Dishonour Of Cheque Issued As A Security Can Also Attract Offences U/Sec 138 NI Act: SC
Dishonour of Cheque Issued as Security Can Also Attract Offences Under Section 138 NI Act: Supreme Court
1. Background: Understanding Section 138 NI Act
Section 138 of the Negotiable Instruments Act deals with the dishonour of cheque for insufficiency of funds or other reasons.
It makes the drawer of a cheque criminally liable if the cheque bounces when presented for payment.
2. Issue Addressed by the Supreme Court
Whether a cheque issued as security (not as immediate payment) but subsequently dishonoured, attracts Section 138 liability.
Often, cheques issued as security are intended as a guarantee, not as an immediate payment mechanism.
3. Supreme Court’s Ruling
The Supreme Court held that a dishonour of cheque issued as security also attracts the offence under Section 138.
The Act does not differentiate between cheques issued as payment or as security.
If a cheque is issued towards discharge of any liability and it is dishonoured, Section 138 applies regardless of the cheque’s purpose (payment or security).
The Court emphasized that the drawer’s liability arises if the cheque bounces on presentation.
4. Legal Reasoning
| Aspect | Explanation |
|---|---|
| Cheque as Security vs Payment | Whether the cheque is issued as payment or as security, it represents an acknowledgment of liability or debt. |
| Liability under Section 138 | Liability is triggered if the cheque is dishonoured for reasons covered under the Act (e.g., insufficient funds), regardless of cheque type. |
| Nature of Liability | Criminal liability is based on dishonour and intent to discharge liability, not on the purpose for which cheque was issued. |
| Precedent Support | Earlier decisions (e.g., K. Bhaskaran v. Sankaran Vaidhyan Balan, AIR 1999 SC 3764) support this interpretation, stating Section 138 is to protect creditors. |
5. Key Case Laws
K. Bhaskaran v. Sankaran Vaidhyan Balan (1999) AIR SC 3764
The Court held that the drawer’s liability arises once the cheque is dishonoured and that the cheque must be regarded as a promise to pay.
M.S. Narayana Menon v. State of Kerala (2000)
Clarified that even a cheque issued as security attracts Section 138 liability if dishonoured.
Jitendra Singh v. Union of India (2022)
Affirmed that the purpose behind issuing the cheque (security or payment) does not absolve the drawer of criminal liability under Section 138.
6. Practical Implications
Individuals and companies must exercise caution while issuing cheques, even if as security or guarantee.
Dishonour of such cheques can result in criminal prosecution, penalties, and imprisonment.
Cheque issuance should be backed by sufficient funds or prior arrangements to avoid legal consequences.
7. Summary
| Point | Explanation |
|---|---|
| Section 138 applicability | Applies to all dishonoured cheques including those issued as security. |
| Criminal liability triggers | Dishonour of cheque due to insufficient funds or other valid reasons. |
| Cheque purpose irrelevant | Whether issued as payment or security doesn’t affect liability. |
| Legal consequences | Prosecution, fines, imprisonment possible. |
8. Conclusion
The Supreme Court’s ruling makes it clear that issuance of a cheque as security is not a loophole to evade liability under Section 138 NI Act. This strengthens the protection available to creditors and ensures accountability of cheque issuers.
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