SUPREME COURT HOLDS DISHONOUR OF CHEQUE ISSUED AS A SECURITY ALSO ATTRACTS THE PROVISIONS OF SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881

A Two Judge Bench of the Hon’ble #SupremeCourt of India comprising of Justices M.R. Shah and A.S. Bopanna passed a Judgment dated 28-10-2021 in the case of Sripati Singh (since deceased) His Son Gaurav Singh v. The State of Jharkhand & Anr. {Criminal Appeal Nos. 1269­1270 of 2021 (Arising out of SLP (Criminal) No.252­253/2020)} held that the #dishonour of #cheque issued as a #security will also be an offence under Section 138 of the Negotiable Instruments Act, 1881 (#NIAct).

For reference Section 138 of the N.I. Act is reproduced as follows:

Dishonour of cheque for insufficiency, etc., of funds in the account. —Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless—

1. the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
2. the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, [within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
3. the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation.— For the purposes of this section, “debt or other liability” means a legally enforceable debt or other liability.

In the instant case, Respondent No.2 and the Appellant had known each other as the daughter of the Appellant and Respondent No. 2 were pursuing their education together in London. After returning to India, the Respondent No. 2 settled in Bangalore and the cordial relationship amongst the families continued. Thereafter, Respondent No. 2 came to know that the Appellant was involved in business and approached him at Daltonganj for seeking financial assistance to the tune of Rs.1 Crore so as to enable the Respondent No. 2 to invest the same in his business. Since the Respondent No. 2 assured that the same would be returned, the Appellant advanced a total sum of Rs. 2 Crores between January 2014 to July 2014. The said amount was transferred from the account of the Appellant and his daughter. Towards the said transaction, the Parties entered into four Agreements thereby acknowledging the receipt of the loan.

The Respondent No. 2 gave an assurance that the amount would be returned during June/July 2015. Towards the same, three cheques amounting to Rs. 1 Crore was handed over to the Appellant. Thereafter, three more cheques for Rs. 1 Crore were also given. The Appellant met Respondent No. 2 in the month of July 2015 and the Respondent No. 2 assured him that the amount will be repaid during October, 2015. Based on such assurance, the Appellant presented the cheques for realisation on 20-10-2015. On presentation, the said cheques were returned due to ‘insufficient funds’ in the Bank Account of Respondent No.2.

The Appellant therefore issued a Legal Notice to the Respondent No. 2 under Section 138 of the N.I. Act. Since the Respondent No. 2 had assured the Appellant that the money borrowed shall be returned on time, but ended up deceiving the Appellant, the Appellant averred that the Respondent No. 2 had cheated him and accordingly the Complaint was filed both under Section 420 of the Indian Penal Code, 1860 (IPC) as also Section 138 of N.I. Act. The learned Judicial Magistrate vide Order dated 04-07-2016 took cognizance and issued summons to the Respondent No.2.

A Miscellaneous Petition was filed by the Respondent No. 2 seeking discharge from the criminal proceeding, which got rejected vide Order dated 13-06-2019. Aggrieved by Orders dated 04-07-2016 and 13-06-2019, the Respondent No. 2 approached the High Court of Jharkhand at Ranchi (High Court) in the said criminal Miscellaneous Petitions. The High Court vide Order dated 17-12-2019 allowed the Petitions filed by the Respondent No. 2. Aggrieved and dissatisfied, the Appellant approached the Hon’ble Supreme Court of India.

After taking into consideration the facts of the case and the arguments advanced by the Parties to the dispute, the Bench observed that the dishonour of cheque issued as a security can also attract offence under Section 138 of the N.I. Act. “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.”

The Court noted that though the cheque was issued as a security at the point when the loan was advanced, it was issued as an assurance to repay the amount after the debt becomes due for repayment.

Hence the Apex Court while placing reliance on the case of Sampelly Satyanarayan Rao vs. Indian Renewable Energy Development Agency Ltd., (Criminal Appeal No.867 of 2016) observed as follows:

“16. 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 timeframe 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 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.”

However, the Supreme Court held that a criminal Complaint under Section 420 IPC was not sustainable in the facts and circumstances of the present case. It reaffirmed that the Complaint under Section 138 of the N.I Act was maintainable.

Therefore, the Bench while setting aside the Impugned Order dated 17-12-2019 and restoring the Orders dated 04-07-2016 and 13-06-2019 passed by the learned Judicial Magistrate made an observation that the loan was already in subsistence when the cheque was issued and the same had become payable during June/July 2015 and the cheque issued towards repayment was agreed to be presented thereafter. The Respondent No. 2 was under an obligation to arrange sufficient balance in the account to honour the cheque which was to be presented subsequent to June/July 2015.

 

Suchitra Upadhyay

Associate

The Indian Lawyer & Allied Services

 

Edited by

Sushila Ram Varma

Chief Consultant

The Indian Lawyer & Allied Services