Section 138 of the Negotiable Instruments Act, 1881 (‘Act’ for short) provides the consequences on dishonor of cheque for insufficiency etc., of funds in the account. The said section provides that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to 2 years or with fine which may extend to twice the amount of the cheque, or with both.
The proviso to this section provides that nothing contained in this section shall apply unless-
- the cheque has been presented to the bank within a period of 6 months from the date on which it is drawn or within the period of its validity, whichever is earlier;
- the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
- the drawer of such cheque fails to make the payment of the said amount of money to the payee or as the case may be, to the holder in due course of the cheque, within 15 days of the receipt of the said notice.
The explanation to this section provides that for the purpose of this section ‘debt or other liability’ means a legally enforceable debt or other liability.
The issue to be discussed in this article whether the post dated cheques described as ‘security’ towards repayment of installment of already disbursed loan amount would attract Section 138 of the Act if the same are dishonored with reference to decided case law.
In ‘Sampelly Sayanarayana Rao V. Indian Renewable Energy Development Agency Limited’ – 2016 (9) TMI 867 - SUPREME COURT the appellant is the director of the company whose cheques have been dishonored and who is also the co-accused. The company is engaged in the field of power generation. The respondent is engaged in development of renewable energy and a Government of India enterprise. The respondent agreed to advance a loan of ₹ 11.50 crores for setting up of 4.00 MW biomass based power project in the State of Andhra Pradesh vide agreement dated 15.03.2011. The agreement recorded that post dated cheques towards payment of installment of loan (principal and interest) were given by way of security.
The company submitted advance cheques to the respondent carrying different dates, depending on the dates of the installments were due. The cheques were dishonored. On this complaints were filed by the respondent in the court of the Magistrate concerned in New Delhi. The appellant approached the High Court to seek quashing of the complaints arising out of 18 cheques of the value of about ₹ 10.3 crores. The appellant contended before the High Court that the cheques were issued given by way of security as mentioned in the agreement and that on the date the cheques were issued, no debt or liability was due. Thus dishonor of post dated cheques given by way of security did not fall under Section 138 of the Act. The appellant relied on clause 3.1 (iii) of the agreement. The appellant further contended that it was not towards discharge of debt or liability in prasenti but for the amount payable in future. The appellant also relied on the decision of Supreme Court in ‘Indus Airways (P) Limited V. Magnum Aviation (P) Limited’ – 2014 (4) TMI 464 - SUPREME COURT
The High Court did not accept the contentions of the appellant. The High Court held that in the present case when the post dated cheques were issued, the loan had been sanctioned and hence, the same fall in the first category, i.e., they were cheques issued for a debit in present but payable in future. The High Court did not find any reason to quash the criminal complaints. However these observations are only prima facie in nature. It will be open for the party to prove the contrary during the trial.
Against the order of the High Court, the appellant approached the Supreme Court. The Supreme Court gave due consideration to the submissions advanced by the appellant as well as the case law ‘Indian Airways’ (supra) with reference to the explanation to Section 138 of the Act and the expression ‘for discharge of debt or other liability’. The Supreme Court was of the view that the question whether a post dated cheque is for ‘discharge of debt or liability’ depends on the nature of the transaction. If on the date of the cheque, liability or debt exists or the amount has become legally enforceable, Section 138 is attracted and not otherwise.
The Supreme Court held that the present case clearly shows that though the word ‘security’ is used in Clause 3.1 (iii) of the agreement, the said expression refers to the cheques being towards repayment of installments. The repayment becomes due under the agreement, the moment the loan is advanced and the installment falls due. It is undisputed fact that the loan was duly disbursed on 28.02.2002 which was prior to the date of the cheques. Once the loan was disbursed and installments have fallen due on the date of the cheque as per the agreement, the dishonor of such cheques would fall under Section 138 of the Act. The cheques undoubtedly represent the outstanding liability.
The Supreme Court distinguished the case law relied on by the appellant. In ‘Indus Airways’ the Supreme Court found that the cheque had not been issued for the discharge of liability but as advance for purchase order which was cancelled. Keeping in mind this fine but real distinction, the said judgment cannot be applied to a case of present nature where the cheque was for repayment of loan installment which had fallen due though such deposit of cheques towards repayment of installments was also described as ‘security’ in the loan agreement. One cannot lose sight of the difference between a transaction of purchase order which is cancelled and that of a loan transaction where loan has actually been advanced and its repayment is due on the date of the cheque.
The Supreme Court held that it is well settled that while dealing with a quashing petition, the Court has ordinarily to proceed on the basis of averments in the complaint. The defence of the accused cannot be considered at this stage. The Court considering the prayer for quashing does not adjudicate upon a disputed question of fact. The Supreme Court held that dishonor of cheque in the present case being for discharge of existing liability is covered by Section 138 of the Act as rightly held by the High Court.
The Supreme Court did not find any merit in the appeal and dismissed the same. The appellant is at liberty to contest the matter in the trial court in accordance with law.
By: Mr. M. GOVINDARAJAN - January 11, 2017
Discussions to this article
Sir, nice article. The apex court upheld the decision of High Court on the ground that the post dated cheques were issued after the loan was sanctioned. Sir, in case of home loan , if i just compare it with this case law (for academy purpose only) then section 138 of Negotiable Instrument Act will not apply, i understand. Thanks..
Thanks for such a nice article Sir.