In a significant judgment, the Supreme Court in the case of Sripati Singh (D) Through His Son Gaurav Singh v. The State of Jharkhand & Anr. has observed in no uncertain terms that the dishonour of cheque issued as security can also attract offence under Section 138 of the Negotiable Instruments Act, 1881.
The Division Bench of Justice MR Shah and Justice AS Bopanna made it clear 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.”
It must also be apprised here that the Bench added that such contention would arise only in a circumstance where the debt has not become recoverable and the cheque issued as security has not matured to be presented for recovery of the amount if the due date agreed for payment of debt has not arrived.
Reasoning and Decision of the Court
The Hon'ble Apex Court made observations with respect to the following:
1. Cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance
“A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. ‘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 time-frame 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 the 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.”
2. The prior discharge of the loan or there is an altered situation due to which there would be an understanding between the parties is a sine qua non to not present the cheque which was issued as security.
"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 is an altered situation due to which there would be an 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 proceeding initiated under Section 138 of the N.I. Act.
Therefore, there cannot be a hard and fast rule that a cheque that 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 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.”
Case Details
Case Name: Sripati Singh (D) Through His Son Gaurav Singh v. The State of Jharkhand & Anr.
Case Number: Criminal Appeal Nos. 1269-70 of 2021 (Arising out of SLP (Criminal) No. 252-253/2020)
Date of Decision: October 28, 2021
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