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Does a Security Cheque Come Under Section 138 of the Negotiable Instruments Act?

In today's fast-paced business world, cheques are a common form of payment. But what happens when a cheque given as security bounces? Does it trigger criminal liability under Section 138 of the Negotiable Instruments Act, 1881 (NI Act)? This question arises frequently in legal disputes, especially when parties claim the cheque was not for a debt but merely as collateral.

This blog post breaks down the legal position based on judicial precedents, helping you understand if a security cheque will come under the offence of the Negotiable Instruments Act. Note: This is general information based on case law and not specific legal advice. Consult a lawyer for your situation.

Understanding Section 138 of the NI Act

Section 138 makes the dishonour of a cheque a criminal offence if it's due to insufficient funds or exceeds arrangement, provided a demand notice is sent and payment isn't made within 15 days. The key ingredients are:
- The cheque must be drawn for discharge, in whole or in part, of any debt or other liability.
- Dishonour due to specified reasons (e.g., 'insufficient funds' or 'payment stopped').
- Non-payment after statutory notice.

The section aims to ensure trust in cheque transactions and penalize casual issuance without backing funds. Punishment includes up to 2 years imprisonment, fine up to twice the cheque amount, or both. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547

The Presumption Under Sections 118 and 139

Once a cheque's execution is admitted (signature proven), Section 118(a) presumes it was for consideration unless rebutted. Section 139 further presumes the holder received it for discharge of a legally enforceable debt or liability.

The Court shall presume a negotiable instrument to be for consideration unless and until after considering the matter before it... M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547

The standard is preponderance of probabilities – the accused needs a probable defence, not proof beyond doubt. Evidence can include complainant's documents or circumstances. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547

Do Security Cheques Fall Under Section 138?

Courts have consistently held that labelling a cheque as 'security' doesn't exempt it from Section 138. A security cheque is still a negotiable instrument and can be presented if liability arises.

Supreme Court and High Court Rulings

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  Liability Exists if Debt is Due: Even if issued as security, if the underlying debt matures (e.g., loan instalment due), dishonour attracts Section 138. In one case, post-dated cheques for loan repayment (termed 'security' in agreement) were held covered, as repayment became due on cheque dates. Sampelly Satyanarayana Rao VS Indian Renewable Energy Development Agency Limited - 2016 6 Supreme 733

  
  


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  Dishonour Due to Stop Payment: Cheques stopped by drawer (security claim) still trigger offence; presumption under 139 applies. Accused must prove sufficient funds and no liability. M. M. T. C. LTD. VS Medchl Chemicals And Pharma Private LTD. - 2001 8 Supreme 227

  
  


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  Guarantor's Security Cheque: A guarantor's cheque for part payment under hire-purchase was upheld under Section 138, rejecting High Court's view that security excludes debt discharge. Language of Section 138 is clear: covers any debt or liability. ICDS Ltd. VS Beena Shabeer - 2002 Supreme(Ker) 505

  
  

The language of S.138 of the Negotiable Instruments Act, 1881 is clear and includes the discharge of any debt or other liability... ICDS Ltd. VS Beena Shabeer - 2002 Supreme(Ker) 505

However, not always:

• Probable Defence Accepted: If accused proves no debt (e.g., cheque purely for security, nothing due), acquittal possible. In a stock transaction case, appellate court accepted 'security' defence due to account discrepancies; Supreme Court upheld, as two views possible in acquittal appeals. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547

...if a cheque is issued for security or for any other purpose the same would not come within the purview of Section 138 of the Act. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547

• Blank or Misused Security Cheque: Blank cheques filled later may not qualify if not valid instruments. Acquittals upheld where loan repaid and cheque was pure security. Chhabra Fabrics Pvt. Ltd. VS Bhagwan Dass, Proprietor of Dhingra Handicrafts Singh Finance VS Davinder Singh - 2010 Supreme(P&H) 1168

Rebutting the Presumption: What the Accused Must Do

Mere claim of 'security cheque' isn't enough. Accused must raise probable defence via:
- Documents: Loan agreements, repayment receipts, account statements showing no dues.
- Witnesses: Proving no liability or misuse.
- Circumstances: E.g., complainant failed to prove debt quantum. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547

For rebutting the presumption u/s 139 r/w 118... what is needed is to raise a probable defence... standard of proof would be pre-ponderance of probabilities... M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547

Failure leads to conviction. E.g., in goods supply cases, accused's security claim rejected without evidence. Victor Cletus vs State Of Kerala, Represented By Public Prosecutor - 2025 Supreme(Ker) 1846 P ANTONY SILVESTER vs LIGY PHILIP - 2009 Supreme(Online)(KER) 26214

Common Scenarios and Outcomes

| Scenario | Likely Outcome |
|----------|---------------|
| Security for loan; debt due on presentation | Offence under 138; presumption holds unless rebutted. Sampelly Satyanarayana Rao VS Indian Renewable Energy Development Agency Limited - 2016 6 Supreme 733 |
| Pure security, no underlying debt proven | Acquittal possible if probable defence. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547 |
| Stop payment on security cheque | Offence; accused proves no insufficiency/no debt. M. M. T. C. LTD. VS Medchl Chemicals And Pharma Private LTD. - 2001 8 Supreme 227 |
| Blank cheque misused | May not attract 138 if invalid. Chhabra Fabrics Pvt. Ltd. VS Bhagwan Dass, Proprietor of Dhingra Handicrafts |
| Guarantor or part-payment security | Covered under 138. ICDS Ltd. VS Beena Shabeer - 2002 Supreme(Ker) 505 |

Quashing Proceedings: When Possible?

High Courts can quash under CrPC Section 482 if no prima facie case (e.g., civil dispute cloaked as criminal). But not if debt alleged. Filing discharge application doesn't bar quashing. G. Sagar Suri VS State Of U. P - 2000 1 Supreme 322

Separate IPC 406/420 complaints alongside 138 may be quashed if abuse of process (purely recovery). G. Sagar Suri VS State Of U. P - 2000 1 Supreme 322

Key Takeaways

• Generally, yes: A security cheque can attract Section 138 NI Act if linked to a debt/liability at presentation.


• Presumption Favours Complainant: Accused bears rebuttal burden on preponderance of probabilities.


• Context Matters: Pure security without debt? Defence viable. But courts scrutinize claims.


• Advice: Businesses should document transactions clearly. Accused: Gather evidence early.

In most cases, security cheques will come under the offence unless robustly rebutted. Judicial trend protects cheque credibility while allowing genuine defences. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547 M. M. T. C. LTD. VS Medchl Chemicals And Pharma Private LTD. - 2001 8 Supreme 227

Disclaimer: Laws evolve; outcomes depend on facts. This post draws from precedents like those cited but isn't exhaustive. Seek professional legal counsel for advice tailored to your case.

Sources Referenced: Supreme Court and High Court judgments including M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547, M. M. T. C. LTD. VS Medchl Chemicals And Pharma Private LTD. - 2001 8 Supreme 227, ICDS Ltd. VS Beena Shabeer - 2002 Supreme(Ker) 505, Sampelly Satyanarayana Rao VS Indian Renewable Energy Development Agency Limited - 2016 6 Supreme 733, G. Sagar Suri VS State Of U. P - 2000 1 Supreme 322, and others.