will continue to be one issued for the discharge of liability as contemplatedss under Section 138 of the N.I. Act. The crucial question is only whether the cheque was drawn – written, signed and delivered, to the complainant by the petitioner.

Basavaraj vs M/S Dhanlaxmi Finance Co.

The appellant has been convicted under Section 138 of the Negotiable Instruments Act (hereinafter referred to as `the Act’), for having issued a security cheque in favour of the respondent company in the sum of Rs. 22,350/-, which was dishonoured.

P.N.Selvaraj vs N.P.Babu on 23 March, 2009

Security cheque issued for taking loan, the circumstances were not accepted as a probable defence resulted in conviction

V. Unnikrishnan vs . Vintage Credit & Leasing Pvt. … on 26 September, 2011

The accused made a somersault and came up with a novel story of having handed over the cheque to Mrs. K. Bhadrakumari to assure her of repayment of his own loan which as discussed earlier, does not appear to be convincing. Even the date of handing over the cheque to Mrs. K. Bhadrakumari is repeatedly changed by the accused in his own sworn statement. Moreover if the liability of the accused was already quantified at the time when he purportedly gave the cheque Ex. CW1/C to Mrs. K. Bhadrakumari, there was no reason for him to have given a blank cheque to her. He could have made the cheque only for his outstanding loan amount as per the conduct of any normal prudent human being.

Seethamma L. vs Paily on 1 July, 2011

The accused submitted that she issued a blank signed cheque as a security for obtaining a loan of Rs. 20,000/- for her friend from the complainant and the complainant has misused the same and created Ext.P1. DW s 1 and 2 were examined on her side. Which is disbelieved by the court.

Deepak Vig vs Avdesh Mittal on 11 January, 2012

Dishonoured cheques were issued towards the discharge of a liability notwithstanding the fact that the money was by way of security deposit for the due performance of the terms of the agreement and was refundable at the time of vacation of the premises.

Conclusion

Courts in India treats security cheques as any other cheques prima facie and presumption under section 139 of NI act is cast against the accused initially, the accused has to raise a probable defense that under what circumstances the cheque was issued. While complainant case should focus on legally enforceable debt, if blank or undated cheque is issued the complainant has to satisfy the court that the on date of issuance of the cheque i.e. the date put on the cheque there was a legally enforceable debt of the like amount. Complainant has to prove the case beyond the reasonable doubt and explain the money that s lend by him by way of transactions. If complainants fails in this the case fails. Once complainant proves this. The accused has to raise a probable defense that the debt was discharged and cheque was a security cheque and was merely misused. It is then if accused proves the discharge of debt then only he can take a benefit of security cheque and he will be acquitted.