Status as on- 18/10/2021
Dishonor of cheque has been seen a significant rise in the recent time. Dishonor of cheques is a punishable offence under Section 138 of the Negotiable Instruments Act, 1881. However, dishonour of “Security Cheques” is not an offence. A Security Cheque is a cheque issued to a drawee as security or surety, not issued against the repayment of the loan.
Supreme Court in the case Indus Airways Pvt. Ltd. v Magnum Aviation Pvt. Ltd (2014) 12 SCC 539 held that dishonored security cheque will not attract section 138 of the NI Act, as the cheque is not issued against debt or any other liability.
Section 138 of Negotiable Instruments Act, 1881
Dishonour of cheque shall constitute an offence under section 138 of NI Act unless the following ingredients are fulfilled:
- cheque is drawn by the accused on an account maintained by him with a banker;
- the cheque amount is in the discharge of a debt or liability; and
- the cheque is returned unpaid for insufficiency of funds or that the amount exceeds the arrangement made with the bank, the offence standing committed the moment the cheque is returned unpaid.
- the cheque should be presented within three months from the date on which it was drawn or within the period of its validity, whichever is earlier.
- within thirty days of receiving a memo of return from the bank, a notice should be served to demand the payment of the said money.
- the drawer fails to pay the said money within 15 days of the receipt of the said notice.
Therefore, thedishonor of cheques is only punishable when the abovementioned conditions are fulfilled under Section 138 of the Negotiable Instruments Act, 1881.
Dishonour of Security Cheque is no Offence
Banks take security cheques from the borrower while granting loans as a surety. These cheques maybe in the form of an undated or postdated cheque. Although the borrower pledge or mortgaged their properties to the bank as a guarantee, however, the banks still take security cheques as their weapon of choice due to the strict liability offence under the Act of 1881.
The Supreme Court in Sudheer Kumar Bhalla vs Jagdish Chandra Bhalla and others 2009, SCC, held that criminal liability under the provision of section 138 NI Act does attract only on account of dishonour of cheque issued in discharge of liability or debt but not on account of issuance of security cheque.
In the case of Vijay v. Laxman (2013) 3 SCC 86, SC held that a security cheque cannot be dishonoured because Section 138 is attracted only when a cheque is issued against a legally enforceable debt or other liability and not as a security.
The Supreme Court in Sampelly Satyanarayan Rao vs Indian Renewable EnergyAIR 2016 SC 4363 decided whether dishonoured cheques issued to discharge existing liability fall under Section 138 of the act, the Supreme Court explained that the question of whether a post-dated cheque is for discharge of debt or liability depends on the nature of the transaction. Section 138 is attracted only if, on the date on which the cheque was issued, liability or debt existed, or the amount had become legally recoverable.
Therefore, the cheque that has been dishonoured which was issued only as security and not for discharge of any debt or liability is no offence under section 138 of the Negotiable Instruments.
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