Cheque issued as 'Security' and S. 138 of the NI Act - Views of the Supreme Court

INTRODUCTION

 

Today, I will talk about the case of Sripati Singh (since deceased) through His Son Gaurav Singh v. State of Jharkhand & Another, SLP (C) No. 252-253/2020, wherein the Hon’ble Supreme Court discussed whether a Cheque issued towards ‘security’ attracts the provisions of Section 138 of the Negotiable Instruments Act, 1881, or not.

 

S. 138 OF THE NI ACT

 

Basically, S. 138 of the NI Act provides for the stipulations to be followed in case there is a dishonour of a Cheque that has been issued for the discharge of a legally enforceable debt or other such liability. In the present case, the Court discussed the status of a cheque that has been issued as a ‘security’ to secure a payment. In order to understand whether a cheque issued towards ‘security’ can attract the provisions of S. 138 of the NI Act or not, let us understand the pertinent observations by the Court.

 

OBSERVATIONS BY THE COURT

 

Firstly, the Court noted that “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.”

 

Secondly, the Court further clarified 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. 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.”

 

Thirdly, the Court also stated that a cheque issued as ‘security’ is an arrangement between the parties to a transaction indicating that the ‘security’ is given only for ensuring the payment in case the borrower fails to make such payment on time in terms of the arrangement arrived at between the parties. In case of such an event, the holder of the cheque/drawee is free to elect any proceedings, whether civil or criminal or under the NI Act, to recover the concerned amount.

 

Fourthly, the Court cited the case of Sampelly Satyanarayana Rao vs. Indian Renewable Energy Development Agency Ltd., Criminal Appeal No.867 of 2016, to explain the meaning of “legally enforceable debt” as mentioned in S. 138 of the NI Act. According to the Court, “whether a post­dated 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.”

 

And lastly, upon cumulative consideration of the legal position just discussed, the Court held that when a cheque is issued as ‘security’ to secure a payment and such payment is not made on designated time, then “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.”

 

HELD BY THE COURT

 

Therefore, it is to be understood that there is no bar under S. 138 to present a cheque that has been issued for security purposes provided that the borrower fails to make payment of the borrowed amount on time.

 

Those were the observations by the Court. So, what are my concluding remarks?

 

CONCLUSION

 

S. 138 of the NI Act was enacted for speedy disposal of financial disputes that arise out of negotiable instruments issued by a party. The whole purpose of negotiable instruments is to provide fluidity and certainty in payments. I concur with the reasoning of the Court that there cannot be a hard and fast rule with respect to cheques issued ‘security’ that the same cannot be presented under any circumstances. If such were the intention of the legislature, it would have been reflected in the text of the NI Act, either expressly or by way of necessary implication. Absence of the same clearly signifies that such cheques issued as ‘security’ are not worthless pieces of paper and can be encashed when the due date for payment has expired.