Legal Advice

Dishonour of security cheque is no offence under N I Act

Question: I gave a loan to my friend because he was facing some financial hardship. At the same time, he gave me a security cheque. That security cheque was bearing the equal amount of loan because he intended to secure the loan. However, I was quite sure that he will repay the loan within 2 months but unfortunately, he failed to do so.  Thereafter, I made some query regarding the repayment of the loan. He told me to encash the security cheque and after receiving his assurance, I presented that cheque in the bank. The bank informed me that he has dishonoured the cheque. I sent him a demand notice to pay the loan amount but he did not reply. After receiving no response from him, I have filed a complaint against him. At the trial, he pleaded that it was a security cheque, therefore, he stopped that cheque. He said that no offence is made out under section 138 NI act. Is he right? What the law towards security cheque?

Advise

Your friend has committed an act of cheque dishonour by instructing the bank to stop the payment, which proves that he was aware of the cheque’s presentation and intentionally dishonoured it. This indicates that he does not intend to fulfil his liability.

A security cheque is a cheque issued as collateral security in a commercial transaction, which is not meant for encashment. However, in this case, your friend cannot claim that the cheque was a security cheque since he was already in debt when he issued it to you, indicating that it was issued in discharge of his debt.

As per Section 139 of the Negotiable Instruments Act, there is a presumption of discharge of debt or liability in your favour. It is presumed that you received the cheque in discharge of your friend’s debt, and the burden of proof now lies upon your friend to prove that it was a security cheque.

Security cheque

A cheque that is issued as collateral security is known as a security cheque. Collateral security refers to an asset that a borrower provides to a lender as a guarantee to be sold in case of failure to repay the loan.

In commercial transactions, a cheque can be used as collateral security, but it cannot be encashed because it is not intended to discharge a debt or liability.

Your friend has committed offence under section 138 NI Act

The dishonour of a cheque is considered an offence only when it is issued in discharge of debt or liability. In this case, your friend cannot deny that he was indebted at the time of issuing the cheque to you. Therefore, he issued the cheque to discharge his debt.

As per the Supreme Court in the case of P. Venugopal vs Madan P. Sarathi, (2009) 1 SCC, if a cheque is issued partly in discharge of liability or debt, then it is not considered a security cheque. If such a cheque is dishonoured, it shall constitute an offence under section 138 of the NI Act.

In your case, all the ingredients of section 138 NI Act are present. You can prove your case on the grounds that your friend took a loan from you, he issued the cheque to discharge the debt, the debt existed at the time of issuance of the cheque, he intentionally stopped the payment of the cheque, and you received no response from him against the demand notice.

The presumption of debt also lies in your favour, and your friend has to rebut that presumption by providing evidence that it was a security cheque. However, in the current circumstances, he cannot deny the loan. Thus, he cannot prove that the alleged cheque is a security cheque.

Therefore, his plea of the security cheque is false and frivolous, and you have enough evidence to prove that he has dishonoured the cheque.

Shivendra Pratap Singh

Advocate

High Court Lucknow

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