Post-dated cheque described as security for repayment of instalment of already disbursed...

Post-dated cheque described as security for repayment of instalment of already disbursed loan

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I have pointed out in an earlier reply 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 which are not issued for discharge of the liability or debt.

Recently, in the case of Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd., (2016) 10 SCC 458 : AIR 2016 SC 4363, the Supreme Court dealt with a situation where post-dated cheques were given describing them as “security” but they were towards repayment of loan amount, and the loan had also been disbursed already. In these circumstances, the Supreme Court held that dishonour of such cheques may attract offence under Section 138 of the Negotiable Instruments Act.

The relevant part of the agreement which dealt with such post-dated security cheques in the above case is as under:

“3.1. Security for the loan. — The loan together with the interest, interest tax, liquidated damages, commitment fee, up-front fee prima on repayment or on redemption, costs, expenses and other monies shall be secured by:

(i)-(ii)***

(iii) Deposit of post-dated cheques towards repayment of instalments of principal of loan amount in accordance with agreed repayment schedule and instalments of interest payable thereon.”

The Supreme Court held 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 recoverable, the section is attracted and not otherwise.

With regard to the above terms in the agreement, the Supreme Court held 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 instalments. The repayment becomes due under the agreement, the moment the loan is advanced and the instalment falls due. It is undisputed that the loan was duly disbursed a date which was prior to the date of the cheques. Once the loan was disbursed and instalments have fallen due on the date of the cheque as per the agreement, dishonour of such cheques would fall under Section 138 of the Act. The cheques undoubtedly represent the outstanding liability.

The Supreme Court distinguished the case of Indus Airways (P) Ltd. v. Magnum Aviation (P) Ltd., (2014) 12 SCC 539, where the purchase order had been cancelled and cheque issued towards advance payment for the purchase order was dishonoured. In that case, it was found that the cheque had not been issued for discharge of liability but as advance for the purchase order which was cancelled. It was held that 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 instalment which had fallen due though such deposit of cheques towards repayment of instalments was also described as “security” in the loan agreement. The Court held that in applying the judgment in Indus Airways, 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 crucial question to determine applicability of Section 138 of the Act is whether the cheque represents discharge of existing enforceable debt or liability or whether it represents advance payment without there being subsisting debt or liability.

Accordingly, observing that a post-dated cheque is a well-recognised mode of payment, the Supreme Court held that dishonour of cheque in the present case being for discharge of existing liability is covered by Section 138 of the Negotiable Instruments Act.

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