Dishonour of cheque given as security – whether offence under Section 138 N.I. Act made out?

Question: Where a cheque has been given only as a security and not as repayment of a loan, whether an offence under Section 138 of Negotiable Instruments Act is made out for dishonour of cheque when this cheque is dishonoured?

Answer: One of the main ingredients of the offence of dishonour of cheque under Section 138 of the Negotiable Instruments Act, 1881, is that the cheque which is dishonoured must have been given “for the discharge, in whole or in part, of any debt or other liability“. The relevant extract from Section 138 is reproduced below:

“138. Dishonour of cheque for insufficiency, etc., of funds in the account.— 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 honour 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 two year, or with fine which may extend to twice the amount of the cheque, or with both: …”.

The language of this legal provision is very clear. The offence of dishonour of cheque is made out only if the cheque had been issued for the discharge of any debt or other liability. If the cheque had been issued as a “security”, and if such cheque bounces, no offence is made out under Section 138 of the Negotiable Instruments Act.

In this regard, it may be noted that in the case of Vijay v. Laxman, (2013) 3 SCC 86, the Supreme Court upheld the acquittal of the accused in a cheque dishonour case on the ground that the accused, who was supplier of milk, was given the price of the milk in advance as per the trade practice, in acknowledgment and by way of security for which amount the accused had issued the cheque in question.

Likewise, in the case of Sudhir Kumar Bhalla v. Jagdish Chand, (2008) 7 SCC 137, the Supreme Court set aside the order of the High Court, inter alia, on the ground that the High Court had not addressed the legal question that the criminal liability of the accused under the provisions of Section 138 of the Negotiable Instruments Act is attracted only on account of the dishonour of the cheques issued in discharge of liability or debt, but not on account of issuance of security cheques. In this case, the Supreme Court remitted the case back to the High Court for reconsideration.

Similarly, in the case of Vinita S. Rao v. Essen Corporate Services (P) Ltd., (2015) 1 SCC 527, the Supreme Court remitted the case back to the High Court by setting aside its order, inter alia, on the ground that the cheques which were dishonoured were issued as a security and that there was no crystallised liability or outstanding dues.

Thus, it is clear that no offence under section 138 of the Negotiable Instruments Act will be made out if the cheque that has been dishonoured was issued only as a security and not for discharge of any debt or liability.

However, in this regard, it may be noted that Section 139 of the said Act raises a presumption that the cheque which has been dishonoured, had been issued for the discharge of any debt or other liability. Section 139 is reproduced as under:

“139. Presumption in favour of holder.—It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque, of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability.”

Since the law raises this presumption against the accused in the case where a cheque is dishonoured, the burden lies on the accused to prove that such cheque was given only as a security and not for discharge of a debt or other liability. However, as held by the Supreme Court in the aforesaid case of Vijay v. Laxman, (2013) 3 SCC 86, the standard of proof required  from the accused for rebutting any such presumption is not as high as that required of the prosecution. So long as the accused can make his version reasonably probable, the burden of rebutting the presumption would stand discharged.

Therefore, while no offence is made out if the cheque that is dishonoured was given only as a security, the court shall presume that it was given for the discharge of any debt or other liability, and subsequently it will be for the accused to prove that the cheque was not given for the discharge of any debt or other liability but it was given only as a security. Once the accused is able to prove it, he shall be entitled to acquittal from the offence of dishonour of cheque.