"A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance."Just because a cheque is issued as a security does not mean that it will not attract the offence as defined under Section 138 of the Negotiable Instruments Act, 1881 ('NI Act'). This position of law as enunciated by the Apex Court in Sripati Singh v....
"A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance."
Just because a cheque is issued as a security does not mean that it will not attract the offence as defined under Section 138 of the Negotiable Instruments Act, 1881 ('NI Act'). This position of law as enunciated by the Apex Court in Sripati Singh v. State of Jharkhand (Criminal Appeal Nos. 1269-1270 of 2021) LL 2021 SC 606 stands crystallised in a series of judgments of the Court. Such framing of the legal position tells us that cheques are a genus of which cheques issued as security form a species. A deeper look however at the reasoning adopted by the Hon'ble Supreme Court reveals a different picture and shows us that any cheque ever issued is always as a security only, and there is no real distinction between a 'cheque' and a 'cheque issued as security', making the latter a misnomer. The question of whether or not liability is attracted under the NI Act turns on whether there is an existing liability against the cheque at the time of presentation. Whether the cheque was issued as a security or not is irrelevant to the determination of culpability under the NI Act, and hence it is advisable to altogether eliminate the use of the term 'cheque issued as security' or 'security cheque'.
While 'security cheque'/ 'cheque issued as security' is a widely used term, it is not defined under the NI Act. What are the ingredients which when added to a cheque make it a security cheque? This crucial question can be answered by reference to paragraph 16 of the judgment in Sripati Singh which, very much in line with the existing precedent of the Court in Sampelly Satyanarayan Rao vs Indian Renewable Energy Development Agency Limited (Criminal Appeal No. 867 of 2016), and which has further been relied upon by the Court in Sunil Todi v. The State of Gujarat (Criminal Appeal No. 1446 of 2021) LL 2021 SC 706, aptly explains the concept of a 'security' cheque:
"16. A cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. 'Security' in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfilment of an obligation to which the parties to the transaction are bound. 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 in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque which is issued as security would mature for presentation and the drawee of the cheque would be entitled to present the same. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of N.I. Act would flow." (Emphasis supplied)
From the above explanation, one ingredient seems to be important for a cheque to be considered as one by way of security – that there is no legally enforceable liability against the cheque at the time of issuing the cheque. The liability against it, if at all, must arise on a future date. It is also to be noted here that the Court recognizes the right of the parties to change their understanding or to enter into a new agreement once the cheque has been issued.
If we then look at the decision of the Hon'ble Supreme Court in Sunil Todi, it is now clear that whether or not there was a liability against the cheque when it was issued is irrelevant for the purposes of determination of liability under the NI Act. For fixing liability under the NI Act, it has to be shown that liability existed at the time of presenting the cheque by the payee, and not when it was handed over by the drawer to the payee. This position of law is clear from the following paragraphs being extracted from the judgment in Sunil Todi:
"24. In Sampelly and Sripati Singh, post-dated cheques were issued as a security for loan installments that were due. On the dates on which the cheques were drawn, there was an outstanding debt. In the present case, the cheques were issued on 30 June 2016. The second respondent commenced the supply of electricity immediately from the next day that is from 1 July 2016. The facts of this case are in contrast with the facts in Indus Airways. In Indus Airways, since the purchase agreement was cancelled, there was no outstanding liability incurred before the encashment of the cheque. The transaction between the parties did not go through as a result of the cancellation of the purchase orders…
- The object of the NI Act is to enhance the acceptability of cheques and inculcate faith in the efficiency of negotiable instruments for transaction of business. The purpose of the provision would become otiose if the provision is interpreted to exclude cases where debt is incurred after the drawing of the cheque but before its encashment…." In Indus Airways, advance payments were made but since the purchase agreement was cancelled, there was no occasion of incurring any debt. The true purpose of Section 138 would not be fulfilled, if 'debt or other liability' is interpreted to include only a debt that exists as on the date of drawing of the cheque. Moreover, Parliament has used the expression 'debt or other liability'. The expression "or other liability' must have a meaning of its own, the legislature having used two distinct phrases. The expression 'or other liability' has a content which is broader than 'a debt' and cannot be equated with the latter…(Emphasis supplied)
If we break down the explanation in Sripati extracted above and as further expounded upon in Sunil Todi, the understanding of a 'cheque issued as security' as per the Hon'ble Apex Court is as broad as that it is simply a pledge of payment in the future. A cheque as per this reasoning becomes a security cheque if it is a pledge of payment not for the present but for the future. Interestingly, this holds true for any cheque ever issued. Even if a cheque is issued against an existing liability, it can only be a promise for payment in future. This is simply for the reason that issuing of a cheque and presenting it in the bank cannot be coterminous.
Whether or not a liability existed at the time of issuing a cheque is irrelevant for purposes of determination of culpability under the NI Act. A drawer may issue a cheque while not having any liability at the time of issuing it but will still be liable if at the time of presenting the cheque, they had assumed liability against it on the basis of an agreement between them and the payee/holder in due course at a time subsequent to the issuing of the cheque. Similarly, even if a liability exists against a cheque when it is issued by the drawer to the payee, the only factor relevant for determination of liability under the NI Act would be whether at the time of presenting the cheque, the liability still existed. If at a point of time between issuing the cheque and presenting it, the liability against it is discharged by the drawer on the basis of a new agreement between the parties, there will be no liability against the cheque.
A look at what really distinguishes a 'cheque issued as security' from a 'cheque' shows us that the distinction may just be superficial. While there is no scope for confusion and the Apex Court is clear that liability under the NI Act turns on the question of whether a liability exists against the cheque at the time of presenting it, a clarification that the genus itself is the species will bring more conceptual clarity on an important issue.
The author is an independent practitioner in Delhi and also serves as an of-counsel for Satya Pro Bono Law. Views are personal.