Proceedings Under Section 138 NI Act For Dishonoured Cheques Issued As Security

Key Takeaways

• This is the case of Sripati Singh (deceased) through son Gaurav Singh v. State of Jharkhand & Anr.
• The respondent approached the appellant and sought financial assistance for Rs. 1 Crore. The respondent submitted cheques as security, which were returned due to insufficient funds
• The court said that 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.

Background of the Case

• 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.
• 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, the appellant contends that the respondent has deceived the appellant, and cheated him.

Judgement

• The Magistrate concluded that the discharge sought by respondent 2 cannot be accepted. 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 found no reason to interfere with this conclusion of the High Court.
• The court said that 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.
• 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.
• After a prima facie analysis, the appeals were allowed

Questions

• What is Section 138 of the NI Act?
• What is the significance of the security given for a loan?

Share your views in the comments section below.