Dishonour of security cheque is no offence under N I Act

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?

Question from: Karnataka

You friend had dishonoured the cheque by stopping the payment. Such an act proves that he:

  • Knew about the presentment of that cheque
  • Instructed the bank to stop the payment
  • Intentionally dishonoured the cheque
  • He does not want to discharge his liability

Security cheque

When a person issues the cheque as collateral security then the said cheque is called a security cheque. Collateral security means an asset which a borrower gives to the lender to sell it upon failure of repayment of the loan. 

The cheque is used as collateral security in the commercial transaction. That cheque does not subject to encashment because it is not issued in discharge of debt or liability. 

You friend took a loan from you and issued a cheque. He cannot say afterwards that it is a security cheque because he was in debt at the time of issue of that cheque. Therefore, he issued the cheque in discharge of debt. 

Prima facie it is not a security cheque. According to Section 139 of the Negotiable Instrument Act, the presumption of discharge of debt or liability lies in your favour. The law presumes that you received the cheque in discharge of debt. Now the burden of proof shifted upon your friend to prove it a security cheque. 

Dishonour of security cheque is no offence

Dishonour of security cheque is no offence under section 138 of the Negotiable Instrument Act (NI Act). The security cheque does not represent any debt or financial liability. Therefore, its dishonour is no offence under the NI Act.

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 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.

Goa HRSSI Development Crp. Vs Samudra Ropes (P) Ltd (2006) 1 ICC Bombay: Dishonour of security cheque does not entail the penal liability.

Absence of debt or liability at the time of issue of cheque, therefore, renders the cheque a security cheque. The holder of that cheque has no right to present it for the encashment. Hence, no criminal liability arises on its dishonour.

Dishonour of cheque is an offence

Dishonour of cheque is an offence when the drawer has issued in the discharge of debt or liability. Your friend cannot deny that he was indebted at the time of issue of that cheque. He wanted to discharge his debt therefore he issued that cheque. 

The presumption of debt also lies in your favour. He has to rebut that presumption by adducing evidence that it was a security cheque. In current circumstances, he cannot rebut that presumption because he could not deny the loan. 

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 enough evidence to prove that he has dishonoured the cheque

All the ingredients of section 138 NI Act are present in your case. You can successfully prove your case on these grounds:

  • Accused took a loan from you.
  • He issued the cheque in discharge of that debt.
  • Debt existed at the time of issue of the cheque.
  • He intentionally stopped the payment of the cheque.
  • You received no response from accused against the demand notice.
  • Accused did not deny the averment of demand notice.

All the above-said grounds are sustainable and the accused cannot deny it in the trial. He has no evidence to prove that alleged cheque is a security cheque. Therefore, his plea of security cheque is false and frivolous.

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