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Cheques issued as security - Cheques given solely for security purposes, without an existing enforceable debt at the time of issuance, generally do not fall under Section 138 of the Negotiable Instruments Act (N.I. Act). Courts have held that for Section 138 to apply, there must be a legally enforceable debt or liability at the time the cheque is issued. If cheques are issued only as security and no such debt exists, proceedings under Section 138 are not maintainable ["Sufi International Pvt Ltd. VS Accurate Trans Heat Pvt Ltd Thro Kedarmal Mangilal Dargad - Gujarat"], ["Sufi International Pvt. Ltd. VS Accurate Trans Heat Pvt. Ltd. Thro Kedarmal Mangilal Dargad - Gujarat"], ["Shaliwahan Singh Rathore S/o Shri Raj Singh Rathore VS State Of Rajasthan Through P. p. - Rajasthan"], ["Paul Mitra S/o Shri Anil Kumar Mitra VS State of Rajasthan through P. P. - Rajasthan"], ["Badri Prasad VS Padam Singh - Himachal Pradesh"].
Relevance of timing - The enforceability of a debt at the time of cheque issuance is crucial. If the debt is not legally enforceable when the cheque is issued, the cheque issued as security is not covered under Section 138. Courts have emphasized that the purpose of Section 138 is to ensure the enforceability of debts through negotiable instruments, and security cheques issued without an existing debt do not meet this criterion ["Shaliwahan Singh Rathore S/o Shri Raj Singh Rathore VS State Of Rajasthan Through P. p. - Rajasthan"], ["Paul Mitra S/o Shri Anil Kumar Mitra VS State of Rajasthan through P. P. - Rajasthan"].
Legal enforceability and existing liability - For Section 138 to be invoked, there must be an existing legally enforceable debt. Cheques issued after the expiry of the stipulated period or without an enforceable liability are generally not subject to prosecution under Section 138, especially if issued merely as security ["Dilip Kr. Das S/o Lt. H C Das VS State Of Assam - Gauhati"].
Presumption and rebuttal - The presumption under Section 139 favors the holder that the cheque was issued for a legally enforceable debt. However, if the cheque was issued purely as security and no enforceable debt exists at the time of issuance, this presumption can be rebutted, leading to the non-maintainability of the complaint ["Rajesh Kumar VS Ranbir Singh Rana - Punjab and Haryana"], ["Badri Prasad VS Padam Singh - Himachal Pradesh"].
Security cheques and liability - While security cheques are recognized as cheques like any other, their liability is contingent upon the existence of an enforceable debt. Merely labeling a cheque as security does not exempt it from the provisions of Section 138 if an enforceable liability exists at the time of presentation. Conversely, if no enforceable debt exists, Section 138 proceedings are not sustainable ["Badri Prasad VS Padam Singh - Himachal Pradesh"].
Courts consistently hold that cheques issued solely as security, without an existing enforceable debt at the time of issuance, are not maintainable under Section 138 of the N.I. Act. The key factor is the timing and existence of a legally enforceable debt; security cheques issued without such a debt do not attract Section 138 proceedings. Therefore, the maintainability of a complaint under Section 138 hinges on proving the existence of a valid, enforceable debt at the time the cheque was issued.
In the world of business transactions, cheques are a common tool for payments and assurances. But what happens when a cheque issued purely as security bounces? A frequent question arises: Are Security Cheques Maintainable Under Section 138 NI Act? This provision of the Negotiable Instruments Act, 1881 (NI Act), penalizes cheque dishonour due to insufficient funds or other reasons, but only if the cheque was issued for a legally enforceable debt or liability JITENDRA SINGH FLORA VS RAVIKANT TALWAR - Madhya Pradesh (2000) Kasturi Agencies VS Mohan, Proprietor, Arunachala Marketing - Madras (2019).
This blog post dives deep into the legal nuances, drawing from key court judgments and principles. We'll examine when security cheques trigger Section 138 liability and when they don't. Note: This is general information, not legal advice. Consult a lawyer for your specific case.
Section 138 makes the drawer of a dishonoured cheque liable for punishment if the cheque was issued to discharge a debt or liability. The offence is complete upon dishonour, followed by a demand notice and non-payment within 15 days Kasturi Agencies VS Mohan, Proprietor, Arunachala Marketing - Madras (2019).
However, the cheque must represent a subsisting and enforceable debt at issuance. Courts repeatedly emphasize: The core requirement under Section 138 of the Negotiable Instruments (NI) Act is that the cheque must be issued for the discharge of a legally enforceable debt or liability JITENDRA SINGH FLORA VS RAVIKANT TALWAR - Madhya Pradesh (2000).
Security cheques are often given as collateral—before a loan disbursement, in advance of a sale, or to guarantee future performance. They provide assurance without an immediate debt.
Multiple judgments clarify: Cheques given solely as security, without an immediate or enforceable debt, are not covered under Section 138 JITENDRA SINGH FLORA VS RAVIKANT TALWAR - Madhya Pradesh (2000) Ramakrishna Urban Co-operative Credit Society Ltd. VS Rajendra Bhagchand Warma - Dishonour Of Cheque (2010) Balaji Seafoods Exports (India) Ltd. , rep. by its Director, Chalapathy and another VS Mac Industries Ltd, S. Pichalah, Managing Director, 153, Mount Road, Madras 15, rep. by it Authorised person U. Vijayakumar - Madras (1998) V. Sampath VS Praveen Chandra V. Shah, And Another - Madras (1998).
The pivotal factor is whether the debt existed at issuance.
Cheques issued prior to fund release or as collateral are typically not maintainable. Cheques issued prior to disbursement of a loan or as collateral security, without an existing debt, are generally not maintainable under Section 138 Ramakrishna Urban Co-operative Credit Society Ltd. VS Rajendra Bhagchand Warma - Dishonour Of Cheque (2010) Ramkrishna Urban Cooperative Credit Society Ltd. VS Rajendra Bhagchand Warma - Bombay (2010) Lekh Raj Sharma VS Yash Pal Gupta - Delhi (2015).
In one case, the court noted no jural relationship or material showing the cheque discharged a debt, dismissing the complaint at registration Battu Satya Murthy @ Satyanarayana Murthy, S/o. Venkata Ratnam VS Vidyanjali Educational Society.
Post-dated security cheques may become enforceable if debt crystallizes before presentation. A post-dated cheque issued after debt has been incurred would be covered by definition of ‘debt’ – However, if sum payable depends on a contingent event, then it takes colour of a debt only after contingency has occurred Sunil Todi VS State of Gujarat - 2021 8 Supreme 614.
The Supreme Court in a power supply dispute held: Purpose of the provision would become otiose if the provision is interpreted to exclude cases where debt is incurred after drawing of cheque but before its encashment Sunil Todi VS State of Gujarat - 2021 8 Supreme 614. Here, cheques issued near power supply commencement were valid despite initial security label.
In sales, context matters:
- Completed sales: Cheques for sale consideration post-possession handover discharge debt, maintainable V. Sampath VS Praveen Chandra V. Shah, and Another - Madras (1998) S. Muniraj VS B. V. Anantharao - Madras (2017).
- Pre-completion security: Not maintainable.
Section 139 presumes the cheque was for a debt unless rebutted. The presumption under Section 139 favors the complainant that the cheque was issued for the discharge of a debt unless the drawer proves otherwise. However, if the cheque was issued as security and no enforceable debt exists at the time, the presumption does not apply Kasturi Agencies VS Mohan, Proprietor, Arunachala Marketing - Madras (2019) N. Radhakrishnan S/o Nanoo vs Kerala Agro Industries Corporation Ltd. - 2025 Supreme(Ker) 2066.
Accused claiming 'security' must prove no debt existed. In a conviction upheld: Cheques issued even as security can trigger liability as per Section 138 if debt exists at the time of presentation - The burden of proof shifts to the accused to establish absence of liability N. Radhakrishnan S/o Nanoo vs Kerala Agro Industries Corporation Ltd. - 2025 Supreme(Ker) 2066. Failure to rebut led to conviction despite security claim.
Courts clarify: Whether a cheque is security is often a trial matter, not pre-trial quashing MR. Manoj Nagar vs Coim India Pvt. Ltd. - 2025 Supreme(Del) 461 Sunil Todi VS State of Gujarat - 2021 8 Supreme 614. A cheque issued as security may still attract liability under Section 138 if a legally enforceable debt exists at the time of its presentation MR. Manoj Nagar vs Coim India Pvt. Ltd. - 2025 Supreme(Del) 461.
No Liability for Pure Security: The Law does not prohibit the invocation of Section 138... even where cheques issued initially as security but only if debt later arises Sunil Todi VS State of Gujarat - 2021 8 Supreme 614. Yet, pure pre-debt security fails MANISH SINGHAL VS STATE OF U. P. - 2017 Supreme(All) 448.
Enforceable Despite Label: In a sales promotion case, consent to outstanding dues made presentation valid MR. Manoj Nagar vs Coim India Pvt. Ltd. - 2025 Supreme(Del) 461.
MOU Contexts: Even with MOU mentioning security, if debt pre-existed, Section 138 applies. Security cheque issued by debtor so that same may be presented for payment — Otherwise it would not be security cheque Suresh Chandra Goyal VS Amit Singhal Suresh Chandra Goyal VS Amit Singhal - 2015 Supreme(Del) 803. Courts rejected 'security' defence where debt was outstanding at issuance Suresh Chandra Goyal VS Amit Singhal - 2015 Supreme(Del) 803.
Dismissal Example: Complaint quashed pre-trial sans debt proof Battu Satya Murthy @ Satyanarayana Murthy, S/o. Venkata Ratnam VS Vidyanjali Educational Society.
Another ruling: Any cheque issued towards repayment of debt or liability as a security, if dishonoured, drawer of cheque incurs liability... Merely because it was issued as a security, no ground to exonerate penal liability MANISH SINGHAL VS STATE OF U. P. - 2017 Supreme(All) 448.
The expression ‘or other liability’ has a content which is broader than ‘a debt’—covering future obligations crystallized pre-presentation Sunil Todi VS State of Gujarat - 2021 8 Supreme 614.
When advising clients, verify the purpose and timing of cheque issuance. If a cheque is issued solely as security, emphasize that it may not be prosecutable under Section 138 unless an enforceable debt is established.
Summary: Cheques issued as security without an existing debt are generally not maintainable under Section 138 NI Act. Always assess context—timing, agreements, and proof.
For tailored advice, reach out to a legal expert. Stay informed on evolving NI Act interpretations!
#Section138NIAct, #SecurityCheques, #ChequeDishonour
Issues: Whether the complaint under Section 138 of the N.I. ... The accused issued cheques for this amount, which were returned due to insufficient funds, leading to a complaint under Section 138 ... 138 if a legally enforceable debt exists at the time of issuance. ... Act is not maintainable since the cheques were issued by way of security#....
Issues: Whether the complaint under Section 138 of the N.I. ... 138 of the N.I. ... Quashing - Criminal Proceedings - Negotiable Instruments Act, 1881 - Sections 138, 142 - The court interpreted the provisions of Section ... Act is not maintainable since the cheques were issued by way of security and not against outstanding dues. ... 138#HL_....
Criminal Procedure Code, 1973 - Section 482 - Negotiable Instruments Act, 1881 - Section 138 - Legally enforceable ... The judgments from Indus Airways (supra) to Sunil Todi (supra) indicate that much of the analysis on whether post-dated cheques issued as security would fall within the purview of Section 138 of the Act hinges on the relevance of time.....
conviction under Section 138 for dishonoring cheques issued as security for a loan. ... (A) Negotiable Instruments Act, 1881 - Section 138 - Dishonor of cheque - The petitioner challenged the ... 138. ... Therefore, even if the same was a security cheque, after expiry of the period stipulated for payment of loan cannot be a ground to hold that no case under section #HL_....
Negotiable Instruments - Section 138 - Summary of Legal Framework: The court interpreted Section 138 of ... Issues: Whether the criminal proceedings under Section 138 of the N.I. ... Ratio Decidendi: The court held that for an offence under Section 138 to be made out, there must be a legally ... The judgments from Indus Airways (supra) to Sunil Todi ....
Negotiable Instruments - Section 138 - Summary of Legal Framework: The court interpreted Section 138 of ... Thus, the proceedings under Section 138 were not maintainable. ... Issues: Whether the criminal proceedings under Section 138 of the N.I. ... The judgments from Indus Airways (supra) to Sunil Todi (supra) indicate that much of the analysis on wh....
Section 138 read with Section 142 of the Negotiable Instruments Act, 1881, (for short, ‘NI Act’) filed by the respondent/company against the petitioner.
(A) Negotiable Instruments Act, 1881 - Section 138 - Quashing of complaint - The petitioner sought quashing of a criminal complaint ... MA Abida and Another, wherein cheques issued by the accused persons on their presentation were dishonoured by the banker with the endorsement, 'payment stopped by the drawer' and the accused took plea that the said cheques were given as a security and th....
Despite receiving a notice, he did not clear the dues, leading to the complaint under Section 138. ... (A) Negotiable Instruments Act, 1881 - Section 138 - Conviction for issuing cheques dishonoured due to insufficient funds - Accused ... (Paras 24, 30) ... ... Issues: Whether the conviction and sentence for Section 138 were justified ... 138 of the Act#HL_E....
Code of Criminal Procedure, 1973 - Section 397, 401, 313 - Negotiable Instruments Act, 1881 - Section 138 ... Needless to say, security cheques are the cheques only like any other cheques and they create same liability to discharge as if they are ordinary cheques and attract the provisions of Section 138 of the Act w....
(iii) The Law does not prohibit the invocation of Section 138 of the NI Act even in a situation where the cheques have been issued initially as a security; (ii) Though the PSA envisaged that payment would be made through LC, they could not be honoured because the LC were not in a format acceptable to the Bankers of the second respondent; (iv) The summoning order of the Magistrate conforms to law.
The application was moved to the bank on 28.11.2014. Therefore, the prosecution of the applicant under Section 138 of the Act would not be maintainable where the cheques have been issued as security amount and became dishonoured. Learned counsel has further led stress that the cheques have been issued by the M/s Chiya Riya Traders, Saharanpur and by its authorized signatory but the complainant had not made M/s Chiya Riya Traders, Saharanpur as party in the complaint.
A comparative reading of the principle laid down by the Andhra Pradesh High Court and the mandatory provisions laid down in section 138 of the Negotiable Instruments The court observed that after having noted the interpretation of the High Court as regards section 138 of the Act, time has thus now come to assess the acceptability of such wisdom. Act is crystal clear that when a cheque has been issued as a security, no complaint will lie under section 138 of the Negotiable Instruments....
The next issue that needs examination is whether the complaint of the appellant was maintainable under Section 138 of the NI Act since the cheques in question were “security cheques”. The MOU (Ex. CW-1/4) itself provides that the first party/ accused will return the amount of Rs.3 Lakhs to the second party/appellant in six installments of Rs.50,000/- each by way of six monthly cheques starting from December, 2011 and second party/Suresh Chandra Goyal will return all security ....
The next issue that needs examination is whether the complaint of the appellant was maintainable under Section 138 of the NI Act since the cheques in question were “security cheques”. The MOU (Ex. CW-1/4) itself provides that the first party/ accused will return the amount of Rs.3 Lakhs to the second party/ appellant in six installments of Rs.50,000/- each by way of six monthly cheques starting from December, 2011 and second party/ Suresh Chandra Goyal will return all securit....
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