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
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
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
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
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
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
, [(2002) 1 SCC 234] the accused can discharge the presumption by
establishing the facts showing how the cheque is not issued for an existing
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
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] =  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
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
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:
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.
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
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):
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.
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
Written By: M V Shanker Bha
t, B.A.B.L., Advocate, Mangaluru