Dishonour of security cheque is no offence under N I Act

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Question asked on: 04/10/2015

I gave loan to my friend and at the same time, he issued a cheque of the equal amount of loan for the security of the loan. However, I was quite sure that he will return that amount in 2 months but he failed to return. I made some query regarding repayment of the loan and after got assurance, from him, I presented that cheque in bank for the withdrawal but unfortunately, it was dishonoured.

I sent him a notice for payment of discharge of that amount and after receiving no response from his side I have filed a complaint against him. He took the plea that it was security cheque so no offence is made out under section 138 NI act. Is he right? What the law towards security cheque?

Advised by: Shivendra Pratap Singh,

The drawer issues security cheque as the collateral security for the repayment of the loan. The security cheque has not been issued in discharge the financial liability. When a person issues a cheque, the law presumes under section 139 of the Negotiable Instrument Act that drawer wants to discharge, in whole or in part, any debt or liability.

The dishonour of that cheque constitutes an offence which is punishable under section 138 of the NI Act. When the cheque is not drawn for the discharge of debt or liability, then its dishonour does not constitute an offence. The burden to prove the absence of such an obligation always lies upon the drawer because the law presumes the existence of such debt in favour of the holder.

In Sudheer Kumar Bhalla vs Jagdish Chandra Bhalla and others 2009, SCC; the Supreme Court held that criminal liability under the provision of section 138 NI Act is attracted only on account of dishonour of cheque issued in discharge of liability or debt but not on account of issuance of security cheque.

Thus, if he successfully proves that it was collateral security to the loan, then its dishonour does not constitute an offence under the NI Act. That kind of cheque never presented for encashment. Hence, the drawer never presumes that holder may produce it before the bank because it used to be a blank cheque and does not bear any amount or date. Dishonour of security cheque does not entail the penal liability [Goa HRSSI Development Crp. Vs Samudra Ropes (P) Ltd (2006) 1 ICC Bombay]

He can take a plea that no offence is made out against him under section 138 of the Negotiable Instrument Act. It was a security cheque which you received as the collateral for repayment of a loan.  

You have given him a loan and received that cheque from him. Generally, the borrower issues the security cheque along with additional collateral security like the original sale deed of property. At that time, he did not provide any other collateral security.

When he failed to repay the loan within the stipulated period, then you had no other option except to present the cheque for encashment. The circumstances of your case prove that it was not a mere security cheque, but he issued in the discharge of debt.

In P. Venugopal vs Madan P. Sarathi, (2009) 1 SCC; the Supreme Court held that if the cheque is issued partly in the discharge of liability or debt, then it does not call a security cheque. Its dishonour shall constitute an offence under section 138 of the NI Act.

You have presented that cheque for encashment after receiving assurance from him. So he cannot take the plea at a subsequent stage that it was a security cheque. He has rebutted the presumption of security cheque. In this condition, his assurance will act as his admission that it was not a security cheque. You did nothing wrong to produce the cheque before the bank for its encashment.

Your complaint is a correct step because he has committed the offence under section 138 NI Act.

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