Security Cheque Dishonour Attracts S.138 NI Act Liability; Civil Dispute or Arbitration Clause No Ground for Quashing Complaint: Himachal Pradesh High Court - 2025-07-11

Legal Awareness & Information.

Security Cheques Are Not 'Worthless Paper'; Can Attract S.138 NI Act Proceedings, Rules HP High Court

Shimla: The Himachal Pradesh High Court, in a significant ruling, has dismissed a petition to quash a criminal complaint under Section 138 of the Negotiable Instruments (NI) Act, reinforcing that the dishonour of a cheque issued as 'security' can lead to criminal prosecution. Hon’ble Mr. Justice Rakesh Kainthla held that pleas of the dispute being civil in nature, the existence of an arbitration clause, or the cheque being for security are matters of trial and not sufficient grounds for quashing proceedings at a nascent stage.

The court was hearing a petition filed by Elder -ICI Health Pvt Ltd and its directors seeking to quash a complaint filed against them by Glide Chem Pvt Ltd, which is pending before the Additional Chief Judicial Magistrate, Paonta Sahib .

Background of the Case

The dispute originated from a tripartite supply agreement where Elder -ICI stood as a guarantor for payments due from IND Swift Ltd. to the complainant, Glide Chem. When defaults occurred, the parties entered into a Memorandum of Understanding (MoU) on September 1, 2019, to settle the outstanding dues of ₹72,08,831/-.

As part of the MoU, Elder -ICI issued two undated cheques as security against a structured repayment schedule. When Elder -ICI allegedly failed to adhere to the payment plan, Glide Chem filled in the dates, presented the cheques, and they were subsequently dishonoured with the remark "accounts closed." This led Glide Chem to file a criminal complaint under Section 138 of the NI Act.

Arguments from Both Sides

Petitioners' ( Elder -ICI) Contentions: - The dispute is fundamentally civil and has been given a criminal colour. - The cheques were issued only for 'security' and not in discharge of a present debt. - The Paonta Sahib court lacks jurisdiction as the demand notice was issued after the cheques were presented in Delhi. - The complainant should have invoked the arbitration clause in the agreement instead of filing a criminal case. - The complaint was not maintainable without impleading the principal debtor, IND Swift Ltd.

Respondent's (Glide Chem) Submissions: - The NI Act creates a legal presumption that a cheque is issued for a legally enforceable liability, and the onus is on the accused to rebut it during trial. - The availability of an alternative remedy like arbitration does not bar criminal proceedings for a statutory offence.

Court's Analysis and Key Legal Precedents

Justice Rakesh Kainthla conducted a thorough analysis, relying on established Supreme Court precedents to reject each of the petitioners' arguments.

On Security Cheques: The court cited Sripati Singh v. State of Jharkhand (2021) , emphasizing that a security cheque is not a "worthless piece of paper."

"If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as security to secure such repayment; if the loan amount is not repaid... the cheque which is issued as security would mature for presentation and the drawee of the cheque would be entitled to present the same."

The court also referred to Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited (2016) , clarifying that the crucial question is whether the cheque represents an existing enforceable debt or liability on the date of presentation. In this case, the liability arose from the MoU, which the petitioners failed to honour.

On Arbitration Clause: Relying on Trisuns Chemical Industry v. Rajesh Agarwal (1999) , the court held that arbitration is a civil remedy for breach of agreement and "cannot be an effective substitute for a criminal prosecution when the disputed act is an offence."

On Factual Disputes and Premature Quashing: Addressing the petitioners' claim of having made part-payments, the court, citing Rathish Babu Unnikrishnan v. State (NCT of Delhi) (2022) , stated that such defences are matters of evidence and must be adjudicated during the trial.

"The quashing Court should not take upon itself the burden of separating the wheat from the chaff where facts are contested... The consequences of scuttling the criminal process at a pre-trial stage can be grave and irreparable."

On Liability of Guarantor: The court rejected the argument that the non-joinder of the principal debtor (IND Swift Ltd.) was fatal. It cited BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. (2025) , which holds that the liability of a guarantor and principal debtor is co-extensive, and the creditor can sue either or both.

Final Decision

The High Court concluded that the petitioners failed to present any valid legal ground for quashing the complaint. The issues raised were factual defences that must be proven through evidence at trial. The court observed that there was no "express legal bar" to the continuation of the proceedings and dismissed the petition, allowing the trial to proceed before the Magistrate's court in Paonta Sahib .