In the realm of financial transactions, cheques are a commonly used instrument to ensure payment security. However, issues often arise when a cheque, particularly a security cheque, gets dishonoured. A widely debated question is whether the dishonour of a security cheque can attract criminal liability under Section 138 of the Negotiable Instruments Act, 1881.
The short answer is yes—even a security cheque, if dishonoured, can attract liability under Section 138, provided certain legal conditions are met. This article explains the legal framework, judicial interpretation, and the key factors that determine whether a dishonoured security cheque can lead to prosecution.
Understanding Section 138 of the Negotiable Instruments Act
Section 138 of the Negotiable Instruments Act, 1881 deals with the offence of cheque dishonour due to insufficient funds or if it exceeds the arrangement with the bank. To invoke Section 138, the following essential ingredients must be satisfied:
- The cheque must have been drawn by the drawer on an account maintained by him.
- It must have been issued for the discharge of a legally enforceable debt or liability.
- The cheque must be presented to the bank within the validity period.
- Upon dishonour, a legal notice must be issued to the drawer within 30 days.
- The drawer fails to pay the cheque amount within 15 days of receiving the notice.
What Is a Security Cheque?
A security cheque is generally issued as a guarantee or collateral for a future obligation, such as loan repayment, service completion, or contractual compliance. The cheque is not issued against an existing debt at the time but may become payable when a future obligation is not fulfilled.
Supreme Court on Security Cheques:
Dashrathbhai Trikambhai Patel vs. Hitesh Mahendrabhai Patel (2022)
In this landmark judgment, the Supreme Court of India clarified that security cheques are not automatically excluded from the scope of Section 138. If, on the date of dishonour, the cheque represents a legally enforceable debt or liability, then the drawer can be held liable under Section 138.
This means that the purpose for which the cheque was initially issued (even as a security) is less important than its status at the time of presentation for payment.
Delhi High Court’s Stand
The Delhi High Court has also upheld the view that a security cheque can attract liability under Section 138. In several rulings, the court has emphasized that what matters is the existence of a debt or liability at the time of the cheque’s presentation, not merely the intention at the time of issuance.
Key Takeaway: Legally Enforceable Debt or Liability
The core requirement of Section 138 is that the cheque must have been issued in discharge of a legally enforceable debt or liability. So, if a security cheque is deposited after a default or breach of a contractual obligation, and the debt becomes enforceable, its dishonour will trigger criminal liability.
Possible Defenses by the Drawer
The person who issued the cheque (drawer) may raise the following defenses during the trial:
- The cheque was given only as security, not for any actual liability.
- No legally enforceable debt existed at the time of dishonour.
- The cheque was misused or presented prematurely.
However, these defenses do not guarantee acquittal. The burden lies on the accused to prove these claims by credible evidence, once the complainant establishes the basic facts.
Conclusion
In conclusion, dishonour of a security cheque can attract criminal liability under Section 138 of the Negotiable Instruments Act, if it is shown that the cheque was presented to discharge a legally enforceable debt or liability. Courts in India, including the Supreme Court and Delhi High Court, have consistently upheld this interpretation to prevent misuse of financial instruments and to ensure fairness in commercial transactions.
If you’re involved in such a dispute, it’s advisable to consult with a legal expert to assess your case based on the facts and supporting documentation.