J. M.R. Shah
J. A.S. Bopanna
Appellant- Sripati Singh (deceased) Through Son Gaurav Singh
Respondent- State of Jharkhand &Anr.
The respondent submitted some cheques as a security to the appellant. After the cheques were mature, the appellant presented them but they were rejected due to insufficient funds. The appellant instituted proceedings against the respondent under Section 138 of the Negotiable Instruments Act, and Section 420 of the IPC.
- The appellant and the respondent knew each other and had a cordial relationship. The respondent approached the appellant and sought financial assistance for Rs. 1 Crore. The respondent assured the appellant that the amount would be returned, and the appellant trusted him. The appellant advanced the sum of Rs. 2 Crore to the respondent. Four agreementsacknowledging the transactions were entered into after the loan was received.
- As a security, the respondent submitted three cheques of Rs. 1 crore to the appellant. The appellant presented the cheques on the assurance of the respondent. The cheques were returned due to insufficient funds.
- The Appellant issued a legal notice under Section 138 of the Negotiable Instruments Act (NI Act). A complaint was filed under Section 420 of the IPC as well and the appellant contends that the respondent has deceived the appellant and cheated him.
- The respondent filed a petition seeking discharge from criminal proceedings, which was rejected. The Petition was allowed by the High Court. The appellants claim to be aggrieved by these appeals.
- The respondent’s case is that the transaction can be considered an advancement of loan, and should give rise to a civil liability, not a criminal one.
Section 138 of Negotiable Instruments Act, 1881- Dishonour of cheque for insufficiency of funds in the account.
Section 420 Indian Penal Code 1860-Cheating and dishonestly inducing delivery of property.
Whether the appeal is maintainable?
Whether the proceedings are limited to the NI Act or invoking Section 420 of the IPC is also justified?
- The High Court was of the view that the case cannot be made out under Section 420 of the IPC. The Supreme Court agrees with this.
- This is because under the loan agreement, the period of repayment was agreed upon, and the cheque was issued to ensure such payment. The mere dishonour of the cheque cannot be construed as a deliberate intention to cheat, and the mens rea is absent. The court finds there is no reason to interfere with this conclusion of the High Court.
- The court says a cheque is issued as a security, in a financial transaction, and cannot be deemed a worthless piece of paper in all circumstances. The security given for a loan is a pledge of payment. During a loan transaction, the borrower agrees to repay the specified amount, and issues a cheque as a security for that, if the amount is not repaid, the cheque would mature and issuee would be entitled to present it.
- If on presentation it is dishonoured the consequences of Section 138 of the NI Act will follow. When a cheque is treated as a security for a loan, all it ensures is that the cheque cannot be presented before the maturing of the loan. A borrower also has the option of repaying the loan amount in any other form and manner. The prior discharge of loan or an alteration in the situation leading to an understanding between the parties is the only defences available to the drawer of the cheque for proceedings under Section 138 of the NI Act.
- The court declared that there cannot be a hard and fast rule that a cheque issued as security cannot be presented by the drawee. If this was the understanding, the cheque would be reduced to an ‘on-demand promissory note’ and the litigation would be civil, which is not the intention of the NI Act. The nature of proceedings is up to the drawee, and not for the drawer to dictate.
- In the present case, the cheque has matured for payment, and the appellant can present the same. On dishonour, consequences under the NI Act will follow. The Respondent cannot seek rejection of the petition.
- The court also saw that the appellant cannot be prevented from proceedings under the NI Act merely because the dishonoured cheques were security. Such a contention would only arise where debt has not become recoverable or has not matured. The respondent’s contention that the cheque should be held has security even after it has matured, is unsustainable. The respondent has failed to keep up the assurance to repay.
After a prima facie analysis, the appeals were allowed.
The respondent used cheques as a security in the case, and upon maturity, they still could not be cashed in. The Supreme Court has found that whenthe cheque has matured for payment, the appellant can present the same and the respondent can’t seek rejection of the appeal. When the cheque is used for recovery of loan, it cannot be presented before the date of maturing, or if the parties come to a separate solution. But after maturing, it can be presented. If it is dishonoured, the consequences under Section 138 of the NI Act will follow.
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What is Section 138 of the NI Act?
What is the significance of the security given for a loan?