Cheque to 'Bank A/c Firm' Makes Bank a 'Holder in Due Course' for Loan Recovery Under S.138 NI Act: Himachal Pradesh High Court - 2025-07-04

Legal Awareness & Information.

Bank Can Be 'Holder in Due Course' for Cheque Payable to 'Bank A/c Firm,' Says Himachal Pradesh High Court

Shimla , HP - The Himachal Pradesh High Court, in a significant ruling on the interpretation of the Negotiable Instruments Act, 1881 (NI Act), has held that a bank can be considered a 'holder in due course' for a cheque made payable to "Bank of India A/c [Firm Name]". The court dismissed a petition seeking to quash a cheque bounce complaint, emphasizing that a hyper-technical approach cannot be used to defeat the legislative intent behind Section 138 of the NI Act.

The decision was delivered by Hon’ble Mr. Justice Virender Singh while adjudicating a petition filed by one Sunil Gupta against the Bank of India.

Case Background

The case originated from a financial dispute between Sunil Gupta , the proprietor of M/s Sun Steel Fabricators, and the Bank of India. Gupta 's firm had availed a Cash Credit (CC) limit from the bank, which was later declared a Non-Performing Asset (NPA). Consequently, the bank initiated recovery proceedings under the SARFAESI Act, 2002.

During these proceedings, Gupta issued a cheque for ₹50,00,000 from his personal savings account. The cheque was drawn in favour of "Bank of India A/c M/s Sun Steel Fabricators". When the bank presented the cheque, it was dishonoured due to insufficient funds. Following the non-payment despite a statutory notice, the bank filed a criminal complaint under Section 138 of the NI Act.

Gupta moved the High Court under Section 482 of the Code of Criminal Procedure (CrPC) to quash the complaint, arguing that the bank had no legal standing to initiate the proceedings.

Arguments of the Parties

Petitioner's Arguments: Mr. Neeraj Gupta , Senior Advocate for the petitioner, argued that the bank was neither the 'payee' nor a 'holder in due course' as defined under the NI Act. He contended that the specific wording on the cheque, "Bank of India A/c M/s Sun Steel Fabricators," indicated that the instrument was meant for deposit into the firm's account and not as a direct payment to the bank. Therefore, the bank lacked the locus standi to file the complaint. Reliance was placed on a Bombay High Court judgment in M/s Credential Finance Ltd. Vs. State of Maharashtra , which had taken a similar view.

Respondent's Arguments: Mr. Deepak Bhasin, Senior Advocate for the Bank of India, countered that the cheque was issued in discharge of a pre-existing legal liability—the outstanding dues of the firm's CC account. He asserted that the bank was fully competent to initiate proceedings as the ultimate beneficiary of the payment intended to clear the debt.

Court's Analysis and Ruling

Justice Virender Singh , after examining the limited scope of jurisdiction under Section 482 CrPC, focused on the substantive legal question. The court rejected the petitioner's hyper-technical interpretation, stating it was contrary to the purpose of the NI Act.

The judgment emphasized the nature of a Cash Credit facility, explaining it as a loan provided by the bank, where the funds, although available to the borrower, legally belong to the bank until repaid.

"The CCL facility, by no stretch of imagination, can be said to be the account of the accused or his firm. It is the facility, which was provided to him by the Bank... The amount belongs to Bank and it is being permitted to be used by the borrower and when, the cheque in question was issued by the accused in favour of Bank of India A/c M/s Sun Steel Fabricators, then, in view of the law, laid down by the Hon’ble Supreme Court in Anil Sachar ’s case (supra) , the Bank falls within the definition of ‘holder in due course’."

The court distinguished the case from the Bombay High Court precedent, stating that it could not concur with such a hyper-technical view which would undermine the legislative intent. It further noted that as per Section 9 of the NI Act, a 'holder in due course' is a person who for consideration becomes the possessor of a cheque. The court observed that the cheque was delivered to the bank for consideration (discharge of debt), which constituted valid negotiation.

Referring to the Supreme Court's decision in Anil Sachar & Anr. Vs. Shree Nath Spinners Private Limited & Ors. , the High Court reiterated that a cheque issued to discharge a debt, even if incurred by another entity (like a sister concern or proprietorship), makes the drawer liable under Section 138.

Final Decision

Finding that a prima facie case was established and that the bank was a 'holder in due course' entitled to file the complaint, the High Court dismissed the petition to quash the proceedings. The court directed the parties to appear before the trial court to proceed with the case. The judgment clarifies that the manner in which a payee is described on a cheque will not absolve the drawer of liability if the instrument was issued to discharge a legally enforceable debt.